Hobby Horse Company Inc. (HH) has a $45 million note payable at the end of September. Financials for the period ending March 31st indicate that the company has suffered a loss for the previous 12 month reporting period and has minimal cash on hand. The management has put all new store construction on hold and has put 15 of the existing 240 stores up for sale. It is not clear if these particular stores are underperforming. The company has expanded rapidly over the past 5 years, increasing the number of stores by over 50% during that period. Net profits during the same period had increased by over 100%, up until the most recent year. A poor Christmas sales season and the opening of new stores have been blamed for the swing to a loss. It should be noted that new store openings in previous years have not negatively impacted profitability. Overall sales are actually up slightly, though sales per store are below historical highs. It is not currently a situation of sharply declining sales as has been seen at K-Mart, Sears and other retailers. The available financials do not provide much insight into administrative or other costs. The significant issues to be resolved include managing cash and appropriate debt terms.
Available cash, or rather the lack of it, is a critical problem facing the company. All of the liquidity ratios are showing signs of decline. The current ratio has been in decrease over the past 4 years, possibly due in part to rapid expansion and more recently to poor product selection. There has been a much sharper weakening over the past 2 years.
The current value of .98 though not a positive sign, is actually being held up in part by higher than historically normal inventories currently maintained. The poor showing during the Christmas season is seen as a primary contributor. It is possible that a portion of the inventory, if it can...
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