BNL Stores Sample Case Analysis PDF

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SMGT4470 Case Analysis Template

Student Name: ____SAMPLE_____________ Case Title:

BNL Stores_____________

A. Issue Identification (2 marks) Immediate Were the new strategies (expanding the number of supercenter stores, phasing out discount stores, offering store credit, granting store managers responsibility for authorizing credit accounts, paying an annual bonus based on net income) responsible for the decline in BNL’s share price?

Basic Poorly instituted credit program. No centralized credit function.

B. Quantitative and Qualitative Data Analysis (Apply 2 to 3 analytical tools) (5 marks) Financial Ratios

There is a steady decline in all profitability ratios. In fact, the company lost money in 2010.

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SMGT4470 Case Analysis Template

The company has been able to reduce its days receivables during the past 2 years. This indicates that their ability to collect cash on their sales has improved. In addition, the company has been able to increase the number of times its sells its inventory in the past 2 years, and it has also been able to generate greater sales from its total assets during the same time frame.

The ability for BNL to covers its short-term obligations using its current assets has decreased during the past 2 years. Significantly, the company is not able to cover its current liabilities when inventory and prepaid expenses are not considered.

The company has increased its debt by a multiple of almost 4 over the past 2 years. As of 2010, the company is financed 2/3 by debt and 1/3 by equity. Overall, the company is no longer profitable and it’s questionable as to whether it has the ability to pay for the additional debt that it has taken on over the past 2 years. The improvements in its turnover ratios may be too little too late.

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SMGT4470 Case Analysis Template Cash Flow Analysis

Cash Flow Analysis Cash Flow from Operating Activities Since 2005, cash flows from operations have remained significantly negative. In effect, the company has not made any cash from its core operations since 2004 – this is concerning. Until 2009, A/R remained negative indicating that the company was making sales but not collecting cash on those sales. This suggests that the customers who were extended credit by the store managers lacked credit worthiness. A separate credit department that approved and collected on credit sales would have been appropriate. In addition, inventory balances have increased steadily over time. This was due to the introduction of the big-box stores and big-ticket items. The large loss of net income in 2010 reflects the increase in selling, 3

SMGT4470 Case Analysis Template general, and administrative expenses. This is likely the result of a write-off of AR as a bad debt expense. NOTE: there is a significant decrease in accounts receivable from 2009 to 2010. Cash Flow from Investing Activities Since 2002, BNL has been increasing its property, plant, and equipment (P,P&E). This increase was incurring even though the company had negative cash flows from operations and very little increase in net income after taxes until 2010, when it experienced a massive loss. At the time when the company's stock price was dropping drastically since 2008 it did not seem wise to purchase more assets when the company could barely cover their operational costs. Cash Flow from Financing Activities The cash flows from financing activities seem to be the main contributors to a positive overall cash flow balance. Since BNL makes no cash from its operations, it has been using debt financing to cover its increase P, P, &E activities. As a result, BNL has incurred significant balance increases for its current and long-term liabilities. Given their cash flow problems, it is surprising that BNL has continued to pay out a substantial dividend. The company might have done this to prevent a loss of investor confidence. However, their operational issues are reflected in the significant drop in their stock price. Investor’s have lost confidence.

Cash Conversion Cycle

The cash conversion cycle measures the length of time (in days) that it takes for a company to convert its investments in inventory and other resources into cash flows from sales. In 2002, BNL was able to convert its investment inventory back into cash in about 3.5 months. In 2008, it took them almost 7 months to do the same thing. BNL has been unable to collect cash because of its failure to collect on its AR and investing too much in inventory when they could not affords to.

C. Alternatives (Briefly describe your alternatives) (3 marks) Expansion into SuperCenter Stores The cause of the decline is share price is due to the expansion into new supercentres.  Steady increase in PPE and other assets  Steady decrease on return on assets 4

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Does not account for which assets were contributors to the inefficiency o Could be inventory or other assets Continuous spending on P,P&E and other assets during times where there is low cash flows from operational activities

Offering Manager Approved In-Store Credit The cause of the decline in share price is because of the increase in selling expenses because managers are paid commission to get customers to open credit accounts.  Decrease in profit margin  Managers lenient in credit approval  No additional regulation for credit approval process

Paying an Annual Bonus Based on Net Income The cause of the decline is improper incentives for managers.  Focus was on net income instead of AR Turnover or Inventory Turnover.  Managers' bonuses were solely based on net income of the store o We are unaware if there is a bonus cap  Increases in A/R  However days receivables actually decreases  A/R does not show to be a contributing factor to the negative operational cash flow in 20092010  Inventory turnover o Shows a slight decrease but then increases in 2010  In 2009 inventory no longer contributes to the negative cash flow from operations

D. Decision Criteria (Justify your decision criteria) (2 marks) Profitability  

BNL is incurring too many expenses relative to the volume of sales that it is generating. In particular, selling, general, and administrative expenses have increased by more than 100% from 2005 to 2010.

Turnover 

BNL’s turnover ratios have not improved. In particular, days receivable, until recently, had increased 5

SMGT4470 Case Analysis Template

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by 200-300% over the past few years. The company has been tragically inefficient in converting sales into cash.

Cash Flows  

The major source of cash flows have been notes payable and long-term debt. Not including 2010, the company has been able to generate positive net cash from operating activities since 2004.

Solvency Ratios 

Without increased cash from sales, the company has relied on debt financing to pay for its expansion.

E. Alternative Assessment Matrix (2 marks) Decision Criteria Alternatives Profitability Turnover Cash Flows (20%) (30%) (30%) 1. Expansion 1 x .2 = .2 3 x .3 = .9 2 x .3 = .6 2. Credit Policy 2 x .2 = .4 1 x .3 = .3 1 x .3 = .3 3. Bonus Incentive 3 x .2 = .6 2 x .3 = .6 3 x .3 = .9 1 - greatest impact of alternative on decision criteria; 3 - lowest impact of alternative on decision criteria.

Solvency TOTAL (20%) 1 x .2 = .2 1.9 2 x .2 = .4 1.4 3 x .2 = .6 2.7

F. Preferred Alternative (Explain your preferred alternative) (5 marks) The preferred alternative, or main contributing cause, for the decrease in share price is the credit policy implemented by BNL Stores. Turnover and cash flows were identified as the two most important decision criteria. With the expansion into more super centers, it was important that BNL be in a position to sell, i.e. turn over, its inventory and to convert sales to cash. The credit policy had the greatest impact on these two criteria. In particular, the granting of credit to noncreditworthy customers resulted in an increase in days receivables. In addition to being impacted by the lack of collection of receivables in a timely manner; 6

SMGT4470 Case Analysis Template BNL was also impacted by having too much cash tied up in inventory. The excess inventory was a direct consequence of having super centers that needed to be stocked with inventory. Finally, if it was found that there were not enough customers that were credit worthy, the expansion could have been delayed or stopped so that the company did not stretch themselves too thin. Although profitability and solvency are important, it is reasonable to expect that these two criteria could have been negatively expected due to the rapid expansion. If BNL had a centralized credit function that controlled the granting of credit, the company could have granted credit only to creditworthy customers. A centralized credit facility would also have allowed the company to centralize its accounts receivable collections to ensure that accounts were followed up and collected upon. Although BNL’s ability to collect cash on their sales has improved, it may be too late since the company is no longer profitable and it’s questionable as to whether it has the ability to pay for the additional debt that it has taken on over the past 2 years. The most recent cash flow analysis indicates that receiving cash continues to be a problem since there has been a large increase in notes payable for 2010.

G. Action and Implementation Plan (short-, medium-, and long-term) (3 marks)

1.2 weeks  

The credit policy needs to be immediately revamped. Store managers should no longer be able to grant credit. Identify stores and inventory that may be sold.

3 weeks - 2 months 

A centralized credit function must be established. 7

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Track and collect on accounts receivable. Review accounts to identify accounts that are no longer collectible and try to sell those accounts to a 3rd party (factoring). Reduce number of super centers in order to generate cash to pay down debts and reduce inventory needs.

2 months + Monitor what is happening as a result of the changes made. The company should continue to revisit its strategy to see if any changes need to be made. They need to find out what areas are more profitable and which are not.

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