Nature of the Business:
Haefren Baum is a well-established high-quality home furniture retailer that associated with Wiegandt. Heafren Baum was established as a partnership in 1965 and incorporated in 1970. In June 1994, two of the four partners sold their shares in the company to the two remaining owners. The company went from one location in downtown Cologne to three more outlet stores in Rhineland suburban areas.
As a furniture retailer, the demand is not seasonal or cyclical, but it’s still affected by the demand of the consumers. When the demand is high, the sale is high. According to the article Wiegandt GmbH Cologne, Germany’s economy encountered a bust in 1993. German’s GDP decreased rapidly from 13.2%(1991) to 2.2%(1992) to -1.2%(1993). Surprisingly, the sales of furniture increased a little bit from 40.5 DM to 44.2 DM. This is only because many retailers decreased prices to maintain sales. This reaction affected small retailers like Wiegandt’s distributors. By looking at the average collection period increased from 52.63days (1993) to 77.18 days (1994), Wiegandt extended more flexible credit to its distributors to pay back debts to keep its sales volume. In the early month of 1995, German economy had begun its recovery, but the furniture market continued to be bad. This had happened not only because Wiegandt has to compete with big furniture stores in German but also with European furniture retailers entered the German market. Because of this, furniture retailers began introducing outlet stores in suburban areas, trying to attract customers with low prices. The number of outlets had multiplied despite the sales volume be at a standstill. I believe this will continue because of the increasing competition.
Haefren Baum is an asset-intensive furniture retailer, so it has to hold some inventory and the necessary property in which to store it all. Haefren’s land and inventory stayed constant throughout 1993-1995 because there was no expansion. However, due to the slowdown of the economy, total asset turnover decreased from 2.09 (1993)-1.55(1994). This decline in efficiency is due to the twenty-three percent decrease in net sales from 1993 to 1995. The fixed asset turnover had decreased from 6.98 to 5.39 during the year 1993-1995, this shows that the company is over-invested in plant, equipment, or other fixed assets. I believe this is also due to the decreasing in sales.
The inventory days also increased from 103.11days to 129.62 days from 1993-1994 due to a decrease in cost of goods sold by twenty percent while inventory remains constant. This indicates that the company took longer to turn its inventory into sales. The average collection period has also decreased from the year 1993-1995, indicates the company takes longer to received money from the day the customer purchased the product. Those two factors have shown that the company’s sale has slow down and it had given consumers longer period to pay back their bill to generate more sell.
Heafren Baum had funded itself from bank loans, mortgages, and credit sales from its supplier. The major change was caused by the economic bust in 1993, which affected the sales to decrease rapidly. The company should satisfy its supplier more because their accounts payable days in 1995 is 163, which is way over the 30 days the supplier provides.
The cash flow is unhealthy because of the negative cash flow from operating. The account payable increased rapidly, this means they purchased a lot more inventory and was unable to pay with cash.
The company is not liquid with a quick ratio of 1.06 – 1.26 with the 1994 cash flow is negative, means they have a very little amount of cash or assets that will turn into cash shortly. Especially with a long accounts payable days. This will cause the company always to be in debt.
The company has a debt/equity ratio of 5.11- 6.76 and times interest earned 2.46- 0.53. 676% is a very high ratio means the company is attempting to increase its value by using borrowed money, this means the company has been aggressive in financing its growth with debt. Which means a high level of leverage risk.
The company has not been very profitable. Return on equity has been decreasing from 1.01 to -0.06, the company did generate much income with shareholders money, and it is experiencing a loss in the year 1994 and 1995. Net profit margin is also at a loss.
Owner cash is not distributed appropriately. The dividend ratio is at -7 at 1994 and 0 at 1995. Shareholders did not receive any money because the company did not make a profit. All the cash are tied in with long period account payable and also the long-time frame for consumers to pay back within the credit limits and long payback time.
The company has not taken the opportunity of the 2% 10 discounts that Wiegandt offered, so they are paying more money.
Haefren Baum has been affected by the economic bust in 1993 and all the competitors. There is not much the company can do because it was affected by the economy. But they should try to pay back their debt in a shorter time frame, and collect consumers money more quickly. This way they can maintain a better relationship with their suppliers and also be more liquidity so they can generate more profit.