Burrows C Analysis - CB

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University of California, Los Angeles *

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231E

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Management

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Nov 24, 2024

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Burrows C Case Write-up So what has happened?  If the company had accounted for a full year of Miller’s sales in 1979 – the total sales would have been approximately $15,035 – So we are assuming that the company’s sales have actually declined for the following 2 years. About 17% for 1980 and flat in 1981. It seems as though Miller is really bringing them down because Burrows was on a trajectory for the prior years. Or else, Burrows stopped growing.  Meanwhile, COGS and expenses continued to rise by 3% points and 5.4% points. If you include the interest expense – their expense to sales went up higher - to 42.6% and 46.8%  Therefore their profit margins went down – and they have their first negative year in 1980. Operationally:  Operationally, they improved excluding profitability:  Collection days went down in the first year – flat for the following year  Inventory turnover increased, and then dropped slightly  Inventory days decreased and then goes up  The biggest glaring problem is that Return on Assets and Return on Equity have declined significantly between 1978 and 1979. Accounts payable are sky rocketing, vendors are going to become more problematic What were the decisions available to investors and management? Sell off Miller or sell the whole company or keep and reevaluate business Now What Do They Do? 1. Determine the source of the problem first.  Analyze effect of Miller  Determine what is effecting sales, is it Cleveland, is it unprofitable stores, industry sales…. 2. At this point, with the time spent in this investment, we think that they should Harvest the business or get out of the Investment: IN REAL LIFE, THEY SOLD / HARVESTED THE BUSINESS  Perhaps they should not continue their expansion, and work on maximizing the sales in their existing stores. If you look at Fixed assets, it looks as though they are continuing to expand and sales are not growing – Perhaps they should stop growing and harvest the business for cash.  They should analyze the current business and determine whether there are unprofitable stores to sell off, and determine if that would make a difference.  Sell the Business – this is what we would do 3. The value of the business is about $1 million for the equity (at 6 times 1981 cash flow less $1.1 million debt) – So it took 8-9 years to double the value of the investment [excluding any management fees collected over the 8 years]. Thus, their Return is 8-9% compounded annually (using Rule of 72) if they sell the business today – given their investment. Remember in Burrows A, the projected return was 29% with a double in 5 years. The lesson here is that you have to know when to SELL!!!

would have 20% X sold it off – 10% CAGR Typical life of business goes through inflection years – Net worth was a million 9 and invested 500,000 in 6 and half years – use the rule of 7.2 At the Burrows C downturn the rate of return was 10% per annum return– if we had sold it more at the start of the downward trend – then you would have gotten 20% return per annum The impact to invest at the end of the B case – then the impact of time and loss in value on compound rate of return, cut the value in half: Few points to talk about –  a decision to expand is defacto a decision to reinvest  exit strategy is as important as investment strategy  impact of time and adversity on rate of return  avoid losses to lift rate of return

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