Haefren Baum Business Analysis Essay
Haefren Baum Business Analysis
Haefren Baum is a furniture retailer, established in 1965 and was incorporated in 1970. Haefren Baum receives its merchandise from Wiegandt GmbH Cologne, a nearby manufacturer, whose business relationship equals over twenty-seven years. The company has one retail location in Cologne, Germany and three recently constructed outlet stores in nearby suburban areas. Demand and product sales are influenced by consumer discretionary income. In 1993, an economic bust in the German economy resulted in a major dip in GDP. Demand for the industry is cyclical and is influenced by the overall economy. There is no evidence of seasonality. In response to the German economic downturn in 1993, the company began to open outlets with wide selections and lower prices to maintain sales volume.
This was a trend used by all in the industry, but sales volumes were not affected and remained flat. As the German economy recovered, Haefren Baum’s business began to see fierce competition from European furniture retailers. This was a concern for the Wiegandt, who saw its retailers losing market share, and began aggressively advertising its brand. The strategies involving aggressive branding and offering wider selections at lower prices proved to be unsuccessful, mainly due to the influx of competition.
Haefren Baum being a retailer needs a large amount of inventory and assets in order to generate sales. To turn profits, the company needs to be efficient in both inventory management and asset turnover. Recently, the Haefren Baum is showing very high values for inventory days, and an overall decline in its TAT and FAT ratios. Figures for total and fixed asset turnover steadily decline from 1993-1995. These figures could be a result of the expansion and building of outlet stores, as well as slower sales. Total assets turnover equals 2.1 in 1993 to 1.5 in 1995. As for fixed asset turnover, 1993 equals 6.98 to 5.39 in 1995. Haefren Baum’s land investment has remained constant over this period, but buildings and equipment investments have changed, again a result from the building of the three outlet stores. Inventory days show and increase from 103 in 1993 to 129 in 1995.
Such a dramatic change shows that the firm is getting less efficient in managing its inventory, which could be a result of increasing competition throughout the industry. The average collection period has also shown significant increases, going from 53 days in 1993 to 77 days in 1994 and 1995. It seems that Haefren Baum has had difficulty obtaining capital due from customers. The overall operations of the company seem to be lacking proper efficiency due to the increase in inventory days and average collection period. The negative values for net income and results from the previous sentence conclude why the firm has seen a decrease and negative values for ROE and ROA.
Haefren Baum’s strategy of selling product at lower prices seems to be ineffective in generating profits. The firm’s operating activities can be misleading, although it seems that it’s improving, the net figures are still negative. The increase in investing activities is explained by the recent construction of outlets, and is shown in the buildings and equipment account. The recent buyout from the other investors is shown in the payables from stockholders. Financing activities seem to be the source of funding for the firm. Haefren Baum’s liquidity has been mildly volatile. The current ratios for the firm have changed from 2.26 in 1993 to 2.53 in 1995. Accounts payable days saw a major increase going from 49 days in ’93, to 65 days in ’94.
Although Wiegandt has been flexible with credit terms, Baum is far exceeding the net 30 terms and is not taking advantage of any discounts. Haefren Baum is showing high leverage risk with its debt to equity ratio of 5.84%, this is a problem due to the large debt compared to equity owned. The NPM of the company is zero, due to the failure to generate profits. The GPM, though positive, shows a steady decline in profitability. Haefren Baum is primarily using financing activities to maintain operations of the business. They are basically staying alive by debt, and will need to re-evaluate its processes to stay in business.
Haefren Baum has been severely impacted by competition and the value of its inventory stemming from the economic downturn in 1993. The firm is producing negative cash flows and in turn producing zero profits. The construction and building of the new outlet stores have no sales support and are eating profits with staggering mortgage cost. The firm needs to be more effective and efficient with inventory and credit lines. Arranging new credit terms in order to receive discounts and improve margins are in order for the firm to generate profits.