De La Salle University

Ramon V. Del Rosario College of Business

Management of Financial Institutions Department

Case Analysis on

THE BODY SHOP INTERNATIONAL PLC

In partial fulfillment

of the course requirements in

MSC535M – Financial Management

Submitted to Prof Ken Yumang

Prepared by Group 4

Jed Abapo

Clarice Acorda

April Joy Balabat

Jonalyn Mendoza

Adonis Lee Villamor

 TABLE OF CONTENTS

I. CASE BACKGROUND 2
II. PROBLEM STATEMENT 2
III. POINT OF VIEW 2
IV. ASSUMPTIONS, SCOPE and LIMITATIONS 2
V. CASE ANALYSIS AND FRAMEWORKS 3
A. Concepts and Frameworks 3
B. Financial Analysis 3
a. Income Statement 3
b. Balance Sheet 4
c. Financial Ratios 5
Liquidity Ratios 5
Leverage and Coverage Ratios 6
Profitability Ratios 6
d. FS Forecast 7
C. TOWS 9
VI. ALTERNATIVE COURSES OF ACTION 10
VII. LOGICAL CONCLUSION and RECOMMENDATION 11
VIII. REFERENCES Error! Bookmark not defined.

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 I. CASE BACKGROUND

The Body Shop International PLC (The Body Shop,TBS), founded by Anita Roddick in

UK and opens her very first shop in Brighton in 1976 . TBS is a multinational company which

mainly producing natural inspired ethically skin and body care product solely made by 100%

organic and against animal testing. TBS headquartered in London, UK. The company offers its

products under various categories such as cosmetics and beauty, bath and body, hair and gifts,

products for men to home fragrance. It has more than 2700 outlets in 66 countries, selling more

than 1200 products which those ingredients get from all over the world through fair trade.

II. PROBLEM STATEMENT

Based on the forecast and and ratio analysis, what will TBS Financial Manager advice to

top management to address reduction in product and inventory cost, increased in investment in

stores and reinforce stakeholder value?

III. POINT OF VIEW

We will analyze the case from the point of view of The Body Shop International’s

financial manager/analyst.

IV. ASSUMPTIONS, SCOPE and LIMITATIONS

a. In analyzing and computing financial data analysis and ratios, the results are

based on the available financial data provided in the case.

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 V. CASE ANALYSIS AND FRAMEWORKS

A. Concepts and Frameworks

a. Percentage-of-sales forecasting

The percentage of sales method is used to calculate how much financing is needed to

increase sales. The method allows for the creation of a balance sheet and an income statement.

The equation to calculate the forecasted net income is: Forecasted Sales = Current Sales x (1 +

Growth Rate/100).

B. Financial Analysis

a. Income Statement

The company’s Sales, COS and

Gross Profit has an upward trend from

1999 - 2000. This means that TBS Sales

has the potential to grow more for the

coming years.

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b. Balance Sheet

4
 c. Financial Ratios

Liquidity Ratios
The company experienced a slight decline in Current and Quick ratio from 1999 to 2000

but was increased in 2001 by 34% and 24%, respectively.

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Leverage and Coverage Ratios
Leverage ratios have a slight upward trend from 1999 to 2001.

Profitability Ratios
Company’s profitability ratio is quite not good. There was an increased in 2000 but had s
slight decrease in 2001.

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d. FS Forecast

FS Forecast based on 38% COGS/SALES

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 It is indicated in the case that the financial analyst wanted to try the following

variations/assumptions for the company’s forecasted financial statements:

● Sales in 2002 – 500M

● COGS runs at 45% of Sales
● Dividends are increased to 60% of Net Income
● Double manufacturing capacity by adding 100M facility in 2002
● Inventories run higher than expected (increase Current Assets to 40% of Sales)
● AR collections improve so that Current Assets run at 28% of sales
● Operating expenses increase faster than sales

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C. TOWS

Threats Opportunities

● Stiff competition on new retailers ● Growth in men’s skin care

of naturally based skin - and hair- products
care products
● No marketing and advertising
department
● rapid changes in consumer
preferences

Weaknesses Strengths

● Founder is unconcerned with ● Brand

financial results ● Innovative Products
● Failed to maintain its brand image ● High brand loyalty
● Strong international presence
● Below expectation financial
● Successful leadership skills
performance; pretax profit down
by 21%
● Lack of advertising

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 VI. ALTERNATIVE COURSES OF ACTION

ACA 1
ACQUIRE DEBT TO FINANCE $100M INVESTMENT AND OPERATIONAL NEEDS

Advantages Disadvantages

● Increased manufacturing capacity to ● Will affect the company’s credit rating.

achieve product-focused strategy ● Ability of the company to recover
● The company’s growth may continue interest over long term against its
without hindrance of operations. working capital.
● Allow operations to invest in additional
stores to increase distribution of its
products.
● Tax benefit on interest expense.

ACA 2
DECREASE DIVIDENDS PAYOUT TO SUPPORT INVESTMENT AND
OPERATIONAL NEEDS

Advantages Disadvantages

● Provide minimal risk on the future of ● The cut in dividends might be

the company while increasing in cash displeasing to shareholders.
in order to continue operations.
● Greater return is expected as
dividends are used for manufacturing
and distribution expansion.
● Greater value is promoted as
dividends is invested to generate
growth in revenue.

ACA 3
BOTH ACA 1 AND ACA 2 BASED ON THE RISK APPETITE OF THE COMPANY

Advantages Disadvantages

● Will provide a mix of risk and return ● Ability of the company to pay interest
to the company. over a long term period and continued
● Leveraging can be achieved. payment of dividends to stakeholders.
● Tax benefit on the interest portion.
● Shareholders still receives dividend
once profit margin has increased.

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 VII. LOGICAL CONCLUSION and RECOMMENDATION

The objectives of the company are:

1. To reduce product and inventory cost

2. To increase in investment in manufacturing and distribution channels

3. To reinforce stakeholder value

In order for the company to generate increase in sales, the company should be able to

produce quality products through an effective and efficient manufacturing facility and

distribution channels. Hence, it will create a better return to all stakeholders. Both alternatives

are coupled with cost, that is debt to expense and equity to dividends, but we should put a

greater emphasis on the urgency of the problem of the company. Therefore, we recommend that

the company should acquire debt financing and decrease dividend payout - ACA 3.

Leveraging is important to generate revenue at the minimal cost. Appropriate mix of debt and

equity financing will result to sustainable operations over period of time.

Medium and long-term business plans are coupled with financial plan based on a master

budget that starts with sales budget down to inventory and expense budget. These budgets can be

zero-based or moving to address sensitivities to scenarios of the company’s expectation.

Movement in the master budget can be easily reflected in the forecasted financial statements of a

company. While, forecasting model of the TBS is acceptable, a master budget will likewise

recommendable for business and financial planning.

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