Principles of Managerial Finance

CHAPTER 2 Financial Statements and Analysis 63

In Practice

Specialized financial analysis tools

can help companies achieve sig-

nificant improvements in ratio

measures of performance. With

assistance from sophisticated new

software programs, for example,

companies can convert masses of

historical sales data into useful

information that guides pricing

strategy and improves operating

efficiency.

Like many of its rivals,

ShopKo Stores, a Fortune 500 dis-

count chain based in Green Bay,

Wisconsin, had no underlying

strategy to sell slow-moving

items. It used “guesstimates” to

reduce prices a bit at a time, until

eventually the merchandise sold.

However, total sales suffered from

the company’s having no way to

determine the maximum price at

which goods would sell. Because

the dollar volume of sales enters

into both the numerator and the

denominator in the gross profit

margin, when sales numbers were

down, the ShopKo’s gross profit

margin also suffered.

Software from Spotlight

Solutions, a Cincinnati company,

applied information technology to

ShopKo’s decisions about mark-

downs. Company research indi-

cated that multiple markdowns are

not so profitable as properly timed

single markdowns. It developed a

program (Markdown Optimizer) to

automate optimal price change ac-

tions so that retailers can achieve

higher sales and margins from ex-

isting merchandise inventories.

The program analyzes several

years of sales figures on similar

products and develops a demand

pattern, taking into account the

sensitivity of customer demand to

price changes (price elasticity).

The software is dynamic—that is,

it “learns” retail customers’ pref-

erences and incorporates that in-

formation into its models.

During a six-month pilot proj-

ect, ShopKo provided three years

of sales data on 300 apparel, home,

and other products. Markdown

Optimizer ran through a series of

mathematical models to arrive at

optimal timing for and amount of

price cuts. ShopKo tracked and

compared sales for these clear-

ance items using the recom-

mended markdowns. Sales on

those products were 14 percent

higher than the prior year. The

company’s gross profit margin

rose 24 percent, despite flat same-

store sales in one quarter. ShopKo

now uses Markdown Optimizer for

all products.

Sources: Amy Merrick, “Retailers Try to Get

Leg Up on Markdowns with New Software,”

Wall Street Journal(August 7, 2001), pp. A1,

A6; “ShopKo Uses Spotlight Solutions

Price Optimization Software,” downloaded

from Spotlight Solutions Web site, http://www.

spotlightsolutions.com/cshopko.html,

November 6, 2001.

FOCUS ONe-FINANCE ShopKo’s Software Solution

operating profit margin
Measures the percentage of each
sales dollar remaining after all
costs and expenses other than
interest, taxes, and preferred
stock dividends are deducted;
the “pure profits” earned on each
sales dollar.

Hint This is a very
significant ratio for small
retailers, especially during times
of inflationary prices. If the
owner of the firm does not raise
prices when the cost of sales is
rising, the gross profit margin
will erode.

Bartlett Company’s gross profit margin for 2003 is

32.1%

This value is labeled (1) on the common-size income statement in Table 2.7.

Operating Profit Margin

The operating profit marginmeasures the percentage of each sales dollar remain-

ing after all costs and expenses other thaninterest, taxes, and preferred stock div-

idends are deducted. It represents the “pure profits” earned on each sales dollar.

Operating profits are “pure” because they measure only the profits earned on

operations and ignore interest, taxes, and preferred stock dividends. A high oper-

ating profit margin is preferred. The operating profit margin is calculated as

follows:

Operating profit margin

Operating profits



Sales

$986,000



$3,074,000

$3,074,000$2,088,000



$3,074,000