Session 9: Net Working Capital Management 1

Session 9: Net Working Capital Management 1

In February 2002, Peter Saunders was appointed as Chief Executive Officer (CEO) of The Body Shop. During the last 10 years, the company had experienced growth: Revenues had increased from £147.4 million in 1992 to £377.7 million in 2002. However, the growth rate in Revenues was down from 27.5% in 1992 to 1.0% in 2002, the Operating Margin had decreased from 18.9% in 1992 to 8.8% in 2002 and Net Income was down from £16.5 million in 1992 to £5.4 million in 2002. Peter Saunders was looking at the financial statements of The Body Shop (see Exhibit 1). He was wondering how to create value for the shareholders.

Background

The Body Shop is a UK company, which sells "green" hair and skin products. In 1976, Anita Roddick, the founder of The Body Shop, opened her first store in Brighton. After 25 years of growth, The Body Shop operates 1,954 stores, in 50 countries (see Exhibit 2).

Anita Roddick headed The Body Shop for 20 years. However, she was an "unconventional" leader12, who was more concerned about the ethical and social, rather than the financial issues. In 1996, she stepped down as CEO and was replaced by Patrick Gournay, from Danone.

At the end of the 1990s, The Body Shop was struggling in the US. That is why, in June 1998, the company entered a joint venture with Bellamy Retail Group (BRG). BRG was headed by Adrian Bellamy. who had experience in the retail industry in the US. He appointed Peter Saunders as Chief Operating Officer (COO) and in three years, the two men improved the profitability of The Body Shop in the US: the operating loss of $13.1 million in 1999 became on operating profit of $5.1 million in 2001. In July 2001, The Body Shop acquired BRG, for £7.9 million.

In September 2001, The Body Shop announced that it had received interest from third parties (Grupo Omnilife, BNP Paribas and Lush), who were exploring the possibility of acquiring the company. However, in February 2002, after several months of discussion, the Board of Directors issued a statement, announcing that: (1) The Body Shop would remain independent and (2) the composition of the Board of Directors had change:

•Anita and Gordon Roddick had stepped down as Co-Chairmen, and had been
replaced by Adrian Bellamy. However: (1) Anita Roddick remained a non-executive
director and, in March 2002, she entered a two-year consultancy agreement with The
Body Shop and (2) with their friend Ian McGlinn, the Roddicks remained the major
shareholders 13 (see Exhibit 3)

•Patrick Gournay had stepped down as CEO and executive director, and had been
replaced by Peter Saunders.

Competitors

The Body Shop benefits from a strong brand. According to the 1997 Interbrand Survey, The Body Shop is ranked 28th brand in the world, and 2nd a in the retail industry. However, in the 1990s, as competition increased, The Body Shop lost its differentiation.

The major competitors are Avon, Boots, Estée Lauder and Limited Brands, the company behind Bath and Body Works (see Exhibit 4).