Catalog Analysis: Profit and Loss Statements Part 2

In June we looked at the profit and loss statement, discussing how a catalog P&L or income statement is different from that of a manufacturer and reviewing what is meant by cancellations, returns, exchanges, cost of goods, and gross margin. Now we’ll look at what goes into the fulfillment, advertising, and general and administrative aspects of the profit and loss statement. Let’s start by examining the remaining cost centers.

Fulfillment: The cost of receiving customers’ orders, inquiries, and catalog requests and of shipping products to them, fulfillment also includes the cost of order entry, computer systems, warehousing, shipping, returns, and customer service. For most “mature” catalogs, the net cost of fulfillment should be in the 10%-15% range.

I prefer including shipping and handling revenue from customers as a credit to fulfillment on the P&L rather than recording it as gross income or sales. Regardless, you must know exactly what it costs to ship one order. To calculate this, take your total fulfillment cost, subtract your S&H revenue, then divide by the number of orders shipped.

Advertising: A huge percentage of the cost of most catalogs, advertising includes fixed and variable costs, such as design, photography, production, printing, paper, binding, lists and list processing, and postage.

Fixed creative costs are enormous for catalogers with smaller mailings. For instance, if a catalog’s fixed cost is $50,000 and it mails only 200,000 copies of the test catalog, fixed costs are $250/M, or $0.25 per book mailed. If the same catalog with the same $50,000 fixed cost is mailed to 1 million names, fixed costs drop to $50/M, or only $0.05 per book.

Further, the higher the response, the lower advertising is as a percent of sales. Say a catalog’s variable printing, mailing, and postage costs are $600/M, or $0.60 a piece. The variable costs of mailing 500,000 books would therefore be $300,000. Now let’s say the cataloger mails 90% of its books to prospects, pulling a 1% response with an average order value (AOV) of $100. That translates to 5,000 orders and $500,000 in revenue. Advertising as a percent of sales equals 60%.

But assume that the cataloger mails 60% of its books to buyers; it pulls a 3% response with a $100 AOV, or 15,000 orders and $1.5 million in sales. Advertising as a percent of sales is now 20%.

A mature catalog mailing to a higher percentage of buyer names can drive its cost, as a percent of sales, to less than 25% for printing, paper, binding, mailing, and postage variable costs and at or near 30% for the combined fixed and variable costs.

Contribution to overhead and profit: This is what is left from gross margin after subtracting fulfillment and advertising. Most catalogers like to control their fixed costs to 7%-8%. With an overall goal of a 10% pretax profit, this contribution line in the model must be achieved or the pretax goal will never be realized.

General and administrative (overhead): These expenses are typically not allocated to each promotional campaign but instead assigned to the monthly, quarterly, or annual income statement. G&A expenses include general management costs, capital or interest charges, and outside service providers.

List rental income: It is not uncommon for a strong, in-demand catalog list to turn its 12-month buyer list rentals 20 or 30 times annually. Any list rental income is normally reported at the bottom of the financial model after contribution to overhead and profit.

Pretax profit: This is the starting point as a goal and the ending point after all expenses are deducted from revenue. Th pretax profit line on the model is sometimes referred to as EBIT — earnings before interest and taxes.

Smart marketers build a plan for each mailing campaign that forecasts expected merchandise sales in units and dollars, list response, AOV and sales per catalog mailed, advertising costs, and expected fulfillment cost per order. All of these costs along with forecasted returns and cancellations are entered into a P&L format similar to the one below. At the end of the catalog cycle, the actual sales and costs are entered into the P&L. Variations between plan and actual are noted and explained.

Identifying and benchmarking your key costs against your company’s predetermined financial model and your industry’s financial model will allow you to constantly evaluate how you are doing.

Jack Schmid is president of J. Schmid & Associates, a Shawnee Mission, KS-based catalog consultancy.

CATALOG/INTERNET Profit and Loss Statement

Category Plan ($) Net sales (%) Actual ($) Net sales (%) Variance
Gross merchandise sales $2,097,472
Returns $147,139 7.0%
Cancellations $26,856 1.3%
Net sales $1,923,477 100.0%
Cost of merchandise $734,876 38.2%
Freight in $38,393 2.0%
Markdowns/excess $56,421 2.9%
Shrinkage $9,865 0.5%
(Co-op advertising or freight allowance) ($55,938) (2.9%)
(Cash discounts) ($30,143) (1.6%)
Cost of goods $753,474 39.2%
Gross margin $1,170,003 60.8%
Call center fees $50,876 2.6%
Order receipt and order entry $71,463 3.7%
Systems/computer processing $88,269 4.6%
Warehousing $55,287 2.9%
Pick, pack, and ship $79,157 4.1%
Credit card hees $32,151 1.7%
(Shipping and handling income) ($139,909) (7.3%)
Fulfillment $237,294 12.3%
Catalog creative (fixed) $123,328 6.4%
Color separations (fixed) $63,107 3.3%
Printing — catalog and order form $188,123 9.8%
Lists and list processing $9,812 0.5%
Binding, addressing, and mailing $16,894 0.9%
Postage $145,963 7.6%
Other fixed costs $39,845 2.1%
Advertising $587,072 30.5%
Contribution to overhead and profit $345,637 18.0%
General management $35,619 1.9%
Building, maintenance, and ultilities $67,765 3.5%
Capital charges $5,535 0.3%
Divisional or company allocation $16,618 0.9%
Outside services (consultants) $40,000 2.1%
Overhead or general and administrative $165,537 8.6%
List rental income $25,000 1.3%
Pretax profit (EBIT) $205,100 10.7%