Home Store, Inc.
Home Store, Inc. is a retail chain of home improvement stores catering primarily to middle income female homemakers interested in undertaking do-it-yourself (DIY) and do-it-for-me (DIFM) projects. The company grew rapidly from a single store with sales revenue of $8.8 million in 2001 to 20 stores with total sales of $11.334 million in 2003. Yet, the company's rapid growth in revenues has been accompanied by declining profits and a substantial increase in receivables, inventories, and capital investments in new stores. The resulting cash outflows have been financed by increased borrowing from Bank of America as well as stretching the company's payables, i.e., taking longer to pay suppliers. Bank of America reluctantly increased the maximum amount available to the company under its term loan to $5 million from $2.6 million. In early January 2004, Hermione Granger, President and Chief Executive Officer of Home Store, Inc., and Ron Weasley, the company's chief financial officer, completed a review of the company's financial situation. The company's executives are unsure whether the new credit limit will permit the company to implement its growth strategy since there is only $1.464 million remaining under the term loan at the beginning of 2004.
The purpose of the case is to evaluate the company's recent financial performance, determine whether the company's planned growth strategy can be financed within the new credit limits, and to assess alternative courses of action that might be available to improve the company's future performance. First, students are asked to consider the company's business strategy and whether it's likely to yield a sustainable competitive advantage. Second, students are asked to develop a cash flow statement for 2001-2003 to assess the company's cash generation. The cash flow statement indicates that the decline in the company's cash flow from operations is a result of ballooning receivables and inventory. At the same time, the company's capital expenditures on new stores have accelerated, causing the company to finance the shortfall by relying on bank debt and stretching its accounts payable. Third, students are asked to conduct an analysis of the company's recent performance to diagnose it problems. An analysis of this profit performance reveals that the company's rapid sales growth has been accompanied by declining gross profit margins, increasing operating and interest expenses, as well as declining asset utilization. Fourth, students are asked to develop proforma statements for 2004 using assumptions developed from the assessment of the company's past performance and additional data provided in the case. The projections indicate that the company will be unable to finance the planned capital expenditure of $907,000 within the new credit limits. Finally, students are asked to identify the company's problems and propose appropriate solutions. Solutions to the company's difficulties include more aggressive receivable collection, improved inventory, and fixed asset utilization so the Home Store can stay within the loan limits and enable the company to take advantage of trade discounts as the company reduces the time taken to pay trade creditors.