Chapter 5 - Page 65

Solution to Y Guess Jeans:

The layout of this case is as follows: first, the financials are reproduced, then the ratios and their
formulas, with solutions, are shown. Cell formulas for ratios are not included, but can be assigned to a new column.
Item 1. Consolidated Financial Statements
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Amounts)
(Unaudited)
August 3,
1996
ASSETS
Current Assets:
Cash and cash equivalents
Receivables
Merchandise inventories
Prepaid expenses
Deferred tax benefit
Total current assets
Property and equipment, at cost
Less--Accumulated depreciation and a
Property and equipment, net
Other Assets, net:
Debt issuance costs
Deferred income taxes
Excess of purchase price over net
assets acquired
Other
Total other assets, net

July 29,
1995

February 3,
1996

$10,603
1,486
132,580
10,876
2,826
158,371
119,425
-65,943
53,482

$8,125
2,778
143,474
11,177
10,296
175,850
117,466
-52,128
65,338

$8,166
2,658
110,744
11,188
989
133,745
120,277
-61,674
58,603

3,816
2,016

3,408
6,198

3,073
2,368

814
6,646

75,215
1,431
86,252

1,303
6,744

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

Chapter 5 - Page 66

Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Borrowings under credit agreement
Current maturities of long-term debt
Accounts payable
Accrued expenses
Accrued income taxes
Total current liabilities
Long-term debt
Other long-term liabilities
Redeemable preferred stock
Shareholders' Equity (Deficit):
Common stock: par value $1.00 per
share; 1,000 shares authorized, issued
and outstanding
Paid-in capital
Accumulated deficit
Total shareholders' equity (deficit)
Total Liabilities & S.E.

Net sales

$218,499

$327,440

$199,092

$81,800
26
47,397
21,864
3,183
154,270
105,018
11,006
48,521

$43,700
29
65,472
18,628
1,341
129,170
135,047
11,094
40,389

$27,000
25
36,754
19,913
3,007
86,699
130,031
11,242
44,319

1
49,789
-150,106
-100,316
$218,499

1
49,789
-38,050
11,740
$327,440

1
49,789
-122,989
-73,199
$199,092

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share Amounts)
(Unaudited)
13 Weeks Ended
13 Weeks Ended
August 3,
July 29,
1996
1995
$121,727
$130,110

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

26 Weeks Ended 26 Weeks Ended

August 3,
July 29,
1996
1995
$243,331
$254,299

Chapter 5 - Page 67

Cost of sales, including buying and

occupancy
Gross profit

90,283
31,444

95,123
34,987

185,812
57,519

190,061
64,238

Selling, general and administrative

expenses
Depreciation and amortization
Loss from operations
Interest expense, net
Loss before income taxes
and extraordinary items
Income taxes
Loss before extraordinary items

33,647
2,956
-5,159
5,072

32,169
3,531
-713
5,200

64,949
5,915
-13,345
9,759

62,042
6,787
-4,591
10,311

-10,231
3,909
-14,140

-5,913
-2,456
-3,457

-23,104
-1,240
-21,864

-14,902
-6,527
-8,375

Extraordinary items, net of income

tax benefit
Net loss

($14,140)

9,997
($13,454)

$(21,864) $

9,997
-18,372

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
26 Weeks
August 3,
1996
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to
net cash used for operating activities:
Extraordinary items
Depreciation and amortization

Ended
July 29,
1995
($21,864)

($18,372)

5,915

9,997
6,787

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

Chapter 5 - Page 68

Amortization of debt issuance costs

and discount

492

924

53
-1,240

189
-3,880

625
-21,836
313
11,211
2,746
-70
-26
-23,681

2,371
-47,203
-1,288
25,358
-4,047
-3,161
-471
-32,796

Borrowings under the Credit

Agreement, net
Issuance of long-term debt

29,800
-

73,700
104,943

Debt issuance costs and prepayment

premiums

-1,257

-6,781

Principal payments on long-term debt

and capital leases
Repayment of long-term debt
Dividend to parent
Advance to parent

-12
-1,051
-

-20
-150,795
-1,051
-235

Net cash provided by financing

activities

27,480

19,761

Rent expense in excess of cash

outlays, net
Deferred tax benefit
Changes in operating assets and
liabilities:
Receivables
Merchandise inventories
Prepaid expenses
Accounts payable
Accrued expenses
Accrued
income taxes
Other
non-current
assets and
liabilities
Net cash used for operating activities
Cash Flows from Financing Activities:

Cash Flows from Investing Activities:

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

Chapter 5 - Page 69

Capital expenditures

-1,365

-9,313

Proceeds from disposal of property

and equipment
Net cash used for investing activities

3
-1,362

14
-9,299

2,437

-22,334

8,166
$10,603

30,459
$8,125

$8,931
$70

$12,519
$514

Net Increase (Decrease) in Cash

and Cash Equivalents
Cash and Cash Equivalents:
Beginning of period
End of period
Memo: Cash Paid During the Period For:
Interest
Income taxes
Item 2: Ratios, Formulas, and Values.

CATEGORY

FINANCIAL RATIO

1. Current Ratio

I
Q
I
U

2. Net Working Capital

I
D
I

FORMULA

Current Assets/Current Liabilities

Current Assets - Current Liabilities

3. Quick Ratio

(Current Assets - Inventory) / Current

Liabilities

4. Cash Flow to Total Debt

Net Income + Depr. Expense / (Curr.

Liabs.-A/P-Accrued Expenses) + LT
Debt

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

6 months
6 months ending
ending July 29,
Aug. 3, '96 Note:
'95 Note: some
some formulas
formulas must
must have income
have income
statement items
statement items
multiplied by 2
multiplied by 2

1.04
5,536 $

1.36
47,102

0.08

0.08

-21.05%

-19.80%

Chapter 5 - Page 70

T
Y
5. Cash Flow from Operations (CFFO)

Net Income + Noncash Charges +

Change in Operating Curr. Liabs. Change in Operating Curr. Assets (or
just pull # from Statement of Cash
Flows)

CC = (Days Inventory Held + Days

Sales Outstanding - Days Payables
Outstanding) or, equivalently, CC =
6. Cash Cycle (CC)
Inventory Conversion Period +
Receivables Conversion Period Payables Deferral Period
days=
Days Sales Outstanding
days=
Days Held in Inventory
days=
Days Payable
CT
=
365
/
CC
7. Cash Turnover
8. Net Liquid Balance

9. Defensive Interval

DEBT
MGT. &
COVERAGE

1. Times Interest Earned

2. Long-Term Debt to Capital *
3. Total Liabilities to Total Assets

NLB = (Cash + ST Investments) (Notes Payable + Current Portion of LT

Debt)
$

(27,732,000) $ (33,346,000)

84.78
1.11
130.22
46.55
4.31

(36,820) $

76.89
1.99
137.77
62.87
4.75

(57,376)

Cash + ST InvestmentsDaily Operating

ExpenseswhereDaily Operating
Expenses =(COGS + Selling, General,
& Administrative Expenses Depreciation Expense) / 365
EBIT / Interest Expense

7.90
-1.21

6.04
-0.40

Long-Term Debt / (Long-Term Debt +

Equity) whereLong-Term Debt
includes Long-term notes and bonds,
term loans, and capital lease obligations
Total Liabilities / Total Assets

-2.08
1.83

1.63
1.18

Copyright 1998 by Harcourt Brace & Company. All rights reserved.

Chapter 5 - Page 71

P
E
R
F
O
R
M
A
N
C
E

1. Return on Equity (ROE)

Earnings Available to Shareholders /

Common Equity where Earnings
Available = (Net Income - Preferred
Stock Dividends - Sinking Fund
Payments - Amortization)

2. Profit Margin on Sales (or Net Profit

Margin)

Net IncomeRevenues

-11.27% or N/A

-9.46% or N/A

3. Return on Total Assets (ROA)

Net IncomeTotal Assets

-25.07% or N/A

-14.66% or N/A

N/A

N/A

* It is unclear if the "other long-term liabilities" on the balance sheet represents terms loans or capital lease obligations.
Regardless, be very careful in interpreting this ratio due to the negative equity in both years.
Conclusions:
This company illustrates what happens to a company's liquidity and debt ratios when it starts experiencing
losses. It is difficult to find any positives in the financial ratios; at least the amount by which NLB is negative has declined.
Y. Guess would want to be very careful with this account. If it has good gross margins (branded jeans generally do),
Y. Guess may hate to lose the account. An experienced credit analyst would offer the following: 1. cut back on terms
from net 30 to net 15 or shorter; 2. keep in contact with County Seat to monitor its financial position, and continue
to monitor its D&B experience; 3. sell with letter of credit backing; 4. possibly go to cash on delivery or even cash
before delivery terms.
Students may miss the first recommendation, but should come up with 2,3, and 4 based on information in the
body of the case and their understanding of Chapter 4.

Copyright 1998 by Harcourt Brace & Company. All rights reserved.