1997 was a year of record sales and profits for The North Face, Inc. The company experienced significant growth in sales, income, and earnings per share. This has been a continuation of their upward trend since 1995.
The North Face has been expanding their retail shops in both domestic and foreign markets. In the process of this expansion though, the company has dramatically increased its overhead costs resulting in greater total liabilities. During the course of 3 years, the liquidity of the company has gone down.
After analyzing the financial statements of The North Face, we have discovered a strong upward trend, which makes this company a prime candidate for investors. Its financial achievements have led us to believe that this is a solid company with strong prospects for future success.
The North Face Inc.
2013 Farallon Drive
San Leandro, CA 94577
TELEPHONE: (510) 618-3500
TICKER SYMBOL: TNFI
The North Face designs and distributes technically sophisticated outerwear, ski wear, functional sportswear, tents, sleeping bags, backpacks and daypacks, all under the North Face name. The company characterizes its apparel-related products
as “equipment for the body”. The North Face products are original designs and carry a lifetime warranty for the original owner against defects in materials and workmanship. The company’s goal is to offer the most technically advanced products in its field and to establish the industry standard in each product category.
Present and Projected Activities
The North Face currently operates 202 Summit Shops with a projected number of 375 shops to be opened by the end of 1998. The company recently introduced a new multidimensional research design and development process involving a 32 member product development team, the input of The North Face’s team of world class athletes, explorers and external technology partners. The North Face also announced a $130 million global credit facility that they will institute in the near future, which will enable them to fund future expansion and support their working capital requirements as they continue to grow.
The TNFI is planning to launch an outdoor performance footwear line in the Spring of 1999. They have completed substantial market tests and concluded that footwear is an integral part of being a complete outdoor and exploration brand.Currently, the shoe market is a $2.8 billion industry internationally with a 6% forecasted growth rate annually over the next five years. This presents a significant sales opportunity which will help The North Face become a more balanced year round business. The company has also instituted an in depth European sales and marketing strategy in hopes of generating an internationally known and respected name of quality outdoor equipment.
Liquidity ratios indicate the corporation’s ability to meet short-term cash requirements and are important to potential and existing creditors. The current ratio indicates whether the firm will have enough resources to meet obligations becoming due during the next period. In 1997, The North Face had a current ratio of 1.98:1 down from 3.6:1 in 1996. Their current ratio falls below the current industry standard of 2.3:1. Being that the ratio was still greater than one, the company was able to meet current liabilities as they fell due. Their working capital had increased in 1997 to $59,117,000 from $50,438,000 in 1996.
The quick ratio is a more stringent test of short-term liquidity. This shows us The
North Face’s ability to pay off their loans without relying on the sale of their inventories.
In 1997 the Quick Ratio was 1.05:1 compared to 1.72:1 in the previous year.
The decreased liquidity ratios show that the increase in liabilities could pose a threat to the companys abilities to generate the capital needed to pay the short-term borrowings in the near future.
Profitability ratios indicate the degree of success of a company’s operations during the year. This is accomplished through showing the amount of resources needed to generate profits versus the capital consumed in the process and finally, the cash availability to stockholders.
Profit margin represents the average percentage of each sales dollar translates into profit. The North Face had a profit margin of 10.2 % for 1997 and 8.6% for 1996, which were both noticably above the current industry average of 2.9%. The North Face’s high profit margin is an indication of their efficiency so a lesser amount of sales are needed to generate a desired level of profit.
Return on Assets illustrates how well a corperation’s assets are utilized in order to achieve a profit. For example, in 1997, The North Face had a Return on Assets of 14.9%.
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In 1997 The North Face earned 49.2% off of owner’s investments; this ratio is currently above both its competitors and industry averages.
Earnings Per Share have increased from $.96 in 1996 to $.98 in 1997, which is a result of an increase in net income over the past two years. However, there were no cash dividends paid out to common stockholders in either 1996 or 1997.
Price to earnings ratio is used as an indicator of the future performance of stock, in 1997, The North Face’s stock was selling at rate of 28.2 times the EPS. This average was slightly below the current industry average of 31.1. Despite The North Face falling short of the P/E industry average, we feel they have demonstrated a strong performance to date and exhibit considerable potential in the future. The underlying reason for their shortcoming is they are a relatively new company, with little or no pay-outs to stockholders in the past 5 years.
Coverage ratios measure the corporation’s ability to meet long-term debt obligations on a continuing basis. The debt to equity ratio of The North Face in 1997 was 40.7%, which refers to the fact that for every $1 of owners equity gained, they incurred $.40 of liabilities. This is up considerably from 1996 when it was 22.7%, but with the current expansion campaign they are in the midst of, that is to be expected with huge amounts of capital needed. In the process of this venture, they impose many important contractual obligations on the company as these liabilities need to be reduced in order to keep a good standing with stockholders. As it stands now, The North Face is currently financed by 17.5% more of debt.
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Book value per share is an indication of the net worth of the corporation. In 1997, The North Face had a book value per share of $8.98 and $7.72 in 1996
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Earnings per share rose 55% in 1997 to $.96 per share. An important factor to look at in the statement of Stockholders Equity is the total shareholders equity which is the owners total claim on the company. This rose from $86,499,000 in 1996 to $103,293,000 in 1997. Retained Earnings increased from $10,113,000 in 1996 to $21,220,000 in 1997. During the 1st quarter of 1997 the price range of common stock reached a high of $21 . The 4th quarter of 1997 showed a high of $27 5/8, which illustrates that with an increase of $5 7/8 per share, giving stockholders a reassurance of growth in the company.
Based on current industry comparisons, we feel that The North Face is a company in strong financial position. Two of The North Face’s main competitors are K2 and Oakley.
As a stockholder we suggest investment in The North Face. The current EPS for 12 months was $.85, compared to an industry average of $0.57, and the EPS for the Fiscal Year was $0.96 compared to an industry average of $0.61.
In analyzing The North Face’s financial statements, we feel the company.
In opening 160 new summit shops in 1997, the company experienced an increase in sales. In 1995 and 1996 the net sales of the compnay were steady at $ 121,534,000 and $ 158,226,000 respectively. Net income was also constant at $ 3,485,000 in 1995 and $4,801,000 in 1997. Due to these openings , the net sales of the company increased by 25% and net income increased by 250%.
The first area we examined was the liquidity ratios. Both the current and quick ratios are below the industry standards. We feel that this is due to the large increase of liabilities they have incurred over the past year.
Over the past 4 years, the company has continued to expand their technical innovations. They created Tekware, a “100 Percent Not Cotton” functional sportswear that resists shrinking and fading and is three times more abrasion- and tear- resistant than cotton.
In 1997 The North Face introduced UltraWick, a new technology designed to replace sweatshirts.
The North Face has also started a campaign make their products readily avaible to everyday customers. They have nine retail shops across the United States and currently operate 220 Summit Shops.
The North Face has showed that they are not only concerned about the present success of the company but the future as well. To date The North Face has opened 202 Summit Shops in the U.S., Canada and Europe, with a minimum of 375 planned to be open by the end opf 1998, 550 planned by the end of 1999 , and 800 planned by the end of 2000.They have made plans for the introduction of a new outdoor footwear line to be introduced in 1999.
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