Analyzing Financial Statements: Pier 1 Imports



Pier 1 Imports: Analyzing Financial Statements

1. Why did cost of goods sold decrease in FY2007?

One reason—sales decreased. If sales go down, it is logical for cost of goods sold to also go down.

2. If you (as management) would like the gross profit margin in 2007 to be equal to the gross profit margin in 2006, what would gross profit equal assuming sales remain the same in 2007?

$814,854 .502 = X/1,623,216

3. Are you pleased with the 2007 SG&A costs? Explain.

No—As a percentage of sales, SGA is increasing.

4. Assuming all Revenue and Expenses stay the same except SG&A, what would you like SG&A expenses to equal in 2007 if the goal is to run as efficiently as the 2006 year? Show your work.

$537,447 .3311 = X/1,623,216

5. Describe one strategy (e.g., sales growth, margin improvements) that might have resulted in break even ($0) operating profit. Explain by showing mathematical calculations.

Improve Gross Profit Margin to 61.84% (of course, this probably isn’t realistic) while maintaining sales

(777,520+226,230)/1,623,216

6. Is it logical to analyze and forecast interest expense as a percentage of sales? Explain.

No—interest expense is a function of debt, not sales.

7. Relative to total assets, does Pier 1 Imports have more invested in property, plant, and equipment in 2007 or 2006? Explain.

2007

2007—26.14% vs 2006 25.55%

8. Relative to total assets, is Pier 1 Imports financed with more debt (i.e., total liabilities) in 2007 or 2006? Explain.

2007

2007—60.60% vs 2006 49.57%

9. Did the net profit margin deteriorate in 2007 due to SGA expenses? Explain.

Yes, this is one factor. SGA as a percentage of sales continues to increase—39.98% vs 33.11% vs. 30.11%.

10. Did the Gross Profit margin deteriorate in 2007 due to SGA expenses? Explain.

No, SGA is not directly related to the gross profit margin. SGA is “below” gross profit.

11. Based on the current ratio, is Pier 1 Imports more or less liquid in 2007 vs. 2006? Explain.

Less 2.23 vs 2.68—the smaller the current ratio, the less liquid.

12. For every $1 of assets, Pier 1 Imports has ____________ net income?

-$.2479

13. For every $1 of equity, Pier 1 Imports has _____________ net income?

-$.6293

14. List two decisions that could increase Pier 1 Import’s EPS.

Because Pier 1 is losing money, the increase in EPS may actually just result in having a smaller negative EPS. A few decisions that could work: 1) cut costs or 2) increase sales. Both of these would influence net income.

If the company was profitable, buying back shares would work. Why? If there are fewer shares, EPS would go up when a company is profitable. Example: Net income of $10—if 10 shares, EPS = $1; if buy back 9 shares, EPS $10.

15. Should Pier 1 Imports try to increase or decrease average age of inventory? Explain.

Decrease Pier 1 Imports’ average age of inventory is above the industry. However, to decrease average age of inventory, Pier 1 Imports might have to be cut prices which would decrease the gross profit margin. So, decreasing average age of inventory seems like a good idea, but it could backfire. If the company could just sell more appealing product that moves off the shelf more quickly without having to cut prices, this would be the best solution. So, high average age of inventory may not be the problem but a symptom of a problem (e.g., poor selection of merchandise).

16. For every dollar of assets (i.e., total assets), Pier 1 Imports generates ______ in sales? Which ratio compares sales to total assets? What is the relevance of this ratio to income?

$1.77 –

Total Asset Turnover. No direct relevance— Sales/Total Assets

Sales is the “top line” figure—net income is the “bottom line”. So, the total asset turnover is not directly related to net income.

However, sales impacts net income. Potentially, a company could have a strong total asset turnover but not be profitable. For example, a company could have strong sales due to low prices but have a very small gross profit margin resulting in a net loss.

17. What percentage of assets (i.e., total assets) is financed with debt (i.e. total liabilities)? Equity? What ratio did you use to answer these questions?

60.60% financed with debt

39.40% financed with equity

Debt ratio

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