Grace and Elegance in the Fashion Industry Grace and Elegance is chain retailer in the apparel and beauty industry. The industry is highlycompetitive where products are easily replaced and become dated. Proud as a trend-setter in the industry, Grace and Elegance targets its products toward the high-end segment of the market, offering luxurious shopping experience as well as value. Grace and Elegance stores could be found in many shopping establishments. Grace and Elegance has formed its brand image through advertising campaigns via the main mass media channels as well as specialisedpromotional events. Strategizing on marketing, design, price, service and quality, Grace and Elegance has established a brand name for itself. The fashion retail industry is highly competitive. There is a broad range of other retailers including department stores, online sites, factory outlets, chain specialty stores, and individualretailers. The company's market share in the apparel-based retail industry has remained unchanged over the last three years. Although the company's profit margin is consistent with the industry's gross profit margin of 32%, the company must develop and maintain a competitive advantage in the industry in order to avoid adverse effect on future financial performance. Grace and Elegance management has learned the hard way in 2016 and 2017 when they have overinvested in inventory of a well-known designer and the expected increase in sales did notmaterialise. In 2017, the company was required to write off a significant portion of its inventorydue to obsolesce. Following this setback, the company's board of directors has restructured themanagement team. Jason Weiss, a new CFO was appointed, together with a group of new management team. The new management team drives the company aggressively. Rulesregarding merchandise consignment were changed and new rules were implemented. As a result, a number of their suppliers have terminated their contract with Grace and Elegance. Tofulfil the void, the management has developed relationships with other suppliers who are mostly newcomers in the industry. The management also has commissioned designs from selected young designers. In 2019, Grace and Elegance has extended its business hours in order to gain more sales. Although the move has indeed gained the expected sales, the company also experienced an increased in administrative costs due to overtime claims. Business operations of Grace and Elegance are seasonal in nature, with two main selling seasons - December - February and June - August. The December - February period accounted for about one-third of net sales in 2019, 2020 and 2021. The seasonal nature of the business has caused seasonal fluctuations in net sales and operating income, with a significantoperating income typically realised during December - February. The company closes its accounts on 31 March each year. This is to allow more time to count inventories and produce its annual financial statements following high selling period. The following financial information was extracted from the company's books. Grace and Elegance Staicunt of biome for the year cuded 31 Mach 2021 2020 2019 RM'000 RM-000 KM'000 244,455 217,325 195,945 (167,900) (119.555) (135.285) 67,770 76,195 60.000 (51,940) (18.170) (11,220) (17,510) (13.855) (11,130) (2,790) 0 1,255 5,745 4.185 (4,175) (4,055) (4,025) 2,730 2.895 (190) 4.585 65 (1.555) (125) 3,030 Net sales Cost of goods sold Cross profils Operating expenses Adhuinistrative expenses Impairment of goodwill Operating income Interest expense Other incont come before income taxes Provisions for Income Taxes Net Income (T.ass) Current ratio Acid lest ratio Dent to total assets Collection period Days to sell inventory Total debt to equaly Long tone debito equity Times interest earned Grow gooil margins Operating profit margin Pre-tax profil nagin Net profit margin Cash numater Accounts receivable lover Inventory ramover Operating cash flow ratio Debt coverage ratio Current liability coverage ratio Long-terin debt coverage ratio 2021 0.52 28.85 days 49.29 days 161 1.31 31.29% 0.51% -0.05% -0.05% 12.48 0.001 0.01 0.02 0.03 2,175 2,635 (905) 1.730 2020 1.58 0.82 30.11 days $2.53 days 1.65 2.99 31.18% 2.11% 10.67 11.95 6.95 0.011 0.07 0.01 Other information: The impairment of goodwill in 2019 is related to the unsold inventories in 2017. In 2021, another goodwill impairment was charged due to the out-of-date merchandise. The impairment loss removes the entire goodwill balance related to the merchandise from the balance sheet. As on 31 March 2021, the company's balance sheet reported RM18,485,000of goodwill. The statement of cash flows shows net inflows of cash provided by operations in each of the past three fiscal years. Currently the company has a debt agreement which contain covenants that require maintenance of certain financial ratios. Debt repayments is very much depended on cash flows from operations. Any decline in operating cash flow may cause the company inabilityto service the debt obligation. The company has two outstanding loans with local banks. The loans were used to finance most of its ongoing operations. One of the loans, amounting to RM3.1 million need to be settled in December 2021 and is secured by substantially all of the company's assets. The CFO is confident that the company will be able to secure a lender to buy out their current loan and avoid the payment due. According to the CFO, the management has a greatrelationship with their lenders, that the company was able to obtain a waiver on the currentyear's debt covenants that requires positive net income. Moreover, the company's sales andgross profit margins have steadily increased over the last three fiscal years - which signalsthe company's revival. The management anticipates annual sales growth between 10 to 11 percent. In order to achievethis target, the company has developed the following strategies: The management believe that they have not fully explored the potential of online sales. This market segment could expand further with proper advertising and promotions. Thus, the management has allocated budget to promote their online store with special discounts and more widespread advertising. The management has started to revamp the online store to become more user-friendly and better facilitates online payments. The management has engaged with a consultant to remodel Grace and Elegance stores. The remodelling exercise will involve renovation works and stores may need to be closed for ashort period during the renovation. In order increase the company's market share, the management has decided to open new stores across the country. The new stores will adopt the new store concepts. The management plans to expand its business overseas. During a business trip in early 2021, a number of potential business partners has voiced their interest - one of which is Panaches Mode. Panaches Mode is a clothing company from Indonesia. The company proposed a co-branding strategy which enables Grace and Elegance to market its merchandise in Panaches Mode outlets in Indonesia and vice versa. The main term of Panaches Mode was that Grace and Elegance must only market its merchandise via Panaches Mode stores in the Indonesian market. The management has yet to make any decision regarding the offer as they have reservation related to Panaches Mode. Two yearsago, Panaches Modes was alleged to have used child labour in their factories. Group 1. Prepare a comparative income statement for Grace and Elegance. Fiscal year 2019 is to beused as the base year. (20 marks) 2. Analyse the comparative income statement prepared for requirement (2) above. What canyou conclude on the company's performance? (10 marks) Grace and Elegance in the Fashion Industry Grace and Elegance is chain retailer in the apparel and beauty industry. The industry is highlycompetitive where products are easily replaced and become dated. Proud as a trend-setter in the industry, Grace and Elegance targets its products toward the high-end segment of the market, offering luxurious shopping experience as well as value. Grace and Elegance stores could be found in many shopping establishments. Grace and Elegance has formed its brand image through advertising campaigns via the main mass media channels as well as specialisedpromotional events. Strategizing on marketing, design, price, service and quality, Grace and Elegance has established a brand name for itself. The fashion retail industry is highly competitive. There is a broad range of other retailers including department stores, online sites, factory outlets, chain specialty stores, and individualretailers. The company's market share in the apparel-based retail industry has remained unchanged over the last three years. Although the company's profit margin is consistent with the industry's gross profit margin of 32%, the company must develop and maintain a competitive advantage in the industry in order to avoid adverse effect on future financial performance. Grace and Elegance management has learned the hard way in 2016 and 2017 when they have overinvested in inventory of a well-known designer and the expected increase in sales did notmaterialise. In 2017, the company was required to write off a significant portion of its inventorydue to obsolesce. Following this setback, the company's board of directors has restructured themanagement team. Jason Weiss, a new CFO was appointed, together with a group of new management team. The new management team drives the company aggressively. Rulesregarding merchandise consignment were changed and new rules were implemented. As a result, a number of their suppliers have terminated their contract with Grace and Elegance. Tofulfil the void, the management has developed relationships with other suppliers who are mostly newcomers in the industry. The management also has commissioned designs from selected young designers. In 2019, Grace and Elegance has extended its business hours in order to gain more sales. Although the move has indeed gained the expected sales, the company also experienced an increased in administrative costs due to overtime claims. Business operations of Grace and Elegance are seasonal in nature, with two main selling seasons - December - February and June - August. The December - February period accounted for about one-third of net sales in 2019, 2020 and 2021. The seasonal nature of the business has caused seasonal fluctuations in net sales and operating income, with a significantoperating income typically realised during December - February. The company closes its accounts on 31 March each year. This is to allow more time to count inventories and produce its annual financial statements following high selling period. The following financial information was extracted from the company's books. Grace and Elegance Staicunt of biome for the year cuded 31 Mach 2021 2020 2019 RM'000 RM-000 KM'000 244,455 217,325 195,945 (167,900) (119.555) (135.285) 67,770 76,195 60.000 (51,940) (18.170) (11,220) (17,510) (13.855) (11,130) (2,790) 0 1,255 5,745 4.185 (4,175) (4,055) (4,025) 2,730 2.895 (190) 4.585 65 (1.555) (125) 3,030 Net sales Cost of goods sold Cross profils Operating expenses Adhuinistrative expenses Impairment of goodwill Operating income Interest expense Other incont come before income taxes Provisions for Income Taxes Net Income (T.ass) Current ratio Acid lest ratio Dent to total assets Collection period Days to sell inventory Total debt to equaly Long tone debito equity Times interest earned Grow gooil margins Operating profit margin Pre-tax profil nagin Net profit margin Cash numater Accounts receivable lover Inventory ramover Operating cash flow ratio Debt coverage ratio Current liability coverage ratio Long-terin debt coverage ratio 2021 0.52 28.85 days 49.29 days 161 1.31 31.29% 0.51% -0.05% -0.05% 12.48 0.001 0.01 0.02 0.03 2,175 2,635 (905) 1.730 2020 1.58 0.82 30.11 days $2.53 days 1.65 2.99 31.18% 2.11% 10.67 11.95 6.95 0.011 0.07 0.01 Other information: The impairment of goodwill in 2019 is related to the unsold inventories in 2017. In 2021, another goodwill impairment was charged due to the out-of-date merchandise. The impairment loss removes the entire goodwill balance related to the merchandise from the balance sheet. As on 31 March 2021, the company's balance sheet reported RM18,485,000of goodwill. The statement of cash flows shows net inflows of cash provided by operations in each of the past three fiscal years. Currently the company has a debt agreement which contain covenants that require maintenance of certain financial ratios. Debt repayments is very much depended on cash flows from operations. Any decline in operating cash flow may cause the company inabilityto service the debt obligation. The company has two outstanding loans with local banks. The loans were used to finance most of its ongoing operations. One of the loans, amounting to RM3.1 million need to be settled in December 2021 and is secured by substantially all of the company's assets. The CFO is confident that the company will be able to secure a lender to buy out their current loan and avoid the payment due. According to the CFO, the management has a greatrelationship with their lenders, that the company was able to obtain a waiver on the currentyear's debt covenants that requires positive net income. Moreover, the company's sales andgross profit margins have steadily increased over the last three fiscal years - which signalsthe company's revival. The management anticipates annual sales growth between 10 to 11 percent. In order to achievethis target, the company has developed the following strategies: The management believe that they have not fully explored the potential of online sales. This market segment could expand further with proper advertising and promotions. Thus, the management has allocated budget to promote their online store with special discounts and more widespread advertising. The management has started to revamp the online store to become more user-friendly and better facilitates online payments. The management has engaged with a consultant to remodel Grace and Elegance stores. The remodelling exercise will involve renovation works and stores may need to be closed for ashort period during the renovation. In order increase the company's market share, the management has decided to open new stores across the country. The new stores will adopt the new store concepts. The management plans to expand its business overseas. During a business trip in early 2021, a number of potential business partners has voiced their interest - one of which is Panaches Mode. Panaches Mode is a clothing company from Indonesia. The company proposed a co-branding strategy which enables Grace and Elegance to market its merchandise in Panaches Mode outlets in Indonesia and vice versa. The main term of Panaches Mode was that Grace and Elegance must only market its merchandise via Panaches Mode stores in the Indonesian market. The management has yet to make any decision regarding the offer as they have reservation related to Panaches Mode. Two yearsago, Panaches Modes was alleged to have used child labour in their factories. Group 1. Prepare a comparative income statement for Grace and Elegance. Fiscal year 2019 is to beused as the base year. (20 marks) 2. Analyse the comparative income statement prepared for requirement (2) above. What canyou conclude on the company's performance? (10 marks)