Body Shop International

Joseph Brock Taylor

Professor Khan

Case Studies in Finance

February 5, 2015

THE BODY SHOP INTERNATIONAL PLC 2001:

AN INTRODUCTION TO FINANCIAL MODELING

Assignment Questions:

1. Why would a company like the Body Shop want to forecast its financial statements? 

Anita Roddick, a founder of The Body Shop, stepped down as chief executive officer in 1998 after numerous unsuccessful attempts to reinvent the company. Patrick Gournay replaced Roddick as the company’s CEO. Despite the management change, in revenue year 2001, revenue grew 13%, but pretax profit decline by over 21%. Gournay said of the results, “This is below our expectations and we are disappointed with the outcome”. Gournay was convinced that a newly implemented strategy would produce improved results. The strategy consisted of three principle objectives: to enhance The Body Shop Brand through a focused product strategy and increased investment in stores, and to achieve operation efficiencies in the company’s supply chain by reducing product and inventory costs, and to reinforce the company’s stakeholder culture. To ensure that Gournay was able to successfully implement these new strategies, it was important that he forecasted the company’s financial statements. By doing so, it would help him to increase operational efficiencies and lower product and inventory costs.

1. Let us vault past the exercise questions and go straight into the three-year forecasts: How did you prepare your forecast and what numbers did you get?

I prepared the financial forecast for the next three years for The Body Shop by using two different methods of financial forecasting. One method was called T-accounting forecasting, which starts with a base year of financial statements, such as last years. The second method of forecasting that I used, is called percentage-of-sales forecasting. This method starts with a forecast of sales and then estimates other financial statement accounts based on some presumed relationship between sales and that account. The most widely used approach of financial forecasting is a hybrid of the methods discussed above. T-accounts are used to estimate shareholders’ equity and fixed assets, where as percent-of-sales forecasting method is used to estimate income statements, current assets and current liabilities.

My forecasting for The Body Shop over the next three years (2002-2004) is listed below.