The key assumptions are the level of inventory turnover improvement, the level of sales improvement, the operating expenses improvement, and the increase in fixed assets. These are all at the core of the proposed strategy for restoring Body Shops performance. They reflect directly on managements plan to move inventory faster, to modernize the stores and to drive down costs through our supply chain. The debt needs vary fairly significantly with these assumptions. For example, if inventory turnover does not improve — that is it stays at 13.7% of sales — this will cost us ?5 million per year. If we scale back our modernization plan such that it only adds 10% to fixed assets rather than 15%, that will reduce our debt requirements by ?23.2 million. It will also impact our profitability improves in future years, however. If consumers do not respond to our initiatives and sales do not increase, it will cost us ?2.4 million in profit over this span, and more down the road.
In the coming years, the company will be making an investment in the future. This will result in a short-term deterioration of financial position as we take on more debt. The companys long-term debt ratio is 26.5% today and this will increase to 39% in 2004. However, Body Shops liquidity will remain strong.
Profits will continue to grow over this period. Shareholders will not only continue to receive their dividend but will also see an improvement in shareholders equity. Essentially, the company has the means to undertake this modernization, and will begin to see reward with an immediate return to profitability.
It is recommended that Body Shop contain the costs of the modernization. The forecast presented depends on the money spent going into store improvements, not contractors pockets. The more of our money that goes into the stores, the more our company will improve. Even at current rates of sales growth, we will return to profitability if we can make our cost-cutting measures stick. It is recommended that this be given highest priority of the three elements of Gournays plan. The third element, “reinforce our stakeholder culture” — I have no idea what that means but it does not appear to translate to our finances and therefore should be given lowest priority. In short, this path of cost cutting and revenue improvements looks like it will be a success. The revenue improvements will need to be dramatic in 2005 and beyond in order to justify the expenditure, however, because the immediate payoff is only a minor profit improvement. The final recommendation is to maintain.