What should Foreman recommend?

MAPLE LEAF HARDWARE LTD. or 30, 2023. David House and Elizabeth M. A. Grasby revised this case (originally written by Steve Foerster under the supervision of R.H. Mimick) solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, NGG ON1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveypublishing. ca. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. Copyright @ 1999, Richard Ivey School of Business Foundation Version: 2015-05-27 On May 29, 2013, Stuart Foreman, assistant manager of the London, Ontario branch of the Central Canadian Bank, was reviewing information he had received from Robert Patrick, president and manager of Maple Leaf Hardware Ltd., who had requested an increase in his line of credit with the bank to cover seasonal working capital needs. Foreman, who had just received a transfer and promotion to the London branch, realized he would have to evaluate this request carefully. COMPANY BACKGROUND Patrick was 32 years of age. His father had established his own hardware business in Nova Scotia in 1983. Robert had worked in his father's store since the age of 16, gaining valuable sales and management experience. In 2005, Patrick accepted a job offer from a large retail department chain. Two years later he was transferred to London, Ontario and eventually became manager of one of the branch stores. In 2010, he decided to leave the department chain in order to become his own boss. He opened his own retail hardware store with a personal investment of $120,000 and $80,000 from a close friend, Les Harrison, and incorporated the company on September 1, 2010. Patrick was able to arrange a long-term loan of $240,000 and a line of credit of $60,000 with the Central Canadian Bank through Terry Woods (Foreman's predecessor, who had recently left the bank). After a detailed analysis, Patrick decided to locate his business on Maple Leaf Street in a growing area of the city. He was able to rent a recently vacated building with 6,500 square feet of space and adequate parking facilities. Initially, only two full-time and three part-time employees were hired to assist Patrick. As the business grew, additional part-time employees were hired. Sales increased steadily during the first few years, and in 2012, Maple Leaf Hardware Ltd. realized its first profit. THE INDUSTRY During the 1960s, home and garden supplies, and hardware were, distributed primarily through small, independently owned stores. Initially, the major alternative distributor was the hardware department of major department stores. However, by the 1980s, many large-scale retailers had begun to sell hardware and "bigbox" hardware retailers had emerged throughout North America; as a result, Home Depot, Rona, and Lowes were now major competitors in the hardware and home improvement retail sectors. The largest of these companies, Home Depot, had achieved world-wide sales of almost $75 billion with a profit margin close to 6 per cent in 2012. It had three locations in London. The increased competition resulted in much consolidation within the industry. There were cooperative groups such as Pro Hardware and Home Hardware. These large organizations bought on a central basis. In addition to Home Depot, there were over 25 stores in London in the retail hardware business, including independently owned, chain, and department stores. These stores offered a wide variety of goods including tools, plumbing and electrical supplies, appliances, cookware, lawn and garden equipment, and in some cases, sporting goods and toys. The major determinant of a hardware store's success was its location, as it was important to have a large area from which to draw customers. This was especially true for independent stores. Hardware sales were traditionally highest around Christmas. January to April were slow months, while sales were much stronger from May to August. Because of this seasonality, and since a company had to order inventory well in advance, a hardware store's greatest need for working capital financing usually occurred in February or March. The strongest cash position was in December. In February or March, a hardware store the size of Maple Leaf Hardware Ltd. would require from $80,000 to $120,000 more working capital than was required in December. In difficult economic times many industries were hit hard financially; however, this was not the case with the hardware industry. During economic downturns, consumers' emphasis shifted from purchasing new goods to repairing and rebuilding old goods. The Canadian Mortgage and Housing Corporation reported For use only in the course Introduction to Business at Richard Ivey School of Business from Sep 01, 2022 to Apr 30, 2023. that 1.7 million Canadian households spent $21 billion on home renovations in 201 1 and this was expected to increase by 2.5 per cent annually for the next few years. PRESENT SITUATION Patrick presented his proposal for an increase in the short-term line of credit from $100,000 (the line of credit which had been granted last year) to $160,000. Patrick included in his report specific information which Foreman had requested, including financial statements for the years the company had been in operation (see Exhibits 1 and 2). Exhibit 3 provides financial ratios for the company, including available industry information, and Exhibit 4 shows the sources and uses of cash for two years ending December 31, 2012. Patrick stated that sales for the year ending December 31, 2013 were expected to be close to $1.7 million. A further increase in sales of 10 to 20 per cent was anticipated in 2014. There were no anticipated purchases of fixed assets in the next few years. Patrick planned to pay a common stock dividend of $20,000 each year starting on December 31, 2013. The rent was expected to increase by $2,400 per month over the current level of $10,000 per month, commencing in September with the signing of a new two-year lease. Patrick was planning to introduce a new inventory control system which he hoped would eventually reduce the age of inventory to the industry average of the past few years; however, he was not sure if he would be able to accomplish this within the next year. Foreman set out to decide whether or not to increase the size of the line of credit for Maple Leaf Hardware td. He noted in his file that on one occasion in the past the company had been slow in sending financial lata the bank had requested, but when Foreman mentioned the incident, Patrick dismissed it as a Renovation and Home Purchase Report, Canadian Mortgage and Housing Corporation, 2012.Page 3 misunderstanding with Woods. In further conversation, Foreman learned that Patrick and Harrison (who owned 40 per cent of the common shares) had recently had some disagreements about how Patrick should be running the business. Patrick commented: Les and I go "way back." We've had our differences throughout the years, but things always get straightened out. I'm the major shareholder in this business, and I know how to run a hardware store profitably. I think sometimes Les forgets that. Since this was Foreman's first evaluation of a loan request in his new position, he wanted to proceed cautiously and perform a thorough analysis. He realized he would have to present his decision within the week