Just For Feet, Inc. is a retailer that specializes in brand name athletic and outdoor footwear and apparel. The company was established in 1977 with the launch of a small store in a mall, and later expanded to open its first superstore in 1988. Due to their impressive sales and ongoing success, Just For Feet has focused on developing and perfecting their superstore concept. By January 1999, they had a total of 120 superstores, with 23 opened in fiscal year 1997 and 26 opened in fiscal year 1998.
Just for Feet plans to open 25 stores during fiscal year 1999 and 2000. In 1997, Just for Feet acquired Athletic Attic and Imperial Sports, which are now operated as the specialty store division of the Company. As of 1999, the company opened a total of 141 company owned specialty stores. The company opened 51 new specialty stores in fiscal 1998 and intends to open approximately 60 new specialty stores in fiscal 1999 and approximately 50 to 100 in fiscal 2000.
Historically, the normal current ratio has been considered to be 2.00. Just for Feet had a current ratio of 1.998 in 1998 and 3.387469 in 1999, showing improvement in liquidity and the ability to pay current liabilities. The current ratio reflects a company’s operating cycle efficiency and its ability to convert products into cash. The quick ratio, which excludes inventory as it is a current asset that is difficult to convert into cash, was 0.674598 in 1998 and 0.373715 in 1999 for Just for Feet. The decrease in the quick ratio can be attributed to an increase in inventory as Just for Feet planned to open approximately 150 stores between 1999 and 2000. This expansion required investment of cash into new stores and specialty stores, resulting in a higher current ratio and lower quick ratio. Net working capital is the difference between current assets and current liabilities and represents the dollar difference between the two for Just for Feet.
This measure calculates the dollar amount of long term funds used to finance current assets if net working capital is positive, or the dollar amount of current liability financing fixed or long term assets if net working capital is negative. It serves as an indicator of a company’s efficiency and short-term financial health. In 1998, Just for Feet had a net working capital of $155,461, which increased to $316,798 in 1999. This positive change indicates that Just for Feet has the capability to settle its short-term debts.
The working capital requirement is the amount of funds that a company needs to maintain in order to meet its debt obligations and business expenses. Just for Feet had $166,860 in 1998 and $311,025 in 1999, which represent the funds used and obtained during the firm’s operation cycle. The net liquidity balance is a measure of a company’s net liquid financial assets. It shows the remaining amount of liquid assets if all current liabilities were paid off.
Just for Feet had a liquidity balance of $79,268 in 1998 and $5,773 in 1999. Despite decreasing their ability by $73,495, they are still capable of paying their current liabilities. The company has also increased their short-term liability but remains able to pay their debt. The cash conversion efficiency, which measures the effectiveness of a firm’s financial supply chain management, including receivables, payables, and inventory, was -0.0551231 in 1998 and -0.105915 in 1999.
In 1998 and 1999, the company’s cash conversion efficiency was negative due to the impact of profitability. The company’s investment in new stores is negatively affecting its ability to pay off its debt. The cash flow statement indicates a negative value of -$26,384 for 1998 and -$82,070 for 1999. In 1999, the negative cash flow is a result of increased accounts payable from $51,162 to $100,322, increased inventory from $206,128 to $399,901, and an increase in accrual account expenses from $9,292 to $24,829. These changes have led to negative results in the cash flow from operations. Furthermore, the account payable has increased to $100,332.
All of these accounts have a significant impact on the cash flow. A/R has a balance of $15,840 for 1998 and $18,878 for 1999. The cash conversion period is a measure of liquidity that analyzes the cash cycle. It calculates the number of days inventory is held from receiving the item until it is sold. In 1998, Just for Feet held its inventory for an average of 268.88 days, and in 1999 it was held for an average of 322.69 days. Days of sales outstanding is the average number of days it takes for customers to pay for merchandise.
In 1998, Just for Feet took 12.08 days to pay for merchandise, while in 1999 they only took 8.89 days. This average shows that Just for Feet has a strict payment policy for their products. The day pay outstanding is the number of days between when inventory is received and when payments are made. In 1998, Just for Feet took 66.74 days to pay their outstanding balances, and in 1999 they took 80.95 days. This indicates that Just for Feet is taking longer to pay their suppliers. The operation cycle is an indicator of management performance efficiency. In 1998, Just for Feet had an operation cycle of $28,096, and in 1999 it was $331.58.
The cash operation cycle is the time it takes for a company to pay for its inventory and receive payment for its finished goods. For Just for Feet, the cash conversion period was 214.22 days in 1998 and 250.63 days in 1999. The longer the cash conversion period, the more financial strain the company experiences due to reduced liquidity. The rapid expansion of Just for Feet is putting pressure on their liquidity. As the company grows and opens new stores, they need to finance the purchase of additional assets to support higher sales. Unfortunately, the company has not generated enough cash flow from operations to cover the added debt.
The substantial growth rate is 8.66% and the Actual growth rate is 62%. Just for Feet is growing too fast too soon and could get into trouble in the long run. They are opening too many stores in a short period of time. Just for Feet is growing too quickly and struggling to fund its growth, leading to increased financial leverage. Just for Feet will open approximately 160 stores by 1999 and 25 superstores during fiscal 1999 and 2000. As a result, the company had to acquire more inventories and significantly increase their long-term debt, as well as account payables.
The company’s capacity to meet their short-term debt obligations has diminished. The potential profitability of opening new stores in the long term remains. However, if Just for Feet grows too rapidly, they may encounter various problems. These include losing control of the company and having to borrow excessively. In addition, they might overlook crucial details concerning quality, customer service, and employee morale. This could lead to surpassing their vendors’ and service providers’ capabilities in terms of materials, equipment, staff, time, skills, and experience. Consequently, they may damage their valuable relationships with existing clients while solely focusing on expanding their business.