Longs Jewelers Introduction Bob Longs of Longs Jewelers

Longs
Jewelers

Introduction

Bob
Longs of Longs Jewelers returned to his store in the spring of 20×5 angry and
depressed. “We just lost our lease; I
don’t see how we can make it now.” It
had been seven years since Bob and his wife, Bonnie, moved their business to
Spartanburg, South Carolina. They had
struggled, and sometimes excelled. But
primarily, through sheer determination, they just survived in the jewelry
business to this point. The loss of
their lease and prime location could be the final blow that would destroy their
business. Bob needed to decide, and
quickly, either to fold the tent or give it one more shot.

York Operations

Longs
Jewelers originally started in 1978 as Able Jewelry and Music—a pawnshop in
York, South Carolina, purchased by Bob’s parents from other family
members. Bob helped his mom in the
business after his graduation from the University of South Carolina with a
major in business in 1989. Wanting to
gain more business experience, Bob earned his MBA from Regent University in 1993
and, with Bonnie, assumed ownership of the store on July 1, 1993.

Bob
and Bonnie met at the University of South Carolina. She graduated in three years with a major in
foreign politics and a minor in Spanish.
After college she was also able to get a Para-legal degree in business
and real estate law and bankruptcy. Her
legal training made it easy for her to find work with a law firm while Bob
completed his MBA.

Even
though the store was a well-recognized landmark in York, it initially had
trouble earning a reasonable profit.
After about three years, Bob saw the 80-20 rule in action. The pawnshop generated 80% of the headaches
and 20% of the revenue. Bob wanted the
store to be more upscale; he eliminated the electronics and musical equipment
inventory associated with the pawnshop and changed the name of the store to Longs
Jewelers. Over the next four years, sales and profits grew.

Bob
and Bonnie lived in Spartanburg where Bonnie grew up, about 30 miles west of
York on I-85. Through their associations
and church activities, they established a loyal clientele in their hometown who
would travel to York to shop at Longs Jewelers.
Many of these customers often encouraged Bob and Bonnie to open a store
in Spartanburg.

In
York, however, Bob had the only jewelry store that catered to a middle-class
market. Unlike in Spartanburg, where
there were several similar jewelry stores already established, he did not have
to worry about competition. The store’s
roots were in York with a long history and a devoted following. Even though the drive to work sometimes
seemed long, the York site was doing well.

This
situation changed about ten years ago.
Video poker was the new craze, and numerous people in the York seemed
addicted to it. While illegal in South
Carolina, it was legal in North Carolina.
Many York citizens frequently drove north a mere 10 miles to the next
state to spend their discretionary income on these games. Bob saw a change in his customer spending habits
as they bought less jewelry, and some even said they or their spouse used the
money instead to gamble and “hit it big.”

At
the same time, York’s Main Street was going the way of many small towns without
a strong economic base. Downtown
businesses were shutting their doors as shoppers drove to new malls or
superstores like Wal-Mart. The only
stores that seemed to be opening on Main Street were loan companies, which
offered high interest rate loans to consumers and businesses. Within two years, this combination of events
took Bob’s operation from being profitable to barely surviving.

Relocating to Spartanburg

Bob
and Bonnie had to decide if it was worthwhile to continue their jewelry
business. They had two young children
and roots in Spartanburg. With Bob’s MBA
and business experience, the possibility of a job at a company in Spartanburg
was attractive. Bonnie could stay home
and raise the kids, and they would be free of the pressure of ownership and the
worry over cash flow.

It
was evident that Longs Jewelers in York would not survive. Persuaded by friends
and motivated by his entrepreneurial spirit, Bob developed a business plan and
sought financial assistance to move his operation to Spartanburg. To his surprise, local banks were not as
supportive as Bob thought they would be.
Longs Jewelers’ current financial condition did not help to qualify for
a loan; it seemed too risky. The
financial institutions denied funding.

Bob
liked the idea of being his own boss, enjoyed the jewelry business, and felt he
had some expertise in the area. So he
kept looking for financial assistance.
Eventually, he returned to his old bank in York. Even though he was leaving town, based on the
relationship he had established with the bank and with their assistance, he
qualified for a Small Business Administration loan of $60,000. Bob and Bonnie sold their house in Spartanburg
and used the equity to add another $20,000 to start over in Spartanburg. Upon the sale of their house in Spartanburg,
Bob and Bonnie and their two children, Hannah and Jonathan, moved from a
3,200-square-foot home into a 1,200-square-foot apartment.

Spartanburg Operations

Bob
secured a lease for almost 3,000 square feet in a prime location in west
Spartanburg on a busy main street across from a large shopping center. This section of Spartanburg was experiencing sustained
consumer consumption since it had easy access to I-85, and new upper-income
home developments were opening on a regular basis. The rent for the store was $3,000 per month.
The strip shopping center included some other fine stores, including an upscale
women’s fashion store and a quality shoe store.

Unexpectedly,
Bob learned that the landlord charged him an additional $40,000 to “up fit” the
store before the first sale was even made.
In some of the other lease contracts they considered, “up fitting” was
already provided, and he wrongly assumed those lease stipulations were included
in this current lease. Bob learned the
importance of “buyer beware.” He regretted not getting professional guidance
before signing the lease, but he was trying to save money and time. On top of that, Bob later learned that his
share of the property tax for the facility was also charged to him at the end
of the year as an additional expense versus being part of the monthly
rent. Already cash poor, Bob used his
remaining $40,000 in funds to acquire inventory.

With
limited working capital, a discretionary income type product with low turnover,
and a seasonal business, Bob continually had cash flow problems. Jewelry was expensive, and the store needed
significant inventory to display in showcases in order to attract
customers. He bought lots of silver,
which was relatively inexpensive, to supplement gold and diamonds.

Bob
maintained a credit purchasing relationship with many of his suppliers, but
when sales did not achieve anticipated levels, Bob quickly found himself past
due on many accounts. It was not long
before some of these suppliers wanted cash up front for purchases. Conditions seemed to go from bad to worse as
debt mounted. In the first year, the business
lost over $108,000.

Bonnie
and Bob both needed to work in the store because at least two people had to be
around to prevent theft. With their
responsibilities as parents, family activities, commitments at church, working
six days a week at the store was demanding and there was little down time. They
even had to give up attending or watching the games of their beloved University
of South Carolina football team—an activity that in the past often gave them
much-needed relaxation from the stress of running your own business.

Fortunately,
the clientele from Spartanburg remained loyal and frequented the store even
more now that the business was more conveniently located in Spartanburg. Store hours were 10:00 a.m. to 5:30 p.m.,
Monday through Saturday. Bob believed
that the customers he was trying to reach, primarily non-working women who
enjoyed shopping and socializing would shop during the day. These women
generally entertained, wanted quality family time, and had other obligations in
the evening. Also, this was more of a
destination location as opposed to a mall location where there would be more
walk by traffic in the evening.

Bob
and Bonnie practiced a high moral and ethical standard and understood the
importance of trust and honesty. They
were fair in valuing stones for both buying and selling purposes, which was
often a concern by less knowledgeable customers. They were also friendly and got to know their
customers on a first-name basis.
Customer service was highly regarded in all of their business
dealings. As it turned out, many
customers bought jewelry exclusively from Longs Jewelers. With over 15 years of experience, plus his
educational training, Bob felt he knew the jewelry business and how to make it
successful.

Additionally,
Bonnie, who was completely self-taught in the jewelry business, had a knack for
picking the right products. She had
always had an interest in colors and texture and was good at determining what
looked good on fashion conscious women. As
a teenager, Bonnie was paid commercial art work for the Governor of New
Jersey. Since their market was primarily
women in a middle- to upper-middle income bracket, it was important for Bonnie
to recognize trends and styles when purchasing inventory. She believed in her products and her
enthusiasm translated into sales to satisfied customers. Bonnie also learned to make jewelry. She
bought older jewelry from estate sales and other secondary sources at a
discounted price and used the materials to make new and more appealing jewelry
items. Customers adored these unique
items.

Even
though competition from other jewelry stores in the immediate vicinity was
fierce, Longs Jewelers effectively used good marketing strategy with ads in
popular publications, radio, store specials, and especially word of mouth primarily
catered to middle-income earners. They became active in the community and
supported charitable events, which helped to give the business
credibility. Also their products were
more fashion forward and seemed to have a unique appeal to their customers. Their target customers were women who looked
for something better than a run-of-the-mill Kmart or Wal-Mart type of product,
but not the exorbitantly priced products found at the really upscale jewelry
stores. Of course, many of the other
individually-owned stores were trying to capture the same market.

As
with many owner-run businesses, Bob and Bonnie focused on little, but
significant, services. They did
engraving, cleaning, and elaborate gift-wrapping at no extra charge. Their best promotion was word of mouth and
personal friendly service.

Still
with all the positive factors that Bob and Bonnie had going for them,
maintaining the financial viability of the business was still a struggle in a
very competitive market. There were any number of factors that seemed to impact
their potential for success including the seasonal nature of sales, high
carrying cost of inventory, high overhead costs, low sales volume, and even sometimes
surprisingly low margins on items sold.

At
times Bob had trouble making the monthly lease payment on the store. This last
year he was four months behind. Like many businesses, the jewelry business was
seasonal. The majority of sales were made during the Christmas season with
other peaks in February, May, and June. Months like July and August were
extremely slow. In the past, Bob caught
up on the rent payments in December when he had a better cash flow.

Over
the years, Bob and Bonnie had no choice but to rely on credit card debt, which
had amounted to over $50,000. Once they were unable to make even the minimum
payment, their credit scores tumbled—and they no longer qualified for any
personal loans or other credit cards.
Nevertheless, they worked hard to repay suppliers and establish a better
relationship with those companies to hopefully get more favorable terms for
future purchases.

Even
with their best efforts, the Spartanburg store did not live up to their
expectations. It had been seven years.
What did Bob and Bonnie have to show for their effort? They had already worked nine years in York
with limited success and now another seven years in Spartanburg. There were
good days, but then there were also days when Bob wished just to sell a watch
battery. With a $3,000-plus monthly rent, it was easy for Bob to determine that
he needed over $200 in sales (assuming a 100% markup) every day just to pay the
rent. Sometimes Bob felt he was working
for his landlord.

However,
Bob and Bonnie both gained much joy selling a quality product, like an
engagement ring to a satisfied customer, knowing they played a role in a
special event. Bob and Bonnie enjoyed
working the store together and had complementary skills and a strong marriage
even though they were together almost 24-7.

Bob
surveyed what he had. His $100,000 of inventory could neatly fit into a couple
of shoeboxes! There was the large safe,
showcases, fixtures and some office furniture.
Of course, there also was the $250,000 debt. He felt fortunate that some of the debt was
still interest-free and that his average cost of debt was around 11%. He had worked very hard to reduce the level
of debt over the past few years. While
the total company debt had decreased, his interest expenses increased as his
credit rating went down and his perceived riskiness by creditors went up.

If
he left the store he asked himself: how was he going to make good on this
debt? Because of their high ethical
values and integrity, Bob and Bonnie felt badly that they had created such a
bad debt situation, and they felt morally obligated to make good on all of the
outstanding debt. Suppliers and others
had placed faith in them and given the store favorable credit terms and assumed
they would fulfill these obligations.

Future Operations

If
Bob wanted to begin again, could he, especially now that his lease was
terminated by his landlord? Seven years
ago, he had a house with some equity that he sold to raise capital for the
business. Now, he did not even have
that. It was doubtful that he could
arrange for debt financing, given his history.
If he brought in a partner, that partner would probably want 51%
ownership or more of the business, and he would lose control. Furthermore, could he even find a suitable
location for his store close to where he had become established?

He
was aware of another location that had recently become available. It was just three blocks away, but it was
only 1,250 square feet, 40% of the size of his current store. Bob surmised that the monthly lease rate
would be about half of his current rate.
What kind of other lease terms would he face with a new landlord? Bob did not want to be surprised again with
hidden charges in another lease agreement.
Also, could he afford the cost of a move, especially transporting the
large and very heavy safe?

There
was also the issue of employees. Because of the need to always have at least
two employees on site, Bob had often hired extra help at various times during
the year. Currently, two additional
employees had come to depend on Bob and the job for their source of income.
They too, would have to seek other employment. And there were his loyal customers.
Many had stuck with him since his early days back in York. He had spent years developing this
relationship and market. Did he want to
give up this valuable but intangible resource?

If
he folded the business, what would he do? For 20 years he had been in the
jewelry business. Working for another company in jewelry, like a competitor,
seemed like such a step down. He wanted to stay in Spartanburg, and he had
plenty of connections. But after being an entrepreneur, could he work for
someone else? What would Bonnie do?
Their children were now 12 and 16. How
would they react to this situation? They had already been through a lot.

Bob
pulled out his last three years of financial data to try to determine if they
even had resources or the financial viability available to make the store viable
at a new location. From Bob’s understanding of the jewelry business, successful
operations have a gross margin of around 50 percent and a profit margin of at
least five to ten percent.

Maybe
it was time to consider another direction.
He had an MBA and years of retail experience, surely he could find a job
in the Spartanburg area in the $50,000 to $60,000 range. Plus Bonnie, with her
talents and skills in the jewelry business, could easily find a part-time or
maybe full time job and earn up to $30,000. Also, with some catching up on the
latest laws in the legal field, she could probably get a much higher paying job
as a Para-legal with a law firm in the area. The thought of using her legal
bankruptcy training on their own store was not amusing. But was it or should it be just about the
money? They really enjoyed the jewelry business and the relationships
established with their clientele. Their
faith had remained strong, but this was going to be a test, or was it an
opportunity?

Longs Jewelers
Income Statement
For the Years
Ending June 30, 20×2, 20×3 and 20×4

20×2

20×3

20×4

Sales

$419,779

$419,667

$432,206

Cost
of Goods Sold

232,869

297,161

228,743

Gross
Margin

186,910

122,506

203,463

Operating
Expenses

Salaries
and Wages

50,374

31,909

44,891

Rent

36,284

38,639

40,523

Taxes
and Licenses

19,772

18,804

26,391

Advertising

13,895

15,515

11,599

Insurance

7,829

7,683

7,658

Utilities

6,506

7,412

6,504

Depreciation

19,047

16,672

16,738

Other
General and Administration

3,087

11,767

19,762

Total
Operating Expenses

156,794

148,401

174,066

Interest
Expense

7,670

3,812

11,696

Total
Expenses

164,464

152,213

185,762

Net
Income Before Tax*

$22,446

$-29,707

$17,701

*Due
to significant losses from prior years, no taxes have been paid over the

three
years because of net operating loss carryforwards. The marginal federal plus state tax rate,
if taxes had been paid, would be 15%.

Longs Jewelers
Balance Sheet
For the Years
Ending June 30, 20×1, 20×2, 20×3 and 20×4

20×1

20×2

20×3

20×4

Current Assets

Cash

$-4,824

$413

$-4,150

$7,637

Accounts
Receivable

7,886

6,100

5,000

4,368

Inventory

186,450

188,237

111,455

99,351

Total
Current Assets

189,512

194,750

112,305

111,356

Long-Term Assets

Equipment

139,497

150,790

149,332

152,942

Less
Accumulated Depreciation

-63,592

-82,639

-99,311

-116,049

Equipment
(net)

75,905

68,151

50,021

36,893

Other
Assets

1,458

1,458

Total
Long-Term Assets

75,905

68,151

51,479

38,351

Total Assets

$265,417

$262,901

$163,784

$149,707

Current Liabilities

Accounts
Payable

$151,743

$140,000

$140,000

$141,328

Long-Term Liabilities

Loans
from Shareholders

19,471

17,200

16,200

44,177

Notes
Payable

206,377

201,846

133,436

70,684

Total
Long-Term Liabilities

225,848

219,046

149,636

114,861

Total
Liabilities

377,591

359,046

289,636

256,189

Common Equity

Common
Stock

1,000

1,000

1,000

1,000

Retained
Earnings*

-113,174

-97,145

-126,852

-107,482

Total
Equity

-112,174

-96,145

-125,852

-106,482

Total Liabilities and Equity

$265,417

$262,901

$163,784

$149,707

*Prior
period adjustments made

to
balance in retained earnings

-6,417

1,669

Longs Jewelers
Discussion Questions

1.
Complete a financial analysis
of Longs Jewelers including a cash flow statement and ratio analysis and
discuss your findings.

2.
Identify critical
non-quantitative issues that should be considered in the decision process.

3.
What risk factors should Bob be
most concerned about regarding his decision?

4.
Identify possible ethical or
values-based issues that could impact any decision.

5.
What should Bob and Bonnie do?