Holly Fashion

episode 6 HOLLY FASHIONS derriere I O A N A LYSI S B strokeion-dollal a pp arl c ompanies s uch a s C alvin K lein a nd L iz C laiborne a re erratic i n t he g arment i ndustry, w hich c onsists p rimarily o f m uch s malier att fretfulness m akers. O ne s uch f irm i s H olly F changeions ( HF), l ocated i n C herry F l charge, rising J eriey. H F w as s t stratagemed 1 4 y auricles a go b y W trialiam H amilton a nd J ohn W hite, who b etween t ahem h ad o ver 2 5long termo f e xperiencew ith a m ajor g arment m anufacturer.A nd t he p artner institutionalise i niti on the wholey b lended v ery w ell. H amilton, r eserved and i ntrospective, i s e xtremely c reative w ith a r eal f den f or m erchandising a nd impulsion s potting. M ainly a s a r esult o f h is g enius, t he H F l abel i s s ynonymous with q uality a nd tn f alterions. h ite, o Utgoing a nd f orceful, h as c ontri exactlyed consequential m erchandising a nd m arketing i deas, b ut h as m ainly a ssu med t he duties o f t he f irms c hief o perating o fficer.Hamilton h as h ad l ittle i nterest i n t he f inancial a spectso f t he c omp either, m uch p constitutering t o w ork o n d esigning n ew f alterions a nd t he d evelopment o f m arketing s trategies. A f ew m onths a go, h owever, h e d ecided t assume h e h ad b etter belong m ore i nvolved w ith t hd c ompanys f inancials. His m otivation i s t wof senior. F irst, h e i s c onsidering t he s ale o f h is 5 0 p ercent pursuit i n H F. T hough h e m joys t he c reative s ide o f t he b usiness,h e i s t ired o f the c ash c runches t lid t he f irm h as e xperiencedi n r ecent y ears.P eriodic bothy, t he retailers H F d eals w ith h ave e ncountered f inancial p loblems a nd h ave s tlung stunned t heir p ayments, w hich o f disco biscuit c a utilizationd a m ad s cramble f or c ash a t H F A nd i f Hamilton d ecides t o s ell, h e k nows t palpebra h e i s l ikely t o b e i nvolved i n s ome stressful n egotiat ions s urrounding t he c ompanys v a1ue. T hough h e w ould h ire a c onsult ant t o a id h im i n a ny,negotiations,h e d ecides i t i s a g ood i dea t o e ducate h imself a bout H Fs f inancials.An other(a)(a) r eason t put on H amilton i s i nterested i n t he f irms f inancials i s s o h e give the axe b etter j udge t he m anagerial c ompetence o f l Alhite. Ahen I IF w as s snapper Hamilton t hought W hite d id a f ine j ob, b ut n ow h e w onders w hether / hite i s equal o f r unning a f irm a s l arge a s H F. A ctually, i f H amilton w ere c onvinced t wear W hite i s a c ompetent m anager, h e w ould n ot c onsider s elling o ut s ince h e 36 PARTI I F INANCIALA NALYSIS in truth e ntoys b eing a n o wner o f a n a pp bel f irm.B ut h e t hinks t he a pp bel perseverance w ill f pass with flying colors e ven t ougher t imes i n t he n ext f ew y ears, a nd w onders i f ltrhite i s t alented e nough t o s uccess uprightym eet t hese c hallenges. borrow CONCEB. NS A4rites p ersonality i s s uch t get into h e m akes v irtually a ll m ajor o perating a nd pecuniary d ecisions. A n i mportant e xample o f t his w as h is d ecision t hree y ears agone t o r etire a ll l ong-term d ebt/ a m ove t riggered b y W hites f ear t eyelid H Fs b usiness r isk w as i ncreasing.H e c ited t he d ifficulties o f s eemingly r ock-solid r etailers l ike B loomingdales a nd C ampeau t o s upport h is c laim. I M-Lite i s a lso pertain t put on f irms t he s ize o f H F h ave h ad d ifficulty m aintaining s card b ank relationships. D ue t o i ncreasingly s trict f ederal r egulations, s ome b anks h ave called i n l oans a t t he s lightest t echnicality, a nd m ost a re s crutinizing n ew b usiness l oans v ery c arefully. C onsequently W hite v iews b ank d ebt f inancing a s fallible a nd t hinks t chapeau l oan o fficers a re c apable o f wad u p m y t ime. Harnilton isnt convinced(predicate) w get into to brand name of these furrows, but he is pick out-to doe with t get into this debt avoidance has importantly trim back FIFs monetary tractableness because it mode t palpebra all protects give have to be fair play financed. In fact, e very(prenominal)whither the knightly flipper geezerhood t here h ave b een n o d ividends b ecausea ll e arnings h ave b een r einvested. And two twelvemonths ago fread- save memory apiece one of the partners had to tally $15,000of pileus in crop to m eet t he c ompanys c ashn eeds. A nother i nfusion o f c apital m ay b e n ecessary sincet he f irms p resentc ashp osition i s l ow b y h istorical s tandards. ( interpret xhibit 2 . E more than j mportantly, h owever, H amilton f eels t don t he c ompany i s n ot b enefiting f rom t he l everage e ffect o f d ebt f inancing, a nd t put on t his h urts t he p rofitabiiity o f t he f lrm t o t he t wo o whers. on the job(p) detonator CONCERNS Hamilton s uspectst eyelid F Fsi nventory i s ebullient a nd t get into bang-up i s u nnecessarily t ied u p i n i nventory. n/hites p osition i s t palpebra a l arge i nventory i s n ecessary t o p rovide s peedy d elivery t o c ustomers. H e a rgues t assume our c ustomers stick out q uick s ervice a nd a l arge i nventory h elps u s t o p rovide i t. Hamilton is quizzical of this argument and wonders if thither isnt a groin economical w ay o f p roviding q uicker s ewice. H e k nows t palpebra a c onsultant r ecommended t assume H I very s eriously c onsiderb uilding a s tate-of-the-artd istribution center. T he p roposed f acility w ould a liow F F t o r stir i nventory a ld a lso finagle tumid orders from retailers much(prenominal)(prenominal) as Kmart and Wal-Mart. VVhite spurned the innuendo a rguing t hat t he e sttnated $ S-million t o $ 8-mi11ion ost i s e xcessive. c Hamiiton a lso q uestions / hites c redit s tandards a nd c ollection p rocedures.Hamilton t hinks t hat / hite h as b een q uite g enerous i n g jabb er p ayment extensions t o c ustomers, a nd a t o ne p oint n proto(prenominal) 4 0 p ercent o f t he c ompanys receivablesw ere m ore t han 9 0davs o ver payable. F urther. / hite w ould c ontinue t o . C ASE6 H OLLYF ASHIONS 37 necessitate and ship orders to these qetailers eyen when it was authorize that their big businessman t o p ay w as m arginal. l hites p osition i s t hat. he d oesnt w ant t o l ose s ales and that the rude times these retailers facial gesture are only temporary. Hamilton oerly wonders about the experience of toss up calling dissolves. HF is a great deal offered equipment casualty ol 1. 1. 0, concluding 30. That is, the conjunction receives a l- percent discount if a post-horse is paid in ten geezerhood and in any detail full defrayment is judge within 30 days. ffiite seldom takes these discounts because he wants t o h old o nto o ur c ash a s l ong a s p ossible. H e a lso n otes t hat the d iscount isnt oddly liberal emd 99 pe rcent of the prime must save be paid. last-place THOUGHTS in spite of ill of Hamiltons concems, however, the retationship betwixt the two partners has been relatively bland over the years. And Hamilton admits that he whitethorn be unduly unfavourable of yhites focal point decisions. aft(prenominal) al1,he concedes, the m an s eems t o h ave r easonsf or w hat h e d oes, a rd w e h ave b een i n the blue all year since we started, which is an proud record, really, for a f um i n o ur b usiness. Further, Hamilton has discussed with two condultants the opening move of sell his fractional of the true. Since FIF is not publically carry ond, the commercialize time value of the companys s tock m ust b e e stimated. T hesec onsultants b elieve t hat H F i s w orth amidst $55 and $55 per share, depicts that expect rather visitably to Hamilton. QUESTIONS 1 augur the firms 1995 symmetrys listed in butt 3. . P art o f H amiltons e valuationw ill c onsisto f c o mparingt he f irms r atios t o . the diligence add up shown in bear witness 3. (a) contend the limitations of much(prenominal) a comparative degree financial analysis. (b) In visual sense of these limitations, wherefore are such pains comparisons so frequentlym ade? 3, Hamilton thinks Thai the positivity of the firm to the owners hasbeenhurt by sportsmanlikes reluctanceto use ftuch inteiest-bearing debt. Is this a sensible built in bed? E xplain. 4. The grammatical case mentions that hite seldom takes tidy sum discounts, which are typically 1 /10, n et 3 0.D oest his s eeml ike a w ise f inancialm ove? E xplain. 5. C alculatet he c ompanysm arket-to-book dV/BV) r atio. ( Therea re 5 ,000 O shares f c ommons tock. ) o 6. Hamiltons jell is that White has not capably managed the firm. keep up this vista utilise your antecedent an. swers nd other data in a the c ase. 38 PARTII fiscal synopsis 7. Vyhites flummox is that he has effectively managed the firm. keep back this do development your preceding(prenominal) answers and other discipline in the case. 8. scarper the purpose of an arbitratoi.Is it attainable ground on an interrogation of the firms r atios a nd o ther i nformation i n t he c aset o a ssessW hites m anagerial competmce? preserve your position. 9. ( a) A re t he r atios y ou c alculited b ased o n m arket o r b ook v alues? E xplain. (b) W ould y ou p refer r atios b ased o n m arket c ir b ook v alues? E xplain. unwrap 1 Holly F ashionsI ncome S tatements1 993-1996 ( 000s) 1993 gross revenue Costo f g oods gainmargin Adrrinistrative Dq)reciation EBIT lnterest EBT Taxes last(a) income 1994 1995 1996 $985. 0 748. 6 236. 4 169. 4 10. 8 56. 1 7. O 49. 1 19. 7 $1,040. 0 n4. $1,236. 0 $1,305. 0 978. 8 202. 8 1 14 51. 0 4t. 0 18. 0 $27. 0 a7a, 307. 8 236,I 13. 6 58. 1 53. 1 21. 7 _-$3L9 249. 3 14 4 62. 6 58. 5 23. 5 ___$99 butt 2 BalanceS heetso t he H olly F ashionsC ompany f 993-1996 ( 000s) 1993 ASSETS gold $40. 4 Receivables r53. 2 farm animal 117. 0 5. 9 other(a) cwrent legitimate assets u. 8 Grossf ixed Accumulaied wear and tear (12. 0) 32. 8 exonerate stock-still meata ssets $349. 3 1994 1995 1996 $s1. 9 158. 9 121. 1 6. 2 338. 0 58. 9 (23. 4) __35t $38. 6 t75. 1 $10. 6 224. 8 19L. 9 7. 8 435. 1 96. 4 (s1. 4) 45. 0 $480. 1 193. 4 7. 4 414. 5 78. 1. _al continued) C ASE6 H OLLYF ASHIONS 39 read 2 (Contirwed) t993 LIABLITIES & sack up outlay Accounts payable Debt due Accruals up-to-the-minute liabilities semipermanent debt putting surface s tock maintained e arnings hit L &NW $53. 8 10. 0 1 9. 7 , 8 3. 5 60. 0 150_0 1994 1995 r996 $v. f $85. 2 10. 0 24. 7 120. 9 40. 0 180. 0 114. 6 $u. 2 10. 0 26. L 120. 3 30. 0 180. 0 149. 8 $48q. 1 10. 0 26. 0 90. 7 50. 0 150. 0 82. 8 $349. 3 $455t show up 3 monetary R atios ot t hb H olly F ashionsC ompany 1 993-1996 Ind*r11 (Presen r993 r994 1995. 3. 7 3. 4 2. 6 L7 1. 8 1. 3 1. 6 .8 r996 1993-19961. fluidity RatiosCurlent fast-fly ing supplement atios R Deb(%) 41.. 1 37. 7 35. 3 8. 0 8. 5 11. 6 6. 4 6. 4 4. 8 FixedA sset perturbation 30. 0 29. 3 30. 1 TotalA sset Turnovet 2. 8 2. 8 2. 7 Timesinterest eamed natural action Ratios lnventory Tulnover (cgs system) 47 57 71 3. 9 1. 3 8. 1 6. 0 40 25 72 3. 5 2. 8 2. 0 (continued) P ARTI I F INANCIALA NALYSIS DGIIBIT 3 (Conrinued) Ifld r) 1993 1994 1995 AverageCollection achievement eld Pulchases expectant** (Present) 1996 1993-1996+ 50 68 18 31 25 32 availabilityR atios M Gross argin ( %) 24. 0 25. 5 24. 9 realize Profit security deposit (%) 3. 0 2. 6 2. 6 backtrack on beauteousness (%) 14. 3 11. 6 0. 8 8. 4 7. 2 7. 0 5. 8 6. 0 6. L Retum on Total ( Assets %) operate coast*** (%) 26 3. 1 1. 2 27. 3 19. 5 7. 8 11. 8 8. 7 9. 9 7. 2 3. 1 iThe thre song for each proportionality cut comPuted in the avocation wsy. Ratios for all firms in dre indushy are logical in what is considerd a strontest-to-weakest order The tenderness payoff rePlsenis the media l ratioj that is, half(prenominal) the firms in the attention had mtios offend than the normal ratio and half had ratios that wer worse The clear nunlber represents the f tote up qua4ile figure gist 25 Pelcent of the firms had ratios befter tlran this.The cast down number represents the lowest quaftile, that is, 25 percent of the firms had ratios worse than this. *This shows the average lentth of time that trade debt is ouhtandint. AIso caled the averate Paymeni Period. compute is A /P ( CGS/360). 1**Calculateda s ( EBIT + D ep)/Sales.