CASE 3BNL STORES

Student Student number

Maria Epifanova 01632800

Lesly JeanLouis 00826331

Junyi Ouyang 01597944

Yifan Cui 01248695

03/05/2016

Table of Contents

Introduction.......................................................................................................................3

Case Analysis......................................................................................................................4

Question 1.................................................................................................................................4

Question 2.................................................................................................................................6

Question 3.................................................................................................................................7

Conclusion.........................................................................................................................7

References............................................................................................................................... 7

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Introduction

BNL is Paul Cruz ‘s favorite place to shop. It was established in Midwestern since 40 years

ago. Recently, BNL issued a series of new business strategies, such as expanding the number

of BNL’s new supercenter stories, selling more durable goods. In addition, BNL’s traditional

tactic was to offer store credit to customers. This strategy was focused to stimulate sells as

well as to motivate each individual store manager selling more goods.

However, according to Paul Cruz ‘s research, BNL store’s stock had fallen dramatically, which

dropping from a high of $100 per share to less than $10. Therefore, the paper is established

to understand whether these new strategies were related to the decline in BNL’s share

price. Based on the company’s income statement, balance sheet and statement of cash

flow, the trends related to financial ratios and amounts from 2002 to 2010 are studied in

depth. The reasons behind those trends are also explained. Besides, for the industry

analyses, Home Depot company is examined. HD was taken for the analysis since it fully

matches with the profile of BNL business. This way, the study supports not only historical

analysis but as well benchmark analysis.

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Case Analysis

As it was mentioned, the analysis is based on examining ten financial ratios that are related

to company’s profitability, turnover, liquidity and financial leverage results during 2002

through 2010. The analysis also examines the cash flow statement for the same nine-year

period as well as its trends and the consequences of these trends.

Question 1

Profitability

Net Profit Margin

2007 2008 2009 2010Net Income $238.738,00 $256.195,00 $73.916,00 $-1.415.678,00 Sales $9.344.542,00 $11.176.830,0

0 $12.568.581,0

0 $11.974.768,0

0 Net profit margin 2,55% 2,29% 0,59% -11,82%

Net profit margin is calculated as a percentage of the net income to sales, thus it expresses

how much each dollar earned transfers to actual earnings of the company. If assessing net

profit margin of BNL stores, it is clearly seen that the ratio has been falling all the way from

2004 to 2010, while before that period it was relatively stable. Although the sales increased

tremendously, that negative trend of profitability ratio might be explained by a rise in

selling, general and administrative expenses. These expenditures have increased from 2004

to 2005 by around 25% from $1,615,437 million to $2,018,114 million. That might be due to

increase in bonuses that were given to managers as a part of motivation to make customers

buy on credit.

Besides, a year of 2009 showed an extremely low profitability ratio as well as a year of 2010

even led to a negative ratio number, though the sales amount in 2009 and 2010 were the

highest within nine years. In 2010 operating loss was more that 2 billion US dollars.

Furthermore, more than 10% of operating expense was accounted for selling costs.

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To make it straight to the point, the profitability ratio has been declining from 3.42% in 2002

to -11.82% in 2010. This fact could be explained due to higher operating expenses growth

over sales earned growth. Moreover, an interesting moment in the financial result of a

downturn year of 2010 is that although operating income was negative, the company still

paid out dividends. That pay out could be because the company wanted to keep their

investors as well as possibly to slightly recover its stock price, nevertheless, if an

experienced creditor sees such a great loss and the negative trend of company’s

profitability, income from dividends is not going to significantly affect his or her decision on

further dealing with a company. Conversely, a company that pays dividends from no income

but debt, should create a concern of any investor.

Return on Equity

2007 2008 2009 2010Net Income $238.738,00 $256.195,00 $73.916,00 $-1.415.678,00 Equity $2.208.552,00 $2.266.811,00 $2.211.704,00 $771.815,00

ROE 10,81% 11,30% 3,34% -183,42%

Return on Equity illustrates the ratio of earnings to shareholder’s equity, it is a measure that

is helpful for potential investors who assess attractive stocks. In addition, it is composed

from three financial measures as profitability, efficiency and financial leverage. As it is seen

from the table above as well as from the case paper, ROE has been fallen through all the

time from 2002 to 2010. This is supported by rising total liabilities. The huge drop of ROE

from 2008 to 2010 resulted from company’s borrowings of long-term debt. Moreover, as it

is seen from the Balance Sheets of BNL company, the account of long-term debt has

tremendously increased (by around 4 times) from 2006 to 2007, that led to a great rise of

short-term notes payable account in 2008 since the company had to pay a lot more interest

in the following years. From the financial data presented by the case, it might be considered

that BNL has borrowed a large loan to get more cash to cover operating expenses since the

company had most of its assets in Accounts Receivables.

Since the management team mainly focused on attracting customers who pay on credit, and

therefore, increase Accounts Receivable, the company did not control its balance of current

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assets by allowing the A/R account to rise every year by a large portion considering the cash

and cash equivalent amount.

In 2008 there was financial crisis that made the company to fell in ROE and its components

as efficiency, profitability and financial leverage. That external difficulty effected the most of

business companies. This fact can be supported by the analysis of an industry player as

Home Depot (HD). HD also had a sharp decrease in ROE owning it from 20.56% to 12.74% in

2008. Nevertheless, Home Depot slightly got ROE better as they succeeded to upgrade it to

14.32% in 2009.

Return on Asset

2007 2008 2009 2010Net Income $238,738.00 $256,195.00 $73,916.00 $-1,415,678.00

Income before tax

$418,408.00 $430,780.00 $96,215.00 $-2,212,097.00

Tax expense $179,670.00 $174,585.00 $22,299.00 $-796,419.00 Tax rate 43% 41% 23% 36%Interest Expense $115,057.00 $146,638.00 $163,086.00 $256,087.00 Assets $6,404,862.00 $7,530,533.00 $8,102,013.00 $7,337,770.00

ROA 4.75% 4.56% 2.46% -17.06%

Return on Asset measure strongly depends on net income and assets outcomes. Hence, a

previously mentioned decline in net income to assets might illustrate the efficiency of

handling assets. The negative ratio in 2010 concludes that the company made a loss on

every dollar invested in asset. That was a result of an impressive deficit made in the same

year.

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Turnover

Days Receivables

2007 2008 2009 2010Accounts Receivable $3.246.562,00 $3.689.622,00 $3.684.015,00 $2.945.781,00 Sales $9.344.542,00 $11.176.830,00 $12.568.581,00 $11.974.768,00

Days receivables 126,81 120,49 106,99 89,79

Days in Account Receivables ratio studies how well a company collects its credit sales. Since

BNL’s strategy is to provide customers with sales on credit and give sales managers the

bonuses based on the sales realized, the company has to concentrate on studying this ratio

as it shows a downturn of this tactic. Undoubtedly, it is easier to sell a good to a customer

by providing a credit, nevertheless there should be a limit of this tactic and the management

needs to track the percentage of cash to accounts receivables and examine the efficiency of

transferring Accounts Receivable into real money. As it is extracted from the financial data,

from 2004 to 2005 the days receivables ratio has more than doubled. That is supported by

increased sales as well as by an immense growth of Accounts Receivable. From that year to

2007 the ratio has been rising. Although sales in the period of 2008 to 2010 were high, the

ratio has decreased because A/R account finally declined. That decline might be a result of

either improved credit collection policy or time issue as collections of A/R from the previous

periods.

Although the ratio has lately ameliorated, the management has to strictly track the

performance of collection policy since their operations are hugely depended on it.

Moreover, if the management had transferred A/R into cash earlier, the company could

have needed no huge borrowings from a bank from 2007 to support its operations.

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Inventory turnover

2007 2008 2009 2010COGS $6.313.787,00 $7.629.270,00 $8.698.367,00 $8.836.150,00 Inventory $2.025.023,00 $2.708.834,00 $3.055.319,00 $2.761.880,00

Inventory turnover

3,12 2,82 2,85 3,20

Although there are high fluctuations of different ratios, the inventory turnover seems to be

the most stable since its lowest point was at 2,85% in 2008 as well as 2009 and its peak was

spotted at 3,7% in 2002. In order to support sales amount that increased every year, the

company needed to carry high level of inventory, and thus earned high levels of COGS.

Total Asset Turnover

2007 2008 2009 2010Sales $9.344.542,00 $11.176.830,0

0 $12.568.581,0

0 $11.974.768,0

0 Assets $6.404.862,00 $7.530.533,00 $8.102.013,00 $7.337.770,00

Total Asset turnover

1,46 1,48 1,55 1,63

Asset Turnover is calculated using sales and assets numbers. It is considered to indicate the

efficiency of company of deploying its assets, and thus, extracting revenues. The higher the

ratio, the better company uses its assets. Hence, using the data collected, it is indicated that

has been decreasing from 2004 to 2008. After 2008 the ratio experienced a slight rise. That

recent positive trend might depict recovery of asset efficiency. Nevertheless, the ratio was

all the time higher than 1, which means that within a year period total assets generate value

in sales by more than just once.

For a better analysis of this ratio, Home Depot is taken as an industry player, and thus, its

outcome in asset turnover is compared to BNL’s result. Home Depot has the following

results in the ratio: 1.96% in 2006, 1.88% in 2007, 1.60% in 2008, 1.67% in 2009 and 1.61%

in 2009. As noticed, there was a slight decreased of Home Depot’s AT from 2007 to 2008,

whereas BNL succeeded to improve the ratio. Therefore, it might be concluded that the

company was comparably efficient using its assets and even improved the results in the

period of economy downturn.

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Liquidity

Current ratio

2007 2008 2009 2010Current Assets $5.646.038,00 $6.653.323,00 $7.100.369,00 $6.292.321,00 Current Liabilities $3.224.410,00 $4.292.203,00 $4.481.974,00 $5.077.616,00

Current ratio 1,75 1,55 1,58 1,24

Current ratio examines company’s ability to pay off its current debt using current assets

(self-liquidating accounts). The company’s A/R accounts have been rising for the whole

period, that created current assets amount to improve as well. Nevertheless, since the

company started immensely borrowing from 2005, and afterwards paying increased interest

expense, it has reflected in the following years as well as resulted in fluctuations of current

ratio. If the current ratio in 2002 equaled to 2.66, in 2010 it was already 1.24, which was due

to more extensive growth of current liabilities rather than stable rise of current assets.

Quick ratio

2007 2008 2009 2010Cash $337.990,00 $209.794,00 $311.548,00 $539.973,00 Accounts Receivable $3.246.562,00 $3.689.622,00 $3.684.015,00 $2.945.781,00 Current Liabilities $3.224.410,00 $4.292.203,00 $4.481.974,00 $5.077.616,00

Quick ratio 1,11 0,91 0,89 0,69

As it was mentioned, the trend of current liabilities was more excessive than the expansion

of current assets including separately cash and accounts receivables accounts. That resulted

in a decreased current ratio, as well as quick ratio. Based on the table above, the cash and

accounts receivables were not increasing enough to catch the liabilities amount. Hence, it

created situation in 2008 when the quick ratio went lower than 1 meaning that “quick

accounts” of assets could not cover current liabilities at that time. When comparing with

Home Depot, BNL seems to do much better since HD’s quick ratio has been always lower

than 0.30 for the period from 2006 to 2010.

In such a volatile industry, in which BNL stores operate it is important to measure liquidity.

Nevertheless, the company seems to do adequate when managing current liabilities to

current assets since most of years (eight out of nine) the ratio was larger than 1.

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Financial Leverage

Debt-to-equity ratio

2007 2008 2009 2010Liabilities $4.196.310,00 $5.263.722,00 $5.890.309,00 $6.565.955,00 Equity $2.208.552,00 $2.266.811,00 $2.211.704,00 $771.815,00

Debt-to-equity ratio

1,90 2,32 2,66 8,51

The ratio of debt to liability examines the portion of liability in assets relatively to

shareholder’s equity. To that extend, the measure assesses company’s financial leverage.

Historically, it is seen that the ratio has been increasing as within nine years, the ratio has

gone up from 0.96 in 2002 to 8.51 in 2010. The last number shows a high risk that a

company involves in its operations. As mentioned, the rise is explained by company’s

borrowing history as to cover operating expenses, BNL sharply increased its loan level, the

same way as its short-term notes payable.

Commonly, this industry tries to come with low financial leverage ratio since the cash flows

are not stable and the market is relatively volatile. To support this, the analysis refers back

to Home Depot results in leverage ratio. Based on HD debt to equity from 2006 to 2010 the

ratios climbed up from 0.10 to 0.45, in percentage that is a steep increase, nevertheless, the

ratio does not even exceed 1. That industry study might support the previous conclusion

that BNL took a risky decision to increase its liabilities to equity.

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Debt-to-capitalization ratio

2007 2008 2009 2010Long-term liabilities $971,900.00 $971,519.00 $1,408,335.00 $1,488,339.00 Contributed Capital $550,787.00 $496,194.00 $510,378.00 $516,385.00

Debt-to-capitalization ratio

0.64 0.66 0.73 0.74

When comparing, within nine years the contributed capital level has not changed much as it

has risen from $397,396 in 2002 to $516,385 in 2010. Nonetheless, long-term liabilities have

steeply gone up from $557,269 to $1,488,339. That trend resulted in a higher debt-to-

capitalization portion especially when stressing the period from 2004 to 2005. As previously

emphasized, the year of 2005 was a decisive year for the company since the management

team decided to double its Accounts receivable in order to accelerate sales levels.

To conclude, when analyzing financial performance of BNL company from 2002 to 2010, the

nine-year period might be divided into three phases: the first phase is from 2002 to 2003,

the second stage is from 2004 to 2008 and the third one is from 2009 to 2010. First period

could be called as stability, the second one as turn-down and the third one as breakdown.

Although in the first phase there was a slight decline in several ratios, the financial output

did not significantly fluctuate. Afterwards, the second period’s failure was due to an internal

problem that was created by management’s decision on increasing sales by selling on credit

and by making Accounts Receivable to climb up high and not creating an essential balance.

Nonetheless, in 2008 the financial crisis generated an external problem for the company,

and from that period on there were two issues that are related to management’s

involvement as well as to economic conditions. From that point it would be difficult for a

company to recover since the right and well-analyzed decisions have to be made.

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Question 2

2008 2009 2010Cash flows from operating activities Net Income (loss) after taxes $256.195,00 $73.916,00 $-1.415.678,00 Adjustments for: Amortization of property, plant and equipment $81.387,00 $89.903,00 $90.744,00

Changes in: Accounts Receivable $-443.060,00 $5.607,00 $738.234,00

Inventories $-683.811,00 $-346.485,00 $293.439,00

Prepaid expenses $-8.610,00 $-4.414,00 $4.800,00

Accounts Payable $-75.220,00 $3.158,00 $164.943,00

Corporate taxes payable $110.466,00 $-240.954,00 $-565.303,00

Deferred corporate income taxes $15.336,00 $18.462,00 $-99.320,00

$-1.084.899,00 $-564.626,00 $536.793,00 Net cash from operating activities $-747.317,00 $-400.807,00 $-788.141,00

Cash flows from investing activities  (Increase) or decrease in property, plant and equipment $-177.982,00 $-154.747,00 $-97.171,00 Proceeds from sale of (acquisition of) other assets $-21.791,00 $-59.590,00 $-37.378,00 Net cash from investing activities $-199.773,00 $-214.337,00 $-134.549,00 Cash flows from financing activities  Proceeds from (repayment of) notes payable

$1.032.547,00 $427.567,00 $996.002,00

Proceeds from (repayment of) long-term debt $-11.933,00 $421.730,00 $192.972,00 Proceeds from (repayment of) other liabilities $-3.784,00 $-3.376,00 $-13.648,00 Proceeds from issuing (repurchase of) share capital $-54.593,00 $14.184,00 $6.007,00 Dividends paid $-143.343,00 $-143.207,00 $-30.218,00 Net cash from (used in) financing activities $818.894,00 $716.898,00 $1.151.115,00 Net increase (decrease) in cash and cash equivalents $-128.196,00 $101.754,00 $228.425,00

Opening balance, cash and cash equivalents $337.990,00 $209.794,00 $311.548,00

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Closing balance, cash and cash equivalents $209.794,00 $311.548,00 $539.973,00

Question 3

Interpreting BNL STORES ' statement of cash flows shed a lot of light on how the company

was managed throughout the years. The effects of these strategies implemented are

reflected through the numbers in the financial statements of the company. Based on the

linkages of the balance sheet and the income statement on the statement of cash flow, it

makes a lot of sense to look at the statement format and data sources to analyze BNL

financial history from an operating, investing and financing perspectives.

The data from 2002 to 2004 in the statement of cash flow showed BNL STORES in a better

light with positive net cash flow from operating activities derived by reasonable change in

account receivable, inventories and account payable. The working capital management was

somewhat effective during those years. Similar observations can be made for the investing

and financing activities during this period. In 2005, the new strategies implemented by the

company's management started to reflect in their statements and BNL reported a significant

negative net cash from operating activities directly related to a very high change in their

account receivable. Having a negative net cash from investing and financing activities would

show BNL is paying back debt and investing back into the business, but that year they were

both positive. This nightmare will continue until 2010 which will affect the company’s future

cash flows negatively.

When it comes to BNL's economic viability, there is no other way to put it or to sugarcoat it.

It does not look good at all. Viability means the ability for any company to sell its products at

a price that cover its costs and provide a return to the shareholders. Looking at the

statement of cash flows and more specifically the income statement, the level of BNL cost of

goods sold, selling and administrative expense, PPE expense, the company will need a

miracle to stay away from going under. To add insult to injury, BNL's management continue

to operate as business as usual with unrealistic investments in PPE and the obsession of

paying dividends.

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For any company listed in the US stock markets, the performance of their stock is directly

related to their management strategies and its impacts on the company top and bottom line

as a whole. In the case of BNL STORES, the decision to expand while phasing out traditional

stores is not without merit, but tying the store managers 'commission to the net income of

the stores was fatal. By leniently giving credits to customers who did not deserve them, the

store managers increased their stores net income and their commission at the same time.

The adverse effect of these actions are reflected in the analysis by tremendously increasing

BNL's receivables and inflating the company's net income. The fact that these statements

are prepared using an accrual accounting method, BNL reported income even though they

did not receive any cash. BNL from a cash management perspective, the fact that BNL will

not be able to effectively finance its day-to-day operations and the fact that the analysts

know how illiquidity can put a company at a risk of failure, BNL will receive a sell

recommendation from Wall Street which will tank the stock price.

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Conclusion

After analyzing the general ratios of BNL’s store, the dramatic change from 2004 to 2005 can

be observed. The critical problem is account/receivable has been increased significantly in

2005. In the long-term, the non-adequacy of accounts receivable level resulted in significant

pressure on the cash flow, and a sharp decline of company’s share price. If a company

decides to follow such a strategy in the future, it should be more efficient and accurate at

collecting the receivables.

The analysis of the nine-year period also led this research to understand that the main

problem did not start in recent years. The negative trend already has started in 2005, when

a management possibly took some wrong decisions. The financial crisis that occurred in

2008 additionally created an external problem to BNL where internal problem already

existed in the business process. The supplementary economic issue attached extra pressure

that resulted in company’s loss in 2010.

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References

1. Cruz, Paul. "BNL Stores." Richard Ivey School of Business Foundation (2013): Print.

2. "HD Home Depot Inc XNYS:HD Stock Quote Price News." HD Home Depot Inc

XNYS:HD Stock Quote Price News. Web. 05 Mar. 2016.

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