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The Sports Guy Case
Business Policy

Submitted To – Yousuf Haque

Submitted To – Yousuf Haque

Submitted By – Anureet Kaur Jaspreet Singh Mangat
Tanya Mukhija
Jaskaran Gill
Sahil Sharma
Loveleen Kaur

Submitted By – Anureet Kaur Jaspreet Singh Mangat
Tanya Mukhija
Jaskaran Gill
Sahil Sharma
Loveleen Kaur

CASE SYNOPSIS: 1) “The Sports Guy” is an independent sporting goods store. 2) It’s a 10 years old business owned by high profile personality (college dropout) in the local sports community. 3) Business structure:

4) Its sales constitute:

i. 70% from sale of equipment and uniform bought by local teams. ii. 30% from regular (“walk-in”) retail trade that consists of wide range of sports and recreational merchandize. 5) Competitor: Canadian Tire Store is a modern store. It offers low prices, but stresses high turnover items.

PROBLEM STATEMENT AND OBJECTIVES:
Despite of fair amount of sales done by Sports Guy’s in the past few years, decrease profit was one of the most important issue faced by them. Following are the problems which results in this poor financial condition.

1) The inventory management system was not effective. Excluding the 70% of sales done to local teams, there was a lack of proper inventory management for the remaining 30% sales. The supply of the goods was not according to the demand in the market, henceforth resulted in decrease in the inventory turnover ratio.

2) Rocky is highly interested in sports, so he has given employment to the town’s Junior B hockey team members despite knowing that they are not good salesperson. Also, he has no professionals working at store with him. This has resulted in high labor cost which has further increased his expenses.

3) If he wants to expand his business and increase profits, he’ll have to introduce new selling techniques and inventory system which needs a lot of investment. He hasn’t been able to do so after comparing the current profits and expenses such as debts (interest expenses, property tax).

4) The sales volume of Sports Guys are not increasing further because league player registrations are slowly declining because decreasing family size and also due to introduction of other activities for children in other fields.

5) Lastly, the land near the store worth $120,000 is not in use but he is paying interest and property tax on it, which has increased his expenses.

SITUATION ANALYSIS:
Sports goods business doesn’t seems to be that profitable to look attractive. It operates at low level. The inventory required is cheap and the one which is expensive like equipment doesn’t have much customers. Its main weakness is “what kind of inventory you should maintain”. Obviously the weaknesses outweighs strengths and points are discussed below.

Strengths:
1) As he has been a high- profile personality in the local sport community, he has well established contacts. About 70% of his sales include uniforms and equipment to local teams. These sales cover most of his business cost. Also, 30% are his walk- in’s which have provided him with profits.
2) According to his customer, he’s his customer service better than his competitors.
3) His business is located in busy commercial area.
4) The prices of his goods are low. This lets him shine among his other competitors (like Canadian Tire Store).

Weaknesses:
1) He’s not a business oriented person. He is a hockey player and a college dropout.
2) Ordering inventory, the inventory for his walk-ins has been a challenge for Rocky. He is required to keep in stock reasonably broad range of inventory so as to fascinate more clients. But a part of his inventory goes out of season because of which he is coerced to sell that stock at discount (in loss). According to his accountant, the lowering inventory turnover rate and resultant levels of inventory are causing increase in his short term debt and interest expenses.
3) He has employed some members from his town’s Junior “B” hockey team. He has done so out of courtesy to serve his game but it’s resulting in higher labor cost.
4) Due to declining league player registrations his sales to teams regarding equipment and uniform is going down. Hence lowering his profitability.

Opportunity:
1) According to Exhibit 2, the ratio of his advertising expenses in relation to the industry are 1:2.1. That means he is saving 50% on his advertising expenses. His advertising expenses include small ad in local newspaper twice a week and its distributed free among each home in city.
2) He’s paying about 55% of income tax in comparison to the industry.

Threats:
1) There is an older store in the locality, “Canadian Tire” which offers lower prices for the same equipment and uniform teams. So Rocky needs to work efficiently to make profits and remain at top in the competition.
2) Furthermore, the declining league player registrations are resulting in less demand for sports equipment.
3) He has employed members from his juniors’ B team. They are not knowledgeable sales staff. This is one of the reason why his sales are declining. Also, such employment is resulting in excessive labor cost. His accountant has suggested him to get rid of such staff, but he’s reluctant to do so. The ratio of wages is 15:13.2

Identification of Alternatives: * He should carry wide range of inventory from low cost to high cost as well as range because his main competitor is giving him competition on the basis of cost and range. * He should try and get himself a partner in his business who have good knowledge on how to manage business. He being a sports guy cannot contain the flow of business but a good partner will certainly help him with this. * He can sell his parking lot space which is not in use, so by doing this he can pay off his mortgage loan which in return will give an increase to his profits.

Analysis: * Inventory Expansion - Carrying a wide range of inventory maybe the first reflex step taken to revive the business but this may give a false indication that business is going into loss. We know that increasing an already existing inventory results in increase in expenses. A person like Rocky who is not business oriented may see it as a huge loss. This alternative may see well at first but it will require significant investment. With already a mortgage of $183,000 to pay, it may seem in-appropriable to borrow more money from bank or friends and family. Even if rocky invest money in the business to increase inventory, it will take considerable time to show back profits in the accounts. Moreover this alternative require a long time period for results which according to us is not suitable for rocky. So, this alternative is not so good considering its pros and cons.

* Getting a partner – Having a partner in business may sound a sane step in this case when you are not a business oriented person. His partner will help him in grabbing opportunities which are helpful in business. But down side to this is that his partner may backstab rocky by acquiring his profits and out measuring him in terms of handling accounts. He may gamble up the books and try to gain more profit than promised. This will lead to more loss to rocky on personal level which may alienate him from his business. There has been lots of cases where partners with good business knowledge unethically pockets their other partners profits who not so good with the books.

* Selling the parking lot – This is the most appropriate alternative to cope the ongoing crisis in the business. Rocky has nothing to lose on this parking lot. He already have some parking space in front of this shop. If he needs more parking, the strip mall parking area is fulfilling his needs. Being in the busiest commercial area of the city, his empty parking lot is much more worth than the cost he brought both lots combined. Practically he is sitting on a gold mine which can greatly help him in his business if sees its positive side. His bank loan is $183,000 and his lot is estimated to be around $120,000 in today’s value. Assuming that he is paid the aforementioned amount of lot, he can use the money from deal to pay back the major part of the mortgage i.e. 65% - 70% in just one go. This will reduce his stress of paying back the loan. His interest on the principle amount will decrease considerably. Due to this, money which was earlier going into paying back the bank will now can be added to other accounts such as gross profit. Moreover, his property tax will also decrease due to less amount of property he is holding now. The only negative effect it will have is that rocky will not be able to expand his business in near future. But this is not his priority now. So seeing its pros and cons, this seems as legit and most sound alternative to his problems right now.
Recommendation:

The most appropriate alternative that we recommend is that he should sell the land which is not in use. Using that money Rocky can pay off his outstanding amount from the debt of $183500. According to the case, last year he paid $18400 as mortgage out of which $8000 was interest amount and remaining amount of $10400 was principal. This way his periodic payment of mortgage will go down and he’ll be required to pay less interest on the amount remaining. Henceforth, this will ebb his business expenses. Decrease in expenses can lead to increase in profits as the income will not be affected after selling the extra but useless land.
So this way the profits will swell and then the owner can think of investing the excess amount of the money (profits) various other things. He can get finance from bank to buy new techniques which will boost his sales. He * Can introduce new computerized inventory management/control system * Can update new selling and advertising techniques. He is already saving around 50% on his advertising expenses. * Can also hire professionals to manage and control the business in the best possible way. * Can introduce the sophisticated purchasing techniques, as his levels of inventory are increasing.

So by selling that unused piece of land he can get rid of that old debt and can use this profit from selling the land for new borrowing from bank to incorporate new techniques.

Exhibit 2 Financial Ratios, 2008 Percent of Sales Revenues Industry Sports Guy Average Sales Revenue 100.0 100.0 Cost of Goods Sold 71.1 70.0 Gross Profit 28.9 30.0 Operating Expenses: Wages 15.0 13.2 Advertising 1.0 2.1 Rent 0.0 7.8 Property taxes 2.0 N.A. Interest 5.3 N.A. Utilities 0.8 N.A. Depreciation 1.0 N.A. Other 0.7 N.A. Total Expenses 25.8 25.0 Net Profit before tax 3.0 5.0 Income tax 0.9 1.5 Net profit after tax 2.1 3.5