Case Studies

Case Study—Troubled Retail Chain

An office products retail chain of more than forty stores had enjoyed extraordinary prosperity by locating small shops in office buildings. The convenience of the locations protected the retailer from competition until the big-box competitors blanketed the area.

Within a year, sales and profitability fell and the bank referred the asset-based loan to the workout group. The bank subsequently made demands on the owner to either guarantee the loan or to find a new bank.

Faced with this, the owner consulted with Walter Simson, whose analysis yielded: -a seasonally-adjusted sales forecast for each store, based on the 60 months of each store’s history. This was overlaid on a graphic displaying each store’s breakeven. The result was a timetable for store closures—the ones with steeper sales losses were closed, and the merchandise was transferred to healthier stores in a bid to save cash. The transfers of more talented managers to the stores with better profiles added significant time. The bank referred the loan to a nearby competitor at relaxed terms.

However, it wasn’t enough to save the retail business. All the stores but one were closed. And the one “store” that remained healthy was an internet café, where a steady and loyal customer base had made repeat orders and paid by credit card. This established the basis of the business going forward.

The business was reorganized around the internet offering, resulting in one of the country’s earliest and most successful office product internet retailers. Walter remained a board advisor to the restored and healthy business for many years.

Case Study—Industrial Products Distribution

A diversified industrial distributor had purchased a service and support operation for a discontinued capital equipment line. While profit margins were high, the sales had declined faster than originally expected. Upper management asked the question: should we close this operation?

The analysis started with a core products/ core customer analysis, which found that 20% of the customers formed a sustainable core business. Many people expect a twenty percent core—but in this case, the characteristics of the remaining 80% were so varied and different from the core that opportunities for selling core products became immediately apparent. In addition, an abbreviated study of the market indicated customer concentration in a geography where the client had no physical presence.

We suggested that the geography be tested with visits by sales reps from other parts of the country before a full time rep be recruited.

The client followed these recommendations and found the next-year sales and increase by 25%, with profitability more than doubling.

Case Study—Wholesale Distributor

A sportswear Distribution LBO with $100 Million revenue found that its availability on bank borrowing facility was decreasing to the point the trade payables were stretched to over 60 days. The finance staff was forced to take extraordinary efforts to manage cash in order to meet payroll and employment taxes.

When the financial statements disclosed a first time operating loss, the bank suggested that a professional be hired.

We found that the company’s lack of internal controls and systems permitted customers to buy product at or even below cost for commodity items. This had been permissible in past years, as the suppliers had provided cash incentives to the wholesaler for growth. However, as the incentives were periodically modified or reduced, the distributors were unable to change business practices to meet the new environment. At the time of our engagement, the entrepreneur indicated that he thought the bank would close the operation and even exercise the entrepreneur’s guaranty within 90 to 120 days.

We provided an analysis of every customer relationship (there were 10,000 customers) and recommended target levels below which the client could not service customers profitably. We also provided a profitability analysis of each region’s distribution center and recommended three for immediate closure, with excess inventories the closures opened up feeding the profitable, remaining operations.

Lastly we modeled these recommendations in a report and cash flow analysis for presentation to the bank, suggesting that an exit via private sale was superior to the bank’s alternate plans, which were to either find an alternate lender or to close down and liquidate.

The company was successfully sold based on the improved economics and the entrepreneur was offered a contract to help effect a smooth transition.

“Mistakes are the portals of discoveries.”

– James Joyce