March 02, 2022

A Poorly Run Business

Yesterday we evaluated a healthy business.

Today we'll explore a comparison between a healthy business and an unhealthy business. In both cases, the brand generates $100,000,000 in demand. The problem is what comes "after" demand is generated. Take a look.

Oh my goodness.

The business on the right can't do anything right. They have more cancels, and their customers return more merchandise than the brand on the left. They have to liquidate more merchandise, resulting in a 54% gross margin instead of 60%. Pick/Pack/Ship expenses consume an additional three percentage points of net sales. The company spends $1.4 million more on marketing and gets nothing for it. There's nearly a million more in fixed costs.

As a result, the brand on the right operates at break-even with a 32% profit factor ... significantly different than the brand on the left which generates $11.9 million in earnings before taxes at a profit factor of 42%.

The brand on the right has a lot of work to do. A new CEO would look at this as a hot mess capable of "being fixed".

These are fun businesses for Management Teams to inherit, because they can be "fixed". 

"Fixed", of course, as long as company culture will allow the brand to be fixed.

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