Canada Hardware Case Study

Company Background

Canada Hardware Incorporated $($CHI$)$ has been operating in Canada for over $40$ years, with hundreds of stores located in every province and territory in Canada. The company has focused almost exclusively in Canada, figuring that its national reputation and knowledge of regional consumer preferences are one of the company$$s key strengths.

Acquisitions have been a key part of the company$$s success, with CHI purchasing the Sports company Sports Geniuses $15$ years ago and the apparel company Mike$$s Warehouse over $20$ years ago. With these acquisitions, the company has continued to be able to diversify its revenue stream and grow its operations despite limiting itself geographically to Canada. CHI was able to keep most of the management from companies it acquired, as CHI focuses on the acquisition of strong companies with experienced management who are passionate about their roles but require the financial power of CHI to truly achieve their executive vision.

CHI organizes itself into three segments: hardware, apparel, and sporting goods. Hardware stores $($under the banner Canada Hardware$)$ offer auto, hardware goods, home, and other supplies. Apparel stores $($under the Mike$$s Warehouse banner$)$ predominantly offer clothes for men over the age of $30.$ The sporting goods stores operate under the banner Sports Geniuses and sell sports equipment, apparel, and accessories.

The company$$s mission statement, extracted from the company$$s annual report, is included below:

$$Our mission is to provide customers with quality goods and services, operate efficient and profitable stores that generate the expected return to shareholders, and innovate with new technology and ideas to provide our customer with competitive prices, superior service, and novel experiences.$$

The company had its initial public offering $($IPO$)$ seven years ago and has paid a steady dividend since then. It trades on the Toronto Stock Exchange under the ticker CHI.TO$.$

Discussion with Chief Executive Officer $($CEO$)$

Tony Stark, CEO of CHI, has been concerned with the future of CHI, particularly for the next fiscal year $(2023).$ 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 $1\mathrm{.}5\%$ and $2\mathrm{.}3\%$ for $2023.$ 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 $2022,$ 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 $2022$s high, but also does not believe it will go below $2021$s gross profit margin.

CHI had increased its marketing expenses significantly in $2020,$ 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 $2022,$ 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 $2022$ developing new technology to improve the store experience and also be