DRAFT ONLY -- FOR REVIEW AND COMMENT
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GARB AND GEAR SPORTS
Ga
and Gear Sports is an independent sporting goods store located in a small town
approximately 60 minutes from the Greater Toronto Area (GTA). About half the town's population
lives in the older section of town; the other half consists mostly of younger families living in
ecently built subdivisions to the south of town. Nearly all of the residents of these subdivisions
commute daily to their work in the GTA. Housing developers have applied to the the town planners
plans for considerably more housing development over the next ten years.
Ga
and Gear is owned by Bob ("Buddy") Guy, age 34, who has for many years been a high-
profile personality in the local sports community. Following in his father's footsteps, Buddy was a
star player for the local high school football team and the town's Junior "C" hockey team that won
the town's first (and only) provincial championship in 2004. He still plays for the town's
Intermediate hockey team, which has a considerable following among the longer-term residents of
the town. Buddy's life centres around sports -- he attends most sporting events in town, supports
and participates in team and league fund-raising activities and is well-known to practically everyone
involved in the local sports community.
Ten years ago, Buddy decided to go into the sporting goods business for himself. Family members
and friends provided some equity capital and the new business was incorporated, with Buddy
owning 60% of the shares and his family and friends 40%.
With his start-up capital and a mortgage from the bank, Buddy was able to purchase a package of
land on a major road near the south edge of town. The purchase of the land and construction of the
store was financed in part by a $183,500 mortgage, at 8.0 percent interest. Last year, the payments
on the mortgage totalled about $18,400, of which approximately $10,400 was interest and $8,000
was principal repayment. The principal remaining on the loan was approximately $125,000.
After 2012, the town grew and the area around Buddy's store became built up into a quite
prosperous neighbourhood. Strip malls developed, and Ga
and Gear is now located in a busy
commercial area. The store's property taxes are $18,000 per year.
The land package that Buddy bought consisted of two lots on a corner. The store was built on one
lot; the other remained vacant. Buddy had originally thought of building a parking lot on the other
lot but never did so. At first, this was because he already had considerable debt and was reluctant to
o
ow more in order to build a parking lot. Later, as time passed, he found he didn't need to use the
lot for parking -- he had a few parking spaces beside his store and the development of a strip mall
eside him provided more spaces. A hockey teammate who is a local realtor thinks the vacant lot
could now be worth as much as $120,000.
About 70% of Ga
and Gear's sales consist of equipment and uniforms bought by local teams.
The largest customers are hockey, soccer, and baseball teams associated with town and county
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leagues, but school volleyball, soccer, football and other teams account for a good proportion of
sales as well. It was sales to local teams that formed the original basis for starting Ga
and Gear,
with Buddy's personal association with so many local sports people providing the key to these sales.
While sales to teams still represent 70% of Ga
and Gear's revenues, they have not been growing
much in recent years. In particular, kids' leagues, which were once a major aspect of the town's
sporting scene, have not grown much over the past decade. In fact, league player registrations have
een slowly declining, partly due to declining family size and partly due to competition from other
activities for children.
About 30% of Ga
and Gear's sales consist of regular ("walk-in") retail trade that consists of a
wide range of sports and recreational merchandise. Its main retail competitor in town is the
Canadian Tire store. This is an older store that is relatively small by modern Canadian Tire
standards. It offers low prices, but stresses high-turnover items and lacks higher-quality and
specialty items. People have commented to Buddy that Canadian Tire's prices are good, but that it is
lacking in customer service.
As noted earlier, most of Ga
and Gear's selling has been through Buddy's personal contacts with
teams. In addition, the store regularly runs a small ad (1/16 page) in the local newspaper, which is
printed twice weekly and distributed free to each household in town. The paper stresses local news,
and Buddy has heard that a survey conducted by a group of retailers indicated that its readership
consists mostly of longer-term residents. In addition, Ga
and Gear advertises on the sports show
on the local cable TV channel that covers community events, and in the local arena.
For several years, Buddy has provided part-time employment in his store for several members of
the town's Junior "B" hockey team. While he knows that they are not the most knowledgeable sales
staff concerning many of the products in the store, Buddy is happy to help out the team in this way.
When his accountant and bank manager pointed out that his labour costs were unusually high,
Buddy replied that this was "a good way for me to put something back into the sports community
that's been so good to me."
While his "walk-in" business accounts for only 30% of his sales, this business is very important to
Buddy. According to his accountant, one way of looking at Ga
and Gear's financial records is
that in the last few years the sales to teams have pretty well covered all the business' costs, while the
"walk-in" trade has provided most of the profits.
Buddy knows that inventory management is a problem for him. It was easier at first, when almost
all of his sales were to teams -- all he had to do was order the amounts of each product needed by
each team and package the items up for delivery or pick-up. In addition, the teams paid him when
they placed their orders. However, ordering inventory for his retail trade has been a challenge for
Buddy. He feels that he has to ca
y a reasonably
oad range of inventory in order to attract "walk-
in" customers, but too often, sales of particular items have not been as strong as he had expected,
leaving him with out-of-season stock that had to be sold off at a loss. In other cases, Buddy would
sometimes find that he didn't have the exact item that a customer wanted and had to order it.
Sometimes the customer would wait for it; at other times he/she would go elsewhere, usually to a
larger store in the Greater Toronto area.
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Buddy's accountant has pointed out his declining inventory turnover rate (increasing days
inventory) and the resultant growing levels of inventory, and how this is causing increases in his
short-term debt and interest expenses. She suggested a couple of years ago that Buddy introduce
more sophisticated purchasing techniques and a computerized inventory control system. However,
Buddy has done nothing done yet in these areas -- he likes sports and selling more than record-
keeping and working at a computer.
When he was single and in his twenties, the store provided Buddy with a decent income from his
salary and share of the profits. However, he is now ma
ied and his own income has not increased
significantly for a few years, while his family responsibilities have been growing. Buddy knows that
his bank manager is concerned about his slow sales growth and the level of debt and rising
inventories. He wants his business to grow with the town, but to do so will require access to bank
credit to finance higher inventories and future expansion. From discussions with his bank manager
and accountant, he has learned that in order to gain access to this credit, he will have to improve
Ga
and Gear's profitability.
Buddy isn't sure what to do. As he's fond of saying, "I'm not really a businessman -- I'm a sports guy
who happens to own a business." (He dropped out of Sheridan College's Business Administration
program after first year, having had particular difficulty with the Accounting and Finance courses,
and skipping most of his Marketing classes because they conflicted with hockey practices. He now
wishes that he had stayed in college and learned more about business.)
Buddy's bank manager and accountant have provided him with the statistics in Exhibit 2, which
compare some of Ga
and Gear's financial results to the industry average for sporting goods
stores. However, Buddy doesn't know what to make of all this information. He comes to you, as a
friend who knows more about business than he does, for suggestions as to how he can improve the
financial performance of his business.
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Wages include Buddy's salary of $32,000 in 2016, $33,000 in 2017 and $34,000 in 2018. Buddy also received 60%
of the dividends paid out in each ear, making his total income in 2018 $41,200 ($34,000 of salary
plus $7,200 in dividends).
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Exhibit 2
Financial Ratios, 2018
Percent of Revenues
XXXXXXXXXXIndustry
XXXXXXXXXXGa
and Gear XXXXXXXXXXAverage
Sales Revenue XXXXXXXXXX% 100.0%
Cost of Goods Sold XXXXXXXXXX
Gross Profit XXXXXXXXXX
Operating Expenses:
Wages XXXXXXXXXX
Advertising XXXXXXXXXX.1
Rent XXXXXXXXXX.8
Property taxes XXXXXXXXXXN.A.
Interest XXXXXXXXXX,8 N.A.
Utilities XXXXXXXXXXN.A.
Depreciation XXXXXXXXXXN.A.
Other XXXXXXXXXXN.A.
Total Expenses XXXXXXXXXX0
Net Profit before tax XXXXXXXXXX
Net profit after tax XXXXXXXXXX
XXXXXXXXXXGa
and Industry
Gear Average
Inventory in days: XXXXXXXXXX
XXXXXXXXXX122
XXXXXXXXXX121
GARB AND GEAR SPORTS
Exhibit 2
Financial Ratios, 2018