stenosis. That way, we could get them the procedure quickly. Can you think of other things we can do to drive procedures?
Student: One thing I would do is focus on educating referring physicians. Because someone would go to a specially-trained doctor only after seeing a referring physician, it’s important to educate them on this procedure.
Interviewer: So can you sum things up for the CEO?
Student: We have an opportunity to increase revenues by 25 percent or approximately $50 million. Two ways we can achieve this growth are by increasing patient outreach efforts in cities where we are under-penetrated and by increasing awareness among referring physicians.
( Case Takeaways )
This was a math heavy case. The student...
quantified related numbers as percentages.
walked the interviewer through his calculations.
was able to draw conclusions from the graphs.
built tables based on the graphs.
He also picked up that there was information missing from a graph.
He verified that he was reading the graph correctly.
His summary was short and to the point.
percent while gross profits were down 13 percent. What’s going on? How do we fix it?
Student: Just to make sure I got this right: Our client is the number three player in the North American powersports market. Its stock fell from $40 to $25, which is a drop of a little less than 40 percent. Its net income was down 18 percent and gross profits fell 13 percent. We’ve been tasked to figure out why and fix it.
Interviewer: That’s right.
Student: Any other objectives or goals I should consider?
Interviewer: No.
Student: Are our competitors having the same problem?
Interviewer: Yes.
Student: Has our market share stayed the same?
Interviewer: Increased, actually.
Student: My initial hypothesis is that industry revenues have dropped because of external factors, which is also the cause of the client’s falling gross profits and that the CEO gave modest guidance during his quarterly analyst call, which expedited the stock’s decline.
Interviewer: Interesting. Why modest guidance?
Student: Because if the entire industry is having this problem it’s probably external factors causing this drop, and that won’t change overnight.
Interviewer: Point taken.
Student: Can I have a moment to think about my structure?
Interviewer: Certainly.
The student takes a minute to write out his structure and then turns it toward the interviewer. He writes E(P=R-C)M
Student: I’d like to look at external factors first, economic factors, as well as changes in the industry. Then I’d like to look at the company – its product mix, revenues, and costs for the last three years, and then come up with a plan to raise revenues and profits, both in the short term and long term.
Interviewer: Talk to me about the external factors first.
Student: The overall worldwide economic slowdown. The strengthening U.S.
dollar and falling Canadian dollar played roles. Consumer confidence is down.
The weakening oil markets combined with an unseasonably warm winter, I believe, constrained demand for off-road vehicles and snowmobiles.
Interviewer: Wouldn’t lower gas prices be good for ATVs and snowmobiles?
Student: Yes, in the consumer market. But I’m betting that this company sells a lot of ATVs to oil companies, which have been hurt by the drop in oil prices and were forced to lay off part of their workforce and curtail cap-X spending. And if workers are laid off, they’re not going to buy a new snowmobile or motorcycle.
Interviewer: Okay, what’s next?
Student: Let’s touch on the market. You said not only that the rest of the industry is having the same issues, but also that our market share has increased. That means to me that we are either making acquisitions or gaining market share organically, maybe as a result of a player exiting the market.
Interviewer: All our businesses increased market share despite a weak powersports industry. We’ve made acquisitions in accessories such as helmets, trailers, goggles, and gloves. But we also gained organically in the snowmobile and motorcycle markets.
Student: You said our net income was down by 18 percent. How’d the industry do overall?
Interviewer: Down 25 percent.
Student: Next I’d like to focus on the company. Do you have any information on the product mix and their revenues for the last three years? As well as overall profits?
Interviewer: This is what I do have. [The interviewer hands the information to the student.] Take a minute and look this over and tell me what you think.
Y2 Performance Summary (in thousands)
Reporting Segments Y2 Y1 Change
Sales
Off-road Vehicles / Snowmobiles 862,032 1,051,801 (18 percent)
Motorcycles 162,558 122,219 33 percent
Global Adjacent Markets
(Other Products and Channels) 81,028 100,980 (20 percent)
Total Sales 1,105,618 1,275,000 (13 percent)
Gross Profit 310,274 367,573 (16 percent)
Gross Profit as Percent of Sales 28.1 percent 28.8 percent -77bps
Operating Expenses 169,072 176,927 (4 percent)
Operating Expenses as Percent of Sales 15.3 percent 13.9 percent 141bps
Operating Income 159,160 210,000 (24 percent)
Operating Income as Percent of Sales 14.4 percent 16.5 percent -207bps
Net Income 110,682 135,397 (18 percent)
Net Income as Percent of Sales 10 percent 10.6 percent -60bps
*Reporting Segment sales include their respective parts, garments, and accessories (PG&A) related sales
Student: ATV and snowmobile sales are crushing us. Not only are they down 18 percent, but they also make up around [quick calculation] 80 percent of the revenues. While motorcycles are up 33 percent, they only make up about 15 percent of sales. That’s nice, but it’s not going to move the needle much. The other interesting thing is that while the company’s operating expenses were down 4 percent it’s probably only because our sales are down and the client probably reduced production.
Interviewer: The client has been reducing costs across the board for the past three years. I can tell you right now, there’s not much there to fix.
Student: Can you give me the breakdown between ATVs and snowmobiles?
Interviewer: Of that 80 percent of revenues, 90 percent is ATVs and 10 percent is snowmobiles.
Student: So ATVs make up 72 percent of all sales and we sell twice as many motorcycles as snowmobiles. I imagine we have excess inventory on hand. Have they reduced their prices?
Interviewer: The short answer is “no.” They have run promotions but are reluctant to cut prices. Neither have its competitors, but I think if one does it they all will, and it will cause a price war.
Student: The volume and the costs are easier to change than the industry price levels, unless all parties change their prices together.
Interviewer: That’s called price fixing and is illegal.
Student: I was thinking more along the lines of airline and gas prices. Regardless, unless the industry prices go up it will hurt everyone in the long run.
Interviewer: Fair enough.
Student: What were the revenues the year before?
Interviewer: Motorcycles were up 67 percent but overall revenues were up just 5
percent. All businesses increased market share in North America for last year despite a weak powersports industry. What about moving forward? We need to fix this.
Student: External challenges will continue to restrain growth and profitability in the short run. However, if gas prices go up and next winter is snowy, our stock might get a dead cat bounce.
Interviewer: A dead cat bounce?
Student: It’s a finance term that means a temporary recovery from a ...
Interviewer: I know what it means. Give me some solutions.
Student: Can I take a moment ...
Interviewer: Knock yourself out.
[Student takes 60 seconds to collect his thoughts and lay out his ideas as bullet points.]
Student: We were tasked to increase stock price and profits both in the short and long terms. As far as increasing the stock price, most would advise a stock buyback program. The stock is down over 40 percent and is probably a very good deal. But this would only increase the price in the short run.
I think the cash on hand would be better spent making acquisitions, not just a competitor, but suppliers as well. The company needs to aggressively manage costs and this is one way to do it. In addition I would continue to introduce more products, particularly accessories, -hich also builds brand. I’d also continue spending ad dollars on the motorcycles since that is the fastest growing segment.
Another thing we could do is to offer consumer financing, either at zero or 1 percent. Offer more for trade-ins as well. We determined that it was important not to drop prices, but we still have a lot of inventory on hand. I would do venture selling, trade our inventory for stock in oil companies that are down but not out, firms that might be a target of a takeover or who have the resources to ride out the oil price downturn. Their stock is even more depressed than ours. There is a chance they will fold, but in the long term I think it is worth the risk, and if they are bought out or turn it around, we would have made a larger profit while protecting our prices. We would need to do our due diligence.
Interviewer: Interesting. Okay, summarize the case for me.
Student: We were tasked to figure out why our stock and profits were falling and come up with some solutions to turn the company around. It was quickly determined that external factors were hampering our profits. While much of that was out of our control, we decided to be proactive by using our cash to make
acquisitions in a depressed market and to exchange excess inventory for stock in oil companies, thus maintaining our prices and reducing inventory.
( Case Takeaways )