Laura Ashley

Analysis

The company had a net cash outflow of £11.4 million from operating activities in year 1999. We can not expect the company to obtain a bank loan unless the net cash flow is positive and optimistic enough. The £43.5 million cash injection from MUI was not even enough to attain a positive cash flow since most of it (£39.0 million) was absorbed by the repayment of loans. At this point a new investment from MUI is not likely until the financial statements show a strong sign of recovery. We think you can finance the company for 2000 if you take our suggestions we present in recommendations section.

The poor performance of the company is evident in Table 1. If we look at the ROCE ratios, we can see that for the last two years company was not able to produce returns on the capital employed. The capital turnover was high for the both years yet the negative ROS caused negative ROCE for these years. The low ROCE ratios of the company through years are almost wholly the result of low margin on sales since the capital productivity is always high. This is an indication of high operating costs which are also the cause of the poor performance. The underlying reasons for high costs are;

* Expanding without sufficient market research and consideration of macroeconomic indicators,

* Inconsistent decisions in product design and retail store preferences (frequently closing and refurbishing stores increases costs),

* Overoptimistic sales projections resulting in excess inventories (cost of production, inventory holding costs),

Recommendations

We need to urge you that Laura Ashley should start employing a business strategy that is consistent with its brand image and legacy. We think that David Hoare's three phase strategy is appropriate for this purpose. Regarding this strategy we present you the following recommendations:

* The current stocks worth £56.4 million. It must be used to generate cash as soon as possible to deal with the financing problem for the year 2000. For this purpose the company can refurbish the stock to better suit for the taste of the consumer. Another way is to create another brand under Laura Ashley and to sell the stock in outlets under the new brand name with huge discounts. The methods can also be used simultaneously to speed up the process.

* Furnishings take a lot of space in the stores. If in a specific store the furnishing sales are low, rent expense alone is enough to incur losses. In a case like this, the product range of the furnishings must be reduced (or removed if necessary) to make space for garments which are more profitable. The store should only be closed if the previous method does not work since closing a store also costs the company.

* An intense franchising policy should be used