January 08, 2013

Kaley's Knits: The Profit And Loss Statement

Yesterday, we saw that top-line demand is growing, nicely.  Life is good, right?

I like to see at least four years of financial results, three years at minimum.  We get an opportunity to see just how healthy a business is.  A table, such as the table illustrated below, should be part of Analytics 101 training and Executive Management 101 training.
Oh, no.

Demand increased from $17.8 to $20.1 million over the past four years.

Earnings Before Taxes decreased, from $2.2 million four years ago to $1.5 million today.

In other words, this business is struggling, struggling badly, right?

Here's your homework assignment for today - which lines in the profit and loss statement illustrate why this business is struggling to produce profit?


  1. Anonymous9:09 PM

    First, Gross Margins are flat across the time period; COGS is growing very fast, ~31% vs. 13% Demand growth. Second, Fixed costs have jumped the past two years. Third, Pick/Pack/Ship is growing slightly faster than Demand.

    The cash story should be interesting.

  2. co x mktg guy6:59 AM

    Obviously margin issues. So .. I have this debate weekly with owner of company X. He can't get over 2008. P&L looks identical to Kaley. While there are a lot of moving parts lets focus on the margin issue. We clearly have been driving business with promotion more than 2008. 25% of business now email with 5 points less margin (so there is 1.2 points, bit more on the catalogs, summer sale has deeper discounts ... and some natural category mix shifts. Fortunately have stayed away from affiliates. He wants his five points back ... hates promotion. We are raising prices, cutting back on promotion to get back to the glory days. I caution him that the business model has changed ... its not that simple. You may have to accept less margin to compete in today's world.On line shopping environment is different (amazon!) This could be dangerous. One more fact our customer is a male old guy (can't remember the Hillstrom name ... jessica jasimine .. ??). I think we can pull back a bit .. grab back one point of margin, but a radical change shift is risky. We are what we are. Agree?

  3. Here's my two cents - discounts are like the stimulus program the US government used several years ago. Stimulus (discounts) prevent certain elements of the p&l (demand/net sales) from crumbling, but impact other lines (margin/cash/profit).

    When you take the stimulus away, lines that were being propped up (demand/net sales) will crumble ... while lines that were hurt (margin) will be restored.

    Most of us want to fix demand/sales AND we want to fix margin. That's tough. We raise prices, which fixes margin, but it can hurt demand/sales, and if it helps demand/sales, it may hurt customers, which hurts long-term demand/sales.

    I once created a simulation for my CEO - the CEO could change any line in the p&l + customer file, and the result of the change would ripple through the p&l + customer file. This is a fun exercise, because you get to see all of the moving parts.

    Furthermore, you get to quickly see just how important merchandise productivity is. Everything ultimately comes down to merchandise productivity, we just don't have a line in the p&l to reflect merchandise productivity (though in retail, we're close with the comp-store sales measure).

    1. co x mktg guy7:06 AM

      playing with the P&L is easy ... knowing the correct assumptions is the hard part. I can provide scenarios but what we need is the "answer". Its a gains vs gains needed thing. Testing is of course the only real answer and even that is suspect today because of the complexities of attribution in a multichannel world. It can be done but often complex and expensive to do a good test. Plus the impact of becoming more promotional is more of a long term issue ... feels like you get the gain to cover the margin loss in the short term (a season) but over the course of a couple years it feels like you just gave away the margin. My guess in long run being more promotional hangs around breakeven ... the question is are you a little better off or a little worse off ... thus the debate continues.

  4. You're the marketing guy ... it's your job to have the answer!!


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