18 Jun Hudson Valley Realty
Hudson Valley Realty owns a number of commercial properties in suburban towns north and east of New York City. The firm previously rented one of them to an upscale department store renowned for jewelry and fine china, but that also sold everything from chandeliers to bed linens to lawn furniture. The building became vacant two years ago when the tenant broke a ten-year lease after only three years of occupancy and unexpectedly filed for bankruptcy. HudsonValley considered any effort to recover early termination penalties a waste of time and money.
Interest expense, high real estate taxes, insurance, and security costs make it extremely expensive to hold vacant property in this area. Although HudsonValley is obviously eager to find a new tenant, it does not want another unexpected vacancy to have a serious negative effect on its investment returns. HudsonValley wants to be sure that the new tenant will be financially stable and will likely stay for at least the full term of the lease.
Vermont Heritage, a well-known furniture chain that targets affluent customers with traditional tastes, has expressed interest in the location. Peter Cortland, HudsonValley’s rental manager, wants to take a close look at the potential tenant’s financial statements before entering into more serious negotiations. Vermont Heritage has submitted the following audited income statements and balance sheets for the last three years.
Vermont Heritage
Income Statement
($ in millions)
Account
20×3
20×2
20×1
Sales
949.0
955.1
907.3
Cost of Goods Sold
466.6
472.8
436.6
Gross Profit
482.4
482.3
470.7
Selling & Administrative
332.3
320.8
315.6
Depreciation
21.3
21.3
21.3
Other income (expenses)
1.4
-9.2
-11.9
Earnings Before Interest and Taxes
130.2
131.0
121.9
Interest Expense
0.8
0.6
0.6
Taxable Income
129.4
130.4
121.3
Taxes
49.2
50.1
45.9
Net Income
80.2
80.3
75.4
Dividends
24.1
20.1
18.9
Vermont Heritage
Balance Sheet
($ in millions)
Account
20×3
20×2
20×1
Current Assets
Cash
57.4
61.6
81.9
Accounts Receivable
28.0
27.0
26.4
Inventory
187.1
186.9
198.2
Other Current Assets
56.5
54.2
53.8
Total Current Assets
329.0
329.7
360.3
Net Fixed Assets
275.2
277.0
289.4
Other Assets
88.8
81.7
81.8
Total Assets
693.0
688.4
731.5
Current Liabilities
Accounts Payable
20.4
22.2
26.1
Short-term Notes
4.2
4.7
101.1
Other Current Liabilities
6.4
7.4
8.0
Total Current Liabilities
31.0
34.3
135.1
Long-term Debt
3.2
4.5
9.2
Other Long-term Liabilities
5.5
52.4
50.2
Total Liabilities
39.7
91.2
194.5
Owners’ Equity
Common Stock
230.0
230.0
230.0
Retained Earnings
423.3
367.2
307.0
Total Owners’ Equity
653.3
597.2
537.0
Total Liabilities & Equity
693.0
688.4
731.5
Required:
Look at Vermont Heritage’s sales revenue, earnings before interest and taxes, and net income over the three-year period. Would you classify it as a growing diminishing, or stable company?
Look at Vermont Heritage’s expense accounts, cost of goods sold, and selling and administrative expenses. Do they seem to be roughly proportional to sales? Do any of these categories seem to be growing out of control?
Depreciation expense is the same for all three years. What does that tell you about Vermont Heritage’s growth?
Look at Vermont Heritage’s earnings before interest and taxes, interest expense, and debt accounts over the three-year period. Comparing debt to equity, do you think the company seems to have excessive debt? Would you expect the company to have any problems meeting its interest payments?
Dividends have increased as a percentage of net income. Why do you think the company decided to pay out more of its earnings to shareholders?
Compare current assets with current liabilities. Would you expect Vermont Heritage to have any problems meeting its short-term obligations?
Overall, do you think Vermont Heritage will be a relatively safe tenant for HudsonValley’s building?
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