Premier Furniture

Premier Furniture Company It was mid-Aprll. and Richard Zimmerman, credit analyst for the Premier Furniture Company, was completing his first round of credit reviews for 1984. Two of his accounts”Deslgners, Inc. of Pittsburgh, Pennsylvania, and Walcott Department Stores of Hartford, Connecticut”had moved well beyond the credit limits set by Premier. It was Zimmerman's Job to determine the appropriate corrective steps. After his third look at the customer file for Designers, Inc. Zimmerman was still undecided. He had evaluated the account as "satisfactory" In his annual review in early 1983, but his reservations at that time were not lessened by the performance in fiscal 1984. It was evident that the substantial sales to Designers in the last three months did not necessarily signal an Improved relationship. Zimmerman was also troubled by the most recent numbers of Walcott Department Stores. Walcott had been a reliable account since 1951 but had posted a large operating loss in fiscal 1984.

His review was further complicated by the tact that the owners had recently opened stores in Worcester and Springfield, Massachusetts. Although Walcott's future obviously depended on how the branch stores fared, Zimmerman had no reason to assume their success or failure. 4h*fi, Designers (ffL+Uee, , FM-x-r eve, It was obvious to Zimmerman that the Designers and Walcott accounts invited a raised eyebrow, but given Premier's credit policy the numbers came as no surprise. quality home furniture for distribution to dealer cooperatives, independent home furnishing retailers, and regional furniture chains.

The company advertised its lines nationally and attempted to maintain intensive coverage of trading areas by istributing through stores strategically located with a particular marketing area. Beginning in 1975, however, Premier found that product quality and service no longer assured success in the broad range of outlets the company had cultivated. Credit terms and financing of dealers became a critical marketing tool, and in the words of credit manager Karl Freund, "Premier soon found itself backed into the position of supporting numerous customers in order to maintain adequate distribution for its products. Unfortunately, Premier's heavy financing of dealers coincided with a national credit squeeze and higher interest rates on borrowed money. tg¦, Zimmerman was also aware that many of Premier's customers had waited out more than seven years of a relatively soft market only to suffer a noticeable decline in sales in the late summerand early fall of 1983. As in previous downturns, stores featuring lower-priced lines were hit first, followed by quality retailers at the end of the year.

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Although the decline in sales was not severe, the drop in volume and subsequent price cutting reduced the profit margins of some retailers enough to offset profits earned in the first half of 1983. As might be expected, the downturn in the market was quickly passed on to manufacturers. Many of Premier's customers tightened their belts by reducing orders for new lines and reorders for established lines. They believed that the price cutting in the second half of 1983 had resulted in considerable overbuying by consumers, and they were therefore anticipating a downturn in sales.

The dramatic drop in orders affected manufacturers across the country. Orders for shipment fell 10% from February to March, and then an additional 20% from March to April. E-fifi f&fllikh, lit, Alpha The Designers and Walcott files sat on his desk awaiting his decision, but Zimmerman was still mulling over the contradictions posed by the files. He knew, for instance, that Walcott enjoyed fairly steady sales throughout the year and that 50% were cash or charge sales. The remaining sales were installment purchases which called for 25% down and the balance in 6 monthly payments.

Premier, on the other hand, supposedly sold on terms of 3% in 10 days, net in 60 days”and had established a $50,000 limit on Designers and a $75,000 limit on Walcott. In truth, Premier's terms had become negotiable. Zimmerman was also frustrated by the fact that Karl Freund expected to see a foot on the brake while the sales manager was pressuring him to ut both feet on the gas. Given his Job, Zimmerman believed that it was in the company's interest to know the difference between a good customer and a bad risk.

But with the sales manager insisting that liberal financing was the only way to spark an upturn in orders, Zimmerman felt caught in an impossible position. The time had come to seek the advice of the company's credit manager. Five minutes after collecting the essential information from each file (see Exhibits 1 through 5), Zimmerman placed the folder in the hands of Karl Freund. f&RhF, 1511?±0, , premier, "”fifi, Q, fi-nmew,?-¦, fi-nmeilfr, A credit analyst for a furniture manufacturer is confronted with two customers who have exceeded their credit limits.

The financial performance of each has been weak, and one of the customers has a highly leveraged balance sheet. Industry conditions are weak; the manufacturer apparently has excess capacity; and the credit analyst is caught between the conflicting demands of the sales managers and the credit manager. The case provides an opportunity for ratio analysis. The Premier Furniture Company of Newfield, North Carolina, centers on manufacturing high-quality home furniture for distribution.

By 1975, Premier found that product quality and service no longer assured success in the markets they were in; therefore, credit terms and financing of dealers became a critical marketing tool. Regrettably, Premier's weighty financing of dealers corresponded with a national credit squeeze and higher interest rates on borrowed money. In 1984, Richard Zimmerman, the credit analyst for the Premier Furniture Company, took over the task of assessing the financial health of Premier's customers. Two of their accounts, exceeded the credit limits previously set by Premier. Premier had to make a decision on Designers Inc. d Walcott”they needed to fgure out the difference between good customers and bad credit risk. premiefiwzb,

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