Objective of this Case: for the student to complete a financial analysis of the subject business including the ratio analysis; evaluation of the prospects, and a recommendation.

Background and Situation: Lucky DeLarr, a Holy Family graduate from a long time ago, owns a small holding company located in Bensalem, PA. Lucky won a lottery worth over $500 million and has established this holding company to manage the investments. He has invested in a number or real estate projects, buying and selling properties, a warehouse project, and a few entrepreneurial startups, where he has bought stock for the second round financing.

You have been hired recently to form a two-person team for financial analysis. The role is to evaluate the investment opportunities and projects and to make recommendations. The senior member of the team also monitors the various projects and businesses from a financial standpoint. You expect to step into this role in a few months.

Immediate Situation and Requirement: Mr. DeLarr has come to you with an assignment. He asks that you keep this confidential at this point, even from your teammate.

Mr. DeLarrs first cousin, Heddy Lamar, has approached him with a proposal to buy a 15 percent interest in Heddys firm, Lamar Swimwear.

The firm manufactures stylish bathing suits and sunscreen products. Distribution is through multiple channels. One is through high-end shops located along the Jersey Shore, including Long Beach Island, Atlantic City, Cape May and Sea Isle City. A second channel is through high-end specialty shops in New York City (five stores total). There are no internet sales.

Ms. Lamar has given Lucky copies of the financial statements from 2013 to 2015. Lucky located a spreadsheet analysis with selected industry ratios for comparison. The financial statements and the ratios are attached here, as well as a template for the ratio calculation.

Ms. Lamar is quick to point out the increase in sales that has taken place over the last three years, as indicated on the income statement, Exhibit I. The annual growth rate is 25%. She thinks this is sustainable through the current channels. The accompanying balance sheet and the selected industry ratios are also included here. Note that the industry growth rate in sales is only 10% to 12%.

The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Lamar Swimwear represents an attractive investment situation.

Lucky has asked you to analyze the overall condition of the firm. His primary interest is usually in the profitability ratios, but the overall condition is first priority now.

Since the firm does not yet pay a cash dividend return to the investor must come from selling stock in the future. Paying a dividend is not out of the picture, but has not been done up to now.

He has also asked you to look at the logic and correctness of the statements. Does anything seem to be missing, or is all ok? How does the cash from operations look and the new working capital too?

After doing a thorough analysis (including ratios for each year and comparison to industry), what issues do you see related to the financial analysis? Does the 25% growth seem realistic and achievable? What comments and recommendations do you offer Lucky? What decisions do you think Mr. DeLarr will need to address?

As a footnote Lucky adds, For now, please keep this analysis between you and me. Bruce is too busy with the financial closings to get involved. He will understand when we tell him about this. (For you do you think Bruce will understand? Explain)

Income Statement As of 12/31/13

12/31/2013

12/31/2014

12/31/2015

Sales (all on credit)

$1,200,000

$1,500,000

$1,875,000

Cost of Goods Sold

$800,000

$1,040,000

$1,310,000

Gross profit

$400,000

$460,000

$565,000

Selling and administrative expenses*

$239,900

$274,000

$304,700

Operating Profit (EBIT)

$160,100

$186,000

$260,300

Interest expense

$35,000

$45,000

$85,000

Net Income before taxes

$125,100

$141,000

$175,300

Taxes

$36,900

$49,200

$55,600

Net Income

$88,200

$91,800

$119,700

Shares O/S

30,000

30,000

30,000

Earnings per share

$ 2.94

$ 3.06

$ 3.99

* includes $15000 in lease payments

each year.

Selected Industry Ratios

Selected Industry Ratios			2013		2014		2015
	Growth in sales y/y/y		0.00%		10.00%		12.00%
	Profit Margin		7.71%		7.82%		7.96%
	Return on Assets		7.94%		8.86%		8.95%
	Return on Equity		14.31%		15.26%		16.01%
	Receivable Turnover		9.02x		8.86x		9.31x
	Average collection period		39.9 days		40.6 days		38.7 days
	Inventory turnover		4.24 x		5.1 x		5.11x
	Fixed Asset Turnover		1.6x		1.64x		1.75x
	Total asset turnover		1.05x		1.1x		1.12x
	Current Ratio		1.96x		2.25x		2.4x
	Quick Ratio		1.37x		1.14x		1.38x
	Debt to total assets		43.47%		43.11%		44.10%
	Times Interest earned		6.5x		5.99x		6.61x
	Fixed Charge coverage		4.70x		4.69x		4.73x
	Growth I EPS		-		10.10%		13.30%