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Harrod's Sporting Goods Jim Harrod knew that service, above all, was important to his customers. Jim and Becky Harrod had opened their first store in Omaha, Nebraska in 1997. Harrod's carried a full line of sporting goods including everything from baseball bats and uniforms to fishing gear and hunting equipment. By the year 2015, there were twelve Harrod stores producing $5 million in total sales and generating a profit of over $200,000 per year. series each year in June and this generates a lot of interest in baseball (and softball as well). Jim, who had been a walk-on third string offensive tackle at the University of Nebraska (the Cornhuskers in Lincoln, Nebraska), took great pride in his stores as well as his prior university affiliation. He and Becky (also a University of Nebraska graduate in the early 1990s) contributed $2,000 annually to the University of Nebraska athletic program. On the positive side, there was an increasing demand for sporting goods as leisure time activities continued to grow Also, the state of Nebraska, where all twelve stores were located, was experiencing moderate growth. Finally there had been a sharp upturn in the last decade for women's sporting goods equipment. This was particularly true of softball uniforms for high school, college, and city league women's teams. Jim's wife Becky was one of the top softball players in the city of Omaha, and her extensive The growth in the stores was the good news for Jim and Becky. The less than good news was the intense competition that they faced. Not only were they forced to compete with nationally established sporting good stores such as Oshman's and the Academy, but Walmart also represented intense competition for the sporting goods dollar. The national stores were extremely competitive in terms of pricing. However, Jim, Becky and their employees offered great personal service, and they hoped this would allow them to continue with their specialty niche. in new business. While Nebraska is primarily known as a football state, Omaha actually hosts the college baseball world In January of 2016, Becky, who served as the company's chief financial officer, walked into Jim's office and said, "I've had it with the First National Bank of Omaha. It is willing to renew our loan and line of credit, but the bank wants to charge us 2% percentage points over prime. The prime rate is the rate at which banks make loans to their most creditworthy customers. It was 4.75 percent at the time Becky had visited the bank, so that the total rate on the loan would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod's was being asked to pay 2% percent over prime. She felt that Harrod's was a strong enough company that one percent over prime should be all that the bank required. Her banker told her he would review the firm's financial statements with her next week and reconsider the premium Harrod's was being asked to pay over prime. While Becky knew the bank "crunched all the numbers," she decided to do some additional financial analysis on her own. She had a bachelor's degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3. Required 1. Compute the profitability ratios, including the a and b components DuPont Methods) of ratios 2 and 3 as shown in the textbook. The profitability ratios should be shown for all three years. 2. Write a brief one-paragraph description of any trends that appear to have taken place over the three-year time period. 3. In examining the income statement in Figure 1, note that there was an extraordinary loss of S170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earmings capability of the fim. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating carnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before up adding it back in. The tax rate was 35 percent for the year S170,000Extraordinary loss 65 (1-tax rate) S1T0,500Attertas addition to profits from eliminating the extraordinary loss from net income trhe more representative net income number for 2015 would now be $200,318 Adjustment for extraordinary loss being eliminated110.500 Initially reported (Figure 1) Adjusted net income $310,818 This adjustment was made because the S170,000 deduction saved 35 percent of this amount in taxes. If we eliminate the $170,000, the tax benefit would also be climinated. Thus, the firm wouid only benefit by 65 percent of s170,000, based on a 35 percent tax rate. The atterax benefit of the tax adjustment for the extraordinary loss is $110,500 Harrod's Sporting Goods Required Based on the adjusted net income figure of $310,818, recompute the profitability ratios for 2015 (include parts a and b for ratios 2 and 3). Now with the adjusted net income numbers as part of the ratios for 2015, write a brief one-paragraph description of trends that appear to have taken place over the three-year time period (refer back to the data in Question 1 for 2013 and 2014). 4. 5. Once again, using the revised profitability ratios for 2015 that you developed in Question 3, write a complete one paragraph analysis of the company's profitability ratios compared to the industry ratios (figure 3). Make sure to include asset turnover and debt to total assets as supplemental material in your analysis. 6. Harrod's has a superior sales to total assets ratio compared to the industry. For 2015, compute ratios 4, 6 and 7 as described in the text and compare them to industry data to see why this is so. Write a brief one-paragraph description of the results. Note: for ratio 4, only half the sales are on credit terms. Conclusion: Based on your analysis in answering Questions 4 and 5, do you think that Becky Harrod has a legitimate complaint about being charged 2% percent over prime instead of one percent over prime? There is no absolute right answer to this question, but use your best judgment 7. Figure 1 Harrod's Sporting Goods Income Statement (2013-2015) 2014 $4,269,871 $4,483,360 $5,021,643 2013 2015 Sales Cost of goods sold 2,991,821 2,981434 3,242,120 Gross Profit $1,278,050 $1,501,926 $1,779,52:3 Selling and administrative expense 865,450 1,004,846 1.175,100 Operating profit $412,600 $497,080 $604,423 Interest 115,300122,680126,241 expense 170,000 loss Net income before taxes 297,300374,400 308,182 Taxes 104,100 131300 107864 S 193,200 243,100 $ 200,318 Net income Figure 2 Harrod's Sporting Goods Balance Sheet (2013-2015) 2014 2015 99,670 2013 Cash S 121,328 S 125,789 56,14266,231 144,090 Marketable securities 341,525 216,240 398,200 Accounts reeivable Inventory 972.456 1,230,110 1,057,008 Total current $1,491,451 $1,658,370 $1,698,968 assets 1.678,749 4.702.280 1.811.142 Net plant and equipment Total assets $3,170,200 $3,360,650 S3,510,110 Liabilitiles and Stockholders' Equity S 539,788 $ 576,910 S 601,000 160,540 180,090 203,070 $700,328$757,000 $804,070 1265,272 1292,995 1372,240 S1,965,600 $2,049,995 $2,176,310 367,400 368000 368,000 837.200 942,665 965,800 1204.600 1310,655 1333.800 Accounts payable Notes payable Total current liabilities Long-term liabilities Total liabilities Commor stock Retained earnings Total Stockholders equity Total liabilities and stockholders equity $3,170,200 S3,360,650 S3,510,110 Figure 3 Harrod's Sporting Goods Selected Industry Ratios for 2015 Net income/Sales 2a.Net income/Total Assets 2b 3a. Net income/Stockholder's Equity 3b.Debt/Total Assets 4.51% 5.10% 1.33 x 9.80% 0.48 5.75 x Sales Total Assets Sales Receivables W ithdrawal of funds in the form of dividends or other mcans makes the sncrease in retainod earnings less than net income, Case 1 3.01 x Sales/Inventory 6. 5. Sales/Fixed Assets 3.20 x Home Insert Page Layout Formulas Data Review View .xCut Copy = = cut . Calibri (Body) Calit ritBody) -111 11 A4 A, A- A ! wrap Text wrap Text Percentage . Paste B I U Forn Format Mini-case #1-Chapter 3 Spring 2018 2 3 5 1. Profitability Ratios: 2014 2015 7 la. Profit margin net income/sales 9 lb. Return on investment (assets) net income / total assets 10 11 3c DuPont(net income / sales) x(sales/total assets) 12 13 Ld. Return on equity net income / stockholders' equity le. Return on equity-return on investment , (1-debt , assets) 16 17 3 Profitability Ratios: (2015 recalculated) 18 19 1a. Profit margin net income , sales 20 2013 2014 2015 0.00% tb. Return on investment (assets) - net income /total assets 21c DuPont (net income / sales) x (sales/ total assets) 25 id. Return on equity- income , stockholders' equity 0.00% 0.00% e Return on equity retur on investment / debe/assets) &Selected Asset Utilieation Ratios Industry th inventory turnover sales/average inventory c. Fixed asset turnover e sales / average fixed assets

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