ACTG 5210 G Group Assignment – Winter 2024

BELLEVUE SHOES INC. AND THE “BELLEVUE LOAFERS”

BACKGROUND

It’s March 2024. Kevin Parker, CEO of Bellevue Shoes Inc. “Bellevue”, is reviewing the 2023
Statement of Financial Position and Statement of Income, as shown in appendix 1. Kevin is very
disappointed with past year’s results and is concerned with how quickly the retail market is changing
and how much business conditions have deteriorated over the past year due. Just over a year ago,
the business was profitable, shareholders were supportive, and the bank had no concerns about the
company’s financial position. The bank last year had even offered to increase the company’s
available line of credit to $1,000,000 so that Bellevue could finance its forecasted sales growth (the
line of credit is the maximum amount that the company can borrow from the bank at the stated
annual rate of interest). Bellevue is only charged interest on the actual amount borrowed. The actual
amount borrowed is shown as “Bank debt on line of credit” in the accompanying financial
statements. The loan is secured by the company’s inventory and accounts receivables.

Online retailing is threatening sales in a variety of “brick and mortar” retail businesses, including the
shoe retail sector. 2023 industry sales for retail businesses in Canada decreased by an unprecedented
19% from previous levels. This decrease in sales resulted in an important meeting with the bank
last week and the bank stated that the rate currently charged on the line of credit will increase by 1
percent by the end of the month due to the poor 2023 results.

The March 2024 results have not been encouraging either and the month is traditionally a difficult
one financially. As a result, the line of credit is projected to reach only $900,000 by March 31, 2024.
The current bank agreement states that the annual rate on the line of credit is “prime plus 2%”. The
current prime rate is at 1.25%.

An annual general shareholder meeting is scheduled for mid-April 2024 and Kevin will need to
defend the most recent results and have a plan for going forward.

PRODUCTS AND DISTRIBUTION

Bellevue is an importer and retailer specializing in trendy shoes. The Bellevue Shoes brand is targeted
primarily towards female consumers, ages 24-36. Most of the company’s sales are direct to
consumers and the brand is promoted with an aggressive advertising campaign. Since markets
change rapidly, what is fashionable this season is soon out-of-fashion. Bellevue Shoes offers a range
of trend-setting styles and colours and one of the top-selling shoes in Canada this season is expected
to be “Bellevue Loafers”, which features a variety of colourful jewels and metal studs emblazoned
along the toe cap of the shoe. It is the company’s first time offering a loafer.

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 ACTG 5210 G Group Assignment – Winter 2024

Bellevue Shoes only sells its own brand through eleven company-operated retail stores located in
the Greater Toronto Area (GTA). The company also leases a 40,000 square-foot storage warehouse
with 3,500 square feet of office space. At this central facility, product is received, stored, and then
supplied to its retail stores to meet the stores’ demand. The company does not currently have any
website online selling efforts.

Inventory planning in this market is an ongoing challenge. The company’s three buyers consider
many factors when placing their orders with suppliers, such as market demand, lead times, and
discounts from suppliers. A buyer knows that they have done a good job if there is very little
inventory left over at the end of each buying season. Part of the buyer’s remuneration is based on
keeping inventory at manageable levels (as measured by inventory turnover ratios). Obsolete
product has not been a major issue for Bellevue in the past, however the styles and trends continue
to change at what seems an ever-increasing rate. It is very difficult to sell obsolete product.

Most of Bellevue’s purchases are from various manufacturers located in Vietnam. Supply contracts
are usually negotiated annually, and suppliers are paid promptly by a bank letter of credit, five days
after the product is received in the Toronto warehouse. Bellevue is responsible for paying all the
inbound transportation costs to its Toronto warehouse and customs and duty costs into Canada.

THE SHOEMAX DEAL

Six months ago, the head buyer from ShoeMax, a major shoe retailer in Central Canada, approached
Kevin and asked if he would be interested in selling the Bellevue Loafers through ShoeMax’s retail
stores. Kevin was very excited about the business prospect especially since ShoeMax owns and
operates 48 retail stores in Ontario and Quebec and the company seems to be a good fit
geographically. Kevin believes that the ShoeMax stores would be a suitable additional retail channel
for the Bellevue Loafers since ShoeMax has excellent brand recognition in the young adult clothing
market. ShoeMax estimated six months ago that they would be able to sell 90,000 pairs of the
Bellevue Loafers during the upcoming spring selling season.

A contract was signed that firmly committed ShoeMax to purchase 60,000 pairs of the Bellevue
Loafers from Bellevue at $33.95 per pair. The price on any additional shoes above the 60,000 level
would be sold at a mutually agreed price (to be negotiated between ShoeMax and Bellevue).
ShoeMax also agreed to pay for product three days after the product is received ShoeMax’s Toronto
regional warehouse.

Kevin believes the ShoeMax deal will help improve Bellevue’s profits in 2024 since the landed costs
of the Bellevue Loafers are forecasted to be only $22.95 per pair. Landed costs include the purchase
cost of the product from the supplier, the freight-in transportation costs, and the
import/duty/brokerage costs into Canada.

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 ACTG 5210 G Group Assignment – Winter 2024

OPERATING COSTS

In addition to the landed costs of the product, there are also other variable operating costs associated
with receiving and shipping regular product sales to Bellevue locations. These additional operational
costs include warehouse processing costs (for receiving, picking, and packing product – estimated
to be $2.20 per pair of shoes) and outgoing shipping costs ($1.60 per pair of shoes) to transport
product to the eleven Bellevue retail stores.

Since the ShoeMax order is significant and the product is being sent to one location, the variable
warehouse expenses for any ShoeMax sales will be only half of the current variable warehouse cost
per unit. The variable shipping costs for the ShoeMax order will be eliminated entirely and replaced
by independent trucking fees to transport the product to ShoeMax. The average truckload will carry
1,800 pairs of shoes and each truckload of product delivered to ShoeMax will cost Bellevue $950.
Marketing and general administrative costs are fixed and are currently allocated at $2.29 per pair of
shoes.

The company currently pays 2.3% commission to its store sales reps on all store sales where the
contribution margin is positive. There are no commissions paid on store sales when the contribution
margin on the sale is negative or when sales are made through head office instead of a Bellevue retail
store (commonly called “house accounts” sales).

MOVING AHEAD

Shortly after signing the contract, Kevin, based on the original ShoeMax forecast, placed his non-
cancellable order with his Vietnamese manufacturer for 90,000 pairs of Bellevue Loafers. The
product is now in transit from Vietnam and expected to arrive in Canada by April 1, 2024.

Since placing the original order, the market conditions have further deteriorated, and nobody
anticipated the rapid decrease in retail demand caused by the online shopping options. ShoeMax
now forecasts that it will only sell 50,000 pairs of the Bellevue Loafers, however it is still prepared
to honour its commitment to buy 60,000 pair of Shoes at the contract price. To be able to sell more
Shoes, ShoeMax is considering lowering its retail selling prices to its customers. ShoeMax estimates
that it could sell 78,000 Shoes at a lower price; however, to make this option feasible they need
Bellevue to reduce its selling price to ShoeMax to $20.95 for the additional 18,000 units. Kevin does
not like the idea of such a low price since it is slightly below the landed cost (landed cost = material
cost + freight costs) of the product, however, he realizes he needs to do something to avoid left
over inventory. If he is not careful, he could easily find himself with excess inventory, which would
put further pressure on the company’s line of credit.

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 ACTG 5210 G Group Assignment – Winter 2024

SELLING THORUGH BELLEVUE RETAIL STORES

Since Bellevue Loafers will also be sold through Bellevue’s stores, the company was going to place
a separate order for its stores but will just draw inventory from the order for 90,000 pairs of shoes
instead, given the situation. However, Bellevue’s warehouse is nearly at full capacity, so any inventory
that the company was planning to buy for its own stores would have been worth only two months
of expected demand to respect warehouse capacity constraints.

Kevin expects that the company can sell the shoes at $42 per pair through its own retail stores, even
if product ends up selling in ShoeMax stores, however if 18,000 extra shoes need to be sold through
the Bellevue stores then it will take longer to sell the extra stock. He estimates that Bellevue stores
can collectively sell the shoes at a rate of 2,500 pairs per month over the next six months without
increasing monthly advertising costs. If he increases his advertising campaign by $5,000 per month
then he estimates he can increase his store sales of Bellevue Loafers by 20%. He will only spend
additional monthly advertising if he still has leftover inventory of the shoes still in the company’s
retail stores.

The extra shoes would be stored at a third-party logistics (3PL) location since there is no additional
storage space at the stores and the existing warehouse is nearly at full capacity. The inventory at the
3PL would gradually be transferred directly to stores to meet monthly demand. The cost of storing
product at a 3PL facility is $20 per pallet per month. Ninety pairs of shoes can be stored on one
pallet. In addition to the monthly storage cost of $20 per pallet per month, there is also a one-time
fee of $5 per pallet when a pallet is received in at the 3PL and another one-time fee of $7 per pallet
when it is shipped out.

Any unsold product after six months can always be discounted and sold to an outlet at $12 per pair
to make room for the next season’s product line. The outlet would pick up the product so there
would be no shipping costs associated with such a sale.

POSSIBLE DEAL

Kevin also had discussions with Trendy Deals, a discount retailer that offered to immediately
purchase 15,000 units of the Bellevue Loafers for $14.95 per pair. This offer is only available to the
end of the week and is a take it or leave it offer for the full stated quantity. Trendy Deals would
arrange for its own transportation pickup of shoes from Bellevue facilities so there would be no
variable shipping charges on this sale.

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 ACTG 5210 G Group Assignment – Winter 2024

REQUIRED

Prepare a report for Kevin, as of March 31, 2024, that recommends a course of action that the
company should take given its current situation based on projections covering April 2024 to
September 2024.

Please ensure that the following report format is followed for the group assignment:

- Title Page
- Executive Summary
o 1 page maximum, not referenced in table of contents
- Table of Contents
- Summary of Issues & Constraints, List Alternative Solutions
- Alternatives Solutions
o State assumptions
o Quantitative Analysis (financial analysis)
o Qualitative Analysis (non-financial discussion, weigh pros/cons)
- Recommendation
o Based on Decision Criteria
o Final recommendation should be fully supported by your analysis
- Appendices
o Including Implementation Plan (i.e. Gantt chart)

No external research is required; the data contained in this case is sufficient for required analysis.
Full financial statement forecasts are not required for your report.

Your report should be limited to 1,500 words, Times New Roman 12-size font, 1.5 spacing. The
page limit excludes the title page, the one-page executive summary, and any appendices.

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 ACTG 5210 G Group Assignment – Winter 2024

APPENDICES

Bellevue Shoes
Summary Income Statement
(in $'000s)

2023 2023 2022

Actual Budget Actual
Revenues 6,503 7,183 6,783
Cost of Sales (landed costs) 3,771 3,986 3,799
Gross Margin 2,731 3,197 2,985
Expenses
Marketing & Sales Expenses 702 715 637
Administration 891 897 878
Warehouse Expenses 569 567 551
Delivery and Shipping Costs 852 850 749
Interest Expense 39 33 16
Total Overhead Expenses 3,052 3,062 2,830
Operating Profit/Loss before Taxes -321 135 155

Bellevue Shoes
Summary Balance Sheet
(in $'000s)

Dec 31, 2023 Dec 31, 2022

Accounts Receivable 3,869 3,158
Inventory 4,616 2,860
Miscellaneous Receivables 44 61
Fixed Assets (Net) 618 618

Total Assets 9,147 6,696

Bank Debt on Line of Credit 667 263

Accounts Payable 5,905 3,673
Accrued Payables 64 78
Total Liabilities 6,635 4,013

Shareholders Loan 663 514

Retained Earnings 1,849 2,170
Total Equity 2,512 2,683

Total Liabilities & Equity 9,147 6,696

Copyright – Moe Romero, 2024

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