Premier Furniture

Kathleen Fuller
Ole Miss
 Walcott Department Stores
• How serious are the late payments?
– $64,000 over 90 days in arrears
– large decline in net income
• Reasons why?
– large increase in operating expenses
• 2 new stores?
 Income Statement
1983 1984
Net Sales 100% 100%
COGS 62.9 68.7
Gross Profit 37.1 31.3
Operating Expenses 31.7 36.6
Operating Profit 5.4 (5.3)
(Deficit)
Adjustments 0 (3.6)
Federal Tax (Refund) 2.3 (1.7)
Net Profit 3.1 0
Profitability ratios
Ratio Analysis 1983 1984
profitability ratio = net profit after taxes/net sales 3.17% 0.04%
long-term profitability = ebiat/e+d 6.33% 0.08%
ROE=profit after tax/ e 10.10% 0.11%
ROE=NI/sales*sales/assets*assets/e 10.10% 0.11%

Activity Ratios
total asset turnover = net sales/total assets 1.65 1.62
average sales per day = net sales/365 77.79 73.30
collection period = acc. Receivable/average sales per day 70.70 72.37
inventory turnover = COGS/inventory 3.32 3.73
fixed asset turnover = net sales/net fixed assets 19.38 20.19

Leverage Ratios
debt ratio = total liabilities/total assets 48.33% 46.14%
total debt ratio at market
times interest earned ratio = EBIT/Interest
(a.k.a. interest coverage ratio)
average purchases per day = COGS / 365 48.90 50.37
days payable = acc. Payable/average purchases per day 49.89 52.81

Liquidity Ratios
current ratio = current assets/ current liabilities 1.39 1.46
quick ratio = current assets - inventory/current liabilities 0.75 0.81
(a.k.a. acid test)
 Improvements
• adjustments to operations
• strength of balance sheet
• elimination of cash dividend
• inventory turnover improved
• collection period steady
 Designers
• Much of deterioration occurred between
1982 and 1983
• Main source of weakness is decline in sales
 Income Statement
1982 1983 1984
Net Sales 100% 100% 100%
COGS 60.8 61.1 62.3
Gross Profit 39.2 38.9 37.7
Operating Expenses 33.6 36.9 36.1
Operating Profit 5.6 2.0 1.6
Other Income 3.8 0.8 1.0
Other Deductions 2.3 2.9 3.1
Net Profit before tax 7.1 (0.1) (0.5)
 Ratio Analysis
Profitability ratios 1982 1983 1984
profitability ratio = net profit after taxes/net sales 4.24% -0.07% -0.25%
long-term profitability = ebiat/e+d 11.94% -0.15% -0.48%
ROE=profit after tax/ e 60.81% -1.15% -3.50%
ROE=NI/sales*sales/assets*assets/e 60.81% -1.15% -3.50%

Activity Ratios
total asset turnover = net sales/total assets 2.16 1.62 1.53
average sales per day = net sales/365 29.10 22.97 22.68
collection period = acc. Receivable/average sales per day 47.60 68.12 70.97
inventory turnover = COGS/inventory 3.54 2.82 2.82
fixed asset turnover = net sales/net fixed assets 9.12 7.76 7.02

Leverage Ratios
debt ratio = total liabilities/total assets 84.96% 89.97% 88.88%
total debt ratio at market
times interest earned ratio = EBIT/Interest
(a.k.a. interest coverage ratio)
average purchases per day = COGS / 365 17.70 14.04 14.12
days payable = acc. Payable/average purchases per day 48.87 61.96 65.49

Liquidity Ratios
current ratio = current assets/ current liabilities 2.40 2.28 2.70
quick ratio = current assets - inventory/current liabilities 1.07 1.08 1.29
(a.k.a. acid test)
 Improvements
• Cash dividend eliminated 1984
– maintained cash dividend at $210k for 1983
– borrowed $215k from stockholders
• Collection period and inventory turnover
stabilized
 Premier’s Choices
• 1) Do nothing now; keep selling the account
without limits.
• 2) Hold strictly to the limits established, but do
not press for collection.
• 3) Press for collection, even if liquidation
would be thereby forced.
• 4) Take vigorous steps to collect, but short of
legal action.
 Evidence of Premier’s
Negligence
• 5 minute analysis
• weak collection effort
• inadequate credit controls
• Walcott and Designers pay their suppliers in 54 and 65
days, respectively. Is Premier’s competitive position so
weak as to require the extension of much longer terms?
• Or is Premier seen as an easy, safe source of credit?
– Designers exceeded its credit limit in December, and some 4
months later, had not heard from Premier!!!!