CASE 1 Harrod's Sporting Goods Jim Harrod knew that service, above all, was important to his customers. Jim and Becky Harrod had opened their first store in Omaha, Nebraska in 1991. Harrod's carried a full line of sporting goods including everything from baseball bats and uniforms to fishing gear and hunting equipment. By the year 2004, there were twelve Harrod stores producing $5 million in total sales and generating profit of over $200,000 per year. On the positive side, there was an increasing demand for sporting goods as leisure time activities continued to grow. Also, the state of Nebraska, where all twelve stores were located, was experiencing moderate growth. Finally, there had been sharp upturn in the last decade for women's sporting goods equipment. This was particularly true of softball uniforms for high school, college, and city league women's teams. Jim's wife Becky was one of the top softball players in the city of Omaha and her extensive contacts throughout the state help to bring in new business. While Nebraska is primarily known as a football state, Omaha actually hosts the college baseball world serried each year in June and this generates a lot of interest in baseball (and softball as well). Jim, who had been a walk-on third string offensive tackle at the University of Nebraska (the Comhuskers in Lincoln, Nebraska), took great pride in his stores as well as his prior university affiliation. He and Becky (also a University of Nebraska graduate in the mid-1980s) contributed $2,000 annually to the University of Nebraska athletic program. The growth in the stores was the good news for Jim and Becky. The less than good news was the intense competition that they faced. Not only were they forced to compete with nationally established sporting good stores such as Oshman's and the Academy, but Wal-Mart and Lowe's also represented intense competition for the sporting goods dollar. It appeared that every time Wal-Mart opened a new store near one of its locations, Lowe's put up one of its "big-boxes nearby The national stores were extremely competitive in terms of pricing. However, Jim, Becky and their employees offered great personal service, and they hoped this would allow them to continue with their specialty niche. In January of 2004, Becky, who served as the company's chief financial officer, walked into Jim's office and said, "I've had it with the First National Bank of Omaha. It is willing to renew our loan and line of credit, but the bank wants to charge us 2% percentage points over prime. The prime rate is the rate at which banks make loans to their most creditworthy customers. It was 4.75 percent at the time Becky had visited + Case 1 the bank, so that the total rate on the loan would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod's was being asked to pay 2% percent over prime. She felt that Harrod's was a strong enough company that one percent over prime should be all that the bank required. Her banker told her he would review the firm's financial statements with her next week and reconsider the premium Harrod's was being asked to pay over prime. While Becky knew the bank "crunches all the numbers," she decided to do some additional financial analysis on her own. She had a bachelor's degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3. Harrod's Sporting Goods Income Statement (2001-2003) 2001 2002 2003 $4,269,871 $4,483,360 $5,021,643 2.991.821 2.981.434 3.242.120 Sales. Cost of goods sold 1,278,050 865,450 1,501,926 1,779,100 1,004,846 1.175.100 Gross Profit Selling and administrative expense. Operating profit. Interest expense. Extraordinary loss. Net income before taxes. Taxes 412,000 115,300 497,080 122,680 604,423 126,241 170,000 297,100 104,100 374,400 131,300 308,182 107,864 Net income $ 193,200 $ 243,100 $ 200,318 Case 1 Figure 2 Harrod's Sporting Goods Cash Marketable securities. Accounts receivable.. Inventory..... Total current assets Net plant and equipment... Total assets.. Balance Sheet (2001-2003) 2001 2002 2003 $ 121,328 $ 125,789 $ 99,670 56,142 66,231 144,090 341,525 216,240 398,200 972.456 1.250.110 1.057.008 1,491,451 1,658,370 1,698,968 1.678.749 1.702280 1.811.142 $3,170,200 $3,360,650 $3,510,110 Liabilities and Stoc"holders' Equity Accounts payable. $ 539,788 $ 576,910 $ 601,000 Notes payable... 160.540 180.090 203.070 Total current liabilities. 700,328 757,000 804,070 Long-term liabilities 1.265,272 1.292.995 1.372.240 Total liabilities. 1,965,600 2,049,995 2,176,310 Common stock 367,400 368,000 368,000 Retained earnings 837,200 942,665 965,800 Total Stockholders' equity 1.204.600 1,310,655 1,333,800 Total liabilities and stockholders' equity.. $3,170,200 $3,360,650 $3,510,110 Figure 3 1. 2. a. b. 3. a. b. 4. 5. 6. Harrod's Sporting Goods Selected Industry Ratios Net income/Sales 4.51% Net income Total Assets 5.1% Net income/Sales x Sales to Total Assets 4.51 x 1.33 Net income/Stockholder Equity 9.8% Net income to Total Assets/(1-debt total assets) 5.1% /(1-0.48) - 9.8% Sales/Receivables 6.75 x Sales/Inventory 3.01 x Sales/Fixed Assets 3.20 x Now, with the adjusted net income numbers as part of the ratios for 2003, write a brief one-paragraph description of trends that appear to have taken place over the three-year time period (refer back to the data in Question 1 for 2001 and 2002). Complete the financial analysis, using the revised profitability ratios for 2003 that you developed in Question 3, for Harrod's Sporting Goods using the entirety of the major ratios for all three years as follows: a. Profit Margin** b. Current Ratio c. Quick Ratio d. Inventory Turnover** e. Accounts Receivable Turnover** f. Days Sales Outstanding g. Fixed Assets Turnover** h. Total Assets Turnover i. Debt Ratio j. Times Interest Earned Ratio ho Note: All ratios indicated by ** have industry comparisons