Hallstead Jewelers

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"Hallstead Jewelers was one of the largest jewelry and gift stores in the United States for 83 years. Customers came from the tri-state regions to buy from Hallstead’s extensive diamond collections in each department. Any gift from Hallstead’s had an extra cache attached to it as they were known for having the best. Even though the principal retail shopping areas shifted two blocks west, Hallstead’s reputation and selection still brought in customers. In 1999 however, sales became stagnate and profits were starting to slip. After the father died his two daughters became the owners (two sisters, Gretchen and Michaela) made several changes in an effort to revitalize the store. The first decision was to move the stores location, expanding it by 50% more space and selling staff. This resulted in a five-year lease as well as a year to complete the expensive renovations. They also made some changes in product offerings and offered more sales potential at the cost of minor reductions in margins. Within the year that it took to complete the renovations the industry started showing major changes toward internet based jewelry sales. Tiffany & Company, a business with an origin much like Hallstead Jewelers, grew to become the number one seller of diamonds in the United States. At the same time, a start-up internet seller, Blue Nile, became the second largest diamond seller in the U.S. While Hallstead’s was growing their fixed costs by doubling their rent payments, Tiffany and Blue Nile were increasing their revenue with “virtual” storefronts allowing them to increase sales with very little increase in expense. In an effort to explore ideas in strategy that would return the business to profitability, the sisters compiled some questions for their accountant to analyze using some additional operating statistics. The following answers will take a deeper look into the mechanics of the business and provide Gretchen and Michaela with recommendations to get their business back on track. "Answer to Q1:

200320042006
Sales space (sq. ft.)10,23010,23015,280
Sales per square foot$839 $792 $701
Sales Tickets5,3415,3166,897
Ave. sales ticket1,607$1,524 $1,553

Changes in Breakeven and Margin of Safety
Modified to Variable Costing Income Statement to Show Contribution Margin
200320042006
Sales $8,583 8,10210,711
Less variable costs:
Cost of goods sold4,3264,1325,570
Commissions 429405536
Contribution Margin$3,828 $3,565 $4,605

Less Fixed costs
Salaries2,0212,0813,215
Advertising254250257
Admin, expenses418425435
Rent420420840
Depreciation8484142
Misc.5393122
Total expenses3,2503,3535,011
Net Income578212-406

CM per unit$0.72 $0.67 $0.67
Breakeven in # of tickets4,5355,0007,505

CM ratio0.44600.44000.4299
Break-even sales (in thousands) $7,287.03 $7,620.20 $11,655.34

Margin of safety$1,295.97 $481.80 ($944.34)

The problem is attributed mainly to the fact that expenses went up due to the new location. The new location drove up costs, the main ones being rent, depreciation, and commisions. And eventhough sales went up, it was not enough to make up for the differences in added costs. Hallstead needs to increase sales in order to cover the new costs.

Answer to Q2:

20062007
Sales space (sq. ft.)15,28015,280
Sales per square foot$701 $686
Sales Tickets6,897$7,500
Ave. sales ticket$1,553 $1,397.70
$10,711,000.00 $10,485,000.00

Reduction in Price
20062007
Sales 10,711$10,485
Less variable costs:
Cost of goods sold5,5705,013
Commissions 536482
Total Cost...
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