SECOND SEMESTER SESSION 2017/2018

BWFF 3193
SEMINAR IN FINANCE
GROUP A

CASE STUDY 1
North West Company

PREPARED FOR: DR. FAIZAH ISMAIL

PREPARED BY:
NAME MATRIC NUMBER
NURUL AZREENA BINTI ZAKARIA 241376
SITI KASRINI BINTI KASIM 241594
PRIYANTHINI A/P MANI 242708
REVATHI A/P BALAKRISHNA 243185
HANA ALFITRIYAH BINTI RUZANE 233264

Date of Submission : 8th March 2018

Seminar in Finance

Question 1

What is (are) the issue(s) of the case?

This case study were published by Ivey Publishing with the aim to analyze the Financial Performance of
North West Company (NWC) and to determine whether by investing in NWC is good decision for
investment firm. The issue that can be seen based on this case study is regarding the ability of the
company to perform better in the future based on its vision of becoming the a leading retailer that serve
the need of rural communities and urban community markets in the region such as Northern Canada,
Western Canada, Rural Alaska, South Pacific Islands and the Caribbean despite the increasing cost that
lead to the rise of price of goods especially in rural communities that affect the purchasing power of the
rural community. With one of its vision to serve the need of rural community, this strategy was never
taken by any retail company even a big company such as Loblaws Company due its high risk due to many
aspect in term of cost, location, customer interest and others. Despite that, this strategy become the
main focus of NCW in becoming a successful company with a total sales of CA$1.6 billion in 2014 which
comes from serving remove community. Operate both domestic and international, NWC manage to
seize a great opportunity and further expand its influence by acquiring the AC Value Center in Alaska
and Cost-U-Less in Caribbean, South Pacific and U.S. territories. Even though NWC have a great vision
and strategy in serving rural/ remote place by adapting to the local preference and culture and high
shipping cost, one of the problem arise is in term of the rising price of goods and in term of the salary
own by the population in the remote area that affect the purchasing power of the community and affect
the sales of NWC. With the high cost of operating and especially in term of freight, this greatly increase
the price of the goods, which decrease the ability of community to spend more money. The issue of high
price of good were mostly feel by the Northern Canada Inuit and aboriginal Community that received a
salary way lower and mostly unemployed than the non-aboriginal which put them into the state of
starvation where place the sales of goods in great risk. Furthermore, there even a protest done by the
community in the Northern Canada that target the NWC stores due to most of the grocery stores were
owned by NWC Company where the community boycott from spending their money in the grocery
stores and demanding for a reduction in the price of goods. However, despite all this, there is nothing
NWC can do to reduce to the price due to high cost incurred, other than hoping for the government to
interfere. This issue will greatly impact the evaluation of the company financial performance in the
future.
Question 2

What the different between remote food retails market compared to mainstream food retail market?

Experienced of doing shopping in the remote area food retail market are exactly different with the
mainstream food retail market. The breadth options of the goods or foods in the mainstream retail
locations are wider than remote retailer. The mainstream retail food can offer variety brands of product
to the customer which gives more satisfaction for the consumer to do a shopping. Otherwise, for remote
food retails market, their product offered are limited to a specific brands that are regularly use by the
consumer, this situation happen because the retailer need to spend a lot of cost if they are tends to
offer a variety brands of specific product. The retailer need to bear the high cost of transportation,
shipping and also need to face the risk of lower demand from the community in that area due to the
high price of the products.

The locations of remote area that was far from the city might prevent the retailer in order to
offer the fresh foods to the consumer since it may takes time to deliver. But it is easier for the
mainstream area because they can be access easily by using any transportation. For the supplier of
retailer the locations are bit different in terms of wholesale distributions which there are more depots
near the mainstreams or city where’s can maximize the number of drop that can reduced the timing of
deliver the goods. Furthermore, the remote food retailers are not convenience in terms of locations and
facility for the consumer. Usually, retail shops only have the specific target of the buyer which concludes
the community around that place only. But for the mainstream area, the advantages for them is the
facility that provide around the area can attracted consumer to come and go shopping with the
reasonable price and availability of stocks. The retailers are not hesitating to provide an international
foods or goods since they are a lot of consumer which tends to high demands.

Question 3

How has North West Company performed financially?

NWC and LOBLAW has different geographic market, products and services and the buyer behavior of the
consumer. NWC has been said to be quite profitable and has a better position to take more debt of
finance expansion plan. According to exhibit TN-1, the cost growth for NWC is higher than revenue and
the company has higher gross margin in terms of sales. Besides, the company also able to meet its short
term investment in aspect of cash and short term asset. Other than that, NWC also covers the interest
on debt with earnings.

Horizontal analysis (2013 to 2014)

$1624400 − $1543125
× 100 = 5.3%
$1543125

CAGR = ($100896) ÷ ($98781) ^ (1/4) – 1 = 0.53%

**CAGR ignores volatility and the growth over the period measured was steady**

Question 4

How does the firm's domestic performance compared to its international performance?

The domestic performance is based on the Canadian food retail industry while international
performance is based on the food retail outside the domestic market which is Canada. Based on the
five-year summary of selected NWC financial, it shows that the domestic performance is more successful
rather than international performance. This can be proved by looking at the sales operation on both two
distinct segments. Over the five years, average of sales from Canadian operation is 67 percent more
than international sales which are only 32 percent. Besides that, the earnings from domestic sales also
higher than international sales which is 78 percent better than international sales. Even though the
domestic earnings are slightly increased, but it has resulted in good sales instead, only 10 percent
earnings international retail food market can make from sales. Other than that, by looking in the other
perspective, the sales of per square foot internationally shows irregular profitability because of the
vitality on the price selling by year differs from the domestic market which shows a steady increase.
Then, looking by the profit per employee, there also shows a differ achievement. The domestic market
resulted a better profit but rather to international markets.

Question 5

Should the investment fund company continue evaluating NWC as a potential investment? Justify your
answer.

The investment fund company should continue evaluating NWC as a potential investment because its
return on equity falls within the industry average and is much higher than Loblaw’s return on equity.
NWC can generate $19.10 for each dollar of equity compared with Loblaw which is generating only
$0.40 for each dollar of equity. In addition, looking at its return on sales, it is higher than industry
average and Loblaw. This shows that the company has ability to generate profits from its resources.
Hence, both return on equity and return on sales would provide the confidence for investors. Even
though, NWC’s solvency ratio is increasing in year 2014 compare to year 2013 (table 2); 1.20 and 1.08
respectively, it is still lower than industry average (1.30-1.60) and Loblaw (1.63), indicating it has a lower
financial risk and stronger solvency. NWC’s current ratio is higher than the industry average indicating
more liquidity, and ability to meet short-term obligation than its competitors such as Loblaw.