Name of the business: Haefren Baum GmgH Nature of the business: Haefren Baum is a retailer of high quality home furniture located in Cologne, Germany. They have also added three outlet stores in Rhineland, a nearby suburban area. Marketing Analysis: Haefren retails high quality furniture manufactured by Wiegandt has advertised aggressively in order to build and maintain a strong brand image. Haefren benefited tremendously from the successful marketing provided by Wiegandt. Wiegandt has However, because the nature of the product is high-end and durable, sales are subject to fluctuations of the business cycle.
During the economic boom leading up to 1993 Haefren, as well as the industry in general, enjoyed strong sales. However, the economic bust in 1993 has slowed sales growth. Decreased consumer confidence caused industry sales growth to decrease from 42. 9% in 1992 to 9% in 1993. Haefren experienced negative sales growth during this period. Haefren has a strong competitive position; however, it is quickly deteriorating. The addition of 3 outlets give Haefren an opportunity to capture a wider market than it currently has. However, new competitors entering the market are all competing for stagnant demand.
European retailers are also entering the German furniture market which makes it even harder for Haefren to maintain its competitive advantage. Operations Analysis: Haefren obtains its merchandise directly from the manufacturer, Weigandt. Weigandt has provided “fairly liberal” credit terms which include a discount for early payment (2% 10, net 30). However, they have jeopardized their lose credit terms because of inefficiencies with their receivables, inventories, and fixed assets. A major issue that Haefren needs to address is the delinquency of their customers accounts.
From 1993 to 1995, days sales outstanding have increased to 77 days, which is dramatically higher than the 30-day monthly installment terms. This delay in collection is creating cash flow problems for Haefren. It is causing them to fall behind on their payments to Weigandt and miss out on significant savings from the early payment discount. The increase in its collection period was expected in 1993 due to the worsening economy. However, the economy is now improving and Haefren’s collection period is still increasing. This signals to inefficiencies within the company’s collection department.
Perhaps, they should even consider increasing the down payment required to establish credit. The sluggish sales in the furniture industry can account for the increase in inventory days. Haefren inventory in 1994-1995 stayed on the floor for around 129 days before it was sold. The longer period that they are holding inventory is increasing their cost of goods sold. Not only are they holding inventory for a longer period of time, but they are also underutilizing their fixed assets. Fixed asset turnover decreased for Haefren from 1993-1994. They constructed three new outlet stores which should have helped them with sales.
However, due to the sluggish demand, these new fixed assets are not returning the sales they were supposed to. Haefren needs to consider whether these outlets are worth the investments. They could potentially benefit from sending inventory from their retail store to the outlet sooner. Even if they have to sell it at a discount, if they do not lose money on it, the lower revenue would be more beneficial. It appears that Haefren might be experiencing problems with human resources as well. They carry a debt account for notes payables for employees.
This account reflects loans that have been made from the employees, or their relatives, to the company. Why are they borrowing from employees? This could potentially come from accrued wages, which would be an even greater issue. Financial Analysis: Haefren’s funding has come from bank loans and utilizing credit from its vendors. Funding needs increased due to the addition of 3 new outlet stores. These outlet stores have increased Haefren’s debt over the three years in questions. Along with this new debt, two of the original partners sold their shares to the other two partners.
It seems like there are too many changes going on at Haefren all at once. In regards to cash flows, Haefren is performing poorly. Cash flows from operations are unhealthy and the total cash on hand has declined over the three years in question. Total cash flow from operations is positive, however, they appear to be driven by depreciation. Their negative net income (net loss), is not driving operations cash flow in a positive direction. They are also carrying a great deal of inventory which is consuming their cash. In order for them to drive up net income they need to find a way to decrease their inventories.
Accounts receivables are also impacting cash flows in a negative way. A/R have increased each year, which can be attributed to the weak economy. This drag in A/R is causing them to receive cash-in after cash goes out. Their cash flow problems are evident when analyzing their account payable days. Wiegdant has given them competitive terms (2% 10, net 30), however, Haefren cannot meet those terms. Their account payable days have increased to 66 days. It is taking them twice as long to repay their current liabilities. All of these cash flow problems are having a negative impact on their liquidity.
Their quick ratio is increasing from year to year, but it is being driven by inventories. Their Current ratio also appears to be ok; however, it is being driven by accounts receivables. Although they appear to going in the right direction, it is not a good sign for Haefren. Inventories and receivables are also driving down operating margin. The positive cash flow from investments reflects the addition of the three new outlets. Investing in long term assets is a good thing. Ideally, the addition of these assets (outlets) should have led to higher revenues for Haefren. However, they invested in those assets at the wrong time.
Their sales growth (revenues) cannot support the addition of the outlets. Weak sales led to a negative return on equity and the addition of the three outlets led to a negative net profit margin. The interest being paid on the current debt in 1995 was 3. 08% of their net sales. Haefren cannot handle any more debt without first making significant changes to their operations. Summary: A weak economy has led to Haefren poor financial conditions. They expanded at the wrong time, right when the economy went sour. They also need to handle their inventories and accounts receivable in order to avoid further cash flow problems.