For part of my assignment for my MBA, We had to prepare the consolidated financial statements (Balance sheets, income statements and cashflows). Next part of our assignment we had to compute the percentage change and common size percentages. For our third part of the assignment we have to prepare pro-forma forecasting of Urban Outfitters Financial Statements using one of the two following approaches:
1.Forecast the next two years by using the three-year average rate of growth in sales of the last three years
Increase all items in the Income Statement by that percentage, including depreciation.
Make the Balance Sheet balance by increasing cash in the next two years by the amount of net income for each year and increasing Retained Earnings for the amount of net income for each year.
2. Forecast the next two years by using some other percentage, such as 5%. In practice, the choice of percentage to use will be a committee decision. The assignment is to focus on what to do with the assumed percentage increase, not how to get it. Also in practice, some items on the Income Statement will not increase with sales-this will vary from company to company. Depreciation may remain constant for example. then multiply the forecasted earnings per share amount by a recent price-earnings multiple as reported by Yahoo Finance for the company. Do this to forecast the future stock price.
Using the first Approach, where the three-year average rate of growth in sales is used to forecast for the two year period, first we calculate the average rate of sales growth over the past three years. Given that Sales for the past three years is as given below,
Fiscal Year Ended January 31,
2009 2008 2007
Sales $ 1,834,618 $ 1,507,724 $ 1,224,717
Then the sales growth rate is as shown below with 2007 being the base year:
2007 2008 2009 Average rate of growth (%)
Sales growth rate - 23.1 21.7 22.4
The average rate of sales growth is 22.4%, which implies that all items in the Income statement including depreciation will be increased by this value.
The forecasted values will be as shown below:
Consolidated Statements of Income
(in thousands, except share and per share data)
Fiscal Year Ended January 31, (Actual Data) Forecasted Data
2009 2008 2007 2010 2011
Net Sales $ 1,834,618 $ 1,507,724 $ 1,224,717 2,245,572.40 2,748,580.70
Cost of sales, including buying, distribution
and occupancy costs 1,121,140 930,952 772,796 1,372,275.40 1,679,665.10
The expert prepares pro-forma forecasting OF urban outfitters financial statements.