Judgment Case 8–1 Riding the Merry-Go-Round
LO8–7
Real World Financials
Merry-Go-Round Enterprises, the clothing retailer for dedicated followers of young men’s and women’s fashion, was looking natty as a company. It was March 1993, and the Joppa, Maryland-based outfit had just announced the acquisition of Chess King, a rival clothing chain, a move that would give it the biggest share of the young men’s clothing market. Merry-Go-Round told brokerage firm analysts that the purchase would add $13 million, or 15 cents a share, to profits for the year. So some Wall Street analysts raised their earnings estimates for Merry-Go-Round. The company’s stock rose $2.25, or 15 percent, to $17 on the day of the Chess King news. Merry-Go-Round was hot—$100 of its stock in January 1988 was worth $804 five years later. In 1993 the chain owned 1,460 stores in 44 states, mostly under the Cignal, Chess King, and Merry-Go-Round names.
Merry-Go-Round’s annual report for the fiscal year ended January 30, 1993, reported a 15% sales growth, to $877.5 million from $761.2 million. A portion of the company’s balance sheet is reproduced below:
Jan. 30, 1993
Feb. 1, 1992
Assets
Cash and cash equivalents
$40,115,000
$29,781,000
Marketable securities
—
9,703
Receivables
6,466,000
6,195
Merchandise inventories
82,197,000
59,971,000
But Merry-Go-Round spun out. The company lost $544,000 in the first six months of 1993, compared with earnings of $13.5 million in the first half of 1992. In the fall of 1992, Leonard “Boogie” Weinglass, Merry-Go-Round’s flamboyant founder and chairman who had started the company in 1968, boarded up his Merry-Go-Ranch in Aspen, Colorado, and returned to management after a 12-year hiatus. But the pony-tailed, shirtsleeved entrepreneur—the inspiration for the character Boogie in the movie Diner—couldn’t save his company from bankruptcy. In January 1994, the company filed for Chapter 11 protection in Baltimore. Shares crumbled below $3.
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Required:
In retrospect, can you identify any advance warning at the date of the financial statements of the company’s impending bankruptcy?
[Adapted from Jonathan Burton, “Due Diligence,” Worth, June 1994, pp. 89–96.]
Group Discussion Board Forum Instructions
For this collaborative discussion board, the instructor will place you into a group at the beginning of the course. You will create a thread in response to the provided prompt for each forum. Each thread must be at least 500 words and demonstrate course-related knowledge. You must support your assertions with at least 2 citations other than the textbooks; the Bible may be 1 of those sources. The composition must be attached as a word document within a new thread of the forum. Put the chapter and case in the subject line of your thread, as in “Chapter 1 Case 1-1.” In addition to the thread, the student will reply to the thread of at least 1 classmate. The reply must be at least 250 words. Citations for the replies are not required, but are encouraged. Everything must be in current APA format.
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