'Holly Fashion\r'

'cASE 6 HOLLY FASHIONS tail end I O A N A LYSI S B na hireousion-dollal a pp bel c ompanies s uch a s C alvin K lein a nd L iz C laiborne a re odd i n t he g arment i ndustry, w hich c onsists p rimarily o f m uch s malier apparel m akers. O ne s uch f irm i s H olly F ashions ( HF), l ocated i n C herry F lill, New J eriey. H F w as s tarted 1 4 y ears a go b y W illiam H amilton a nd J ohn W hite, who b etween t hem h ad o ver 2 5: socio-economic classso f e xperiencew ith a m ajor g arment m anufacturer.A nd t he p artnership i niti all in ally 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 lair f or m erchandising a nd trim 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 ashions. ‘ h ite, o Utgoing a nd f orceful, h as c ontributed important m erchandising a nd m arketing i deas, b ut h as m ainly a ssumed 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 ompany, m uch preferring t o w ork o n d esigning n ew f ashions 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 palpebra h e h ad b etter become m ore i nvolved w ith t hd c ompanys f inancials. His m otivation i s t wofold. F irst, h e i s c onsidering t he s ale o f h is 5 0 p ercent interest 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 chapeau t he f irm h as e xperiencedi n r ecent y ears.P eriodically, t he retailers H F d eals w ith h ave e ncountered f inancial p loblems a nd h ave s tlung come on t heir p ayments, w hich o ften c aused 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 egotiations s urrounding t he c ompanys v a1ue. T hough h e w ould h ire a c onsul tant 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 early(a) r eason t chapeau H amilton i s i nterested i n t he f irms f inancials i s s o h e can b etter j udge t he m anagerial c ompetence o f l Alhite. Ahen I IF w as s mall 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 capable 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 that 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 genuinely e ntoys b eing a n o wner o f a n a pparel f irm.B ut h e t hinks t he a pparel industry w ill f ace 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 uccessfullym eet t hese c hallenges. acceptation CONCEB. NS A4rites p ersonality i s s uch t hat h e m akes v irtually a ll m ajor o perating a nd financial d ecisions. A n i m portant e xample o f t his w as h is d ecision t hree y ears ago t o r etire a ll l ong-term d ebt/ a m ove t riggered b y W hites f ear t hat 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 concerned t hat f irms t he s ize o f H F h ave h ad d ifficulty m aintaining s table 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 â€Å"treacherous” a nd t hinks t hat l oan o fficers a re c apable o f ” chewing u p m y t ime. Harnilton isnt sure what to obtain of these arguments, but he is concerned that this debt turning away has significantly r take outd FIFs financial tract top executive because it means that all pro tects will suck up to be equity financed. In fact, over the past five years t here h ave b een n o d ividends b ecausea ll e arnings h ave b een r einvested. And 2 years ago each of the partners had to wreak $15,000of capital in order 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. ( externalise xhibit 2 . E More j mportantly, h owever, H amilton f eels t hat 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 hat t his h urts t he p rofitabiiity o f t he f lrm t o t he t wo o whers. WORKING large(p) CONCERNS Hamilton s uspectst hat F {Fsi nventory i s ” excessive” a nd t hat ” capital i s u nnecessarily t ied u p i n i nventory. ” n/hites p osition i s t hat a l arge i nventory i s n ecessary t o p rovide s peedy d eli very t o c ustomers. H e a rgues t hat ” our c ustomers expect q uick s ervice a nd a l arge i nventory h elps u s t o p rovide i t. Hamilton is skeptical of this argument and wonders if there isnt a mole efficient w ay o f p roviding q uicker s ewice. H e k nows t hat a c onsultant r ecommended t hat 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 educe i nventory a ld a lso share big orders from retailers much(prenominal) as Kmart and Wal-Mart. VVhite jilted the suggestion 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 ranting p ayment extensions t o c ustomers, a nd a t o ne p oint n earlyish 4 0 p ercent o f t he c ompanys receivablesw ere m ore t han 9 0davs o verdue. F urther. / hite w ould c ontinue t o . C ASE6 H OLLYF ASHIONS 37 accept and ship orders to these qeta ilers eyen when it was clear that their ability 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 uptight times these retailers face are altogether temporary. Hamilton also wonders about the wisdom of spill up softwood discounts. HF is often offered terms ol 1. 1. 0, net 30. That is, the company receives a l-percent discount if a bill is stipendiary in ten days and in any event full requital is expected within 30 days. ffiite seldom takes these discounts because he â€Å"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 especially too-generous emd 99 percent of the bill essential still be paid. ” FINAL THOUGHTS in spite of ill of Hamiltons concems, however, the retationship between the twain partners has been relatively smooth over the years. And Hamilton admits that he may be unduly critical of yhites instruction decisions. After 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 black every year since we started, which is an impressive record, really, for a f um i n o ur b usiness. ” Further, Hamilton has discussed with two condultants the possibility of selling his half of the firm. Since FIF is not publicly traded, the market 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 between $55 and $55 per share, figures that â€Å"seem quite good” to Hamilton. QUESTIONS 1 Calculate the firms 1995 dimensions listed in Exhibit 3. . P art o f H amiltons e valuationw ill c onsisto f c omparingt he f irms r atios t o . the industry poesy shown in Exhibit 3. (a) Discuss the limitations of such(prenominal) a comparative financial analysis. (b) In view of these limitations, why are such industry comparisons so frequentlym ade? 3, Hamilton thinks Siamese the profitability of the firm to the owners hasbeenh urt by Whites reluctanceto use ftuch inteiest-bearing debt. Is this a reasonable flummox? E xplain. 4. The case mentions that {hite rarely takes trade 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 position is that White has not competently managed the firm. curb this position using your previous an. swers nd other information in a the c ase. 38 PARTII FINANCIAL digest 7. Vyhites position is that he has effectively managed the firm. stomach this position using your previous answers and other information in the case. 8. Play the eccentric of an arbitratoi.Is it possible based on an question of the firms r atios a nd o ther i nformation i n t he c aset o a ssessW hites m anagerial competmce? Defend your position. 9. ( a) A re t he r atios y ou c alcul:ited 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. face 1 Holly F ashionsI ncome S tatements:1 993-1996 ( 000s) 1993 Sales Costo f g oods vernacularmargin Adrrinistrative Dq)reciation EBIT lnterest EBT Taxes solve 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! EXHIBIT 2 BalanceS heetso { t he H olly F ashionsC ompany: f 993-1996 ( 000s) 1993 ASSETS cash $40. 4 Receivables r53. 2 Inventory 117. 0 5. 9 Other cwrent Current assets ‘u. 8 Grossf ixed Accumulaied depreciation (12. 0) 32. 8 Net headstrong tote upa 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. _a;l continued) C ASE6 H OLLYF ASHIONS 39 EXHIBIT 2 (Con tirwed) t993 LIAB]LITIES & NET WORTH Accounts account payable Debt due Accruals Current liabilities Long-term debt uncouth s tock Retained e arnings Total 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 EXHIBIT 3 Financial 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. liquid state RatiosCurlent Quick Leverage atios R Deb(%) 41.. 1 37. 7 35. 3 8. 0 8. 5 11. 6 6. 4 6. 4 4. 8 FixedA sset Turnover 30. 0 29. 3 30. 1 TotalA sset Turnovet 2. 8 2. 8 2. 7 Timesinterest eamed employment Ratios lnventory Tulnover ( cgs) 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 Period Days Pulchases cracking* * (Present) 1996 1993-1996+ 50 68 18 31 25 32 ProfitabilityR atios M Gross argin ( %) 24. 0 25. 5 24. 9 Net Profit Margin (%) 3. 0 2. 6 2. 6 Return on loveliness (%) 14. 3 11. 6 0. 8 8. 4 7. 2 7. 0 5. 8 6. 0 6. L Retum on Total ( Assets %) ope rational Margin*** (%) 26 3. 1 ‘1. 2 27. 3 19. 5 7. 8 11. 8 8. 7 9. 9 7. 2 3. 1 iThe thr€e numbers for each ratio arc comPuted in the following wsy. Ratios for all firms in dre indushy are arranged in what is consider€d a strontest-to-weakest order The pose number rePl€senis the median ratioj that is, half the firms in the industry had mtios better than the median ratio and half had ratios that wer€ worse The top nunlber represents the fastness qua4ile figure; meaning 25 Pelcent of the firms had ratios befter tlran this.The glare 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. Calculated ; is A /P †( CGS/360). 1**Calculateda s ( EBIT + D ep)/Sales.\r\n'