Assignment Question 1:
Assessment of BBBY business, operating and expansion strategies
Business Strategy
To offer huge quality branded merchandise at 20% to 40% low prices below department stores. Provide one shop buying by arranging maximum house furnishing items (30,000 SKU) and offer superior service to make buying experience and BBBY so pleasurable that they become “word of mouth advertisers” of BBBY.
Operating Strategy
Store layout, merchandise display and categorization is superb to facilitate easy tracing / location. Individual store managers have liberty to adjust merchandising mix to suit local taste and placing replenishment orders. Purchasing through central office to get maximum margins, low expense
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Comparison of performance with competitors
Exhibit 3 highlighted comparison of performance of BBBY with its competitors. BBBY is out performing its competitors; its gross profit and net profit expressed in percentage of sales are much higher than other store chains. BBBY is turning over its inventory and assets to generate income at a better ratio than others. Sales per square feet of space ROE and sustainable growth rate are surpassing other players in the field. Due to all this company is getting superior price earning ratio (see exhibit 4 for reference)
Sustainability
Company does not have big amount of debt to pay. In 1994 its outstanding debt is only 36.4% of its total assets which is a healthy rate. Its current assets are higher 2.4 times than its current liability. Also company has no outstanding interest to pay. Price earning ratio of 42.80 is highest among the competitors. (Pls. see exhibit 2, 3&4) for details. So we can safely conclude that BBBY has great potential to sustain.
Assignment Question 3:
Potential Problems
BBBY faces both external / internal potential problems while it tactics to implement its expansion plan.
External Problems • Home furnishing industry may not remain strong. • Price war may start due to competition which may put pressure on BBBY’s profit margin. • Sustainability of values and customers satisfaction may become
In what ways does Trader Joe's demonstrate the importance of each responsibility in the management process—planning, organizing, leading, and controlling?
Financial analysis: Haefren Baum is funding itself from bank loans, mortgages, and their supplier’s flexible credit. The major change in consumer demand, from the economic bust, in 1993, lead to lower sales and extended account payable days. The cash flow statements are unhealthy as they negative operating cash flows generated from a negative net income and high account payables. The company is far from liquid with 1.26 quick ratio in 1995 and high account payable days. The company has profitability issues, which is seen in their decrease in operating profit and negative return on equity. As stated earlier this is due to their decline in sales, tough economic conditions, and increased competition. They are highly leveraged company, which is risky. Their debt to equity ratio jumped from 5.84 in 1993 to 8.22 in 1995, which means it is hard for them to sustain that debt with their low equity. For
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BBBY will need to trade off business risk against financial risk. They operate in an industry with fairly low business risk however BBBY's operating leverage is high which could indicate a higher than industry business risk if they are not cognizant of managing their fixed costs. In addition, BBBY's debt to total asset ratio is higher than their industry. Both of these indicate a high business and financial risk. If BBBY were to recapitalize to 80% debt to total capital it would only increase their financial risk and reduce shareholders earnings per share. Therefore the recommendation for a capital structure for BBBY would be to add more than the 40% debt to total capital but not more than 80%.
This represents a 7% increase in stock price. Further, the additional leverage and return of excess cash to shareholders will significantly increase ROE. If the market determines that an 80% debt capital structure is feasible for BBBY, then we will expect further capital gains as investors applaud shareholder friendly policies and re-examine EPS estimates. However, if top line growth and same store sales growth continue to trend downward, investors may become skeptical of BBBY management’s ability to continue generating over 30% EPS growth, and thus question the ability of the company to service its debt in the future.
An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.
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