We first start off by looking at the gross profit margin. By tracking the gross profit margin it allows us to keep an eye on profitability trends. In the case of Watson Sporting Goods, the gross profit margin has not fluctuated much from one year to the next (going up by 1% each year). With an adequate gross margin the company will be able to pay its operating and other expenses and build for the future.
Although 39% is a good gross profit margin, there are two ways that Watson Sporting Goods can improve it. First, they can increase their prices. Second, they can decrease the costs to produce their goods. Although an increase in prices can cause sales to drop, this method requires a careful reading of inflation rates, competitive factors and basic supply and demand for the product Watson is producing.
Another method to increase the gross profit margin would be to lower the variable costs to produce the product.
By decreasing material costs or making the product more efficiently this can be accomplished. In addition, the more material you buy from a supplier, the more likely you are to get a volume discount. This is a good way to reduce material costs. You can also look into finding a less costly supplier, however, you may sacrifice quality if the goods are not made as well.
In order to pay for the companies fixed costs, such as interest on debt, they must have a healthy operating margin. From 2002 to 2003 the operating profit margin went from 11.3% to 11%. In 2004 it jumped up to 12.5%, and this is a good thing because the company's margin is increasing, which means it is earning more per dollar of sales. The higher the margin the better because they have...