Garb and Gear Sports

is an independent sporting goods store located in a small town

approximately 60 minutes from

the Greater Toronto Area

(GTA)

. About half the town's population

lives in the older section of town; the other half consists mostly of younger families living in

recently built subdivisions to the south of town. Nearly all of the residents of these subdivisions

commute daily to their work in the GTA.

Housing developer

s have

applied to the

the

town planners

plans

for co

nsiderably more housing development over the next ten years.

Garb and Gear

is owned by Bob ("

Buddy

") Guy

, age 34

, who has for many years been a high-

profile personality in the local sports community. Following in his father's footsteps, Buddy

was a

star p

layer for the local high school football team and the town's Junior "C" hockey team that won

the town's first (and only

) provincial championship in 2004. He still plays for the town's

Intermediate hockey team, which has a considerable following among the l

onger

-term residents of

the town. Buddy

's life centres around sports --

he attends most sporting events in town, supports

and participates in team and league fund

-raising activities and is well-

known to practically everyone

involved in the local sports com

munity.

Ten years ago, Buddy

decided to go into the sporting goods business for himself. Family members

and friends provided some equity capital and the new business was incorporated, with Buddy

owning 60% of the shares and his family and friends 40%.

Wi

th his start-

up capital and a mortgage from the bank, Buddy

was able to purchase a package of

land on a major road near the south edge of town. The purchase of the land and construction of the

store was financed in part by a $183,500 mortgage

, at 8.0

percent interest

. Last year, the payments

on the mortgage totalled about $18,400, of which approximately $10,400 was interest and $8,000

was principal

repayment

. The principal remaining on the loan was approximately $

125,000.

After 201

2, the town grew and the area around Buddy

's store became built up into a quite

prosperous neighbourhood. Strip malls developed, and

Garb and Gear

is now located in a busy

commercial area. The store's property taxes are $1

8,000 per year.

The land package that Buddy

bought c

onsisted of two lots on a corner. The store was built on one

lot; the other remained vacant. Buddy

had originally thought of building a parking lot on the other

lot but never did so. At first, this was because he already had considerable debt and was reluc

tant to

borrow more in order to build a parking lot. Later, as time passed, he found he didn't need to use the

lot for parking --

he had a few parking spaces beside his store and the development of a strip mall

beside him provided more spaces. A hockey tea

mmate who is a local realtor thinks the vacant lot

could now be worth as much as $120,000.

About 70% of

Garb and Gear

's sales consist of equipment and uniforms bought by local teams.

The largest customers are hockey

, soccer,

and baseball teams associated with town and county

2

leagues, but school volleyball, soccer, football and other teams account for a good proportion of

sales as well. It was sales to local teams that formed the original basis for starting

Garb and Gear

,

with

Buddy

's personal association w

ith so many local sports people providing the key to these sales.

While sales to teams still represent 70% of Garb and Gear

's revenues

, they have not been growing

much in recent years. In particular, kids' leagues, which were once a major aspect of the tow

n's

sporting scene, have not grown much over the past decade. In fact, league player registrations have

been slowly declining, partly due to declining family size and partly due to competition from other

activities for children.

About 30% of

Garb and Gear

's sales consist of regular ("walk

-in") retail trade that consists of a

wide range of sports and recreational merchandise. Its main retail competitor in town is the

Canadian Tire store. This is an older store that is relatively small by modern Canadian Tir

e

standards. It offers low prices, but stresses high-

turnover items and lacks higher

-quality and

specialty items. People have commented to Buddy

that Canadian Tire's prices are good, but that it is

lacking in customer service.

As noted earlier, most of

Ga

rb and Gear

's

selling has been through Buddy

's personal contacts with

teams. In addition, the store regularly runs a small ad in the local newspaper, which is

printed twice weekly and distributed free to each household in town. The paper stress

es local news,

and

Buddy

has heard that a survey conducted by a group of retailers indicated that its readership

consists mostly of longer

-term residents. In addition,

Garb and Gear

advertises on the sports show

on the local cable TV channel that covers co

mmunity events, and in the local arena.

For several years, Buddy

has provided part

-time employment in his store for several members of

the town's Junior "B" hockey team. While he knows that they are not the most knowledgeable sales

staff concerning many o

f the products in the store, Buddy

is happy to help out the team in this way.

When his accountant and bank manager pointed out that his labour costs were unusually high,

Buddy

replied that this was "a good way for me to put something back into the sports c

ommunity

that's been so good to me."

While his "walk

-in" business accounts for only 30% of his sales, this business is very important to

Buddy

. According to his accountant, one way of looking at

Garb and Gear

'

s financial records is

that in the last few y

ears the sales to teams have pretty well covered

all the business' costs, while the

"walk

-in" trade has provided most of the profits.

Buddy

knows that inventory management is a problem for him. It was easier at first, when almost

all of his sales were to team

s -- all he had to do was order the amounts of each product needed by

each team and package the items up for delivery or pick

-up.

In addition, the teams paid him when

they placed their orders. However, ordering inventory for his retail trade has been a cha

llenge for

Buddy

. He feels that he has to carry a reasonably broad range of inventory in order to attract "walk

-

in" customers, but too often, sales of particular items have not been as strong as he had expected,

leaving him with out

-of-season stock that ha

d to be sold off at a loss. In other cases, Buddy

would

sometimes find that he didn't have the exact item that a customer wanted and had to order it.

Sometimes the customer would wait for it; at other times he/she would go elsewhere, usually to a

larger s

tore in the Greater Toronto area.

3

Buddy

's accountant has pointed out his declining inventory turnover rate

(increasing days

inventory)

and the resultant growing levels of inventory, and how this is causing increases in his

short

-term debt and interest exp

enses. She suggested a couple of years ago that Buddy

introduce

more sophisticated purchasing techniques and a computerized inventory control system. However,

Buddy

has done nothing done yet in these areas --

he likes sports and selling more than record-

keeping and working at a computer.

When he was single and in his twenties, the store provided Buddy

with a decent income from his

salary and share of the profits. However, he is now married and his own income has not increased

significantly for a few years,

while his family responsibilities have been growing. Buddy

knows that

his bank manager is concerned about his slow sales growth and the level of debt and rising

inventories. He wants his business to grow with the town, but to do so will require access to bank

credit to finance higher inventories and future expansion. From discussions with his bank manager

and accountant, he has learned that in order to gain access to this credit, he will have to improve

Garb and Gear

's profitability.

Buddy

isn't sure wha

t to do. As he's fond of saying, "I'm not really a businessman --

I'm a sports guy

who happens to own a business." (He dropped out of Sheridan College's Business Administration

program after first year, having had particular difficulty with the Accounting and Finance courses,

and skipping most of his Marketing classes because they conflicted with hockey practices. He now

wishes that he had stayed in college and learned more about business.)

Buddy

's bank manager and accountant have provided him with the st

atistics in Exhibit 2, which

compare some of

Garb and Gear

's financial results to the industry average for sporting goods

stores. However, Buddy

doesn't know what to make of all this information. He comes to you, as a

friend who knows more about business t

han he does, for suggestions as to how he can improve the

financial performance of his business.

4

Wages

include

Buddy

's salary of $3

2,000 in 2016, $33,000 in 2017 and $34,000 in 2018. Buddy also

received 60%

of

the

dividends paid out in each ear, making his total income in

2018 $41,200

($34,000 of salary

plus $7,200 in dividends).

5

Exhibit 2

Financial Ratios, 2018

Pe

rcent of Revenues

Industry

Garb and Gear

Average

Sales Revenue

100.0%

100.0%

Cost of Goods Sold

71.1

70.0

Gross Profit

28.9

30.0

Operating Expenses:

Wages

16.2

13.2

Advertising

1.0

2.1

Rent

0.0

7.8

Property taxes

2.0

N.A.

Interest

3,8

N.A.

Utilities

0.8

N.A.

Depreciation

1.0

N.A.

Other

0.7

N.A.

Total Expenses

25.8

25.0

Ne

t Profit before tax

3.3

5.0

Net profit after tax

2.1

3.5

Garb and

Industry

Gear

Average

Inventory in days:

2016

132

120

2017

138

122

2018

148

121