Haefren Baum Essay

Haefren Baum is an independent home furnishings retailer associated with Wiegandt that sells high quality furniture. The company began as a partnership in 1965. Haefren Baum became a retailer for Wiegandt in 1968. Two years later, it became a corporate entity. Haefren Baum is located in Cologne, which is one of the most populated and rich cities in Germany. Haefren retails home furnishing from a location downtown Cologne, and three recently constructed stores in Rhineland. Marketing Analysis Located in downtown Cologne Haefren Baum is a high quality retailer, which recently expanded its operations by opening three retail outlet stores in nearby Rhineland suburban areas. The company carries Wiegandt’s high quality furniture whose furniture is heavily advertised. Since the economic condition has not been steady and new competitors are entering the market Haefren Baum had to decrease its prices in order to maintain sales volume, these challenges (competition, economy) caused a decrease in sales by (-21%) between 93,94, a decrease of( -1.24% )between 94,95. Haefren Baum’s products reflect cyclical demand because others seasons did not cause a decline in sales, but instead the economy and competition. The German recession has slowly been improving, but it has not helped the furniture market, and the future does not look very promising for Haefren since they will need to adapt to the growing competition also. Overall, Haefren market position seems to be improving , sales growth will get better but I cannot say that the company will be successful in the future. Operations Analysis Wiegandt provided its retails distributors’ credit on 2% 10 net 30 terms, which is consistent with competitors in the industry. Haefren Baum upper limit on outstanding balances were established on historical furniture order, and they had a limits of DM 60,000. Although the sales of the company have declined significantly their cost of goods sold has remained really high, between 94, 95. There was decline in sales and an increase in cost of  goods sold from $8,189 to $8,237. This is evidence the company is having problems making profit. Haefren needs to address is the delinquency of their customers’ accounts, from 93 to 95, days sales outstanding have increased to 77 days, which is a lot higher than the 30-day monthly installment terms. The company is not stringent in collection efforts but this can be because of the economic condition in Germany. The company does not manage its assets very well. Its decrease in fix asset turnover from 6.98 in 1993 to 5.39 in 1995 can be because of their decrease in sales, but the low total asset turnover which is also decreasing from 2.1 to 1.5 prove that their assets are not being used very efficiently. Since sales are decreasing and competition increases their inventory days has also increased from 103 to 129 which again could cause low price. The company is already experiencing a loss of revenue due to the fact they lowered price because of economic condition. Financial Analysis The company have generated very low operating cash flows, which is caused by a negative net income(16, 55) in 94,95, again with sales going down and cost of goods sold increasing. The company current ratio (2.3, 2.1, 2.5) in 93, 94, 95 are indicating satisfactory but when analyze quick ratio (1.1, 1.1, 1.3), and we also know that sales are down which mean more inventories. Now the account payable days has been increasing (49, 62, and 66). They have been delaying there payment which mean more cash on hand but cost of goods sold is also increasing from $8,189 to $8,237 meaning the cost of increasing APD may be less than the cost of paying that cash earlier and having to borrow the shortfall to continue operations. The gross profit margin is decreasing (36% to 34, 33) and we also know sales been dropping significantly from 93 to 95 this shows that the company cannot control cost inventories and to pass along price increase through sales to customers. The operating profit margin is also dropping significantly from (5.1%, 1.8, and 1.5) we can definitely see that the firm is not efficient. The company has not improved its operating margin; apparently the company was not able to control the growth of operating expenses while sale is decreasing. Net profit margin is decreasing and negative this is because of decreasing sales, poor customer experience, inadequate expense management and also  because of the hardship in German economy. If we analyses cash flow margin it is (-0.01, 0.02), the company is not able to translate sales into cash. The company’s ROE is declining (-1.4 ), it signals that customers are no longer willing to pay for its products as they were in the past. It could be because new competition or economic condition. ROA is also declining (1.6, -1.5 ) again this mean profitability is deteriorating, with cash flow from operating activities declining and total asset increasing, the company is not showing any sign of cash generating abilities. With total liabilities going up for years 93 to 95 (6914, 7786, and 7887) and equity with negative retained earnings, the company is financing with debt, specifically with account payable, note payable. The company takes longer to pay their creditor, paying high interest rates. Since operating earnings are not more than sufficient to cover the fixed charges associated with debt, the company relies on financial leverage. The company is showing a riskier capital structure since debt equity ratio is (5.8, 9, and 8). Both the profit margin and the asset turnover are lower in (93, 94, and 95). The combination of increased debt (financial leverage) and the improvement in profitability did not occur and asset utilization has not produced an improved overall return in 94 relative to the previous years. Specifically, the firm has added debt to finance capital asset. Debt carries more risk and added cost in the form of interest expense, it also has the positive benefit of financial leverage when employed successfully, which is could be the case for Haefren. There was no improvement in inventory management and has impacted the firm negatively and showing no improvement to total asset turnover ratio. The company’s ability to control operating costs while sales decrease during economic condition has not improved the net profit margin. The overall return on investment is not improving as a result of these combined factors. Summary The findings from the analysis of Haefren financial statements can be summarized from an industry outlook; company’s well-positioned geographically but economy hardship make it difficult to benefit from expected economic and industry growth. The company has aggressive marketing and expansion strategies. There was no recent improvement in management of accounts receivable and inventory. The company did not successfully use of  financial leverage and solid coverage of debt service requirements. Substantially sales dropped significantly, partially resulting from market competition and economic condition. The company did not increased profitability in 1994 or positive generation of cash flow from operations. In general, the outlook for the company could be promising. Haefren appears to be in credit risk with attractive investment potential. The management of inventories, cost controls, and receivable will play an important to the company future success.