Platos Closet Used Clothing Store Essay
Plato’s Closet brand started franchising in the year 1999. The main activity of Plato’s Closet franchises is to buy and sell accessories and clothing meant for teenagers and young adults. The Platos’s Closet provides customers with an opportunity to dispose off their old clothes by selling it to the store while also having an opportunity to purchase clothes of their choice from the store. The main advantage of such a trend is the fact that customers are able to sell clothes that they have outgrown but having gently used them. The store has very high quality clothes also gently used and which customers can purchase at very low prices in compared to the prices they go for in stores that sell new merchandise. Plato’s Closet is a major store that has increasingly gained immense popularity and has been registering impressive expansion through franchising in the United States and Canada. Consequently, there have been various measures put aside to offer guidance on the manner in which Plato’s Closet can be franchised. The success of Plato’s Closet has been extreme such that an analysis of the shops financials over the past two years reveals that the shop is destined for great success in the future. Plato’s Closet currently has over 350 franchised stores throughout the United States and Canada. The store focuses on latest fashion brands which are always in very good condition.
Plato’s Closet is owned by Winmark Corporation which is based in Minneapolis. Winmark Corporation provides the financing of Plato’s Closet. Winmark Corporation is involved in various activities on franchising, leasing, buying and selling old and new merchandise, as well as the parent company to Once Upon A Child, Music Go Round, Plato Closet, Style Encore, Play It Again and numerous other businesses (Yahoo Finance 1). As the parent company to Plato Closet, Winmark Corporation is a listed company whose stocks trade publicly at NASDAQ: WINA. Consequently, an analysis of Winmark’s financial performance is a reflection of the performance of Plato Closet and its franchises. In any case, financial reports of Plato’s Closet franchises are not publicly available as they are private companies. Therefore, the benchmark for use in this analysis is the financial report of Winmark Corporation.
Analysis of financial performance
The following analysis of financial performance of Winmark Corporation reveals the prospects of success for Plato’s Closet.
|Item/ Year||2011 ($mn)||2012 ($mn)||Growth (%)|
From the analysis of the financial performance of Winmark over the past two years, it can be seen that the company’s revenues have recorded a slow increase. Indeed, the analysis of the two years; 2011 and 2012 reveals a serious trend whereby the rate of growth of the company’s revenue has been surpassed by the growth in cost of sales as well as the growth in operating expenses. Such a situation is highly scary as the company may soon be operating under losses. It is a crucial requirement for the company to therefore adopt measures that will reduce the costs of operation and cost of sales. The company is not involved in manufacturing activities as most of its sources of revenue are franchises where it is a parent company several franchises from which it receive huge amounts of income in terms of subscription prices and charges. Additionally, it is important to note that the performance of the parent company is a reflection of the prevailing situation in some diploma.
Through findings obtained from the analysis of the financial statement s above, it can be argued that the current financial performance of Winmark Corporation reflects the individual performance of Plato’s Closet. Therefore, a consideration of the prevailing financial performance is important for the successful launch of products that are highly regarded in terms of quality and the nature of the market. The fact that Winmark Corporation has been registering minimal profit level means that a franchise set under the prevailing market conditions will not make profitable sales (Yahoo Finance 1). In particular, if it is assumed that the prevailing rates of growth as maintained, there is no doubt that franchises opened under the prevailing conditions will not make economic profits. Consequently, it is important that any prospective entrepreneur planning on getting into the business through Plato’s Closet model under the low market demands make is destined for serious failure or just an average performance. It is imperative to calculate various financial ratios for Winmark Corporation to ascertain various important ratios including profitability and liquidity.
Profitability ratios are important in the assessment of the ability of a business to create revenue and hence the earnings level of the firm. The calculation of profitability relies on an assessment of costs and expenses over a specified period of time. Some important profitability ratios include profit margin return on equity, return on assets and other different metrics used in the assessment of the firm.
Gross Margin (%) = [(50.3 – 43.9]/ 50.3
Gross Margin = 12.72%
Gross Margin (%) = [(51 – 43.3)]/51
Gross Margin (%) = 15.1%
Clearly, the gross margin for the year 2012 was better than that of 2011. This is an indication that the company is currently making profits which have been growing steadily. Therefore an investment into the business is a profitable venture.
Liquidity ratios are important metrics in the determination of whether a company is in a position to pay its prevailing liabilities in the short-term. Higher ratios are preferred than lower ratios as it is expected that higher ratio means a higher availability of liquid assets to service short term debt obligations. An important liquidity metric is the current ratio
Current Ratio = 18.9/20.5 = 0.92
Current ratio = 23.7/7.8 = 3.04
Although the current ratio for 2012 is less than meaning that the company is not in a position to effectively service its current debt obligations, the calculation for the year 2011 indicate that the firm was highly liquid meaning that it could comfortably service it current debts.
Pro-forma income statement for the franchise
The assumption here is that $500,000 is invested into the franchise. The calculation of the proforma income statement has incorporated the percentage growth as shown in the income statement, the balance sheet and the cash flow. Therefore, a reliable prospective forecast is undertaken.
Cost of sales (59,000)
Gross Profit 641,000
Less: operating expenses 310,000
Operating income 331,000
Proforma balance sheet
Cash and equivalents 50,000
Short-term investments 11,500
Total cash and investments 45,000
Total Receivables 25,000
Total current assets 131,500
Net Property plant and equipment 200,000
Total current liabilities (30,000)
Total Liabilities 50,000
Liabilities and Equity
Accounts payable 100,000
Accrued expenses 50,000
Short term borrowings 150,100
Proforma Cash Flow
Net income 10,000
Depreciation & amortization 4,000
Cash from operations 15,000
Cash from investing 25,000
Total debt issued 200,000
The proforma income statement, proforma balance sheet and proforma cash flow indicate that the franchise is envisaged to make it is reasonable to attract numerous reports. Profits with the
The Real Costs of the Franchise:
The analysis of Winmark Corporation reveals that there are many costs incurred in setting up a bed. The analysis of Plato’s Closet reveals a trend toward the use and maintenance of high level of product quality (Businessweek 1). Therefore, it is important that financing is sought before the project. Individual products often extend a major avenue through which the analysis has been done. The fact that there are various critical requirements by the parent company shows as a massive capital outlay is needed. For instance, the company has ensured that licensing operate under different management. Additionally it is imperative that an entrepreneur has enough capital for utilization especially in the initial stages to avoid business failure.
Businessweek. Winmark Corp (WINA: NASDAQ). Businessweek.com. Retrieved on Tuesday, December 3, 2013 from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=WINA&dataset=cashFlow&period=A¤cy=native.
Plato’s Closet. Franchise FAQ’s. Retrieved on Tuesday, December 3, 2013 from http://www.platoscloset.com/own-a-platos-closet/FAQ.
Yahoo Finance. Fashion Resale Franchisor Takes a Green Approach to Hot and Cool Prices. Retrieved on Tuesday, December 3, 2013 from http://finance.yahoo.com/news/platos-closet-celebrates-spirit-earth-214407066.html.