Case Study: Retail Sales and Gross Profit Analysis
A retail client of high-end women’s clothing with yearly sales of approximately $3 million had been experiencing lower net income over the previous few years. It was unsure why this was happening, as its gross revenue had been increasing each year. To help identify the issue, we used our dashboard approach, which summarizes and compares several years of revenue and expenses, and the reason for the underperformance quickly became apparent.
The dashboard showed that the gross profit margin was increasing, but not at the same percentage as gross revenues. This was revealed when we highlighted the drop in the gross profit margin percentage. The client informed us that several years before it had made a strategic decision to improve its net income by increasing the number of discount sales, with the belief that this would increase traffic and gross revenue. The strategy did indeed cause gross sales to increase, from $2.5 million to $3 million, but the impact of the product discounts was a decreasing bottom line due to the decline in the gross profit margin percentage.
We suggested that the client stop the practice of having numerous sales and instead increase prices by 10% to lift the gross profit margin to 55%. This was the appropriate strategy given that the client was a price maker with an exclusive product line and client base. We were able to convince the client that this would increase its bottom line by approximately $200,000 annually. The impact of this change would not be a dollar-for-dollar increase to the bottom line (i.e., increasing sales by 10% or $250,000 would not increase profit by $250,000), as there would be a drop-off in clients and revenue due to the price increase. It was not an easy decision for the client to make. Once it did, we suggested watching the results closely over the next few months, and in fact, at the end of the year the result was an 8% increase in gross revenue and an increase in gross profit margin to 54%. The client’s bottom line had increased by over $180,000 for the year.