KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT (KUSOM)

Case Study on
“Performance Sports Group: To Invest or Not to Invest”

Submitted by: (Group 8)

Utsav Kafle (21308)

Alish Rai (21323)

Jenish Shahi (21326)

Johsnson Thapa (21336)

MBA Spring 2021

Submitted to:
Mr. Prajol Joshi, Faculty
 Faculty of Financial Management and Decisions .(FIN 501)

14th December, 2021

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

Performance Sports Group (PSG) is a leading developer and manufacturer of ice hockey, roller
hockey, lacrosse, baseball and softball sports equipment. It is also related to apparel and soccer
apparel as a global sporting goods industry and is publicly traded on both Toronto and New York
Stock Exchanges. It stands as a global leader in hockey with the strongest and most recognized
brand and also holds the strongest position in North American brand position in baseball and
softball. Its products are marketed under brands as Bauer, Mission, Maverik, Cascade, Inaria,
Combat and Easton and are distributed by sales representatives and independent distributors
throughout the world.

PSG includes its mission and vision to flourish its market share by expanding internationally and
making additional strategic acquisitions and serving the performance and protection of athletes.
The company also insists to integrate acquisitions and streamline its supply chain to improve
efficiency by lowering working capital and allowing faster reaction to consumer demands.     

The competitive analysis framework for Performance Sports Group (PSG) in regard to
Porter’s 5 forces model are as follows: -

a) Rivalry among existing competitors

PSG has established its strong presence in sports segments such as hockey, baseball,
lacrosse and soccer through its brands as Bauer, Mission, Easton, Combat, Maverik,
Cascade, and Inaria and has high market share especially in hockey equipment. It
accomplishes 70% and 65% in Ice Hockey skates and helmets, protective gears
respectively. The remaining parts of hockey sticks and Goalie gear includes 45% and 35%
of the market share. This is a very high share of the market and strong position of
Performance Sports Group (PSG). As to stay ahead with its competitors, PSG maintains a
strong leading role by introducing newer product designs and also invests heavily for
research and development (R&D).

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 There is high competition among rivals to come up ahead being a strong distributor in the hockey
field as well. As for Lacrorosse equipment and related apparel brands as Warrier/Brine and STX
equally competitive with the Performance Standard Group (PSG) products of Maverik/Cascade.
As Warrior also entered for football market in 2012, with kits and training equipment for several
clubs around the world along with strong position of hockey and Lacrosse equipment As football
sponsorship and products were later not continued with parent company, PSG subsidiaries are
still struggling to keep up with competitors. STX is also known as global sporting goods and
leader. It has been innovating since 1970 in the categories of lacrosse, field hockey, and ice
hockey. The next highly competitive brand is DeBeer Lacrosse one of the oldest sports
equipment manufacturers in the USA. These companies are also equally through with enhancing
their products to come up ahead and are giving tough time for PSG subsidiaries. As in here the
main part comes about the design where PSG is looking to stand with the competition.

As PSG also stands as a strong competitor against distribution of Baseball/Softball equipment.

Easton a subsidiary of PSG leads in the first place in market share. It is leader in selling bats,
helmets whereas second position in catcher protectiveness, third in batting gloves and sixth in
ball gloves. As brands such as Wilson, Mizuno are giving tough competition to Easton. There is
regular focus from PSG to enhance service distribution and specialize in Research and
Development prospects to come up ahead in gloves and protective equipment as well. Other
brands are standing strong to come higher in bats, helmets as well. This has presented a strong
rivalry among existing competitors. 

b)  Threat of new Entrants

 As every business faces a different situation when a new entrant arises in the existing
competition. As new entrants face a very hard situation when there are already many companies
in the field but are likely to emerge soon if there are few companies in the market with not so
strong performance competition.

 In the case of Performance Standard Group (PSG), they are already much ahead in market share.
The strongest position is held by hockey equipment, followed by others like baseball, softball
equipment etc. There is already competition with well-established brands like Reebok, Easton
Hockey, Mizuno etc. These brands are giving strong competition in the market with

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 specialization in their core product areas, higher research and development (R&D) works etc.
There is very little chance for a new entrant to give fear to Performance Sports Group (PSG), as
PSG is already an established brand and there is presence of existing brands. PSG needs to find a
way to deal with existing brands and don’t need to worry much about new entrants. As
newcomers need to come up facing competition and influence their new image into the minds of
customers.The new entrant can challenge PSG in few segments such as hockey and baseball
individually but it will be extremely difficult for an entrant to establish itself in all the segments
without backing of prominent brands. It is really a tough job in North America to set an image
with existing companies in the market. They are only likely to flourish if they can come up with
a low-pricing strategy and new things that stand different from the existing brand.

Hence, there is no such strong threat new entrants can give to existing brands until people are
highly curious with new things or are extremely sensitive to price factors. New entrants can’t
give as problems as existing brands give in the market.  

 c)  Bargaining power of suppliers

There are a large number of international partners to supply raw products to Performance
Sports Group (PSG). International suppliers generally have strong bargaining power
regarding negotiation, distribution and decision making supply.

As of 2015 there were 90% of international suppliers. They had strong bargaining power as
they were primarily focused on China, Tibet and Thailand and supply to North America
zones were of least concern. As international trade consists of strong privacy provisions
and suppliers can reject on the basis of being insured or making difficulty in payments or in
any other situations. The positive sides were suppliers having deep relationships with PSG
brands for around 10-30 years. There are developing concerns to strengthen relationship,
enhance efficiencies and working capital but suppliers must be treated well in order to
grant long-term easy access to services and supply of raw products

As due to high competition and work processes there is high bargaining power of suppliers
and such prospects can be equipped with genuine trade concerns and payments with
regular intervals.

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d) Bargaining power of buyers

Buyers are the major source to enhance flow of services and equip with strong bonding. Buyers
have strong bargaining power when there are many alternatives and less bargaining power when
there are few alternatives. As for PSG there are many competitors equally competitive so PSG
faces strong bargaining power from buyers.

As for PSG to remain competitive in this industry, it must be able to address changing demands
of customers and services accordingly. The important concerns to develop loyal customers are to
provide quality products and services, efficient delivery, access and payments procedure. As
along with other approaches preserving the quality of its brands is also necessary. In 2015, PSG's
total sales were around 58 percent in the United States, 24 percent in Canada, and 18 percent in
the rest of the parts of the world. It includes a global sales and distribution network, selling to
more than 5,000 retailers in Canada, the United States, Scandinavia, Finland, and over 60
distributors in more than 55 countries in other international markets. PSG's top ten customers
account for around 37% of sales, with Canadian Tire Corporation, Ltd accounting for 10%. It’s
dedicated to growing market share by expanding internationally and making additional strategic
acquisitions to serve the performance and protection of athletes.

PSG has a unique way of attracting clients, as they opened their first PSG "Own the Moment"
hockey experience in Burlington, Massachusetts, in August 2015, with plans to open more in the
months ahead. PSG's uncertainty can be identified by reaching out to its customers. Targeting
and buying power of customers varies according to each individual. They are generally providing
strong offerings making it difficult to switch from their products whereas customers have strong
bargaining power.

 e) Threat of substitute products and services

Although there is a solid presence of PSG in sports sector, which positioned it to gain profit on
the increasing sports equipment industry, it has faced competition from many brands such as
Wilson, Mizuno, Reebok, Nike, Under Armour, STX, and others etc that provide similar services
of distributing sports stuff as compared to PSG products. These competitors offer products that
are substitutes for those offered by PSG, and given their international brand recognition, they can

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 pose a serious threat to the company. Furthermore, PSG's objective is international growth, and
in most non-hockey playing nations, standard or non-hockey specific gloves, pads, and helmets
are utilized as a less expensive replacement for branded equipment. As a result, the danger of
substitution in the worldwide market has the ability to stymie PSG's expansion. There is need to
develop loyal customers along with high emphasis on developing brand value.

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.

The thorough financial ratios of Performance Sports Group are shown in the above table which
provide detail evidence regarding the financial situations and the standard of cash management
of the Company. In our analysis of the financial statements of the company, using financial ratios
and comparisons to past performance, it is visible that the Net income of the company has
significantly decreased (83%) for the year 2015 as compared to that of previous years. In 2015
and 2014, the net income was $3282 and $19987, respectively. One factor that might explain the

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 huge drop in profit is the loss in foreign exchange, as more than half of the income is collected in
Canadian currency, but the cost and payments are paid in US dollars. Foreign exchange losses
were $19580 in 2015, leading to the company's net profit reduction. Furthermore, Interest
expenditures in 2015 totaled $19838, a 104 percent increase over the previous years. The rise in
interest expenditure is mostly attributable to the acquisition of a firm valued $352389 in 2014. In
2015, the corporation paid down a debt of $119626. In 2014, the debt-to-equity ratio was 3.31,
while in 2015, it was 1.71. This indicates that the company's debt funding has been lowered
while its equity has grown. Besides, the tax rate in 2014 was 23%, whereas the rate has
proliferated to 50% in 2015. Also, the depreciation expense has increased due to the acquisition
of plant and machinery worth $17563 in 2015.

According to the financial ratio study, the Return on Asset in 2015 was 0.004, a decline from
0.024 in 2014. Furthermore, the ROE in 2014 was 0.10, which has plummeted by 89 percent in
2015. As a result, earnings per share in 2015 were much lower than in 2014. In 2013, 2014, and
2015, the diluted EPS was $0.69, $0.53, and $ 0.07. The decreasing EPS can be explained in part
by the rising number of shares outstanding from 2013 to 2015. However, net income has also
decreased dramatically from 2013 to 2015.
Lastly, the profitability ratios also shows that the profit margin on sales has declined by 88% in
2015 despite the increase in sales revenue in the year 2015 was by 46% as compared to that of
the year 2014.

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.

After the thorough analysis of the quantitative and qualitative features of the financial statements
of the PSG Company, and with the consideration of the investment goals of Mr. Farmer, we
suggest that he not invest his inheritance in the company. Mr. Farmer’s decision may be
influenced by his inclination and affinity towards the sport or the team, however, as a financial
view, there could be other more lucrative opportunities that resonate with his principle of “buy
low, sell high”.

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 There are multiple reasons for not investing in PSG.

a) Declining Return on Asset:

The ROA has declined from 0.024% to 0.004%, which suggests that the company is not
generating sufficient income as per the investment in the company assets. The major reason
behind such plummeting figures should be the high investment in R&D and investments in retail,
which may harbor good returns in the long term, but at the same time carries high risk.

b) Increasing Shareholder’s equity

The issuance of shares in New York Stock Exchange (NYSE), in addition to the outstanding
shares in Toronto Stock Exchange (TSE) has drastically increased the shareholder’s equity. This
move corresponds to the company’s vision of becoming globally no.1 sports equipment
manufacturer, however, this also spreads the earning over a large no. of shareholders, as well as
decreases the EPS and the effects also reflects in the market price of the share. Again, this
strategy is a long term goal of the company, and may not reflect Mr. Farmer’s strategy.
c) Declining Return on Equity
The declining RoE again, corresponds with the company’s long term strategy of global reach and
expansion, as a result of which, the capital acquired through the issuance of the common stock
over multiple stock exchanges are reinvested in the expansion strategy.
d) Dependency on Foreign currency
The company meets its liabilities and obligations in US$, on the other hand, records its income in
CAD$. This poses a great risk of currency fluctuation of the company. Increasing volatility may
result in major losses, despite the company’s excellent performance, as evidenced from the
statement, in the year 2015, the company incurred a loss of 19,580,00 USD from foreign
exchange alone, which is 5.96 times higher than its net income for that year.

e) Reinvestment over dividends:

The company is investing heavily in R&D and new strategies to increase its market share
and global reach, and in doing so, there is a sharp decline in net income and ultimately in
distributable dividends. Companies that pay dividends generally display a sound company
health, which increases its market value. However, the market price of PSG is continually

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declining, from 20.8 USD in May 31 2015, to 12.95 USD in August 31 in 2015. This indicates
the market price of the stocks of PSG is not going to see any significant rise soon.

In conclusion, we recommend Mr. Farmer to invest without a mindset of “buy low, sell high”
alone. Mr. Farmer need to understand that the wealth generation in the stock market takes time
and knowledge of the financial statement of the company, as well as its long term strategy and
goals, and other macroeconomic factors, which are beyond the company’s control. Performance
Sports Group (PSG) has also never announced or paid any cash dividends on its shares; there is
no path for earning through cash for wealth maximization. Since PSG Company is the kind to
invest in its operation to expand its global reach and market share, we recommend Mr. Farmer to
diversify his investment and consider other companies as well which may resonate with his
investment goals.