03/05/2016

CASE 3
BNL STORES

Student

Student

Maria

number
01632800

Epifanova
Lesly

00826331

JeanLouis
Junyi Ouyang
Yifan Cui

01597944
01248695

Table of Contents

Introduction.............................................................................3
Case Analysis...........................................................................4
Question 1......................................................................................4
Question 2......................................................................................6
Question 3......................................................................................7

Conclusion................................................................................ 7
References...............................................................................7

Introduction
BNL is Paul Cruz s favorite place to shop. It was established in Midwestern
since 40 years ago. Recently, BNL issued a series of new business
strategies, such as expanding the number of BNLs new supercenter
stories, selling more durable goods. In addition, BNLs traditional tactic
was to offer store credit to customers. This strategy was focused to
stimulate sells as well as to motivate each individual store manager
selling more goods.
However, according to Paul Cruz s research, BNL stores stock had fallen
dramatically, which dropping from a high of $100 per share to less than
$10. Therefore, the paper is established to understand whether these new
strategies were related to the decline in BNLs share price. Based on the
companys income statement, balance sheet and statement of cash flow,
the trends related to financial ratios and amounts from 2002 to 2010 are
studied in depth. The reasons behind those trends are also explained.
Besides, for the industry analyses, Home Depot company is examined. HD
was taken for the analysis since it fully matches with the profile of BNL
business. This way, the study supports not only historical analysis but as
well benchmark analysis.

Case Analysis
As it was mentioned, the analysis is based on examining ten financial
ratios that are related to companys profitability, turnover, liquidity and
financial leverage results during 2002 through 2010. The analysis also
examines the cash flow statement for the same nine-year period as well
as its trends and the consequences of these trends.

Question 1

Profitability
Net Profit Margin
Net Income
Sales
Net profit
margin

2007
$238.738,0
0

2008
$256.195,0
0

2009
$73.916,00

$9.344.542
,00

$11.176.83
0,00

$12.568.58
1,00

2010
$1.415.678,0
0
$11.974.76
8,00

2,55%

2,29%

0,59%

-11,82%

Net profit margin is calculated as a percentage of the net income to sales,

thus it expresses how much each dollar earned transfers to actual
earnings of the company. If assessing net profit margin of BNL stores, it is
clearly seen that the ratio has been falling all the way from 2004 to 2010,
while before that period it was relatively stable. Although the sales
increased tremendously, that negative trend of profitability ratio might be
explained by a rise in selling, general and administrative expenses. These
expenditures have increased from 2004 to 2005 by around 25% from
$1,615,437 million to $2,018,114 million. That might be due to increase in
bonuses that were given to managers as a part of motivation to make
customers buy on credit.
Besides, a year of 2009 showed an extremely low profitability ratio as well

as a year of 2010 even led to a negative ratio number, though the sales
amount in 2009 and 2010 were the highest within nine years. In 2010
operating loss was more that 2 billion US dollars. Furthermore, more than
10% of operating expense was accounted for selling costs.
To make it straight to the point, the profitability ratio has been declining
from 3.42% in 2002 to -11.82% in 2010. This fact could be explained due
to higher operating expenses growth over sales earned growth. Moreover,
an interesting moment in the financial result of a downturn year of 2010 is
that although operating income was negative, the company still paid out
dividends. That pay out could be because the company wanted to keep
their investors as well as possibly to slightly recover its stock price,
nevertheless, if an experienced creditor sees such a great loss and the
negative trend of companys profitability, income from dividends is not
going to significantly affect his or her decision on further dealing with a
company. Conversely, a company that pays dividends from no income but
debt, should create a concern of any investor.

Return on Equity
Net Income
Equity
ROE

2007
$238.738,0
0

2008
$256.195,0
0

2009
$73.916,00

$2.208.552
,00
10,81%

$2.266.811,
00
11,30%

$2.211.704,
00
3,34%

2010
$1.415.678,0
0
$771.815,0
0
-183,42%

Return on Equity illustrates the ratio of earnings to shareholders equity, it

is a measure that is helpful for potential investors who assess attractive
stocks. In addition, it is composed from three financial measures as
profitability, efficiency and financial leverage. As it is seen from the table
above as well as from the case paper, ROE has been fallen through all the
time from 2002 to 2010. This is supported by rising total liabilities. The
huge drop of ROE from 2008 to 2010 resulted from companys borrowings

of long-term debt. Moreover, as it is seen from the Balance Sheets of BNL

company, the account of long-term debt has tremendously increased (by
around 4 times) from 2006 to 2007, that led to a great rise of short-term
notes payable account in 2008 since the company had to pay a lot more
interest in the following years. From the financial data presented by the
case, it might be considered that BNL has borrowed a large loan to get
more cash to cover operating expenses since the company had most of its
assets in Accounts Receivables.
Since the management team mainly focused on attracting customers who
pay on credit, and therefore, increase Accounts Receivable, the company
did not control its balance of current assets by allowing the A/R account to
rise every year by a large portion considering the cash and cash
equivalent amount.
In 2008 there was financial crisis that made the company to fell in ROE
and its components as efficiency, profitability and financial leverage. That
external difficulty effected the most of business companies. This fact can
be supported by the analysis of an industry player as Home Depot (HD).
HD also had a sharp decrease in ROE owning it from 20.56% to 12.74% in
2008. Nevertheless, Home Depot slightly got ROE better as they
succeeded to upgrade it to 14.32% in 2009.
Return on Asset
Net Income

2007
$238,738.0
0

2008
$256,195.0
0

2009
$73,916.00

Income
before tax

$418,408.0
0

$430,780.0
0

$96,215.00

Tax
expense
Tax rate
Interest
Expense
Assets

$179,670.0
0
43%
$115,057.0
0
$6,404,862

$174,585.0
0
41%
$146,638.0
0
$7,530,533

$22,299.00

23%
$163,086.0
0
$8,102,013.

2010
$1,415,678.0
0
$2,212,097.0
0
$796,419.00
36%
$256,087.0
0
$7,337,770.

ROA

.00
4.75%

.00
4.56%

00
2.46%

00
-17.06%

Return on Asset measure strongly depends on net income and assets

outcomes. Hence, a previously mentioned decline in net income to assets
might illustrate the efficiency of handling assets. The negative ratio in
2010 concludes that the company made a loss on every dollar invested in
asset. That was a result of an impressive deficit made in the same year.

Turnover
Days Receivables
Accounts
Receivable
Sales
Days
receivables

2007
2008
$3.246.562 $3.689.622,
,00
00
$9.344.542 $11.176.830
,00 ,00
126,81
120,49

2009
$3.684.015,
00
$12.568.581
,00
106,99

2010
$2.945.781,
00
$11.974.768
,00
89,79

Days in Account Receivables ratio studies how well a company collects its
credit sales. Since BNLs strategy is to provide customers with sales on
credit and give sales managers the bonuses based on the sales realized,
the company has to concentrate on studying this ratio as it shows a
downturn of this tactic. Undoubtedly, it is easier to sell a good to a
customer by providing a credit, nevertheless there should be a limit of this
tactic and the management needs to track the percentage of cash to
accounts receivables and examine the efficiency of transferring Accounts
Receivable into real money. As it is extracted from the financial data, from
2004 to 2005 the days receivables ratio has more than doubled. That is
supported by increased sales as well as by an immense growth of
Accounts Receivable. From that year to 2007 the ratio has been rising.
Although sales in the period of 2008 to 2010 were high, the ratio has
decreased because A/R account finally declined. That decline might be a
result of either improved credit collection policy or time issue as
collections of A/R from the previous periods.
Although the ratio has lately ameliorated, the management has to strictly
track the performance of collection policy since their operations are
hugely depended on it. Moreover, if the management had transferred A/R
into cash earlier, the company could have needed no huge borrowings
from a bank from 2007 to support its operations.

Inventory turnover
COGS
Inventory
Inventory
turnover

2007
$6.313.787
,00
$2.025.023
,00
3,12

2008
$7.629.270,
00
$2.708.834,
00
2,82

2009
$8.698.367,
00
$3.055.319,
00
2,85

2010
$8.836.150,
00
$2.761.880,
00
3,20

Although there are high fluctuations of different ratios, the inventory

turnover seems to be the most stable since its lowest point was at 2,85%
in 2008 as well as 2009 and its peak was spotted at 3,7% in 2002. In order
to support sales amount that increased every year, the company needed
to carry high level of inventory, and thus earned high levels of COGS.
Total Asset Turnover
Sales
Assets
Total Asset
turnover

2007
$9.344.542
,00
$6.404.862
,00
1,46

2008
$11.176.83
0,00
$7.530.533,
00
1,48

2009
$12.568.58
1,00
$8.102.013,
00
1,55

2010
$11.974.76
8,00
$7.337.770,
00
1,63

Asset Turnover is calculated using sales and assets numbers. It is

considered to indicate the efficiency of company of deploying its assets,
and thus, extracting revenues. The higher the ratio, the better company
uses its assets. Hence, using the data collected, it is indicated that has
been decreasing from 2004 to 2008. After 2008 the ratio experienced a
slight rise. That recent positive trend might depict recovery of asset
efficiency. Nevertheless, the ratio was all the time higher than 1, which
means that within a year period total assets generate value in sales by
more than just once.
For a better analysis of this ratio, Home Depot is taken as an industry
player, and thus, its outcome in asset turnover is compared to BNLs
result. Home Depot has the following results in the ratio: 1.96% in 2006,

1.88% in 2007, 1.60% in 2008, 1.67% in 2009 and 1.61% in 2009. As

noticed, there was a slight decreased of Home Depots AT from 2007 to
2008, whereas BNL succeeded to improve the ratio. Therefore, it might be
concluded that the company was comparably efficient using its assets and
even improved the results in the period of economy downturn.

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Liquidity
Current ratio
Current Assets
Current
Liabilities
Current ratio

2007
$5.646.038
,00
$3.224.410
,00
1,75

2008
$6.653.323,
00
$4.292.203,
00
1,55

2009
$7.100.369,
00
$4.481.974,
00
1,58

2010
$6.292.321,
00
$5.077.616,
00
1,24

Current ratio examines companys ability to pay off its current debt using
current assets (self-liquidating accounts). The companys A/R accounts
have been rising for the whole period, that created current assets amount
to improve as well. Nevertheless, since the company started immensely
borrowing from 2005, and afterwards paying increased interest expense, it
has reflected in the following years as well as resulted in fluctuations of
current ratio. If the current ratio in 2002 equaled to 2.66, in 2010 it was
already 1.24, which was due to more extensive growth of current liabilities
rather than stable rise of current assets.
Quick ratio
Cash
Accounts
Receivable
Current
Liabilities
Quick ratio

2007
$337.990,0
0
$3.246.562
,00
$3.224.410
,00
1,11

2008
$209.794,0
0
$3.689.622,
00
$4.292.203,
00
0,91

2009
$311.548,0
0
$3.684.015,
00
$4.481.974,
00
0,89

2010
$539.973,0
0
$2.945.781,
00
$5.077.616,
00
0,69

As it was mentioned, the trend of current liabilities was more excessive

than the expansion of current assets including separately cash and
accounts receivables accounts. That resulted in a decreased current ratio,
as well as quick ratio. Based on the table above, the cash and accounts
receivables were not increasing enough to catch the liabilities amount.
Hence, it created situation in 2008 when the quick ratio went lower than 1
meaning that quick accounts of assets could not cover current liabilities
at that time. When comparing with Home Depot, BNL seems to do much

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better since HDs quick ratio has been always lower than 0.30 for the
period from 2006 to 2010.
In such a volatile industry, in which BNL stores operate it is important to
measure liquidity. Nevertheless, the company seems to do adequate when
managing current liabilities to current assets since most of years (eight
out of nine) the ratio was larger than 1.

Financial Leverage
Debt-to-equity ratio
Liabilities
Equity
Debt-toequity ratio

2007
$4.196.310
,00
$2.208.552
,00
1,90

2008
$5.263.722,
00
$2.266.811,
00
2,32

2009
$5.890.309,
00
$2.211.704,
00
2,66

2010
$6.565.955,
00
$771.815,0
0
8,51

The ratio of debt to liability examines the portion of liability in assets

relatively to shareholders equity. To that extend, the measure assesses
companys financial leverage. Historically, it is seen that the ratio has
been increasing as within nine years, the ratio has gone up from 0.96 in
2002 to 8.51 in 2010. The last number shows a high risk that a company
involves in its operations. As mentioned, the rise is explained by
companys borrowing history as to cover operating expenses, BNL sharply
increased its loan level, the same way as its short-term notes payable.
Commonly, this industry tries to come with low financial leverage ratio
since the cash flows are not stable and the market is relatively volatile. To
support this, the analysis refers back to Home Depot results in leverage
ratio. Based on HD debt to equity from 2006 to 2010 the ratios climbed up
from 0.10 to 0.45, in percentage that is a steep increase, nevertheless,
the ratio does not even exceed 1. That industry study might support the

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previous conclusion that BNL took a risky decision to increase its liabilities
to equity.

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Debt-to-capitalization ratio
Long-term
liabilities
Contributed
Capital
Debt-tocapitalization
ratio

2007
$971,900.
00
$550,787.
00
0.64

2008
$971,519.0
0
$496,194.0
0
0.66

2009
$1,408,335.
00
$510,378.0
0
0.73

2010
$1,488,339.
00
$516,385.0
0
0.74

When comparing, within nine years the contributed capital level has not
changed much as it has risen from $397,396 in 2002 to $516,385 in 2010.
Nonetheless, long-term liabilities have steeply gone up from $557,269 to
$1,488,339. That trend resulted in a higher debt-to-capitalization portion
especially when stressing the period from 2004 to 2005. As previously
emphasized, the year of 2005 was a decisive year for the company since
the management team decided to double its Accounts receivable in order
to accelerate sales levels.
To conclude, when analyzing financial performance of BNL company from
2002 to 2010, the nine-year period might be divided into three phases:
the first phase is from 2002 to 2003, the second stage is from 2004 to
2008 and the third one is from 2009 to 2010. First period could be called
as stability, the second one as turn-down and the third one as breakdown.
Although in the first phase there was a slight decline in several ratios, the
financial output did not significantly fluctuate. Afterwards, the second
periods failure was due to an internal problem that was created by
managements decision on increasing sales by selling on credit and by
making Accounts Receivable to climb up high and not creating an
essential balance. Nonetheless, in 2008 the financial crisis generated an
external problem for the company, and from that period on there were two
issues that are related to managements involvement as well as to
economic conditions. From that point it would be difficult for a company to
recover since the right and well-analyzed decisions have to be made.

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Question 2

2008

2009

2010

Cash flows from operating

activities
Net Income (loss) after taxes
Adjustments for:
Amortization of property,
plant and equipment

$1.415.678,00

$256.195,00

$73.916,00

$81.387,00

$89.903,00

$90.744,00

Accounts Receivable

$-443.060,00

$5.607,00

$738.234,00

Inventories

$-683.811,00

$-346.485,00

$293.439,00

Prepaid expenses

$-8.610,00

$-4.414,00

$4.800,00

Accounts Payable

$-75.220,00

$3.158,00

$164.943,00

Corporate taxes payable

$110.466,00

$-240.954,00

$-565.303,00

$18.462,00

$-99.320,00

Changes in:

Deferred corporate income

taxes

Net cash from operating

activities
Cash flows from investing
activities
(Increase) or decrease in
property, plant and
equipment

$15.336,00
$1.084.899,00

$-564.626,00

$536.793,00

$747.317,00

$-400.807,00

$-788.141,00

$-177.982,00

$-154.747,00

$-97.171,00

Proceeds from sale of

(acquisition of) other assets

$-21.791,00

$-59.590,00

$-37.378,00

Net cash from investing

activities

$199.773,00

$-214.337,00

$-134.549,00

Proceeds from (repayment

of) notes payable

$1.032.547,0
0

$427.567,00

$996.002,00

Proceeds from (repayment

of) long-term debt

$-11.933,00

$421.730,00

$192.972,00

Proceeds from (repayment

of) other liabilities

$-3.784,00

$-3.376,00

$-13.648,00

$-54.593,00

$14.184,00

$6.007,00

Dividends paid

$-143.343,00

$-143.207,00

$-30.218,00

Net cash from (used in)

financing activities

$818.894,00

$716.898,00

Net increase (decrease) in

cash and cash equivalents

$-128.196,00

$101.754,00

$228.425,00

Opening balance, cash and

cash equivalents

$337.990,00

$209.794,00

$311.548,00

Cash flows from financing

activities

Proceeds from issuing

(repurchase of) share capital

15

$1.151.115,0
0

Closing balance, cash and

cash equivalents

$209.794,00

$311.548,00

$539.973,00

Question 3
Interpreting BNL STORES ' statement of cash flows shed a lot of light on
how the company was managed throughout the years. The effects of
these strategies implemented are reflected through the numbers in the
financial statements of the company. Based on the linkages of the balance
sheet and the income statement on the statement of cash flow, it makes a
lot of sense to look at the statement format and data sources to analyze
BNL financial history from an operating, investing and financing
perspectives.
The data from 2002 to 2004 in the statement of cash flow showed BNL
STORES in a better light with positive net cash flow from operating
activities derived by reasonable change in account receivable, inventories
and account payable. The working capital management was somewhat
effective during those years. Similar observations can be made for the
investing and financing activities during this period. In 2005, the new
strategies implemented by the company's management started to reflect
in their statements and BNL reported a significant negative net cash from
operating activities directly related to a very high change in their account
receivable. Having a negative net cash from investing and financing
activities would show BNL is paying back debt and investing back into the
business, but that year they were both positive. This nightmare will
continue until 2010 which will affect the companys future cash flows
negatively.
When it comes to BNL's economic viability, there is no other way to put it
or to sugarcoat it. It does not look good at all. Viability means the ability
for any company to sell its products at a price that cover its costs and
provide a return to the shareholders. Looking at the statement of cash

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flows and more specifically the income statement, the level of BNL cost of
goods sold, selling and administrative expense, PPE expense, the
company will need a miracle to stay away from going under. To add insult
to injury, BNL's management continue to operate as business as usual
with unrealistic investments in PPE and the obsession of paying dividends.
For any company listed in the US stock markets, the performance of their
stock is directly related to their management strategies and its impacts on
the company top and bottom line as a whole. In the case of BNL STORES,
the decision to expand while phasing out traditional stores is not without
merit, but tying the store managers 'commission to the net income of the
stores was fatal. By leniently giving credits to customers who did not
deserve them, the store managers increased their stores net income and
their commission at the same time. The adverse effect of these actions
are reflected in the analysis by tremendously increasing BNL's receivables
and inflating the company's net income. The fact that these statements
are prepared using an accrual accounting method, BNL reported income
even though they did not receive any cash. BNL from a cash management
perspective, the fact that BNL will not be able to effectively finance its
day-to-day operations and the fact that the analysts know how illiquidity
can put a company at a risk of failure, BNL will receive a sell
recommendation from Wall Street which will tank the stock price.

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Conclusion
After analyzing the general ratios of BNLs store, the dramatic change
from 2004 to 2005 can be observed. The critical problem is
account/receivable has been increased significantly in 2005. In the
long-term, the non-adequacy of accounts receivable level resulted in
significant pressure on the cash flow, and a sharp decline of
companys share price. If a company decides to follow such a strategy
in the future, it should be more efficient and accurate at collecting the
receivables.
The analysis of the nine-year period also led this research to understand
that the main problem did not start in recent years. The negative trend
already has started in 2005, when a management possibly took some
wrong decisions. The financial crisis that occurred in 2008 additionally
created an external problem to BNL where internal problem already
existed in the business process. The supplementary economic issue
attached extra pressure that resulted in companys loss in 2010.

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References
1. Cruz, Paul. "BNL Stores." Richard Ivey School of Business
Foundation (2013): Print.
2. "HD Home Depot Inc XNYS:HD Stock Quote Price News." HD Home
Depot Inc XNYS:HD Stock Quote Price News. Web. 05 Mar. 2016.

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