business case_le chaeteau canada

Group Project –ACTG 5100– Acquisition of LE CHÂTEAU

Rao Keddy Thompson

• Dhananjay Chauhan

• Manish Surana

• Vaibhav Kapoor

• Nipun Sharma

• Samvit Roy

• Sairam Raman

• Aditya Reddy

• Suresh Mallya

Corporate Presentation

Rao Keddy Thompson

1 Introduction and Outline

2 LE CHÂTEAU – Industry Context and Basic Business Model

3 LE CHÂTEAU - Social Responsibility and Sustainability

4 LE CHÂTEAU- Financial Position, Performance, Cash Flows

5 Overall Analysis & Recommendations

Rao Keddy Thompson

Introduction

• Headquartered at Montreal, Quebec

• 228 retail stores in Canada

• Chairman is Jane Silverstone Segal

• 67% of shares owned by Silverstone family

• 35% of apparel comes from it’s production

facilities

• Major Products :

• Apparel

• Lifestyle accessories

• Footwear

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Outline

PRESENT SCENARIO: Canadian apparel retail industry grew by 3.3% in 2013 to reach a value of $27 billion

FUTURE SCENARIO: Forecast is the value will increase by 15.9% to reach $31.3 billion.

25.1 26 26.3 26.9 27.8

2009 2010 2011 2012 2013

Canada Apparel Retail Industry Value

27.8 28.6 29.5 30.4 31.3 32.2

2013 2014 2015 2016 2017 2018

Canada Apparel Retail Industry Value Forecast

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The Retail Market Space

GROWTH SEGMENT:

Women wear segment is the most lucrative,

Total revenue of $14.2 billion

RIVALRY:

Moderate Rivalry

KEY TRENDS:

Fashion is highly competitive & seasonal business

Several external factors

KEY CHALLENGES:

Anticipate and Respond to changing customer preference.

New Shopping Formats should be exploited such as e-commerce

Fluctuating prices of cotton

WHAT WE KNOW: Clothing is an essential item, with consumer choice being influence by

factors such as fashion and a desire to signal social success.

Demand patterns are susceptible to branding and advertising


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Rao Keddy Thompson

Industry Context

Apparel/ Clothing Stores in Canada

Supply Industries

Key Economic

Drivers

Related Industries

Consumers in Canada

Footwear

Accessories

Wholesaling &

Manufacturing

Family Department

Stores,

E-Commerce

Superstores

Per capita disposable

income,

World Price of cotton,

No of adults b/w 20 to

64

No of adults b/w 20 to 64

Operating Avenues:

• Brick & Mortar Stores

• Online stores

• Licensing: Retail developers in the Middle East and in Asia

• 228 outlets in Canada and 1 in the US,

• 5 licensed stores in the Middle East and Asia.

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The Business Model

Apparel. Footwear. Accessories

33.91

26.29

Prairies 20%

11.78

5.24

US, Middle East & Asia 3%

Sales Percentage/ Region

OntarioQuebecPrairiesBritish ColumbiaAtlanticUS, Middle East & Asia

52.5

31.3

16.2

% of Market as of 2013

Women Men Children

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SWOT Analysis

SWOT Analysis

Strengths Weaknesses

Multiple channel selling Limited geographic presence

Strong foothold in Canadian market Poor financial position

Vertically integrated operations

Strong Online Response

Opportunities Threats

Increasing consumer spending Expansion initiatives by competitors

Organic Growth Increase in counterfeit products

Growing retail market in Canada The Company’s liquidity follows a seasonal

pattern based on the timing of inventory

purchases and capital expenditures.

Growing Online Trends

1. Hudson’s Bay

2. Reitmans

3. H & M

4. YM Inc.

5. Le Chateau

6. Northern Reflections

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Market Share

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Online Trends

Online trends indicate that people search more for Le Chateau than Reitman


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Le Château are reducing their stores' energy footprint

The floorings are made from all-natural products

Their stores are encouraged to participate in all mall-coordinated recycling programs

Reusable eco-chic bags: all profits from the sale of their $1 bags go to the David

Suzuki Foundation

In progress: They are currently exploring the option of making their plastic shopping

bags, biodegradable.

Le Château also has a formal corporate policy concerning fur-free products.

Angora products are sourced exclusively from vendors that harvest the hairs using a

shearing process that does not harm or kill the animal.

La chateau has been supported by World University Service of Canada (WUSC),

whose mission is to foster human development and global understanding

through education and training

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Corporate Social Responsibility & Sustainability


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Rao Keddy Thompson

LE CHÂTEAU- Financial Position

• The company’s assets declined by 4% over the previous year while liabilities grew by 6%

• Asset / Liability Ratio reduced from 2.75 in 2013 to 2.45 in 2014.

• Analysis : a) Assets reduced due to closing down stores, write down of inventories

• b) Liabilities went up due to additional bank indebtedness.

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• 59% of total assets are made up of inventories which is up by 2% from previous year.

• Property & Equipment decreased by 5%.

• Analysis : a) Poor inventory management

• b) Lower Sales

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• Long Term debt has reduced from 18% of total liability in 2013 to 9% in 2014.

• Bank indebtedness increased from 16% of total liability in 2013 to 36% in 2014.

• Analysis : a) Revolving credit from banks taken up to CAD 70 million dollars

• b) Long term debt paid off by the company.

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• Current ratio declined to 2.20 from previous year’s ratio of 2.79 while quick ratio essentially maintained the

same low at 0.20.

• Debt / Equity Ratio increased from 0.58 in 2013 to 0.69 in 2014.

• Analysis : a) Shows Liquidity issues because of Lower Sales & Poor inventory management.

• b) Low D/E ratio indicates company’s appeal to lenders and investors.

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LE CHÂTEAU- Performance

• Y-O-Y Sales has remained essentially unchanged since 2013.

• Online sales increased by 82% from last year

• Analysis : a) Bad Weather conditions, Ineffective marketing of products.

• b) Shift in buying patterns from Outlets to E Commerce.

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• Y-O-Y Gross Margin reduced from 66.3 to 62.9 because of possible discounts offered during sale season.

• Net Margin decreased further to -5.8165 because of increased losses.

• Analysis : Lower Sales, Higher fixed expenses

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• Inventory turnover of Le Chateau is only 0.82 in comparison with Reitman’s 3.72.

• Asset turnover of Le Chateau is 1.27 in comparison with Reitman’s 1.62.

• Analysis : Poor inventory management of Le Chateau can be improved for better performance.

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LE CHÂTEAU- Cash Flows

• Cash flow from operations and cash from investing has declined but cash from financing activities has

increased

• Analysis : The negative cash flow from investing and operations and positive flow from financing relates to

their negative growth. Their expansion plans have been financed largely from borrowing.


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Rao Keddy Thompson

LE CHÂTEAU- AnalysisCONSOLIDATED BALANCE SHEETS - Common size or Vertical analysis

2014 2013 2012

$ $ $

ASSETS

Current assets

Cash 0.7% 0.8% 3.1%

Accounts receivable [note 6] 0.7% 0.9% 1.0%

Income taxes refundable 3.2% 1.5% 0.9%

Derivative financial instruments 0.2% 0.1% 0.1%

Inventories [notes 6 and 7] 59.2% 56.0% 51.0%

Prepaid expenses 1.1% 0.9% 0.7%

Total current assets 65.1% 60.0% 56.8%

Property and equipment [notes 8 and 12] 33.1% 37.8% 41.0%

Intangible assets [note 9] 1.8% 2.1% 2.3%

100.0% 100.0% 100.0%

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Bank indebtedness [note 6] 14.6% 5.9%

Trade and other payables [note 10] 9.3% 9.4% 9.3%

Deferred revenue 1.8% 1.6% 1.7%

Current portion of provisions [note 11] 0.1% 0.1% 0.1%

Current portion of long-term debt [note 12] 3.8% 4.5% 7.0%

Total current liabilities 29.5% 21.5% 18.1%

Long-term debt [note 12] 3.7% 6.5% 12.5%

Provisions [note 11] 0.2% 0.2% 0.1%

Deferred income taxes [note 14] 0.9% 1.0% 1.3%

Deferred lease credits 6.4% 7.2% 6.9%

Total liabilities 40.7% 36.5% 38.8%

Shareholders’ equity

Share capital [note 13] 20.4% 19.4% 16.1%

Contributed surplus 1.7% 1.2% 1.0%

Retained earnings 37.1% 42.8% 44.0%

Accumulated other comprehensive income 0.1% 0.1% 0.0%

Total shareholders’ equity 59.3% 63.5% 61.2%

100.0% 100.0% 100.0%

Rao Keddy Thompson

LE CHÂTEAU- AnalysisCONSOLIDATED BALANCE SHEETS - Trend or Horizontal analysis

2014 2013 2012

$ $ $

ASSETS

Current assets

Cash 20.1% 24.8% 100.0%

Accounts receivable [note 6] 62.6% 80.8% 100.0%

Income taxes refundable 311.8% 150.3% 100.0%

Derivative financial instruments 324.0% 166.7% 100.0%

Inventories [notes 6 and 7] 104.7% 103.3% 100.0%

Prepaid expenses 146.5% 120.8% 100.0%

Total current assets 103.4% 99.6% 100.0%

Property and equipment [notes 8 and

12]73.0% 87.0% 100.0%

Intangible assets [note 9] 71.4% 87.4% 100.0%

90.2% 94.2% 100.0%

LIABILITIES AND SHAREHOLDERS’

EQUITY

Current liabilities

Bank indebtedness [note 6]

Trade and other payables [note 10] 89.6% 94.9% 100.0%

Deferred revenue 94.7% 90.8% 100.0%

Current portion of provisions [note 11] 88.3% 76.0% 100.0%

Current portion of long-term debt [note

12]48.9% 60.3% 100.0%

Total current liabilities 147.0% 111.9% 100.0%

Long-term debt [note 12] 26.9% 49.0% 100.0%

Provisions [note 11] 325.8% 441.7% 100.0%

Deferred income taxes [note 14] 61.9% 77.8% 100.0%

Deferred lease credits 83.3% 98.8% 100.0%

Total liabilities 94.6% 88.7% 100.0%

Shareholders’ equity

Share capital [note 13] 113.9% 113.3% 100.0%

Contributed surplus 153.8% 114.4% 100.0%

Retained earnings 76.0% 91.5% 100.0%

Accumulated other comprehensive

income331.5% 168.5% 100.0%

Total shareholders’ equity 87.4% 97.7% 100.0%

90.2% 94.2% 100.0%

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LE CHÂTEAU- Analysis

Analysis : Difference in quick ratio is due to high inventories;

Accounts payable turnover ratio is higher for Le Chateau which means they are paying suppliers earlier than

Reitman does. Reitman has a better liquidity position

FINANCIAL POSITION BENCHMARKING TO REITMAN

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LE CHÂTEAU- Analysis

Analysis : Gross margin of Le Chateau is marginally better than Reitman. Whereas net profit / return on

assets , return on equity figures for Reitman are positive while for Le Chateau is negative due to loss.

PERFORMANCE BENCHMARKING WITH REITMAN

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LE CHÂTEAU- Recommendations

Sales

Promote E Commerce to maximize cross channel sales and attract new customers.

Modernization of stores with emphasis on technology in line with growing trend.

Advertise strategically in key focus areas and internet to increase footfalls.

Operations

Establish new specialty stores for items selling high i.e. footwear, ladies apparel.

Align with new retailers across the emerging markets to expand the no of stores.

Lease down the stores not generating enough sales.

Inventory Management

Introduce proper inventory management systems in the company to ensure

synchronization between customer demands and inventory reserves.

Cost Control

Introduce proper cost control measure to minimize expenses and increase net

income by aligning with new suppliers and logistic companies.

Our definition of a business that is under performing is a business that is not reaching its

full potential. And hence we recommend to acquire this company in view of long term

growth potential and financial benefits. So how do we turnaround Le Chateau to perform

to its potential ?? Here are some recommendations we make:

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LE CHÂTEAU – Future Projections

• Sales will bounce back to pre 2012 period up to CAD 343 million because of mitigating measures

• Net Profit will be positive to around CAD 13 million.

• Inventories will decline up to 40% from current reserves as a result of better inventory management

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• Gross profit margin improves to 65.98%.

• Net Profit Margin improves to 4.07%.

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• With implementation of proper inventory management systems we can reduce time for average days

inventory in hand as well as self financing period.

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LE CHÂTEAU – APPENDIX

Ratio Name Formula 2,014 2,013 2,012

Liquidity

Current Ratio Current Assets/ Current liability 2.20 2.79 3.13

Quick ratio Current Assets-inventory/ Current liability 0.20 0.19 0.32

Asset turnover ratio Sales/Avg total assets 1.28 1.21

Inventory turnover ratio COGS/Avg. inventory 0.82 0.76

Avg. days inventory in hand (in days) 365/Inventory turnover ratio 444.90 478.19

Average Accounts Payable As per note 10 in the annual report 10,290.00 11,250.00 12,505.00

Purchases COGS - beginning inventory + ending inventory 103,430.00 96,458.00

Accounts Payable turnover ratio Purchase/Avg acc. Payable 9.60 8.12

Avg Payment period for Accounts payable(days) 365/Accounts Payable turnover ratio 38.01 44.94

Inventory Self financing period (in days) Avg. days inventory in hand - Avg Payment period

for Accounts payable 406.89 433.25

Book Value Total Assets - Total Liabilities 125,099.00 139,798.00 143,105.00

Net Operating profit to Current LiabilitiesNet Operating Profit(L)/ Current Liabilities (0.31) (0.19) (0.03)

Operating Cash Flow to Current LiabilitiesOperating Cash Flow / Current Liabilities (0.05) 0.13 (0.27)

Cash Balance to Total Liabilities Cash/Total Liabilities 0.02 0.04 0.17

Solvency and Leverage

D/E Ratio Total Liabilities / Shareholder's Equity 0.69 0.58 0.63

Total Liabilities to Total Tangible AssetsTotal Liabilities/ Total Tangible Assets 0.63 0.61 0.68

Interest Cover (Net Profit before tax + interest)/ Interest (8.00) (3.98) (1.51)

Performance

Earnings(Loss) Per Share Net Income(loss)/ Total Shares outstanding (0.59) (0.34) (0.10)

Gross Profit Margin (Sales - COGS) / Sales 62.97 66.32 0.68

Net Profit(Loss) Margin Net Income(loss)/ Sales (5.82) (3.17) (0.79)

Return on Assets Net Income(Loss)/Total Assets (7.58) (3.96) (1.02)

Return on Equity Net Income(Loss)/Total Equity (12.78) (6.24) (1.67)

Price to book value ratio market value of equity/book value of equity 0.50

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LE CHÂTEAU – APPENDIX

References :

- IBIS World

- Newspaper Reports

- Globe and the Mall

- Internet Websites

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ANY QUESTIONS??