Darlarna is a high-end Swedish furniture company that produces and sells various home and office furniture products across Canada. Despite having small distribution coverage, it managed to achieve high growth rates and profits between 2005 and 2007. As the company began expanding into the United States market in 2008, it found itself struggling to compete with the high rise in the factors of production and threats from competitors. The company soon reported a drastic decrease in net income and internal financial problems. Looking at the balance sheet and the information provided, the company should seek to retrench in 2009 in hopes of stabilizing profits and its financial problems. Despite the perceived potential in the U.S. market, Darlarna …show more content…
From the balance sheet, it can be seen that the financial crisis has greatly impacted the financial outlook of the company. Prior to its entrance to the U.S. market, the company reported over $1.3 million in net sales with around $523 thousand in gross profits in 2006 and over $1.5 million in net sales with a gross profit of around $550 thousand in 2007. Despite the opportunity of gaining many potential customers in the U.S., the company only reported net sales of around $1.8 with $581 thousand in gross profits. Looking at the net sales and gross profits, the company’s rapid expansion into the U.S. market did not bring enough profits and sales to justify the higher cost of production. Even though the rising cost of skilled workers and key production inputs affects many in the furniture industry, its affect on Darlarna is exemplified because of the high production level that did not yield an equivalent growth in sales. By producing more and stocking more inventories, it increases their cost of production. This is reflected in the company’s decreasing EBIT margin which shows the results from a reduction in revenue and higher operating costs. Furthermore, the drastic …show more content…
The Bank of Montreal requires that the company maintain a current ratio of 2.0 and a long-term debt to total capitalization ratio of 55 per cent. Between 2006 and 2008, the company’s current ratio decreased from 2.53 to 1.69 while the long-term debt to total capitalization ratio increased from 42.07 percent to 58.13 percent. It is further evident that the company has experienced slow growth and must retrench in order to meet the requirements set by the Bank of Montreal. Furthermore, the industry average for current ratio is 2.5 while the long-term debt to total capitalization ratio is 30%. This yields great concerns about Blix and Darlarna’s internal financial issues and ineffective management. Despite warnings about the deep recession is in the U.S., Darlarna continued to expand its order process, purchase of raw materials, and account functions which has greatly affected the company’s total debt. Furthermore, Blix’s decision to impress customers on factory visits rather in investing in active markets attributes to his poor management skills and unnecessary expenses. The company should look to slow expansion in the U.S. and focus on a selective domestic market which was responsible for its initial success and would decrease the additional costs of transportation and distribution in the U.S. Along with slowing sales, the company should look to sell some