Hallstead Jewelers Essay

COMPANY OVERVIEW Hallstead Jewelers has been one of the premiere jewelers in the United States for 83 years. Located in the largest city in the tri-state area, the company has remained a family business since its inception. Up until 1999, the company had operated in the same location without the need to expand or relocate due to its superb reputation and loyal customer base. However, Hallstead Jewelers reached a point during that year when profits began to decrease and sales became stagnant. After a few years of this trend it became obvious to the owners that relocation was necessary.

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So in 2004 the owners, Gretchen Reeves and Michaela Hurd made the decision to relocate to a larger building in an effort to expand and grow the business. Since the new facility was only two block away from the original location, it was anticipated that there would be no loss of their loyal customer base. The owners also made the decision to expand the product line in hopes of increasing sales.

However, the company faced stiff competition from large retailers such as Tiffany and Company and the internet business, Blue Nile. Unfortunately, the relocation did not produce the results that Gretchen and Michaela expected.

Instead, revenue has continued to fall. An analysis was conducted to identify operating issues and to determine a course of action that would improve revenue and business profitability. Appendix A provides a detailed account of the company’s profitability for the years 2003, 2004 and 2006 respectively. Appendices C, D and E detail the impact upon company profitability based upon various levels of ticket sales during these same periods. The average ticket price fluctuated over these periods. An analysis of this information identified the following issues.

OPERATING ISSUES The following issues were identified: *The company has failed to maintain pace with change in the landscape of businesses in the area. *Revenue and profits have continued to decrease. *The company faces competition from other local businesses and internet businesses providing competing products. BUSINESS ANALYSIS Questions 1. The breakeven point in the number of sales tickets were $4616, $5032 and $7442 in 2003, 2004 and 2006 respectively. The breakeven in sales dollars were $7417, $7669 and $11,556 in 2003, 2004 and 2006 respectively.

Margin of safety were $1165, $432 and ($845) for 2003, 2004 and 2006 respectively. We can see a decline in the Margin of Safety and in 2006, the company began incurring losses. The lower margin of safety has increased the company’s risk of not breaking even. Sales were $8,583 million, $8,102 million and $10,711 million in 2003, 2004 and 2006 respectively, showing an increase of $2. 6 million attributable to an increase in volume of product sold related to the new and redesigned location and product offering favorably received by their customers.

The company also has increased its operating fixed cost in rent, salaries, commissions and other miscellaneous expenses causing the breakeven point to rise and the margin of safety to decline (See Appendix B). 2. One approach considered to increase business profitability is to reduce sales price. It is anticipated that a 10% reduction in price would increase the number of tickets sold to 7500. Appendix F provides a detailed analysis of how profit would be impacted by the price reduction. With this approach, the company would have to sell a total of 7,583 items at an average price of $1,397. 0 to break even. This represents an increase of an additional 141 items that must be sold at the reduced price to reach the break even point. 3. According to Gretchen’s Grandfather and Father, sales commissions has been a key reason for the company’s success. However, Gretchen has the idea of eliminating sales commission. According to Appendix G, if sales commissions were cut, the breakeven point in sales volume would decrease by $1,116. 72. This could possibly affect the growth of Hallstead Jewelers in a good way. 4. Increasing the advertising by $200,000 will increase breakeven sales by $416. 9. An increase in advertising also increases total expenses and causes net income to decrease even more. If sales continue to drop for Hallstead Jewelers, it would not be wise for Gretchen and Michaela to increase advertising. An analysis of increasing advertising is provided in Appendix H. 5. If fixed costs remain the same for 2007 as they were in 2006, average sales tickets would have to increase by $122. 50. Appendix I provides a detailed analysis of how this figure was obtained. RECOMMENDATION Gretchen and Michaela should eliminate the sales commission.

The company needs to avoid or reduce as many costs as possible during their rough patch. They have already incurred more expenses due to their relocation, including rent for the building and salaries for the added staff. It would be wise to end the practice of sales commissions since doing so will decrease the breakeven point in sales volume by $1,116. 72. Also along those lines, advertising should not be increased by $200,000 because of the fact that the managers are already experiencing large losses. Increasing the advertising budget by $200,000 increases the breakeven sales by $416. 9, thus it further increases their total expenses and causes net income to decrease. It is not guaranteed that pouring a large amount of money into advertising would increase their sales and since the company has just experienced a loss almost double the income of the last normal year, 2004; it would not be the best move for the company to spend that much money on advertising. Lastly, reducing the price by 10% would not be beneficial either. Gretchen and Michaela expect the number of tickets sold to increase to 7500 with the price reduction. But the company would actually have to sell a total of 7,583 items at an average price of $1,397. 0 just to break even so this would not be a good choice for the company. Appendix A (in thousands)200320042006 Sales $ 8,583. 00 $ 8,102. 00 ######## Cost of goods sold $ 4,326. 00 $ 4,132. 00 $ 5,570. 00 Gross margin $ 4,257. 00 $ 3,970. 00 $ 5,141. 00 Expenses Selling expenses Salaries $ 2,021. 00 $ 2,081. 00 $ 3,215. 00 Commissions $ 429. 00 $ 405. 00 $ 536. 00 Advertising $ 254. 00 $ 250. 00 $ 257. 00 Administrative expenses $ 418. 00 $ 425. 00 $ 435. 00 Rent $ 420. 00 $ 420. 00 $ 840. 00 Depreciation $ 84. 0 $ 84. 00 $ 142. 00 Misellaneous expenses $ 53. 00 $ 93. 00 $ 122. 00 Total expenses $ 3,679. 00 $ 3,758. 00 $ 5,547. 00 Net income $ 578. 00 $ 212. 00 $ (406. 00) 200320042006 Sales space (square feet) 10,230 10,230 15,280 Sales per square feet $ 839. 00 $ 792. 00 $ 701. 00 Sales tickets 5,341 5,316 6,897 Average sales ticket $ 1,607. 00 $ 1,524. 00 $ 1,553. 00 Appendix B (in thousands)200320042006 Sales $ 8,583. 00 $ 8,102. 00 ######## Cost of goods sold $ 4,326. 0 $ 4,132. 00 $ 5,570. 00 Gross margin (contribution margin) $ 4,257. 00 $ 3,970. 00 $ 5,141. 00 Contribution margin ratio 0. 50 0. 49 0. 48 Expenses Selling expenses Salaries $ 2,021. 00 $ 2,081. 00 $ 3,215. 00 Commissions $ 429. 00 $ 405. 00 $ 536. 00 Advertising $ 254. 00 $ 250. 00 $ 257. 00 Administrative expenses $ 418. 00 $ 425. 00 $ 435. 00 Rent $ 420. 00 $ 420. 00 $ 840. 00 Depreciation $ 84. 00 $ 84. 00 $ 142. 00 Misellaneous expenses $ 53. 0 $ 93. 00 $ 122. 00 Total expenses $ 3,679. 00 $ 3,758. 00 $ 5,547. 00 Net income $ 578. 00 $ 212. 00 $ (406. 00) Total Fixed Costs $ 3,679. 00 $ 3,758. 00 $ 5,547. 00 Contribution Margin ratio 0. 50 0. 49 0. 48 Sales Break-even Point (in thousands) $ 7,417. 63 $ 7,669. 35 ######## Break-even Tickets 4,616 5,032 7,442 Ave Sales Ticket $ 1,607. 00 $ 1,524. 00 $ 1,553. 00 Break-even = Total Fixed Costs/Contri Margin Ratio Margin of Safety (use actual sales (minus) BE sales ) $ 1,165. 7 $ 432. 65 $ (845. 88) (in thousands) Appendix C Sales Tickets – Ave $1607. 00 Profit 4000 $ (490,837. 82) 4100 $ (411,133. 76) 4200 $ (331,429. 71) 4300 $ (251,725. 66) 4400 $ (172,021. 60) 4500 $ (92,317. 55) 4616 $ 139. 16 4700 $ 67,090. 56 4800 $ 146,794. 62 4900 $ 226,498. 67 5000 $ 306,202. 73 5100 $ 385,906. 78 5200 $ 465,610. 84 Appendix D Sales Tickets – Ave $1524. 00 Profit 4400 $ (472,256. 00) 4500 $ (397,580. 00) 4616 $ (310,955. 84) 4700 $ (248,228. 00) 4800 $ (173,552. 00) 4900 $ (98,876. 00) 5032 $ (303. 68) 5100 $ 50,476. 0 5200 $ 125,152. 00 5300 $ 199,828. 00 5400 $ 274,504. 00 5500 $ 349,180. 00 5600 $ 423,856. 00 Appendix E Sales Tickets – Ave $1553. 00Profit 6900 $ (403,464. 00) 7000 $ (328,920. 00) 7100 $ (254,376. 00) 7200 $ (179,832. 00) 7300 $ (105,288. 00) 7441 $ (180. 96) 7442 $ 564. 48 7500 $ 43,800. 00 7600 $ 118,344. 00 7700 $ 192,888. 00 7800 $ 267,432. 00 7900 $ 341,976. 00 8000 $ 416,520. 00 Appendix F Average Price Reduced 10% Increase sales tickets to 7500 20062007 Planning Sales (in thousands) $ 10,711. 04 $ 10,482. 75 Cost of goods sold $ 5,570. 00 $ 5,451. 28

Gross margin (contribution margin) $ 5,141. 04 $ 5,031. 47 Contribution margin ratio 0. 48 0. 48 Expenses Selling expenses Salaries $ 3,215. 00 $ 3,215. 00 Commissions $ 536. 00 $ 536. 00 Advertising $ 257. 00 $ 257. 00 Administrative expenses $ 435. 00 $ 435. 00 Rent $ 840. 00 $ 840. 00 Depreciation $ 142. 00 $ 142. 00 Miscellaneous expenses $ 122. 00 $ 122. 00 Total expenses $ 5,547. 00 $ 5,547. 00 Net income $ (405. 96) $ (515. 53) Total Fixed Costs $ 5,547. 00 $ 5,547. 00

Contribution Margin ratio 0. 48 0. 48 Sales Break-even Point (in thousands) $ 11,556. 83 $ 11,556. 83 Break-even Tickets 7,442 7,583 Break-even = Total Fixed Costs/Contri Margin Ratio Margin of Safety (use actual sales (minus) BE sales ) $ (845. 79) $ (1,074. 08) (in thousands) 20062007 Planning Sales tickets 6,897 7,500 Increase # Average sales ticket $ 1,553. 00 $ 1,397. 70 Reduce 10% Appendix G Elimination of Commissions 20062007 Planning Sales (in thousands) $ 10,711. 04 $ 10,711. 04 Cost of goods sold $ 5,570. 0 $ 5,570. 00 Gross margin (contribution margin) $ 5,141. 04 $ 5,141. 04 Contribution margin ratio 0. 48 0. 48 Expenses Selling expenses Salaries $ 3,215. 00 $ 3,215. 00 Commissions $ 536. 00 $ – Advertising $ 257. 00 $ 257. 00 Administrative expenses $ 435. 00 $ 435. 00 Rent $ 840. 00 $ 840. 00 Depreciation $ 142. 00 $ 142. 00 Misellaneous expenses $ 122. 00 $ 122. 00 Total expenses $ 5,547. 00 $ 5,011. 00 Net income $ (405. 96) $ 130. 04 Total Fixed Costs $ 5,547. 0 $ 5,011. 00 Contribution Margin ratio 0. 48 0. 48 Sales Break-even Point (in thousands) $ 11,556. 83 $ 10,440. 11 Break-even Tickets 7,442 6,723 Break-even = Total Fixed Costs/Contri Margin Ratio Margin of Safety (use actual sales (minus) BE sales ) $ (845. 79) $ 270. 93 (in thousands) 20062007 Planning Sales tickets 6,897 6,897 Average sales ticket $ 1,553. 00 $ 1,553. 00 Appendix H Increase Advertising by $200,000 20062007 Planning Sales (in thousands) $ 10,711. 04 $ 10,711. 04 Cost of goods sold $ 5,570. 0 $ 5,570. 00 Gross margin (contribution margin) $ 5,141. 04 $ 5,141. 04 Contribution margin ratio 0. 48 0. 48 Expenses Selling expenses Salaries $ 3,215. 00 $ 3,215. 00 Commissions $ 536. 00 $ 536. 00 Advertising $ 257. 00 $ 457. 00 257+200 Administrative expenses $ 435. 00 $ 435. 00 Rent $ 840. 00 $ 840. 00 Depreciation $ 142. 00 $ 142. 00 Misellaneous expenses $ 122. 00 $ 122. 00 Total expenses $ 5,547. 00 $ 5,747. 00 Net income $ (405. 96) $ (605. 96) Total Fixed Costs $ 5,547. 0 $ 5,747. 00 Contribution Margin ratio 0. 48 0. 48 Sales Break-even Point (in thousands) $ 11,556. 83 $ 11,973. 52 Break-even Tickets 7,442 7,710 Ave Sales Ticket $ 1,553. 00 $ 1,553. 00 Break-even = Total Fixed Costs/Contri Margin Ratio Margin of Safety (use actual sales (minus) BE sales ) $ (845. 79) $ (1,262. 48) (in thousands) 20062007 Planning Sales tickets 6,897 6,897 Average sales ticket $ 1,553. 00 $ 1,553. 00 Appendix I How much would the ave sales ticket have to increase to break even? 20062007 Planning

Sales (in thousands) $ 10,711. 04 $ 11,555. 92 Cost of goods sold $ 5,570. 00 $ 6,009. 08 Gross margin (contribution margin) $ 5,141. 04 $ 5,546. 84 Contribution margin ratio 0. 48 0. 48 Expenses Selling expenses Salaries $ 3,215. 00 $ 3,215. 00 Commissions $ 536. 00 $ 536. 00 Advertising $ 257. 00 $ 257. 00 Administrative expenses $ 435. 00 $ 435. 00 Rent $ 840. 00 $ 840. 00 Depreciation $ 142. 00 $ 142. 00 Misellaneous expenses $ 122. 00 $ 122. 00 Total expenses $ 5,547. 0 $ 5,547. 00 Net income $ (405. 96) $ (0. 16) Total Fixed Costs $ 5,547. 00 $ 5,547. 00 Contribution Margin ratio 0. 48 0. 48 Sales Break-even Point (in thousands) $ 11,556. 83 $ 11,556. 25 Break-even Tickets 7,442 7,441 Break-even = Total Fixed Costs/Contri Margin Ratio Margin of Safety (use actual sales (minus) BE sales ) $ (845. 79) $ (0. 33) (in thousands) 20062007 Planning Sales tickets 6,897 6,897 Average sales ticket $ 1,553. 00 $ 1,675. 50 Sales ticket must increase: $ 122. 50

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