PRI is a Canadian privately held retailer working under the concept of a departmental store owned and operated by Legault family. It has basically two types of departmental stores. Phoenix stores are high-end stores that focus on the highest quality products and source them locally in order to promote the local businesses and has a great reputation among locals. There are 14 Phoenix stores.
Cinder stores, on the other hand,are mass merchandizer that the company has in order to increase the customer base for the company. The Cinder store made the PRI as a go-to store for the Canadians with its product offering and pricing structure. There are 75 Cinder stores. It focuses on providing everyday consumer goods at affordable prices and most of the Cinder stores are in small towns.
The Legault family put great emphasis on ensuring that it has a high reputation among customers through friendly service, easy returns and providing a general sense that it is doing best for the customers. It is also treating its staff in a great way just like its customers and thus its staff is well paid, taken care of and is highly satisfied.
Although departmental store concept was highly popular in the past, now it struggles to stay current with the modern business requirements as the consumers tend to purchase online and also from the specialty stores. That is why PRI is struggling and the owner family is looking at different options to realize the value of the business and make it popular among the current generation.
The company requires improvements in a number of Phoenix’s properties in order to maintain them at the qualityexpected. The company is also facing cash shortageand this is a very serious concern since bankloans are coming due over the next few years. With the changes in the market since thelast negotiation, any bank financing will come with a higher interest rate and stricterterms.
Mission Vision and Strategy
The vision of the company is “We make it easy for Canadians to shop with us.” And so the company wants to make the shopping experience easy and convenient for the Canadians.
The mission of the company is to serve its customers through the provision of high-quality home and fashion retail experience. The company tailors the experience to meet the need of Canadians through providing quality products with great choice and service.
The three core values on which the company’s strategy is based are quality, choice,and service. The company tends to provide high-quality products that can exceed customer expectations. Then the company tends to provide a great choice from which customers can choose from. Due to its consistent quality and fair prices, it tends to instill confidence among the customers.
Current situation of PRI
Many of the stores are reporting a loss which is not only impacting the business but also the shareholders. The financial plan should be devised to manage all rented stores as well as the owner’s shops in the suburbs. One advice is that the management should separate its property management activities from retail activities. However, this alone would not be a sufficient solution. The management is advised to separate Phoenix into two divisions, the ” retail ” division and the ” rental activities ” division.
- Changing attitudes of the consumers
- Declining store traffic
- The Canadian economy is not in very good shape
- Entry of fast food giants in retail trade
- The company can start its own online selling business and its 89 stores can also serve as a distributioncenter
- It can expand to other countries
- It can use new technologies to increase the sales for example by offering the option to order online and then pick up the order from the store.
It is evident from the ratio analysis that the liquidity ratio of Phoenix is quite bad as compared to the industry. However, the debt percentage is quite appropriate as it is less than the sector. The accounts receivable turnover has improved in the past two years and is better than the industry. However, the inventory turnover needs to be improved and so as the asset turnover. If we look at the return ratios, they are quite good as they are better than the sector averages. However, overall, the performance of Phoenix stores is better than the Cinder stores.
Sale of Vancouver building
Things to be considered
Time horizon is 10 years
The tax rate is 20%
The discount rate is 6%
Amortization is annual
The above table shows that the sale of building after renovations will bring immediate cash flows. However, rent will be needed to be paid. Renovations on the other hand alone will result in immediate expenditure but will not result in significant improvement in cash flows in the future as well. So it is better to renovate the Vancouver building and sale it if the company wants to improve cash flows. Otherwise,We do not recommend the sale of the building because the amount covers rent charges only for 14 years and it is too risky for the future.
The Phoenix chain is the core of PRI. As a national department store chain, from the beginning, Phoenix established itself as an icon in the Canadian retail sector and has high brand awareness. However, now the store is suffering because the shoppers’ preferences have changed particularly over the last two years and they are more likely to purchase everything online.
In this regard, we recommend that the buildings should be renovated and give them an ultra-modern look, in accordance with the expectations of modern shoppers. Then the company should also start online operation. However, for that matter, the management needs to ensure that it has the right kind of skill to run online secure operations that are compatible with organizational values and prove to be profitable. The existing Phoenix stores can also be used as distribution centers similar to how Best Buy is operating.
Our final conclusion and recommendation on this project are as follows,
Start an online store while renovating all stores as it would also help in increasing the royalty level of the stores.
Cinder is a budget store and there are 14 such stores. However, it is not sustainable to maintain so many stores. As evident from the above financial analysis, its profitability is lower as compared to Phoenix. It is recommended that the company should maintain stores in the Downtown as the sale per square foot is higher in the downtown with $ 61 as compared to Suburb where it is $ 40 only. Although the purchase of Sparky would bring in some sales and new customers it has different values and is too costly to purchase as compared to the profit and sales it can bring to the company. Although its online presence can bring in some benefit as it is too costly, it is better to build a customized solution for online marketing. For Cinder store a separate online portal can be build or a single portal can be used for both Cinder and Phoenix.
The other option is adding a grocery department to Cinder. This is a viable option as it would bring in the margin of 13% as compared to the lost margin of 10% on cannibalized products. Moreover, it would also increase overall sales by 20%. The Cinder store has lower profitability and the new department would help increase it. So the company should add a new department to the Cinder store.
Recommendation regarding the Supplier
Polar Tradition inc. (manufacturer since day 1) → Winter Gear Ltd
Following are the facts of the supplier arrangement
Cost: Best margin ($ 600 → $ 400)
Quality: Reluctance to reveal used materials
Value: Coats made in China
Respect for other companies over time
Ethics: Current provider depends on you (90%) and thus there is a huge Risk of bankruptcy in case management decides to switch the supplier while around 50 employees may lose the job. Therefore, we recommend that the company should not change the supplier.
Transfer of shares to 3rd generation
Following are the risks associated with the transfer of shares to the 3rd generation
- Inability to perform all that was planned
- The decrease in the redemption percentage of the shares of Jacques and Stéphane
- Repayment of the loan to Cinder
- Need $ 3M financing
For improving cash flows, the following approach is suggested.
Vancouver building should be sold
Start e-commerce for Phoenix
The method used: VAN
Duration: 5 years
Minimum ROE of 8% required
As a net initial investment of $ 28M is required for the CITCC
Additional net operating finance for working capital required would be in the range of $ 2.5M to $ 17M depending upon the initial performance and management plan.
VAN = $ 14.6M so profitable
The sales are expected to grow in the long run and so the business is expected to be not only profitable but growing in the long run as well. It is in accordance with the company’s vision as the company would be able to target a wider clientele and would be able to serve a large number of Canadians. However, the company would be required to ensure it provides consistent online services and exceeds customer’s expectations as it does with its current business. Moreover, it also needs to protect the computer security as in the modern world, it is a big risk for the online businesses and can severely damage the business repute along with the direct and indirect financial loss.
There are two options available,
- Buy the Sparky License
- Develop a custom system
Following items needed to be considered for making choice among the above mentioned two options,
- The start date of operation
- Image of the Sparky
- Its compatibility with the company’s values and culture
- Security of the system
Financial Considerations of the purchase
Current Rating by M.Snookers: $ 1.8G
Our methods used; (evaluation as of December 31, 2015)
Capitalized feature profit method; AND
Adjustments for the years 2014 and 2015
Multiple earnings: 15 to 20 times EBITDA
Capitalized characteristic cash flow method
Adjustment of the year 2015
Our results: $ 1.3G
Other things to Consider
Sparky has a Strong online presence (⅓ of sales)
It would bring new customers, new market shares
It is contradictory to your fundamental values;
Employees: High turnover rate, desire to unionize
There is a class action against the Sparky which would bring bad publicity
There are security breach issues
Our final conclusion and recommendation on this project are as follows,
We do not recommend the acquisition of Sparky Limited because
- Asking price is too high compared to its real value ($ 1.8G vs $ 1.3G)
- Against the values and mission of the company
Renovation of the stores
Pros and Cons of renovation are as follows,
Do not renovate
- Brand image
- The store will go to waste (mission impact, the sale of the building at a loss)
- Increasing the value of the building, increasing ridership
- Only Phoenix store that experienced variable cost margin growth
Other things to consider
- Duration 10 years
- Leases signed in 2017
- The discount rate, the same level of risk for all locations
- Duration of renovations
- No impact during renovations
- Same tax implications as accounting for rent charges
Our recommendation is that renovate all stores and an increase in royalty level
The company should go for the planned improvements of the buildings as they would bring in significant sales. However, before that, the company should analyze whether the profit on new sales would cover the financial costs of the improvements.