Regent University ?Nygaard Jewelers Ratio Analysis Discussion Questions Nygaard Jewelers Discussion Questions 1.Complete a three year financial analysis o

Regent University ?Nygaard Jewelers Ratio Analysis Discussion Questions Nygaard Jewelers Discussion Questions

1.Complete a three year financial analysis of Nygaard Jewelers including cash flow statements and ratio analysis for each year and discuss your findings.

2.Identify critical non-quantitative issues that should be considered in the decision process.

3.What risk factors should Bob be most concerned about regarding his decision?

4.Identify possible ethical or values-based issues that could impact any decision.

5.What should Bob and Bonnie do? Dialogue 3 Nygaard Jewelers
Introduction
Bob Nygaard of Nygaard Jewelers returned to his store in the spring of 20×5
angry and depressed. “We just lost our lease; I don’t see how we can make it
now.” It had been seven years since Bob and his wife, Bonnie, moved their
business to Spartanburg, South Carolina. They had struggled, and sometimes
excelled. But primarily, through sheer determination, they just survived in the
jewelry business to this point. The loss of their lease and prime location could be
the final blow that would destroy their business. Bob needed to decide, and
quickly, either to fold the tent or give it one more shot.
York Operations
Nygaard Jewelers originally started in 1978 as Able Jewelry and Music—a
pawnshop in York, South Carolina, purchased by Bob’s parents from other family
members. Bob helped his mom in the business after his graduation from the
University of South Carolina with a major in business in 1989. Wanting to gain
more business experience, Bob earned his MBA from Regent University in 1993
and, with Bonnie, assumed ownership of the store on July 1, 1993.
Bob and Bonnie met at the University of South Carolina. She graduated in three
years with a major in foreign politics and a minor in Spanish. After college she
was also able to get a Para-legal degree in business and real estate law and
bankruptcy. Her legal training made it easy for her to find work with a law firm
while Bob completed his MBA.
Even though the store was a well-recognized landmark in York, it initially had
trouble earning a reasonable profit. After about three years, Bob saw the 80-20
rule in action. The pawnshop generated 80% of the headaches and 20% of the
revenue. Bob wanted the store to be more upscale; he eliminated the electronics
and musical equipment inventory associated with the pawnshop and changed the
name of the store to Nygaard Jewelers. Over the next four years, sales and
profits grew.
Bob and Bonnie lived in Spartanburg where Bonnie grew up, about 30 miles west
of York on I-85. Through their associations and church activities, they
established a loyal clientele in their hometown who would travel to York to shop
at Nygaard Jewelers. Many of these customers often encouraged Bob and
Bonnie to open a store in Spartanburg.
In York, however, Bob had the only jewelry store that catered to a middle-class
market. Unlike in Spartanburg, where there were several similar jewelry stores
already established, he did not have to worry about competition. The store’s
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roots were in York with a long history and a devoted following. Even though the
drive to work sometimes seemed long, the York site was doing well.
This situation changed about ten years ago. Video poker was the new craze,
and numerous people in the York seemed addicted to it. While illegal in South
Carolina, it was legal in North Carolina. Many York citizens frequently drove
north a mere 10 miles to the next state to spend their discretionary income on
these games. Bob saw a change in his customer spending habits as they bought
less jewelry, and some even said they or their spouse used the money instead to
gamble and “hit it big.”
At the same time, York’s Main Street was going the way of many small towns
without a strong economic base. Downtown businesses were shutting their
doors as shoppers drove to new malls or superstores like Wal-Mart. The only
stores that seemed to be opening on Main Street were loan companies, which
offered high interest rate loans to consumers and businesses. Within two years,
this combination of events took Bob’s operation from being profitable to barely
surviving.
Relocating to Spartanburg
Bob and Bonnie had to decide if it was worthwhile to continue their jewelry
business. They had two young children and roots in Spartanburg. With Bob’s
MBA and business experience, the possibility of a job at a company in
Spartanburg was attractive. Bonnie could stay home and raise the kids, and they
would be free of the pressure of ownership and the worry over cash flow.
It was evident that Nygaard Jewelers in York would not survive. Persuaded by
friends and motivated by his entrepreneurial spirit, Bob developed a business
plan and sought financial assistance to move his operation to Spartanburg. To
his surprise, local banks were not as supportive as Bob thought they would be.
Nygaard Jewelers’ current financial condition did not help to qualify for a loan; it
seemed too risky. The financial institutions denied funding.
Bob liked the idea of being his own boss, enjoyed the jewelry business, and felt
he had some expertise in the area. So he kept looking for financial assistance.
Eventually, he returned to his old bank in York. Even though he was leaving
town, based on the relationship he had established with the bank and with their
assistance, he qualified for a Small Business Administration loan of $60,000.
Bob and Bonnie sold their house in Spartanburg and used the equity to add
another $20,000 to start over in Spartanburg. Upon the sale of their house in
Spartanburg, Bob and Bonnie and their two children, Hannah and Jonathan,
moved from a 3,200-square-foot home into a 1,200-square-foot apartment.
Spartanburg Operations
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Bob secured a lease for almost 3,000 square feet in a prime location in west
Spartanburg on a busy main street across from a large shopping center. This
section of Spartanburg was experiencing sustained consumer consumption since
it had easy access to I-85, and new upper-income home developments were
opening on a regular basis. The rent for the store was $3,000 per month. The
strip shopping center included some other fine stores, including an upscale
women’s fashion store and a quality shoe store.
Unexpectedly, Bob learned that the landlord charged him an additional $40,000
to “up fit” the store before the first sale was even made. In some of the other
lease contracts they considered, “up fitting” was already provided, and he
wrongly assumed those lease stipulations were included in this current lease.
Bob learned the importance of “buyer beware.” He regretted not getting
professional guidance before signing the lease, but he was trying to save money
and time. On top of that, Bob later learned that his share of the property tax for
the facility was also charged to him at the end of the year as an additional
expense versus being part of the monthly rent. Already cash poor, Bob used his
remaining $40,000 in funds to acquire inventory.
With limited working capital, a discretionary income type product with low
turnover, and a seasonal business, Bob continually had cash flow problems.
Jewelry was expensive, and the store needed significant inventory to display in
showcases in order to attract customers. He bought lots of silver, which was
relatively inexpensive, to supplement gold and diamonds.
Bob maintained a credit purchasing relationship with many of his suppliers, but
when sales did not achieve anticipated levels, Bob quickly found himself past due
on many accounts. It was not long before some of these suppliers wanted cash
up front for purchases. Conditions seemed to go from bad to worse as debt
mounted. In the first year, the business lost over $108,000.
Bonnie and Bob both needed to work in the store because at least two people
had to be around to prevent theft. With their responsibilities as parents, family
activities, commitments at church, working six days a week at the store was
demanding and there was little down time. They even had to give up attending or
watching the games of their beloved University of South Carolina football team—
an activity that in the past often gave them much-needed relaxation from the
stress of running your own business.
Fortunately, the clientele from Spartanburg remained loyal and frequented the
store even more now that the business was more conveniently located in
Spartanburg. Store hours were 10:00 a.m. to 5:30 p.m., Monday through
Saturday. Bob believed that the customers he was trying to reach, primarily nonworking women who enjoyed shopping and socializing would shop during the
day. These women generally entertained, wanted quality family time, and had
other obligations in the evening. Also, this was more of a destination location as
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opposed to a mall location where there would be more walk by traffic in the
evening.
Bob and Bonnie practiced a high moral and ethical standard and understood the
importance of trust and honesty. They were fair in valuing stones for both buying
and selling purposes, which was often a concern by less knowledgeable
customers. They were also friendly and got to know their customers on a firstname basis. Customer service was highly regarded in all of their business
dealings. As it turned out, many customers bought jewelry exclusively from
Nygaard Jewelers. With over 15 years of experience, plus his educational
training, Bob felt he knew the jewelry business and how to make it successful.
Additionally, Bonnie, who was completely self-taught in the jewelry business, had
a knack for picking the right products. She had always had an interest in colors
and texture and was good at determining what looked good on fashion conscious
women. As a teenager, Bonnie was paid commercial art work for the Governor
of New Jersey. Since their market was primarily women in a middle- to uppermiddle income bracket, it was important for Bonnie to recognize trends and styles
when purchasing inventory. She believed in her products and her enthusiasm
translated into sales to satisfied customers. Bonnie also learned to make
jewelry. She bought older jewelry from estate sales and other secondary sources
at a discounted price and used the materials to make new and more appealing
jewelry items. Customers adored these unique items.
Even though competition from other jewelry stores in the immediate vicinity was
fierce, Nygaard Jewelers effectively used good marketing strategy with ads in
popular publications, radio, store specials, and especially word of mouth primarily
catered to middle-income earners. They became active in the community and
supported charitable events, which helped to give the business credibility. Also
their products were more fashion forward and seemed to have a unique appeal
to their customers. Their target customers were women who looked for
something better than a run-of-the-mill Kmart or Wal-Mart type of product, but not
the exorbitantly priced products found at the really upscale jewelry stores. Of
course, many of the other individually-owned stores were trying to capture the
same market.
As with many owner-run businesses, Bob and Bonnie focused on little, but
significant, services. They did engraving, cleaning, and elaborate gift-wrapping
at no extra charge. Their best promotion was word of mouth and personal
friendly service.
Still with all the positive factors that Bob and Bonnie had going for them,
maintaining the financial viability of the business was still a struggle in a very
competitive market. There were any number of factors that seemed to impact
their potential for success including the seasonal nature of sales, high carrying
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cost of inventory, high overhead costs, low sales volume, and even sometimes
surprisingly low margins on items sold.
At times Bob had trouble making the monthly lease payment on the store. This
last year he was four months behind. Like many businesses, the jewelry
business was seasonal. The majority of sales were made during the Christmas
season with other peaks in February, May, and June. Months like July and
August were extremely slow. In the past, Bob caught up on the rent payments in
December when he had a better cash flow.
Over the years, Bob and Bonnie had no choice but to rely on credit card debt,
which had amounted to over $50,000. Once they were unable to make even the
minimum payment, their credit scores tumbled—and they no longer qualified for
any personal loans or other credit cards. Nevertheless, they worked hard to
repay suppliers and establish a better relationship with those companies to
hopefully get more favorable terms for future purchases.
Even with their best efforts, the Spartanburg store did not live up to their
expectations. It had been seven years. What did Bob and Bonnie have to show
for their effort? They had already worked nine years in York with limited success
and now another seven years in Spartanburg. There were good days, but then
there were also days when Bob wished just to sell a watch battery. With a
$3,000-plus monthly rent, it was easy for Bob to determine that he needed over
$200 in sales (assuming a 100% markup) every day just to pay the rent.
Sometimes Bob felt he was working for his landlord.
However, Bob and Bonnie both gained much joy selling a quality product, like an
engagement ring to a satisfied customer, knowing they played a role in a special
event. Bob and Bonnie enjoyed working the store together and had
complementary skills and a strong marriage even though they were together
almost 24-7.
Bob surveyed what he had. His $100,000 of inventory could neatly fit into a
couple of shoeboxes! There was the large safe, showcases, fixtures and some
office furniture. Of course, there also was the $250,000 debt. He felt fortunate
that some of the debt was still interest-free and that his average cost of debt was
around 11%. He had worked very hard to reduce the level of debt over the past
few years. While the total company debt had decreased, his interest expenses
increased as his credit rating went down and his perceived riskiness by creditors
went up.
If he left the store he asked himself: how was he going to make good on this
debt? Because of their high ethical values and integrity, Bob and Bonnie felt
badly that they had created such a bad debt situation, and they felt morally
obligated to make good on all of the outstanding debt. Suppliers and others had
5
placed faith in them and given the store favorable credit terms and assumed they
would fulfill these obligations.
Future Operations
If Bob wanted to begin again, could he, especially now that his lease was
terminated by his landlord? Seven years ago, he had a house with some equity
that he sold to raise capital for the business. Now, he did not even have that. It
was doubtful that he could arrange for debt financing, given his history. If he
brought in a partner, that partner would probably want 51% ownership or more of
the business, and he would lose control. Furthermore, could he even find a
suitable location for his store close to where he had become established?
He was aware of another location that had recently become available. It was just
three blocks away, but it was only 1,250 square feet, 40% of the size of his
current store. Bob surmised that the monthly lease rate would be about half of
his current rate. What kind of other lease terms would he face with a new
landlord? Bob did not want to be surprised again with hidden charges in another
lease agreement. Also, could he afford the cost of a move, especially
transporting the large and very heavy safe?
There was also the issue of employees. Because of the need to always have at
least two employees on site, Bob had often hired extra help at various times
during the year. Currently, two additional employees had come to depend on
Bob and the job for their source of income. They too, would have to seek other
employment. And there were his loyal customers. Many had stuck with him since
his early days back in York. He had spent years developing this relationship and
market. Did he want to give up this valuable but intangible resource?
If he folded the business, what would he do? For 20 years he had been in the
jewelry business. Working for another company in jewelry, like a competitor,
seemed like such a step down. He wanted to stay in Spartanburg, and he had
plenty of connections. But after being an entrepreneur, could he work for
someone else? What would Bonnie do? Their children were now 12 and 16.
How would they react to this situation? They had already been through a lot.
Bob pulled out his last three years of financial data to try to determine if they
even had resources or the financial viability available to make the store viable at
a new location. From Bob’s understanding of the jewelry business, successful
operations have a gross margin of around 50 percent and a profit margin of at
least five to ten percent.
Maybe it was time to consider another direction. He had an MBA and years of
retail experience, surely he could find a job in the Spartanburg area in the
$50,000 to $60,000 range. Plus Bonnie, with her talents and skills in the jewelry
business, could easily find a part-time or maybe full time job and earn up to
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$30,000. Also, with some catching up on the latest laws in the legal field, she
could probably get a much higher paying job as a Para-legal with a law firm in the
area. The thought of using her legal bankruptcy training on their own store was
not amusing. But was it or should it be just about the money? They really
enjoyed the jewelry business and the relationships established with their
clientele. Their faith had remained strong, but this was going to be a test, or was
it an opportunity?
Nygaard Jewelers
Income Statement
For the Years Ending June 30, 20×2, 20×3 and 20×4
20×2
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Salaries and Wages
Rent
Taxes and Licenses
Advertising
Insurance
Utilities
Depreciation
Other General and Administration
Total Operating Expenses
Interest Expense
Total Expenses
Net Income Before Tax*
$419,779
232,869
186,910
50,374
36,284
19,772
13,875
7,829
6,506
19,047
3,087
156,774
7,670
164,444
$22,466
20×3
20×4
$419,667 $432,206
297,161 228,743
122,506 203,463
31,909
38,639
18,804
13,515
7,683
7,412
18,672
11,767
148,401
3,812
152,213
$-29,707
44,891
40,523
26,391
11,599
7,658
6,504
16,738
19,762
174,066
11,696
185,762
$17,701
*Due to significant losses from prior years, no taxes have been paid over the
three years because of net operating loss carryforwards. The marginal
federal plus state tax rate, if taxes had been paid, would be 15%.
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Nygaard Jewelers
Balance Sheet
For the Years Ending June 30, 20×1, 20×2, 20×3 and 20×4
Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Long-Term Assets
Equipment
Less Accumulated
Depreciation
Equipment (net)
Other Assets
Total Long-Term Assets
Total Assets
Current Liabilities
Accounts Payable
Long-Term Liabilities
Loans from Shareholders
Notes Payable
Total Long-Term Liabilities
20×1
20×2
20×3
20×4
$-4,824
7,886
186,450
189,512
$433
6,100
188,237
194,770
$-2,130
5,000
111,455
114,325
$9,657
4,368
99,351
113,376
139,497
150,790
149,332
152,942
-63,592
75,905
-82,639
68,151
75,905
68,151
-101,311
48,021
1,458
49,479
-118,049
34,893
1,458
36,351
$265,417 $262,921 $163,804 $149,727
$151,743 $140,000 $140,000 $141,328
19,471
206,377
225,848
18,200
200,846
219,046
16,200
133,436
149,636
44,177
70,684
114,861
Total Liabilities
Common Equity
Common Stock
Retained Earnings*
Total Equity
377,591
359,046
289,636
256,189
1,000
-113,174
-112,174
1,000
-97,125
-96,125
1,000
-126,832
-125,832
1,000
-107,462
-106,462
Total Liabilities and Equity
$265,417 $262,921 $163,804 $149,727
*Prior period adjustments
made to balance in
retained earnings
-6,417
8
1,669

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