Prepare a basic income statement forecast for the subsequent fiscal year, using a percentage of sales approach and using information included in the materials below to support assumptions that correspond for each revenue and expense. Each line item (e.g., marketing expenses) should have a note and an explanation on how it was calculated.

Tony Stark, CEO of CHI, has been concerned with the future of CHI, particularly for the next fiscal year (2018). He has asked you to help in preparing a financial forecast for the next year.

Tony does not expect there to be much change in the hardware segment, with revenue growing in line with Real GDP which has been forecasted to grow between 1.5% and 2.3% for 2018. Inflation is expected to remain low at 1%, with the influence on prices ultimately being passed on to the consumer.

The Sporting Goods segment is expected to be 20% of total CHI revenue (including inflation), as CHI has partnered with the NHL to sell more NHL jerseys and equipment in Sports Genius stores. CHI has just started experimenting with these strategic partnerships, and feels that there are more opportunities available in the Canadian market. CHI has also started expanding its sports offerings to offer more hiking, weightlifting, and nutritional products to take advantage of Canadians growing health and active conscious preferences. This has been built into the 20% of revenue assumption.

Total CHI revenue is expected to grow 10% (includes inflation).

Gross margin is expected to decrease from 2017, due to higher promotional activity to boost sales volume. "We have been very successful in developing our own products internally," boasted Mr. Stark. "This has allowed us to continue to drive down product costs and develop high brand reputations for some of our brands including our Fathercraft drills and Katcheno kitchen appliances." Mr. Stark does not believe that gross profit margin will reach 2017's high, but also does not believe it will go below 2016's gross profit margin.

CHI had increased its marketing expenses significantly in 2015, hiring more staff and running more advertising campaigns. "We have done well with our core customers in maintaining their loyalty, especially through our rewards program," explained Tony Stark. "However, we have had issues with attracting new customers from the millennial and Gen Z segment, especially with our focus on more traditional advertising on television, radio, and print. This year, we want to increase our marketing breadth with several digital campaigns including social media. We have also partnered with Canadian celebrities in our attempt to attract more youth to our stores, so we expect marketing costs to be at 12% of our sales for the year."

CHI invested heavily in online and digital operations in 2017, include new proprietary technology developed internally by CHI's research department.

"This year, we had to focus more on the digital game and experience," informed Tony. "The retail landscape has changed. People are shopping more and more online, but they still want to come into the store if they get an experience there! We spent an enormous amount of money in 2017 developing new technology to improve the store experience and also be able to understand our 12 million customers in our loyalty program. We now leverage that data from our customers that we get from every purchase they make while collecting loyalty points, allowing us to better serve them. No other retailer in Canada has the loyalty or frequency of customers that we do, with our loyalty customers spending twice as much on the average purchase as non-loyalty members. This investment cost us on the bottom line, but I expect R&D expenses to return to historical norms in 2018."

Employee turnover has also been a significant issue in the last few years at CHI, especially in the apparel segment. CHI has lost some key employees at the retail store level who have left for international competitors that have more perks and better pay. The minimum wage hikes in several Provinces are expected to significantly impact employee costs, but Tony Stark already had plans brewing for better employee compensation before the government regulations set in.

"The minimum wage hikes provide us an opportunity to emphasize the importance of our front-line employees," lectured Tony Stark. "Now, all the retailers are on a level playing field, as the new wages are higher than what most retailers were paying their employees. We can afford to pay employees this amount or more without cutting front-line jobs, which is what our competitors have been doing. I hope better wages will help solve some of our customer service issues, as the number of customer complaints per product sold has risen over the last few years."

"However, we will have to make our corporate structure a little bit leaner due to the wage hikes and the weakening economy out West and in the East. I anticipate there to be some restructuring at the corporate office as we look for more efficiency. My estimate is that general & administrative costs will be 14% of 2018 revenue."

Depreciation & amortization costs are expected to increase 50% in 2018 due to higher capital expenditures on software, in-store development, and new equipment purchases. In order to support some of these costs, CHI will take on another $1.5B in debt at the same interest rate as its current long-term debt holdings that mature in 2022. CHI is also selling several properties to a real estate developer as it rationalizes its store fleet, and expects to record a one-time gain of $250M from the sale in 2018.

Mr. Stark suggests that you take the average tax rate over the past five years for the forecast when calculating the taxes owed to get to net income.