MINICASE

Burchetts Green had enjoyed the bank training course, but it was good to be starting his first real job in the corporate lending group. Earlier that morning the boss had handed him a set of financial statements for The Hobby Horse Company, Inc. (HH). Hobby Horse, she said, has a $45 million loan from us due at the end of September, and it is likely to ask us to roll it over. The company seems to have run into some rough weather recently, and I have asked Furze Platt to go down there this afternoon and see what is happening. It might do you good to go along with her. Before you go, take a look at these financial statements and see what you think the problems are. Heres a chance for you to use some of that stuff they taught you in the training course.

TABLE 4.10 Financial highlights for The Hobby Horse Company, Inc., year ending March 31

Mr. Green was familiar with the HH story. Founded in 1990, it had rapidly built up a chain of discount stores selling materials for crafts and hobbies. However, last year a number of new store open- ings coinciding with a poor Christmas season had pushed the com- pany into loss. Management had halted all new construction and put 15 of its existing stores up for sale.

Mr. Green decided to start with the 6-year summary of HHs balance sheet and income statement (Table 4.10). Then he turned to examine in more detail the latest position (Tables 4.11 and 4.12).

What appear to be the problem areas in HH? Do the financial ratios suggest questions that Ms. Platt and Mr. Green need to address?

financial highlights for year ending march 31

	2014	2013	2012	2011	2010	2009
Net Sales	3351	3314	2845	2796	2493	2160
EBIT	-9	312	256	243	212	156
Interest	37	63	65	58	48	46
Taxes	3	60	46	43	39	34
net profit	-49	189	145	142	125	76
earnings per share	-0.15	0.55	0.44	0.42	0.37	0.25
Current Assets	669	469	491	435	392	423
Net Fixed Assets	923	780	753	680	610	536
Total Assets	1592	1249	1244	1115	1002	959
Current Liabilities	680	365	348	302	276	320
Long-term Debt	236	159	297	311	319	315
Stockholders Equity	676	725	599	502	407	324
Number of Stores	240	221	211	184	170	157
Employees	13057	11835	9810	9790	9075	7825

Income Statement ending march 31 2014
Net Sales	3351
cost of goods sold	1990
selling, general, and administrative expenses	1211
Depreciation Expense	159
(EBIT) earnings before interest and taxes	-9
Net interest expense	37
Taxable income	-46
income taxes	3
Net income	-49
allocation of net income
Addition to to retained earnings	-49
dividends	0

Consolidated balance sheet

Assets	Mar.31,2014	Mar.31,2013
Current assets
cash and marketable securities	14	72
Receivables	176	194
Inventory	479	203
Total Current Assets	669	469
Fixed assets
Property, plant and equipment	1077	910
Less accumulated depreciation	154	130
Net fixed assets	923	780
Total Assets	1592	1249

Liablities and shareholders equity	Mar.31,2014	Mar.31,2013
Current liabilities
Debt due for repayment	484	222
Accounts Payable	94	58
Other Current Liabilities	102	85
Total current liabilities	680	365
Long-term debt	236	159
Stockholders equity
Common stock and other paid-in capital	155	155
Retained earnings	521	570
total stockholders equity	676	725
total liabilities and stockholders equity	1592	1249

Environmental Analysis

1. Declining Net Sales:

• The company's net sales have been relatively stagnant from 2010 to 2014, and there's a slight decline in 2014 compared to 2013.
• This may indicate a saturation of the market or increased competition.

2. EBIT and Net Profit Losses:

• The company incurred negative earnings before interest and taxes (EBIT) and net profit losses in 2014.
• This suggests that the company is currently operating at a loss, which is a significant issue.
• It could be due to factors such as poor cost management, declining sales, or high operating expenses.

3. Decline in Number of Stores:

• The number of stores has been declining since 2010.
• Closing stores may be a response to declining sales, but it could also mean the company is facing difficulties in sustaining its physical presence.

4. High Current Liabilities:

• Current liabilities have increased substantially, especially in 2014.
• This could be due to increased short-term debt, which might indicate financial distress or liquidity issues.

5. Low Shareholders' Equity:

• Shareholders' equity has been decreasing over the years, reaching $676 million in 2014.
• This could be a result of consistent losses or distributions to shareholders.

6. High Debt Levels:

• The company has both short-term and long-term debt.
• High debt levels can be a risk, especially when the company is facing financial losses.

7. Inventory Growth:

• Inventory levels have increased significantly in 2014.
• This might indicate overstocking or slow-moving inventory.

8. Declining Employee Count:

• Despite a decline in the number of stores, the company's employee count has also been decreasing.
• This may suggest cost-cutting measures, which could impact customer service and operations.

9. Weak Liquidity Position:

• Cash and marketable securities have decreased substantially in 2014, indicating a weakened liquidity position.

10. Poor Profitability Ratios: - Earnings per share (EPS) have been consistently declining, reaching a negative value in 2014. - These trends reflect poor profitability and the inability to generate returns for shareholders.

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