1.

Conduct a Porter’s (2008) Five Forces analysis on PSG to gauge its profitability within
the global sporting goods industry.

The analysis of Porter’s five forces on Performance Sports Groups (PSG) to gauge its
profitability within the global sporting goods industry are as follows: -
A. Competition
PSG is maintaining a leading role in capturing the market share in the hockey equipment
industry with their brand ‘Bauer’. Their ‘Ice hockey skates’ has 70% market share, their
‘Helmets and protective gear’ has 65% market share, their ‘Hockey sticks’ has 45% of the
market share and their ‘Goalie gear’ has 35% of the market share as per the case. This huge
market share in the variety of the hockey equipment shows PSG’s dominance among its
competitors which is admirable. PSG ranks number 1 in total market share captured, market
share captured in ice hockey skates, ice hockey sticks, ice hockey helmets, protective gear and
ranks number 2 in the market share of the Goalie gear.
Just like in the Ice Hockey industry, they also have big dominance in the Baseball/Softball
industry. Their brand ‘Easton’ also ranks number 1 brand in the North American market with the
highest number of market share of Baseball/Softball equipment ahead of big players such as
Wilson, Rawlings, Mizuno etc.
This impressive performance of PSG shows that it is way ahead of its competitors and it's
mainly because of their focus and priority on the research and development and introducing new
products designs. The company also invests heavily on the R&D, they have spent approximately
4.0% of its annual revenue on research and development in 2015 which is around 24.2 million.
For example, they have opened a world-class facility in Blainville, Quebec for research and
development. These investments have provided PSG with a strategic competitive advantage and
are helping them to remain the leader in this competitive market. Also, the acquisitions along
with the research and developments has helped PSG to achieve strong revenue and profit growth
which has kept them above all the competition.
B. Threat of new entrants
It is very difficult for an athletic product company to enter in the market at this era as many
of the companies are already established. And as for Performance Sports Groups, it is well
established in the market and their products are very popular in different countries and among
the consumers so the threat of new entrants is very minimal. Many of the PSG’s competitors in
the market such as Nike, Adidas, and Under Armor and so on are already a huge brand that is
famous worldwide and even these companies find it difficult to compete with PSG’s in their
segment. Therefore, in this particular athletic segment in the market, the threat of new entrants is
very low.
C. Power of Suppliers
Performance Sports Group's vendors and suppliers include a number of international
partners. In 2015, international suppliers accounted for 90% of all providers, with facilities
largely located in China, Thailand, and Vietnam. Bauer, in example, uses an exclusive vendor
base to manufacture the majority of their equipment. Suppliers and manufacturers are bound by
rigorous confidentiality agreements to protect proprietary trade secrets. Manufacturers have
created excellent ties with PSG's brands, with several of them having been associated with PSG's
brands for 10–30 years. PSG intends to execute an approach to assist decrease costs, increase
efficiencies, and lower working capital by leveraging the strong connections it has built with its
suppliers. PSG thinks it has the lowest production costs when compared to its competitors. This
is due to its production infrastructure, distribution network, and research and development
efforts.
D. Power of buyers
Performance Sports Good has a sales and distribution network of its goods all over the globe.
It sells to about more than 6000 retailers in different parts of the world such as Canada, United
States, and Scandinavia, Finland and so on. It also has more than 60 distributors in more than 55
other countries in the international market. According to the report in the fiscal year 2015,
around 58% of PSG’s total sales were made in the United States, 24% of the sales were in
Canada and the rest were made in different parts of the world. PSG sells 27% of its goods and
products to big-box stores such as Walmart, Target, Home Depot and Lowe’s and sells the
remaining 73% to sport-specific retailers.
Some of the PSG brands like Combat, Maverik, Cascade and Bauer have online stores to
showcase the information regarding the products and some of the brands like Easton and Inaria
also have an online presence that sells their products directly to the consumers. Furthermore,
PSG's top ten customers account for roughly 37% of total sales, with Canadian Tire Corporation,
Ltd. accounting for 10%. As a result, if one or more of these critical customers experiences a
downturn, it may lessen its reliance on PSG products or cease its connection with PSG entirely.
Therefore, in order to tackle this problem, PSG inaugurated its first "Own the Moment"
hockey experience in Burlington, Massachusetts, in August 2015, with plans to open more in the
coming months. This 20,000-square-foot retail location includes an indoor ice hockey rink where
consumers can "fit, learn, and experience" Bauer items and the sport of ice hockey.
E. Threat of Substitution
For PSG, the threat of the substitution is very low because the consumers usually go for new
innovations and product designs. As discussed earlier, PSG has high focus and investments in the
research and development and they have continuously introduced new products and product
designs which is enabling them to continuously advance and evolve. This has provided them
with the competitive advantage over their competitors such as Reebok, Easton Hockey, Wilson,
Mizuno, etc. which are big players too.
If PSG will continue to invest in the research and development and if they will continue to
bring new product innovations, they will continue to dominate the market because it will be
difficult for the competitors to keep up with the new product developments and innovations.
2. Complete a thorough financial analysis of PSG based on the financial statements
presented in the 2015 annual report (see Tables 6, 7, and 8). Analyses ought to include, but
are not limited to, common size and year-over-year analyses of PSG’s statement of cash
flow (see Table 7) and balance sheet (see Table 8), and key financial ratios in evaluating
business performance.

A. Common Size and Year-Over-Year Analysis

Income Statement
The common size analysis in the PSG‘s income statement is performed by expressing
each line item in the income statement as a percentage of revenue. The gross profit of the
company seems to have decreased in relation to the increase in revenue, which can be explained
by the increase in COGS which seems to have increased along with the increase in revenue of
the company. The operating income of the company seems to have dropped from 9% to 6% of
the total revenue from year 2013-2015, this shows the health of core operating areas of the
business. The interest expense comprises of 2-3% of total revenue on average for the period of
three years which shows that the company pays interest to the shareholders. It can also be
observed that the company has been spending an average of 3-4% of total revenue in research
and development over the years. In the similar manner the increment in the percentage of various
expense items in relation to the revenue can be noted, which further explains the decrease in net
income over the years i:e from 6.31% to 0.50% of total revenue.
Looking at the trend the revenue of the company seems to have increased from 11% to
46.73% over the year. This increase in revenue has led to the increase in gross profit from 4.87%
to 33.73% as well as the increment in operating income from -24.73% to 38.56 % this shows that
the company is performing well in its core operating areas. However the increase in interest
expenses and increasing loss on derivatives and foreign exchange have resulted in a decreasing
trend in the net income.
Balance Sheet
The common size analysis of Balance Sheets shows that, major chunk of total assets is
composed of current assets i.e., about 50% which is a good indication of a company's ability to
pay its debts in response to its current liabilities. However, the receivables and inventories
occupy a greater percentage of current assets which is a concerning size. It is because inventories
are not highly liquid assets like cash, and cash which is a highly liquid asset is not even 1% of
total assets in both years and has decreased by 57.33% from 2014 to 2015.
Looking at the non-current assets, PSG seems to have invested in fixed assets as shown
by horizontal analysis indicating 85.81% increase from 2014 to 2015. The intangible assets
including goodwill also comprises a significant portion of the total assets, however the trend in
two years shows a declining trend of intangible assets.
The size and the trend of liabilities and stockholder’s equity in response to total assets
shows that the total liabilities for PSG is 63.1% and 76.84% of total assets in 2015 and 2014 and
shows a decreasing trend in two years by 16.26%. The stockholders equity comprises 36.9% and
23.16% in 2015 and 2014 respectively. And the trend shows that the total stockholders’ equity
seems to have increased significantly by 62.43% from 2014 to 2015. This indicates that PSG has
been shifting its capital structure from debt financing to equity financing. Altogether, since the
total liabilities is higher than total equity, we can say that the company has been financing its
activities with debt more than equity. The retained earning has increased by 6.22% from 2014 to
2015 which is an indicator that the company is increasing its funds in retained earnings for
further investing in future.
Cash Flow Statement
The common size analysis for cash flow statements has been conducted as a percentage
of revenue from the income statement. The findings show that net income ranged from 0 to 6%
from 2013 to 2015 however has shown a decreasing trend from 2013 to 2015. The percentage of
net income as a percentage of revenue is extremely low indicating that despite the revenue, PSG
has not been able to realize it into net income given the level of increasing expenses.
Looking at the three major components of the cash flow statement: cash generated from
operating activities, cash generating from investing activities and cash generated by financing
activities, we can see some astounding results. The net cash provided by operating activities as a
percentage of revenue is below 5% for all the three years. The even more concerning figure is
shown by horizontal analysis which indicates that the cash generated by operating activities has
been plunging down from 2013 to 2014 and 2014 to 2015. This further implies that the company
has not been able to generate enough cash flow from its core business activities.
 The percentage of cash outflow due to investing activities as a percentage of revenue
shows that the company has been investing heavily. The rate was 20.37% in 2013, 80.33.5 in
2014 and 2.57% in 2015 as a percentage of revenue. The investment has been broadly done in
acquisition of new businesses as stated in the cash flow statement itself. The company generated
cash inflow in 2015 through acquisition and cash outflow due to purchase of plant and
equipment. The trend through horizontal analysis shows that the cash outflow for acquisition has
declined however investment in property, plant and equipment has increased significantly by
more than 98% from 2014 to 2015.
The result regarding net cash flow from financing activities shows that PSG has been
increasing its debt financing as the percentage of it as a percentage of revenue was 15.95% in
2013, 78.73% in 2014 and 0.27% in 2015. The cash inflow from financing activities increased by
363.11% from 2013 to 2014 and it further reduced by 99.65% from 2014 to 2016.
Overall, the cash flow position of PSG shows that it is extremely less in comparison to
the revenue generated by the company which is less than 2% and has substantially declined from
2014 to 2015 by 70.92%. Such a low level of cash flow cannot convince the investors to invest in
the company as the cash flow statement provides a crux of the overall financial position of the
business in a single glance.

B. Key Financial Ratios:

I. Liquidity Ratio: The liquidity ratio normally indicates the ability of the business to meet
the maturing or current debt and the efficiency of management in utilizing working
capital.
a. Working Capital: The working capital of the company is positive and has
increased from the year 2014 to 2015. This depicts that the company has enough
current assets to meet its debt obligations. This also indicates that the company
will have enough left for operating after settling all the current liabilities.
b. Current ratio: The current ratio of the company also seems to have increased
from 2.19 to 2.27. This means that for every dollar worth of current liabilities
there are current assets worth $ 2.19 and $ 2.27 in the year 2014 and 2015
respectively. This means that the company is able to meet its current liabilities.
c. Quick Ratio: The quick ratio of the company has decreased from 1.18 to 1.13
although this amount of ratio shows the ability of the current assets to cover its
current liabilities, the company is seen to have a decreasing quick assets amount
means the company is taking risk by not maintaining the appropriate buffer of
liquid assets.
d. Accounts receivable turnover ratio: The account receivable turnover ratio of the
company has increased from 2.19 to 3.22 from the year 2014 to 2015. This
connotes that the efficiency to collect receivables have increased over the years.
The ratio of 3 means that the company collects its receivables 3 times in a year i:e
every 111 days as given by no of days sales in receivable ratio.
e. Inventory turnover ratio: Similarly the inventory turnover ratio is 2.69, which
indicates that the company sells 2 times of its inventory and the company takes
about 134 days to sell its inventory or complete one turn.
 II. Solvency Ratio: Solvency ratio measures the company’s ability to meet its long-term
obligations. It measures the size of a company's profitability and compares it to its
obligations.
a. Debt-Equity Ratio: The debt to equity ratio has decreased from 3.20 to 1.60
from the year 2014 to 2015. The debt to equity ratio of 3.20 indicates that the
company has $3.20 of debt for every $1 equity. This means that the company’s
debt position is increasing in terms of its equity position and most of its financial
activities are financed by debt which also is complimented by our vertical and
horizontal analysis.
b. Times Interest Earned Ratio: The times interest earned ratio of the company has
decreased from 3.71 to 1.34 from the year 2014 to 2015. This means the company
used to make income to pay its total interest expenses over 3.71 times but now is
only making income over 1.34 times to pay its total interest expenses. The
company at the moment seems to be in a risky path compared to previous year.

III. Profitability Ratio: Profitability ratios show a company’s ability to generate profits
from its operation, focusing on a company’s return on investment in inventory and other
assets.
a. Gross Profit Ratio: Although the company seems to be performing on profit, the
gross profit of the company is seen to have decreased from 0.37 to 0.32 from the
year 2013-2015. This gross profit of 0.32 means that the company has 32% of its
sales revenue to cover its operating costs.
b. Net profit margin: Similar to the gross profit margin, the net profit margin is
also in the decreasing trend i.e. from 0.063 to 0.005. This means that the company
converts 5% of its sales into profits which seems to be very low as well as in
decreasing trend from 6.3% to 5%.
c. Return on Assets (ROA): The ROA of the company tells us that every dollar the
company invested in its assets produced 1.8% of net income.
d. Return on Sales Ratio: The return on sales ratio has decreased from 5.8% to
2.3% this means previously the company used to earn 0.058 cents per dollar sales
but it is now earning only 0.023 cents per dollar in sales.
e. Assets Turnover ratio: The assets turnover ratio is 0.78 this means that for every
dollar in assets the company earns 78 cents.
f. Return on Equity (ROE): The ROE of the company is 1.2% this means that
every dollar of common shareholder’s equity earned about 0.012 cents.

3. Based on the above analyses, should Farmer invest part of his inheritance in PSG or
consider investing in other companies? Why or why not? Explain your answer.

Looking at the quantitative aspects of the company, PSG’s liquidity position is

considerably good given its level of working capital, current and quick ratios. However there is a
critical need for the company to focus on receivables of the company as well as on inventory
turnover rate. On the other hand the company seems to be slightly lacking behind in its solvency
and profitability positions. As an investor considering investing in PSG, its profitability ratios are
not convincing enough to invest in it.
 Although the company is making the gross profit it is really less compared to the
increment in the revenue as COGS is increasing in the same ratio. The company is experiencing
decrement net income over the years despite the increasing gross profit. The overall profitability
ratios also indicate dissatisfactory performance of PSG given its aggressive investment through
acquisitions and capital budgeting decisions.
On the other spectrum, if we look at the qualitative aspects and analyze them with the
help of porter five forces, company strategy, and its competitive position, it seems that it can be a
wise investment opportunity as the company is seeking massive growth and expansion through
acquisition and R&D. Although it has not been providing any returns in the form of cash
dividend or bonus share, it has potential to provide greater rate of return in upcoming years. Thus
there lies the potential in the shares of PSG to give higher return at this price level over the years.
However, based on the information about the company is not substantial enough to make
an informed decision. In addition, we also need to analyze the industry status and data on
industry average to compare how PSG is performing in response to the industry performance.
Similarly, the data for three years is limited to analyze and evaluate the trends in the financial
performance of PSG. Thus, we also need to look into additional data for about 5-6 years so as to
draw a clear picture for informed investment decisions.
It has also been stated in the case that the company's past performance has not been good
enough and the future scenario portrays a bleak picture of uncertainties and questionable
investment scenarios given the exchange rate risk and business cycle risk. Thus, we suggest
Farmer to invest in PSG only after a thorough analysis of above stated scenarios. Also, Farmer
can look for other investment opportunities available while still considering his decision on PSG
and if other opportunities can yield better returns.

The investment in PSG shares can be competitive if following improvements can be made in the
company policies

● There lies the possibility for PSG to increase its profit margin in response to the revenue
by reducing the cost of goods sold.
● There also exists the possibility to increase the net income by reducing the various
expenses major being selling and administrative expenses.
● The company can make its shares attractive in the stock market by offering minimal
dividends in terms of cash or bonus shares based upon the earnings and requirements.
● The company can work on the receivable and inventory turnover rate to improve its cash
positions.
● The ROA is extremely low indicating that the company has not been efficient in utilizing
its available assets and is acquiring more and more assets. Thus the company should
utilize its assets effectively to produce better results.