Acquisition of LE CHÂTEAU Analysis

Group Project – ACTG 5100
– Acquisition of LE CHÂTEAU
Rao Keddy Thompson
• Dhananjay Chauhan
• Manish Surana
• Vaibhav Kapoor
• Nipun Sharma
• Samvit Roy
• Sairam Raman
• Aditya Reddy
• Suresh Mallya

Corporate Presentation
Rao Keddy Thompson
1 Introduction and Outline
2 LE CHÂTEAU – Industry Context and Basic Business Model
3 LE CHÂTEAU - Social Responsibility and Sustainability
4 LE CHÂTEAU- Financial Position, Performance, Cash Flows
5 Overall Analysis & Recommendations

Rao Keddy Thompson
Introduction
• Headquartered at Montreal, Quebec
• 228 retail stores in Canada
• Chairman is Jane Silverstone Segal
• 67% of shares owned by Silverstone family
• 35% of apparel comes from it’s production
facilities
• Major Products :
• Apparel
• Lifestyle accessories
• Footwear

Rao Keddy Thompson
Outline
PRESENT SCENARIO: Canadian apparel retail industry grew by 3.3% in 2013 to reach a
value of $27 billion
FUTURE SCENARIO: Forecast is the value will increase by 15.9% to reach $31.3 billion.
25.1 26 26.3 26.9 27.8
2009 2010 2011 2012 2013
Canada Apparel Retail Industry Value
27.8 28.6 29.5 30.4 31.3 32.2
2013 2014 2015 2016 2017 2018
Canada Apparel Retail Industry Value Forecast

Rao Keddy Thompson
The Retail Market Space
GROWTH SEGMENT:
Women wear segment is the most lucrative,
Total revenue of $14.2 billion
RIVALRY:
Moderate Rivalry
KEY TRENDS:
Fashion is highly competitive & seasonal business
Several external factors
KEY CHALLENGES:
Anticipate and Respond to changing customer preference.
New Shopping Formats should be exploited such as e-commerce
Fluctuating prices of cotton
WHAT WE KNOW: Clothing is an essential item, with consumer choice being influence by
factors such as fashion and a desire to signal social success.
Demand patterns are susceptible to branding and advertising

Rao Keddy Thompson
Industry Context
Apparel/
Clothing
Stores in
Canada
Supply
Industries
Key
Economic
Drivers
Related
Industries
Consumers
in Canada
Footwear
Accessories
Wholesaling &
Manufacturing
Family Department
Stores,
E-Commerce
Superstores
Per capita disposable
income,
World Price of cotton,
No of adults b/w 20 to
64
No of adults b/w 20 to 64

Operating Avenues:
• Brick & Mortar Stores
• Online stores
• Licensing: Retail developers in the Middle
East and in Asia
• 228 outlets in Canada and 1 in the US,
• 5 licensed stores in the Middle East and
Asia.
Rao Keddy Thompson
The Business Model
Apparel. Footwear. Accessories
33.91
26.29
Prairies
20%
11.78
5.24
US,
Middle
East &
Asia
3%
Sales Percentage/ Region
Ontario
Quebec
Prairies
British Columbia
Atlantic
US, Middle East & Asia
52.5
31.3
16.2
% of Market as of 2013
Women Men Children

Rao Keddy Thompson
SWOT Analysis
SWOT Analysis
Strengths Weaknesses
Multiple channel selling Limited geographic presence
Strong foothold in Canadian market Poor financial position
Vertically integrated operations
Strong Online Response
Opportunities Threats
Increasing consumer spending Expansion initiatives by competitors
Organic Growth Increase in counterfeit products
Growing retail market in Canada The Company’s liquidity follows a seasonal
pattern based on the timing of inventory
purchases and capital expenditures.
Growing Online Trends

1. Hudson’s Bay
2. Reitmans
3. H & M
4. YM Inc.
5. Le Chateau
6. Northern Reflections
Rao Keddy Thompson
Market Share

Rao Keddy Thompson
Online Trends
Online trends indicate that people search more for Le Chateau than Reitman

 Le Château are reducing their stores' energy footprint
 The floorings are made from all-natural products
 Their stores are encouraged to participate in all mall-coordinated recycling programs
 Reusable eco-chic bags: all profits from the sale of their $1 bags go to the David
Suzuki Foundation
 In progress: They are currently exploring the option of making their plastic shopping
bags, biodegradable.
 Le Château also has a formal corporate policy concerning fur-free products.
 Angora products are sourced exclusively from vendors that harvest the hairs using a
shearing process that does not harm or kill the animal.
 La chateau has been supported by World University Service of Canada (WUSC),
whose mission is to foster human development and global understanding
through education and training
Rao Keddy Thompson
Corporate Social Responsibility & Sustainability

Rao Keddy Thompson
LE CHÂTEAU- Financial Position
• The company’s assets declined by 4% over the previous year while liabilities grew by 6%
• Asset / Liability Ratio reduced from 2.75 in 2013 to 2.45 in 2014.
• Analysis : a) Assets reduced due to closing down stores, write down of inventories
• b) Liabilities went up due to additional bank indebtedness.

Rao Keddy Thompson
• 59% of total assets are made up of inventories which is up by 2% from previous year.
• Property & Equipment decreased by 5%.
• Analysis : a) Poor inventory management
• b) Lower Sales

Rao Keddy Thompson
• Long Term debt has reduced from 18% of total liability in 2013 to 9% in 2014.
• Bank indebtedness increased from 16% of total liability in 2013 to 36% in 2014.
• Analysis : a) Revolving credit from banks taken up to CAD 70 million dollars
• b) Long term debt paid off by the company.

Rao Keddy Thompson
• Current ratio declined to 2.20 from previous year’s ratio of 2.79 while quick ratio essentially maintained the
same low at 0.20.
• Debt / Equity Ratio increased from 0.58 in 2013 to 0.69 in 2014.
• Analysis : a) Shows Liquidity issues because of Lower Sales & Poor inventory management.
• b) Low D/E ratio indicates company’s appeal to lenders and investors.

Rao Keddy Thompson
LE CHÂTEAU- Performance
• Y-O-Y Sales has remained essentially unchanged since 2013.
• Online sales increased by 82% from last year
• Analysis : a) Bad Weather conditions, Ineffective marketing of products.
• b) Shift in buying patterns from Outlets to E Commerce.

Rao Keddy Thompson
• Y-O-Y Gross Margin reduced from 66.3 to 62.9 because of possible discounts offered during sale season.
• Net Margin decreased further to -5.8165 because of increased losses.
• Analysis : Lower Sales, Higher fixed expenses

Rao Keddy Thompson
• Inventory turnover of Le Chateau is only 0.82 in comparison with Reitman’s 3.72.
• Asset turnover of Le Chateau is 1.27 in comparison with Reitman’s 1.62.
• Analysis : Poor inventory management of Le Chateau can be improved for better performance.

Rao Keddy Thompson
LE CHÂTEAU- Cash Flows
• Cash flow from operations and cash from investing has declined but cash from financing activities has
increased
• Analysis : The negative cash flow from investing and operations and positive flow from financing relates to
their negative growth. Their expansion plans have been financed largely from borrowing.

Rao Keddy Thompson
LE CHÂTEAU- Analysis
CONSOLIDATED BALANCE SHEETS - Common size or Vertical analysis
2014 2013 2012
$ $ $
ASSETS
Current assets
Cash 0.7% 0.8% 3.1%
Accounts receivable [note 6] 0.7% 0.9% 1.0%
Income taxes refundable 3.2% 1.5% 0.9%
Derivative financial instruments 0.2% 0.1% 0.1%
Inventories [notes 6 and 7] 59.2% 56.0% 51.0%
Prepaid expenses 1.1% 0.9% 0.7%
Total current assets 65.1% 60.0% 56.8%
Property and equipment [notes 8 and 12] 33.1% 37.8% 41.0%
Intangible assets [note 9] 1.8% 2.1% 2.3%
100.0% 100.0% 100.0%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness [note 6] 14.6% 5.9%
Trade and other payables [note 10] 9.3% 9.4% 9.3%
Deferred revenue 1.8% 1.6% 1.7%
Current portion of provisions [note 11] 0.1% 0.1% 0.1%
Current portion of long-term debt [note 12] 3.8% 4.5% 7.0%
Total current liabilities 29.5% 21.5% 18.1%
Long-term debt [note 12] 3.7% 6.5% 12.5%
Provisions [note 11] 0.2% 0.2% 0.1%
Deferred income taxes [note 14] 0.9% 1.0% 1.3%
Deferred lease credits 6.4% 7.2% 6.9%
Total liabilities 40.7% 36.5% 38.8%
Shareholders’ equity
Share capital [note 13] 20.4% 19.4% 16.1%
Contributed surplus 1.7% 1.2% 1.0%
Retained earnings 37.1% 42.8% 44.0%
Accumulated other comprehensive income 0.1% 0.1% 0.0%
Total shareholders’ equity 59.3% 63.5% 61.2%
100.0% 100.0% 100.0%

Rao Keddy Thompson
CONSOLIDATED BALANCE SHEETS - Trend or Horizontal analysis
2014 2013 2012
$ $ $
ASSETS
Current assets
Cash 20.1% 24.8% 100.0%
Accounts receivable [note 6] 62.6% 80.8% 100.0%
Income taxes refundable 311.8% 150.3% 100.0%
Derivative financial instruments 324.0% 166.7% 100.0%
Inventories [notes 6 and 7] 104.7% 103.3% 100.0%
Prepaid expenses 146.5% 120.8% 100.0%
Total current assets 103.4% 99.6% 100.0%
Property and equipment [notes 8 and
12]
73.0% 87.0% 100.0%
Intangible assets [note 9] 71.4% 87.4% 100.0%
90.2% 94.2% 100.0%
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current liabilities
Bank indebtedness [note 6]
Trade and other payables [note 10] 89.6% 94.9% 100.0%
Deferred revenue 94.7% 90.8% 100.0%
Current portion of provisions [note 11] 88.3% 76.0% 100.0%
Current portion of long-term debt [note
12]
48.9% 60.3% 100.0%
Total current liabilities 147.0% 111.9% 100.0%
Long-term debt [note 12] 26.9% 49.0% 100.0%
Provisions [note 11] 325.8% 441.7% 100.0%
Deferred income taxes [note 14] 61.9% 77.8% 100.0%
Deferred lease credits 83.3% 98.8% 100.0%
Total liabilities 94.6% 88.7% 100.0%
Shareholders’ equity
Share capital [note 13] 113.9% 113.3% 100.0%
Contributed surplus 153.8% 114.4% 100.0%
Retained earnings 76.0% 91.5% 100.0%
Accumulated other comprehensive
income
331.5% 168.5% 100.0%
Total shareholders’ equity 87.4% 97.7% 100.0%
90.2% 94.2% 100.0%

Rao Keddy Thompson
Analysis : Difference in quick ratio is due to high inventories;
Accounts payable turnover ratio is higher for Le Chateau which means they are paying suppliers earlier than
Reitman does. Reitman has a better liquidity position
FINANCIAL POSITION BENCHMARKING TO REITMAN

Rao Keddy Thompson
Analysis : Gross margin of Le Chateau is marginally better than Reitman. Whereas net profit / return on
assets , return on equity figures for Reitman are positive while for Le Chateau is negative due to loss.
PERFORMANCE BENCHMARKING WITH REITMAN

Rao Keddy Thompson
LE CHÂTEAU- Recommendations
 Sales
 Promote E Commerce to maximize cross channel sales and attract new customers.
 Modernization of stores with emphasis on technology in line with growing trend.
 Advertise strategically in key focus areas and internet to increase footfalls.
 Operations
 Establish new specialty stores for items selling high i.e. footwear, ladies apparel.
 Align with new retailers across the emerging markets to expand the no of stores.
 Lease down the stores not generating enough sales.
 Inventory Management
 Introduce proper inventory management systems in the company to ensure
synchronization between customer demands and inventory reserves.
 Cost Control
 Introduce proper cost control measure to minimize expenses and increase net
income by aligning with new suppliers and logistic companies.
Our definition of a business that is under performing is a business that is not reaching its
full potential. And hence we recommend to acquire this company in view of long term
growth potential and financial benefits. So how do we turnaround Le Chateau to perform
to its potential ?? Here are some recommendations we make:

Rao Keddy Thompson
LE CHÂTEAU – Future Projections
• Sales will bounce back to pre 2012 period up to CAD 343 million because of mitigating measures
• Net Profit will be positive to around CAD 13 million.
• Inventories will decline up to 40% from current reserves as a result of better inventory management

Rao Keddy Thompson
• Gross profit margin improves to 65.98%.
• Net Profit Margin improves to 4.07%.

Rao Keddy Thompson
• With implementation of proper inventory management systems we can reduce time for average days
inventory in hand as well as self financing period.

Rao Keddy Thompson
LE CHÂTEAU – APPENDIX
Ratio Name Formula 2,014 2,013 2,012
Liquidity
Current Ratio Current Assets/ Current liability 2.20 2.79 3.13
Quick ratio Current Assets-inventory/ Current liability 0.20 0.19 0.32
Asset turnover ratio Sales/Avg total assets 1.28 1.21
Inventory turnover ratio COGS/Avg. inventory 0.82 0.76
Avg. days inventory in hand (in days) 365/Inventory turnover ratio 444.90 478.19
Average Accounts Payable As per note 10 in the annual report 10,290.00 11,250.00 12,505.00
Purchases COGS - beginning inventory + ending inventory 103,430.00 96,458.00
Accounts Payable turnover ratio Purchase/Avg acc. Payable 9.60 8.12
Avg Payment period for Accounts payable(days)365/Accounts Payable turnover ratio 38.01 44.94
Inventory Self financing period (in days)
Avg. days inventory in hand - Avg Payment period
for Accounts payable
406.89 433.25
Book Value Total Assets - Total Liabilities 125,099.00 139,798.00 143,105.00
Net Operating profit to Current LiabilitiesNet Operating Profit(L)/ Current Liabilities (0.31) (0.19) (0.03)
Operating Cash Flow to Current LiabilitiesOperating Cash Flow / Current Liabilities (0.05) 0.13 (0.27)
Cash Balance to Total Liabilities Cash/Total Liabilities 0.02 0.04 0.17
Solvency and Leverage
D/E Ratio Total Liabilities / Shareholder's Equity 0.69 0.58 0.63
Total Liabilities to Total Tangible AssetsTotal Liabilities/ Total Tangible Assets 0.63 0.61 0.68
Interest Cover (Net Profit before tax + interest)/ Interest (8.00) (3.98) (1.51)
Performance
Earnings(Loss) Per Share Net Income(loss)/ Total Shares outstanding (0.59) (0.34) (0.10)
Gross Profit Margin (Sales - COGS) / Sales 62.97 66.32 0.68
Net Profit(Loss) Margin Net Income(loss)/ Sales (5.82) (3.17) (0.79)
Return on Assets Net Income(Loss)/Total Assets (7.58) (3.96) (1.02)
Return on Equity Net Income(Loss)/Total Equity (12.78) (6.24) (1.67)
Price to book value ratio market value of equity/book value of equity 0.50

Rao Keddy Thompson
LE CHÂTEAU – APPENDIX
References :
- IBIS World
- Newspaper Reports
- Globe and the Mall
- Internet Websites

Rao Keddy Thompson
ANY QUESTIONS??

Acquisition of LE CHÂTEAU Analysis

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (15)

Similar to Acquisition of LE CHÂTEAU Analysis

Similar to Acquisition of LE CHÂTEAU Analysis (20)

Recently uploaded

Recently uploaded (20)

Acquisition of LE CHÂTEAU Analysis