Holly Fashion

parapraxis 6 HOLLY FASHIONS betrayer I O A N A LYSI S B adverseion-dollal a pp atomic design 18l c ompanies s uch a s C alvin K lein a nd L iz C laiborne a re whimsical i n t he g arment i ndustry, w hich c onsists p rimarily o f m uch s malier cloak m akers. O ne s uch f irm i s H olly F alterions ( HF), l ocated i n C herry F l complaint, invigorated J eriey. H F w as s t inventioned 1 4 y atrial auricles a go b y W laid low(predicate)iam H amilton a nd J ohn W hite, who b etween t stitch h ad o ver 2 5long fourth dimensiono f e xperiencew ith a m ajor g arment m anufacturer.A nd t he p artner send out i niti anyy b lended v ery w ell. H amilton, r eserved and i ntrospective, i s e xtremely c reative w ith a r eal f hide away f or m erchandising a nd vogue s potting. M ainly a s a r esult o f h is g enius, t he H F l abel i s s ynonymous with q uality a nd tn f alterions. h ite, o Utgoing a nd f orceful, h as c ontri noneffervescented life-size m erchandising a nd m arketing i deas, b ut h as m ainly a ssumed t he duties o f t he f irms c hief o perating o fficer.Hamilton h as h ad l ittle i nterest i n t he f inancial a spectso f t he c omp w chapeausoever, m uch p notering t o w ork o n d esigning n ew f ashions a nd t he d evelopment o f m arketing s trategies. A f ew m onths a go, h owever, h e d ecided t palpebra h e h ad b etter perform m ore i nvolved w ith t hd c ompanys f inancials. His m otivation i s t wof ancient. F irst, h e i s c onsidering t he s ale o f h is 5 0 p ercent stakes i n H F. T hough h e m joys t he c reative s ide o f t he b usiness,h e i s t angrinessd o f the c ash c runches t put on t he f irm h as e xperiencedi n r ecent y ears.P eriodically, t he retailers H F d eals w ith h ave e ncountered f inancial p loblems a nd h ave s tlung out t heir p ayments, w hich o f ten c a put ond a m ad s cramble f or c ash a t H F A nd i f Hamilton d ecides t o s ell, h e k nows t palpebra h e i s l ikely t o b e i nvolved i n s ome disagreeable n egotiations s urrounding t he c ompanys v a1ue. T hough h e w ould h ire a c onsult emmet t o a id h im i n a ny,negotiations,h e d ecides i t i s a g ood i dea t o e ducate h imself a orgy H Fs f inancials.A nonher r eason t chapeau H amilton i s i nterested i n t he f irms f inancials i s s o h e female genital organ b etter j udge t he m anagerial c ompetence o f l Alhite. Ahen I IF w as s center Hamilton t hought W hite d id a f ine j ob, b ut n ow h e w onders w hether / hite i s able o f r unning a f irm a s l arge a s H F. A ctually, i f H amilton w ere c onvinced t put on W hite i s a c ompetent m anager, h e w ould n ot c onsider s elling o ut s ince h e 36 PARTI I F INANCIALA NALYSIS actually e ntoys b eing a n o wner o f a n a pp atomic exit 18l f irm.B ut h e t hinks t he a pparel effort w ill f unity e ven t ougher t imes i n t he n ext f ew y ears, a nd w onders i f ltrhite i s t alented e nough t o s uccess fruit drinkptym eet t hese c hallenges. adoption CONCEB. NS A4rites p ersonality i s s uch t don h e m akes v irtually a ll m ajor o perating a nd mo utmostary d ecisions. A n i mportant e xample o f t his w as h is d ecision t hree y ears foregone t o r etire a ll l ong-term d ebt/ a m ove t riggered b y W hites f ear t assume H Fs b usiness r isk w as i ncreasing.H e c ited t he d ifficulties o f s eemingly r ock-solid r etailers l ike B loomingdales a nd C ampeau t o s upport h is c laim. I M-Lite i s a lso concern t put on f irms t he s ize o f H F h ave h ad d ifficulty m aintaining s circumvent b ank relationships. D ue t o i ncreasingly s trict f ederal r egulations, s ome b anks h ave called i n l oans a t t he s lightest t echnicality, a nd m ost a re s crutinizing n ew b usiness l oans v ery c arefully. C onsequently W hite v iews b ank d ebt f inancing a s punic a nd t hinks t don l oan o fficers a re c apable o f grind u p m y t ime. Harnilton isnt reliable w assume to my stify of these line of credits, but he is implicated t eyelid this debt turning away has significantly decreased FIFs monetary tract readiness because it gist t palpebra all protects willing know to be lawfulness financed. In fact, all everywhere the past louvre eld t here(predicate) h ave b een n o d ividends b ecausea ll e arnings h ave b een r einvested. And ii categorys ago apiece of the partners had to present $15,000of corking in lay to m eet t he c ompanys c ashn eeds. A n otherwise(a) i nfusion o f c apital m ay b e n ecessary sincet he f irms p resentc ashp osition i s l ow b y h istorical s tandards. ( recognise xhibit 2 . E much j mportantly, h owever, H amilton f eels t palpebra t he c ompany i s n ot b enefiting f go bad storage t he l everage e ffect o f d ebt f inancing, a nd t eyelid t his h urts t he p rofitabiiity o f t he f lrm t o t he t wo o whers. workings cracking CONCERNS Hamilton s uspectst assume F Fsi nventory i s un re asonable a nd t chapeau crownwork i s u nnecessarily t ied u p i n i nventory. n/hites p osition i s t lid a l arge i nventory i s n ecessary t o p rovide s peedy d eli actually t o c ustomers. H e a rgues t put on our c ustomers persuade q uick s ervice a nd a l arge i nventory h elps u s t o p rovide i t. Hamilton is wondering(a) of this argument and wonders if at t palpebra place isnt a wall effective w ay o f p roviding q uicker s ewice. H e k nows t hat a c onsultant r ecommended t hat H I very s eriously c onsiderb uilding a s tate-of-the-artd istribution center. T he p roposed f acility w ould a liow F F t o r protract i nventory a ld a lso grasp big orders from retailers much(prenominal)(prenominal) as Kmart and Wal-Mart. VVhite jilted the mite a rguing t hat t he e sttnated $ S-million t o $ 8-mi11ion ost i s e xcessive. c Hamiiton a lso q uestions / hites c redit s tandards a nd c ollection p rocedures.Hamilton t hinks t hat / hite h as b een q uite g enerous i n g rave p ayment extensions t o c ustomers, a nd a t o ne p oint n primal 4 0 p ercent o f t he c ompanys receivablesw ere m ore t han 9 0davs o ver out-of-pocket. F urther. / hite w ould c ontinue t o . C ASE6 H OLLYF ASHIONS 37 feign and ship orders to these qetailers eyen when it was pretend that their ability t o p ay w as m arginal. l hites p osition i s t hat. he d oesnt w ant t o l ose s ales and that the jittery measure these retailers tone are only when temporary. Hamilton as well wonders virtually the soundness of difference up duty discounts. HF is much offered term ol 1. 1. 0, net 30. That is, the party receives a l- percent discount if a appoint is paying(a) in ten days and in any sheath full hire is pass judgment within 30 days. ffiite seldom takes these discounts because he wants t o h old o nto o ur c ash a s l ong a s p ossible. H e a lso n otes t hat the d iscount isnt especially liberal emd 99 percent of the charge moldines s still be paid. utmost THOUGHTS patronage ill of Hamiltons concems, however, the retationship in the midst of the dickens partners has been relatively polish over the years. And Hamilton admits that he whitethorn be unduly deprecative of yhites trouble decisions. later on al1,he concedes, the m an s eems t o h ave r easonsf or w hat h e d oes, a rd w e h ave b een i n the dimmed every year since we started, which is an thundering record, really, for a f um i n o ur b usiness. Further, Hamilton has discussed with ii condultants the happening of merchandising his half(prenominal)(a) of the fast. Since FIF is not publicly alternated, the commercialize repute of the companys s tock m ust b e e stimated. T hesec onsultants b elieve t hat H F i s w orth between $55 and $55 per share, computes that have the appearance _or_ semblance kind of best to Hamilton. QUESTIONS 1 write in code the firms 1995 symmetrys listed in give away 3. . P art o f H amiltons e val uationw ill c onsisto f c omparingt he f irms r atios t o . the perseverance come shown in troop 3. (a) dispute the limitations of such a comparative financial analysis. (b) In take of these limitations, why are such effort comparisons so frequentlym ade? 3, Hamilton thinks Siamese the lucrativeness of the firm to the owners hasbeenhurt by lights reluctanceto use ftuch inteiest-bearing debt. Is this a reasonable personate? E xplain. 4. The berth mentions that hite rarely takes trade discounts, which are typically 1 /10, n et 3 0.D oest his s eeml ike a w ise f inancialm ove? E xplain. 5. C alculatet he c ompanysm arket-to-book dV/BV) r atio. ( Therea re 5 ,000 O shares f c ommons tock. ) o 6. Hamiltons perplex is that White has not competently managed the firm. brook this posture development your former an. swers nd other info in a the c ase. 38 PARTII pecuniary epitome 7. Vyhites mark is that he has efficaciously managed the firm. fend for this post utiliz e your preliminary answers and other education in the case. 8. hunt the lineament of an arbitratoi.Is it executable ground on an run of the firms r atios a nd o ther i nformation i n t he c aset o a ssessW hites m anagerial competmce? concord your position. 9. ( a) A re t he r atios y ou c alculited b ased o n m arket o r b ook v alues? E xplain. (b) W ould y ou p refer r atios b ased o n m arket c ir b ook v alues? E xplain. express 1 Holly F ashionsI ncome S tatements1 993-1996 ( 000s) 1993 gross revenue Costo f g oods piggishmargin Adrrinistrative Dq)reciation EBIT lnterest EBT Taxes authorize income 1994 1995 1996 $985. 0 748. 6 236. 4 169. 4 10. 8 56. 1 7. O 49. 1 19. 7 $1,040. 0 n4. $1,236. 0 $1,305. 0 978. 8 202. 8 1 14 51. 0 4t. 0 18. 0 $27. 0 a7a, 307. 8 236,I 13. 6 58. 1 53. 1 21. 7 _-$3L9 249. 3 14 4 62. 6 58. 5 23. 5 ___$99 peril 2 BalanceS heetso t he H olly F ashionsC ompany f 993-1996 ( 000s) 1993 ASSETS gold $40. 4 Receivables r53. 2 armory 117. 0 5. 9 opposite cwrent accepted assets u. 8 Grossf ixed Accumulaied dispraise (12. 0) 32. 8 low fixed substancea ssets $349. 3 1994 1995 1996 $s1. 9 158. 9 121. 1 6. 2 338. 0 58. 9 (23. 4) __35t $38. 6 t75. 1 $10. 6 224. 8 19L. 9 7. 8 435. 1 96. 4 (s1. 4) 45. 0 $480. 1 193. 4 7. 4 414. 5 78. 1. _al continued) C ASE6 H OLLYF ASHIONS 39 record 2 (Contirwed) t993 LIABLITIES & solve deserving Accounts payable Debt due Accruals upper sideical liabilities semipermanent debt putting green s tock hold e arnings thorough L &NW $53. 8 10. 0 1 9. 7 , 8 3. 5 60. 0 150_0 1994 1995 r996 $v. f $85. 2 10. 0 24. 7 120. 9 40. 0 180. 0 114. 6 $u. 2 10. 0 26. L 120. 3 30. 0 180. 0 149. 8 $48q. 1 10. 0 26. 0 90. 7 50. 0 150. 0 82. 8 $349. 3 $455t deliver 3 pecuniary R atios ot t hb H olly F ashionsC ompany 1 993-1996 Ind*r11 (Presen r993 r994 1995. 3. 7 3. 4 2. 6 L7 1. 8 1. 3 1. 6 .8 r996 1993-19961. liquid RatiosCurlent alert leverage atios R Deb(%) 41.. 1 37. 7 35. 3 8. 0 8. 5 11. 6 6. 4 6. 4 4. 8 FixedA sset employee turnover 30. 0 29. 3 30. 1 TotalA sset Turnovet 2. 8 2. 8 2. 7 Timesinterest eamed bodily function Ratios lnventory Tulnover ( cgs) 47 57 71 3. 9 1. 3 8. 1 6. 0 40 25 72 3. 5 2. 8 2. 0 (continued) P ARTI I F INANCIALA NALYSIS DGIIBIT 3 (Conrinued) Ifld r) 1993 1994 1995 AverageCollection full point long time Pulchases corking** (Present) 1996 1993-1996+ 50 68 18 31 25 32 realiseabilityR atios M Gross argin ( %) 24. 0 25. 5 24. 9 crystalize Profit gross profit (%) 3. 0 2. 6 2. 6 bring forth on fair play (%) 14. 3 11. 6 0. 8 8. 4 7. 2 7. 0 5. 8 6. 0 6. L Retum on Total ( Assets %) direct moulding*** (%) 26 3. 1 1. 2 27. 3 19. 5 7. 8 11. 8 8. 7 9. 9 7. 2 3. 1 iThe thre metrical composition for all(prenominal) ratio arc comPuted in the by-line wsy. Ratios for all firms in dre indushy are arranged in what is deliberated a strontest-to-weakest order The shopping mall number rePlsenis the add up ratioj that is, half the firms in the as siduity had mtios better than the median ratio and half had ratios that wer worsened The top nunlber represents the speed qua4ile figure kernel 25 Pelcent of the firms had ratios befter tlran this.The frown number represents the lowest quaftile, that is, 25 pct of the firms had ratios worse than this. *This shows the average lentth of time that trade debt is ouhtandint. AIso caled the averate Paymeni Period. reckon is A /P ( CGS/360). 1**Calculateda s ( EBIT + D ep)/Sales.