Grant Company Case

In the mid-1960s, Grant had altered its business strategy to transformer itself from an urban discount store, which built its reputation on sales of low-priced soft goods to low-income customers, to a suburban house goods store chain. This change finally brought Grant into bankruptcy in October, 1975. After reading the background of Grant and analyzing the last years' financial data, in my opinion, there are several fatal factors that caused Grant's failure.

1. Rapidly opened new stores and expansion.

In the period 1969-1973, Grant opened 369 new stores. To finance the expansion of store space, Grant entered into leasing arrangement. The total estimated present value of Grant's lease increased from $457,111 to $708,666. In 1975, the year that Grant went into bankruptcy, this value was $821,565. This change need a substantial outlay of capital and most came from debt liability. In 1972, the long-term debt increased 297.6%. In 1973, the bank loans increased 64.1%. As result, the interest expense was $21,127, $78,040, $86,079 in thousand from 1973 to 1975. For the last two years, the interest expense was unbelievable nearly half of the total revenues! That's why although the new chairman Kendrick took some positive new moves after 1974, the effects still could not overcome the disastrous events and led Grant reported a loss of $177 million in 1975.

2. Extension of credit term to customers

Actually, if Grant generated sufficient cash from sales, they probably could overcame the heavily interest burden and avoid fail into bankruptcy. In order to attract more customers and satisfied the expansion strategy, Grant issued one new credit policy which permitted customers 36 months to pay for their purchases and the minimum monthly payment was $1 regardless of total purchases. But this change brought another nightmare to Grant. During 1969-1973, the cash account didn't increased as rapidly as expected. But the account receivable increased significantly from 1971-1974. With the reason that bad debt expense averaged 1.2% of sales each year, total $155.7 million provision was really hurt Grant's cash flow.

3. High volume of inventory

In order to fuel the expansion strategy, Grant increased its inventory after 1970 and culminated in1973. The inventory's growth rates were 6.5%, 17.3%, 14.7% and 33.8% year to year. But we should pay attention that at the same time period, the growth rates for sales were 10.5%, 3.6%, 9.6% and 19.6% respectively. These numbers figured out that the sales were not sufficient to offset the large outflows of inventory cost.

As I stated above, Grant raised tremendous amount of long-term debt, bank loans and inventory in 1973. I would have become skeptical of the ability of Grant to continue as a viable going concern from this year.