Gary Halper Menswear

Question 1: Describe GHM & its financial attributes up to time of case

Company’s business and Strategy

Gary Halper Menswear Ltd. (GHM) is a manufacturer of men’s suits and sports jackets based out of Montreal. The company sells suits typically priced between $350 and $600 which specifically targets a customer looking for luxury suiting at an affordable price. At the time of the case, GHM has 70% of its sales in Canada, 29% to US and 1% to Italy. The firm typically sources its raw materials from China and utilizes temporary workers to manufacture finished suits. This model keeps a major portion of the costs variable and gives the firm flexibility to deal with fluctuating volumes.

Financial Attributes and Analysis

In order to analyze GHM’s performance. I have prepared common sized balance sheets and income statements for FY09 to FY13 and conducted a horizontal as well as vertical analysis for both statements. This was done to identify key assets of the company and to identify significant trends in those assets over time. Key takeaways from this analysis are that a large portion of the firm’s assets are current and that cash and inventory comprise of the firm’s largest assets. Assets have reduced from FY11 to FY12. The firm has reduced its receivable and has paid out a big portion of it’s debt while showing increasing retained earnings which is a healthy sign. Inventory levels have been rising and is a cause for concern. The income statement reveals that profitability has fluctuated over the years due to expansions. It also indicates that sales growth has slowed over time. Gross profit margins have been fairly consistent. Please refer to Exhibit 1 & 2 for details and numbers.

I have also conducted ratio analysis including liquidity, activity, profitability and solvency calculations. I compared the ratios to the industry benchmarks to identify strong and weak aspects of the company. To summarize key observations, the current ratio seems fine but the gap with quick ratio appears to be rising primarily due to increasing inventories. The debt levels had risen in FY11 primarily due to the US expansion. The Interest coverage also dropped in FY11 because of reduced profits during the expansion period. The activity analysis indicates that GHM’s cash cycle has been increasing over time which is a problem. This is caused by increasing receivable days and slower inventory turnover which is causing inventory days to increase. The payable days have been more or less consistent. The increase in AR along with inventory is concerning and could be indicative of channel stuffing. I also conducted a DuPont Analysis using the Net Income/Equity ratio (ROE) to assess the historical trend and compare GHM with its peers. GHM’s ROE ratio improved in FY12 to 14% from low of 0.5% in FY11.  The reduction in financial leverage coupled with improved net margin caused the jump. Asset turnover can be observed to be dropping over time which would need investigation. I believe this may be due to an increase in assets due to the expansions that the company is undertaking. Please refer to Exhibit 3 for detailed insights and analysis on each ratio. I have put notes behind possible explanations for the ratios observed