Triple a office Mart - Case Study

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Susan Burke is the president of Triple A office mart. Triple A office mart has two stores operated in two adjoin states in the southwestern United States. With the advent of the personal computer and a general trend in the economy towards specialty stores, Triple A had experience excellent growth and earnings history.  In the case of the new store opening, there was an increase in inventory and bank borrowing. In recent months during early 1996 there had been a cause for concern on the part of company management. Prices from suppliers had increased and the firm’s financial managers wondered about the effect of this upon profitability and the general operation of the business.  Triple A’s financial concerns including potential impact of sales growth dropping, inventory and accounts receivable control, financial ratios, cash flows, and dividends are addressed in this case analysis. Triple A’s 1997 predictions are calculated to simulate a 50% drop in sales growth, as well as the impacts associated with this phenomenon. Lastly, precautions regarding potential fall in sales growth, how Triple A’s management should handle their inventory, and general concerns are reviewed.

On paper, Triple A office mart is a strong company. They have had a large constant growth in sales, as well as in all other profitable aspects. Triple A office mart’s suppliers have also had steady annual growth in their prices. Unfortunately, Triple A office mart has been unable to obtain a single constant supplier. Triple A office mart offers a wide range of office equipment, they require a very diverse and inconsistent inventory. Because of this, they are not able to develop a strong mutually supportive relationship with one supplier.  As a result of having multiple inconstant suppliers, the cost of inventory from suppliers changes each year. In this case, the cost of inventory increases each year. With such a growing economy, increasing sales to keep up with the rising cost of inventory and cost of goods sold is no major chore. There is a major problem with this though. If sales were to slow, the company would be in financial despair. A minor concern in regards to Triple A office mart is the uncertainty of the overall health of the economy. A dip in the economy would hinder sales and profitability of the company.

Since conception, Triple A office mart has seen a compound average growth ratio for sales of 16.45%, a compound average growth of costs of goods sold of 19.33%, and compound average growth of net income of 7.5% (see cells H4, H5, and H15 in the income statement). Triple A office mart’s earnings per share increase from 3.65 in 1993 to 4.49 in 1996. Their dividends per share more than doubled in the 4 years of operation and their payout ratio was 45% in 1996. The dividends paid for similar companies in the same industry were 30% to 60%, placing Triple A’s payout ratio safely in the middle of the industry average. This indicates a steady, but not necessarily healthy growth.  As stated above, Triple A office mart has inconstant suppliers, meaning inventory prices are manipulated at the whim of whatever supplier is currently selling to them. The inventory turnover (refer to cells C13 – F13 on the ratios sheet) from 1993 to 1996 remains constant for the most but has a minimal decrease; the inventory value however nearly doubles. This is due to a rise in price of inventory and rise in price of cost of goods sold. With the current growth rate of sales, Triple A can support these rising costs without financial distress.

If however in 1997, the sales growth increased by only half of the compound annual average, there would be major financial implications to Triple A office mart (see column F on the income statement and balance sheet for 1997 predictions, note that the compound average growth rate for sales is reduced from 16.45% to 8% to simulate a 50% drop in the growth of sales and all other compound annual averages remain constant to their calculated values). The first major implication of a 50% drop in sales growth would be razor thin profitability ratios (refer to the ratios sheet). The biggest impacts of sales growth dropping by 50% would be the impact to the net profit margin. The net profit margin would decrease from nearly 9% in 1996 to 0.76% in 1997. This is due to an enormous decrease in net income as a result of lower sales and the continuous increase cost of goods sold. Dividends would no longer be paid out, return on equity would drop from nearly 30% to 2.26%, and operating profit margin would decrease from 12.82% to 4.58%. The current rate of increase for cost of inventory and cost of goods sold would drive Triple A in to major financial distress if sales growth dropped by 50%. Because of the possibility of a decrease in sales growth, Triple A office mart should not qualify, nor want, a long term loan. The amount of long-term loans is generally higher and Triple A does need any more debt. The option to receive a short-term loan however should be approved. This is because Triple A’s strong current and quick ratios (refer to cells C4 - G4 and C5 – G5).  This indicates that Triple A would be able to pay off a short-term loan, because of its current assets being higher than its current liabilities.