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The Body Shop Plc

Financial Projection
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5/9/2016

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The Body Shop International Plc, previously being one of the fastest growing manufacturer retailers in the world,
operates in a niche naturally based skin care and hair care products. The company which used to grow at 20% per
annum in early to middle 1990s, had seen decline in growth to 8% in late 1990s impacted by stiff competition in the
market and brand repositioning from niche premium segment to mass retailer. Anita Roddick, the founder, stepped
down as CEO in 1998 and Patrick Gournay on-boarded as new CEO took the responsibility of regaining lost market
share, repositioned brand image and grow the business. Sales although grew by 13% in 2001, yet profitability
decline by 21%. New CEO has set the growth agenda with focus on product strategy and increased investment in
stores; achieve operational efficiencies in supply chain and hence reduce product and inventory costs and grow
profitability to reinforce stakeholders. The paper presents the thesis behind next three year financial projection of the
Body Shop Plc.
Method of Forecasting used

For the purpose of financial projection of The Body Shop International Plcs, percentage of sales

method has been used to build estimates. Assumptions are made based on last three years actual

financials and management expectation about future. In case of Income Statement and Balance

Sheet, most of the items are forecasted based on % of sales.

Assumptions behind Financial Projections

Income Statement Assumptions

Revenue Growth Annual growth has been assumed on an uptrend basis. Growth for 2002 is assumed at

15% and then extra 3% growth has been built for 2003 before it is assumed to be peaked at 20% in 2004.

This is also in line with management expectation which is planning to invest in focused product strategy

and investment in setting up new stores.

Cost of Sales It is observed that the cost of sales when measured on % of sales basis had shown

declining trend. It is assumed at 40% in 2002 which then assumed to reduce to 39% in 2003 and 38% in

2004. As per management the focus will be on to achieve operational efficiencies in supply chain and

reduce product and inventory costs.

Operating Expenses This is rising year over year and hence has been built with average hike of another

1% before it will peak at 55%. We assume the company will spend more advertisement and promotion so

as to mitigate competition. Exceptional and Restructuring cost being an one-time cost is ignored.

Interest Expense Interest cost is assumed at 6% p.a. Also in case of excess cash in balance sheet,

interest income has been assumed on excess cash at 6%. Interest Expense is shown on net basis.

Interest Expense Interest cost is assumed at 6% p.a. Also in case of excess cash in balance sheet,

interest income has been assumed on excess cash at 6%. Interest Expense is shown on net basis.

Tax Rate Tax rate is assumed at 30% of profit before tax.

Ordinary Dividend Dividend has been assumed at the same rate as it has been declaring and paying last

three years in absolute terms.

Balance Sheet

Cash Balance It is assumed to be maintained at $14.5 million every year end.

Accounts Receivable Is considered at 8% of sales which is at par with last year rate.

Inventory Is built as 33% of sales in 2002 and assumed to be on a declining trend to 30% buy 2004.

These are measured as % of cost of sales. This may be possible with management focus on inventory cost

reduction and improving efficiency of supply chain.

Other current assets It has been taken as % of sales based on last two years average at 4.7%

Net fixed assets It is maintained at 30% of sales based on last three years average. This resulted in

increase in investment in net fixed assets by $72.2 million. This is line with management belief of

investment in stores and focus on product strategy.

Other assets These are assets belonging to receivables pending in 2000 and 2001 on account of sale of

manufacturing plant. This is assumed to have been recovered in 2002.

Accounts Payable, Tax Payable, Accruals and Other Current Liabilities These are projected based on

last three years average. Except accounts payable, measured on cost of sales, the other three are based on %

of sales.

Overdraft balance has been assumed to be nil.

Debt or Long-term liabilities This has been used as a plug or balancing figure. Based on other

assumptions, debt goes up by $30 million over next three years. Although the base case assumption does

not result into negative debt, yet the logic has been build in the model to reflect negative debt which is also

known as excess cash over debt is shown as excess cash balance in the assets side.
Financial projections

Income Statement

Income Statement 28-Feb-99 28-Feb-00 28-Feb-01 28-Feb-02 28-Feb-03 28-Feb-04

Sales 303.7 330.1 374.1 430.2 507.7 609.2
Growth (%) 8.69% 13.33% 15.00% 18.00% 20.00%
Cost of sales 127.7 130.9 149.0 172.1 198.0 231.5
% of Sales 42.05% 39.65% 39.83% 40.00% 39.00% 38.00%
Gross profit 176.0 199.2 225.1 258.1 309.7 377.7
Gross Margin (%) 57.95% 60.35% 60.17% 60.0% 61.0% 62.0%

Operating expenses
Regular Expenses 151.4 166.2 195.7 228.0 274.1 335.1
% of Sales 49.85% 50.35% 52.31% 53.00% 54.00% 55.00%
Exceptional costs* 4.5 0.0 11.2
% of Sales 1.48% 0.00% 2.99%
Restructuring costs** 16.6 2.7 1.0
% of Sales 5.47% 0.82% 0.27%

EBIT 3.5 30.3 17.2 30.1 35.5 42.6

Net interest expense 0.1 1.5 4.4 3.4 4.2 5.5
% of Sales 0.03% 0.45% 1.18% 0.78% 0.83% 0.90%
Profit before tax 3.4 28.8 12.8 26.8 31.3 37.2
Tax expense 8.0 10.4 3.5 8.0 9.4 11.2
% of PBT 235% 36% 27% 30% 30% 30%

Profit/(loss) after tax (4.6) 18.4 9.3 18.7 21.9 26.0

Net Margin (%) -1.51% 5.57% 2.49% 4.35% 4.32% 4.27%
Ordinary dividends 10.9 10.9 10.9 10.9 10.9 10.9
Profit/(loss) retained (15.5) 7.5 (1.6) 7.8 11.0 15.1

* Exceptional costs in 2001 included redundancy costs (4.6 million), costs of supply chain development (2.4 million) and impairment of fixed
assets and goodwill (4.2 million). The exceptional costs of 4.5 million in 1999 were associated with closing unprofitable shops and an
impairment review of the remaining shops in the USA.

** Restructuring costs in 2001 and 2000 relate to the sale of manufacturing plants in Littlehampton, England, and to associated reorganization
costs. Restructuring costs in 1999 arose from the realignment of the management structure of the business in the US and the UK.
 Balance Sheet

Balance Sheet 28-Feb-99 28-Feb-00 28-Feb-01 28-Feb-02 28-Feb-03 28-Feb-04

Assets
Excess Cash 0.0 0.0 0.0 0.0 0.0 0.0
Cash 34.0 19.2 13.7 15 14.5 14.5
% of sales 11.2% 5.8% 3.7% 3.4% 2.9% 2.4%
Accounts receivable 27.8 30.3 30.3 34.4 40.6 48.7
% of sales 9.2% 9.2% 8.1% 8.0% 8.0% 8.0%
Inventories 38.6 44.7 51.3 56.8 61.4 69.4
% of Cost of sales 30.2% 34.1% 34.4% 33.0% 31.0% 30.0%
Other current assets 12.5 15.6 17.5 20.2 23.9 28.6
% of sales 4.1% 4.7% 4.7% 4.7% 4.7% 4.7%
Total Current Assets 112.9 109.8 112.8 125.9 140.3 161.3
% of sales 37.2% 33.3% 30.2% 29.3% 27.6% 26.5%
Net fixed assets 87.8 104.7 110.6 129.1 152.3 182.8
% of sales 28.9% 31.7% 29.6% 30.0% 30.0% 30.0%
Other assets*** 0.0 6.0 6.7 0.0 0.0 0.0
% of sales 0.0% 1.8% 1.8% 0.0% 0.0% 0.0%
Total assets 200.7 220.5 230.1 255.0 292.6 344.1
% of sales 66.1% 66.8% 61.5% 59.3% 57.6% 56.5%

Liabilities and Equity

Accounts payable 13.0 20.5 10.7 18.9 21.8 25.5
% of Cost of Sales 10.2% 15.7% 7.2% 11.0% 11.0% 11.0%
Taxes payable 11.3 11.7 7.1 12.9 15.2 18.3
% of sales 3.7% 3.5% 1.9% 3.0% 3.0% 3.0%
Accruals 10.8 15.6 11.5 16.3 19.3 23.1
% of sales 3.6% 4.7% 3.1% 3.8% 3.8% 3.8%
Overdrafts 0.0 0.3 0.7 0.0 0.0 0.0
% of sales 0.0% 0.1% 0.2% 0.0% 0.0% 0.0%
ain development (2.4
Other current liabilities 21.6 13.3 16.9 21.5 25.4 30.5
sts of 4.5 million in % of sales 7.1% 4.0% 4.5% 5.0% 5.0% 5.0%
Total Current Liabilities 56.7 61.4 46.9 69.7 81.7 97.3
% of sales 18.7% 18.6% 12.5% 16.2% 16.1% 16.0%
Long-term liabilities 28.0 36.7 61.2 55.9 70.5 91.2
% of sales 9.2% 11.1% 16.4% 13.0% 13.9% 15.0%
Other liabilities**** 1.7 1.0 0.4 0.0 0.0 0.0
% of sales 0.6% 0.3% 0.1% 0.0% 0.0% 0.0%
Shareholders' equity 114.3 121.4 121.6 129.4 140.4 155.6
% of sales 37.6% 36.8% 32.5% 30.1% 27.7% 25.5%
Total liabs. and equity 200.7 220.5 230.1 255.0 292.6 344.1
% of sales 66.1% 66.8% 61.5% 59.3% 57.6% 56.5%

Trial Assets 200.7 220.5 230.1 255.0 292.6 344.1

Trial Liabs and Equity 172.7 183.8 168.9 199.1 222.1 252.9
Plug: Debt (Excess Cash) - - - - - -

*** Other assets in 2001 and 2000 represented receivables relating to the sale of the company's Littlehampton manufacturing plant.

**** Other liabilities included mostly deferred taxes.

Scenario Analysis

Besides above assumptions which are considered as base case numbers, the financial estimates have also been tested

on two other scenarios which are considered as the optimistic and bear case scenario by changing assumptions on

critical variables.

Bear Case
Year Revenue Growth Cost of Sales Operating Cost Inventory
2002 13% 40% 53% 33%
2003 13% 40% 55% 33%
2004 13% 40% 57% 33%

Base Case
Year Revenue Growth Cost of Sales Operating Cost Inventory
2002 15% 40% 53% 33%
2003 18% 39% 54% 31%
2004 20% 38% 55% 30%

Optimistic Case
Year Revenue Growth Cost of Sales Operating Cost Inventory
2002 17% 40% 53% 33%
2003 20% 37% 54% 30%
2004 22% 35% 55% 27%

As a result, the net profit is expected to turn into losses in Bear Case, whereas in optimistic case, it is expected to

jump up to $31 million by 2004.

Bear Base Optimistic Bear Base Optimistic

Revenue Revenue Revenue Net Profit Net Profit Net Profit
2002 422.7 430.2 437.7 7.6 7.8 8.1
2003 477.7 507.7 525.2 2.8 11.0 19.5
2004 539.8 609.2 640.8 (3.8) 15.1 31.1

Recommendations

Based on forecasted financials, Sales is expected to increase from $374.1 million in 2001 to

$609.2 million resulting in nearly tripling of net profit from $9.3 million in 2001 to $26 million

in 2004. As a result, return on net worth or equity increases from 7.65% in 2001 to 16.73% in

2004 resulting in substantial return for shareholders.

1. Appendix Assumptions Base Case

Assumptions 2002 2003 2004 Remarks

Revenue Growth 15% 18% 20% Has been taken at 15% and then built extra 3% next year and peak rate of 20% for 2004 assuming initiatives will be taken for higher
growth. This is because of rise seen in last two years
Cost of Sales 40% 39% 38% This has declined and been maintained at 40% and on a declining trend for going ahead
Operating Expenses 53% 54% 55% This is rising year over year and hence has been built with average hike of another 1% before it will peak at 55%.
Exceptional and Restructuring cost is a one time cost and hence will have no future impact
Interest Expense 6% 6% 6% Interest expense has been assumed at 6%. For excess cash interest income of 6% has been built
Tax Rate 30% 30% 30%
Ordinary dividend 10.90 10.90 10.90 Maintained at last three years average rate
Cash 14.50 14.50 14.50 Assumed to have a fixed cash balance of $14.5 milion every year end
Accounts Receivable 8.0% 8.0% 8.0% Maintained at last year average rate
Inventory 33.0% 31.0% 30.0% Maintained at last three years average rate but on a declining trend. Inventory is measured at cost of sales
Other current assets 4.7% 4.7% 4.7% As per last two years
Net fixed assets 30% 30% 30% Maintained at last three years average rate
Other assets 0% 0% 0% 2000 and 2001 represents receivables relating to sale of manufacturing plant which is assumed to have been recovered in 2002
Accounts Payable 11% 11% 11% Maintained at last three years average rate. Accounts Payable is measured at cost of sales
Taxes Payable 3% 3% 3% Maintained at last three years average rate
Accruals 4% 4% 4% Maintained at last three years average rate
Overdraft 0% 0% 0% Assumed not to have any overdraft balance
Other Current Liabilities 5% 5% 5% Maintained at last three years average rate
2. Appendix 2 Assumptions Bear Case

The Body Shop Plc - Forecasted Financial Statements ($ million)

Assumptions 2002 2003 2004 Remarks
Revenue Growth 13% 13% 13% Has been taken flat at 13%

Cost of Sales 40% 40% 40% This has declined and been maintained at 40% and on a declining trend for going ahead
Operating Expenses 53% 55% 57% This is rising year over year and hence has been built with average hike of another 2% before it will peak at 57%.
Exceptional and Restructuring cost is a one time cost and hence will have no future impact
Interest Expense 6% 6% 6% Interest expense has been assumed at 6%. For excess cash interest income of 6% has been built
Tax Rate 30% 30% 30%
Ordinary dividend 10.90 10.90 10.90 Maintained at last three years average rate
Cash 14.50 14.50 14.50 Assumed to have a fixed cash balance of $14.5 milion every year end
Accounts Receivable 8.0% 8.0% 8.0% Maintained at last year average rate
Inventory 33.0% 33.0% 33.0% Maintained at last three years average rate but on a declining trend. Inventory is measured at cost of sales
Other current assets 4.7% 4.7% 4.7% As per last two years
Net fixed assets 30% 30% 30% Maintained at last three years average rate
Other assets 0% 0% 0% 2000 and 2001 represents receivables relating to sale of manufacturing plant which is assumed to have been recovered in 2002
Accounts Payable 11% 11% 11% Maintained at last three years average rate. Accounts Payable is measured at cost of sales
Taxes Payable 3% 3% 3% Maintained at last three years average rate
Accruals 4% 4% 4% Maintained at last three years average rate
Overdraft 0% 0% 0% Assumed not to have any overdraft balance
Other Current Liabilities 5% 5% 5% Maintained at last three years average rate
3. Appendix 3 Assumptions Optimistic Case

The Body Shop Plc - Forecasted Financial Statements ($ million)

Assumptions 2002 2003 2004 Remarks
Revenue Growth 17% 20% 22% Has been taken at 17% and then built extra 3% next year and peak rate of 22% for 2004 assuming initiatives will be taken for higher
growth. This is because of rise seen in last two years
Cost of Sales 40% 37% 35% This has declined and been maintained at 40% and on a declining trend for going ahead
Operating Expenses 53% 54% 55% This is rising year over year and hence has been built with average hike of another 1% before it will peak at 55%.
Exceptional and Restructuring cost is a one time cost and hence will have no future impact
Interest Expense 6% 6% 6% Interest expense has been assumed at 6%. For excess cash interest income of 6% has been built
Tax Rate 30% 30% 30%
Ordinary dividend 10.90 10.90 10.90 Maintained at last three years average rate
Cash 14.50 14.50 14.50 Assumed to have a fixed cash balance of $14.5 milion every year end
Accounts Receivable 8.0% 8.0% 8.0% Maintained at last year average rate
Inventory 33.0% 30.0% 27.0% Maintained at last three years average rate but on a declining trend. Inventory is measured at cost of sales
Other current assets 4.7% 4.7% 4.7% As per last two years
Net fixed assets 30% 30% 30% Maintained at last three years average rate
Other assets 0% 0% 0% 2000 and 2001 represents receivables relating to sale of manufacturing plant which is assumed to have been recovered in 2002
Accounts Payable 11% 11% 11% Maintained at last three years average rate. Accounts Payable is measured at cost of sales
Taxes Payable 3% 3% 3% Maintained at last three years average rate
Accruals 4% 4% 4% Maintained at last three years average rate
Overdraft 0% 0% 0% Assumed not to have any overdraft balance
Other Current Liabilities 5% 5% 5% Maintained at last three years average rate