Y Guess Jeans Page 93

Solution to Y Guess Jeans:

The layout of this case is as follows: first, the financials are reproduced, then the ratios and their formulas, with solutions, are shown. Cell formulas for ratios are not included, but can be assigned to a new column. Item 1. Consolidated Financial Statements COUNTY SEAT STORES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except Share Amounts) (Unaudited) ASSETS Current Assets: Cash and cash equivalents Receivables Merchandise inventories Prepaid expenses Deferred tax benefit Total current assets Property and equipment, at cost Less--Accumulated depreciation and amortization Property and equipment, net Other Assets, net: Debt issuance costs Deferred income taxes Excess of purchase price over net assets acquired Other Total other assets, net Total Assets 3-Aug-96 $10,603 1,486 132,580 10,876 2,826 158,371 119,425 -65,943 53,482 3,816 2,016 814 6,646 $218,499 29-Jul-95 $8,125 2,778 143,474 11,177 10,296 175,850 117,466 -52,128 65,338 3,408 6,198 75,215 1,431 86,252 $327,440 3-Feb-96 $8,166 2,658 110,744 11,188 989 133,745 120,277 -61,674 58,603 3,073 2,368 1,303 6,744 $199,092

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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Borrowings under credit agreement $81,800 Current maturities of long-term debt 26 Accounts payable 47,397 Accrued expenses 21,864 Accrued income taxes 3,183 Total current liabilities 154,270 Long-term debt 105,018 Other long-term liabilities 11,006 Redeemable preferred stock 48,521 Shareholders' Equity (Deficit): Common stock: par value $1.00 per share; 1,000 shares authorized, issued and outstanding 1 Paid-in capital 49,789 Accumulated deficit -150,106 Total shareholders' equity (deficit) -100,316 Total Liabilities & S.E. $218,499

$43,700 29 65,472 18,628 1,341 129,170 135,047 11,094 40,389 1 49,789 -38,050 11,740 $327,440

$27,000 25 36,754 19,913 3,007 86,699 130,031 11,242 44,319 1 49,789 -122,989 -73,199 $199,092

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COUNTY SEAT STORES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands, Except Share Amounts) (Unaudited) 13 Weeks Ended 13 Weeks Ended 26 Weeks Ended August 3, July 29, August 3, 1996 1995 1996 Net sales $121,727 $130,110 $243,331 Cost of sales, including buying and occupancy 90,283 95,123 185,812 Gross profit 31,444 34,987 57,519 Selling, general and administrative expenses 33,647 32,169 64,949 Depreciation and amortization 2,956 3,531 5,915 Loss from operations -5,159 -713 -13,345 Interest expense, net 5,072 5,200 9,759 Loss before income taxes and extraordinary items -10,231 -5,913 -23,104 Income taxes 3,909 -2,456 -1,240 Loss before extraordinary items -14,140 -3,457 -21,864 Extraordinary items, net of income tax benefit 9,997 Net loss ($14,140) ($13,454) ($21,864)

26 Weeks Ended July 29, 1995 $254,299 190,061 64,238 62,042 6,787 -4,591 10,311 -14,902 -6,527 -8,375 9,997 ($-18,372)

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COUNTY SEAT STORES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) 26 Weeks August 3, 1996 Cash Flows from Operating Activities: Net loss Adjustments to reconcile net loss to net cash used for operating activities: Extraordinary items Depreciation and amortization Amortization of debt issuance costs and discount Rent expense in excess of cash outlays, net Deferred tax benefit -1,240 -3,880 Changes in operating assets and liabilities: Receivables Merchandise inventories Prepaid expenses Accounts payable Accrued expenses Accrued income taxes Other non-current assets and liabilities Net cash used for operating activities ($21,864) 5,915 492 53 625 -21,836 313 11,211 2,746 -70 -26 -23,681 Ended July 29, 1995 ($18,372) 9,997 6,787 924 189 2,371 -47,203 -1,288 25,358 -4,047 -3,161 -471 -32,796

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(continued) COUNTY SEAT STORES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Cash Flows from Financing Activities: Borrowings under the Credit Agreement, net Issuance of long-term debt Debt issuance costs and prepayment premiums Principal payments on long-term debt and capital leases Repayment of long-term debt Dividend to parent Advance to parent Net cash provided by financing activities Cash Flows from Investing Activities: Capital expenditures Proceeds from disposal of property and equipment Net cash used for investing activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents: Beginning of period End of period Memo: Cash Paid During the Period For: Interest $12,519 Income taxes 29,800 -1,257 -12 -1,051 27,480 73,700 104,943 -6,781 -20 -150,795 -1,051 -235 19,761

-1,365 3 -1,362 2,437 8,166 $10,603

-9,313 14 -9,299 -22,334 30,459 $8,125

$8,931 $70 $514

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Item 2: Ratios, Formulas, and Values. Note: Some formulas must have income statement items multiplied by 2
CATEGORY FINANCIAL RATIO 1. Current Ratio 2. Net Working Capital $47,102.00 3. Quick Ratio (Current Assets - Inventory) / Current Liabilities 4. Cash Flow to Total Debt Net Income + Depr. Expense / (Curr. Liabs.-A/P-Accrued Expenses) + LT Debt 5. Cash Flow from (CFFO) Net Income + Noncash Charges Operations + Change in Operating Curr. Liabs. Change in Operating Curr. Assets (or just pull # from Statement of Cash Flows) 6. Cash Cycle (CC) CC = (Days Inventory Held + Days Sales Outstanding Days Payables Outstanding) or, equivalently, CC = Inventory Conversion Period + Receivables Conversion Period Payables Deferral Period Days Sales Outstanding days= Days Held in Inventory days= Days Payable days= 7. Cash Turnover CT = 365 / CC 8. Net Liquid Balance NLB = (Cash + ST Investments) (Notes Payable + Current Portion of LT Debt) 9. Defensive Interval Cash + ST Investments Daily Operating Expenses where Daily Operating Expenses =(COGS + Selling, General, & Administrative Expenses Depreciation Expense) / 365 0.08 -21.05% ($27,732,000) 0.08 -19.80% ($33,346,000) FORMULA Current Assets/Current Liabilities Current Assets - Current Liabilities 6 months ending Aug. 3, '96 1.04 $5,536.00 6 months ending July 29, '95 1.36

84.78

76.89

1.11 130.22 46.55 4.31 ($36,820.00) 7.90

1.99 137.77 62.87 4.75 ($57,376.00) 6.04

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1. Times Interest Earned EBIT / Interest Expense 2. Long-Term Debt to Capital* Long-Term Debt / (Long-Term Debt + Equity) where Long-Term Debt includes Long-term notes and bonds, term loans, and capital lease obligations 3. Total Liabilities to Total Total Liabilities / Total Assets Assets 1. Return on Equity (ROE)

1.21 2.08

-0.40 1.63

1.83

1.18

or N/A

2. Profit Margin on Sales (or Net Profit Margin) 3. Return on Total Assets (ROA)

Earnings Available to Shareholders / Common Equity where Earnings Available = N/A (Net Income - Preferred Stock Dividends Sinking Fund Payments - Amortization) Net Income Revenues -11.27% or N/A Net Income Total Assets -25.07% or N/ A

N/A -9.46% -14.66% or N/A

* It is unclear if the "other long-term liabilities" on the balance sheet represents terms loans or capital lease obligations. Regardless, be very careful in interpreting this ratio due to the negative equity in both years. Conclusions: This company illustrates what happens to a company's liquidity and debt ratios when it starts experiencing losses. It is difficult to find any positives in the financial ratios; at least the amount by which NLB is negative has declined. Y. Guess would want to be very careful with this account. If it has good gross margins (branded jeans generally do), Y. Guess may hate to lose the account. An experienced credit analyst would offer the following: (1) cut back on terms from net 30 to net 15 or shorter; (2) keep in contact with County Seat to monitor its financial position, and continue to monitor its D&B experience; (3) sell with letter of credit backing; (4) possibly go to cash on delivery or even cash before delivery terms. Students may miss the first recommendation, but should come up with 2, 3, and 4 based on information in the body of the case and their understanding of Chapter 5.