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Case Study: Grace Fashion Brand

CASE STUDY OF GRACE FASHION BRAND

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Case Study: Grace Fashion Brand
Introduction

The present report provides a comprehensive analysis of Grace Fashion Limited, a well-

known brand in the fashion industry. The report investigates the company's current growth crisis,

profitability, qualitative performance, working capital management, and potential strategies for

raising additional capital. The objectives of this report are to critically evaluate the company's

financial and operational performance, identify key issues and challenges that may hinder its

growth, and provide strategic recommendations for enhancing its overall performance.

Grace Fashion Limited is a leading fashion company specializing in producing high-

quality women's clothing. The company has been in operation for over a decade and has

established itself as a reputable brand in the fashion industry. However, recent developments

have led to a growth crisis, jeopardizing the company's future. Therefore, conducting an in-depth

analysis of the company's financial and operational performance is essential to identify key

issues and challenges that may be hindering its growth.

This report aims to provide a comprehensive analysis of Grace Fashion Limited's

financial and operational performance. By doing so, we aim to provide valuable insights to help

the company's management team make informed decisions about its future direction. The report

will begin by analyzing the company's growth crisis, then by evaluating its profitability using

various profitability ratios. Subsequently, we will assess the company's qualitative performance

using the Balanced Scorecard framework. Next, we will explore options for managing the

company's working capital before presenting strategic recommendations for raising additional

capital.
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Case Study: Grace Fashion Brand
The Growth Crisis Facing Grace Brand

Grace Fashion Limited is currently experiencing a growth crisis that can be attributed to

several company challenges. Grace Jackson, the sole owner, and manager, may be overburdened

with the business's day-to-day operations, including managing 16 employees. This situation

could hinder the company's growth and development. Having a single person in charge of

managing such a large workforce poses potential risks, such as a lack of delegation, potential

burnout, and the absence of a succession plan. These risks could undermine the long-term

sustainability of the company.

Another significant challenge facing Grace Fashion Limited is the ban on cotton

importation from Uzbekistan, which the European Union imposed in 2017 due to human rights

abuses by the oppressive regime of President Islam Karimov (Wilson, 2017). The company used

to source all its raw cotton materials from Uzbekistan. They were then shipped to Bangladesh for

weaving into styled fabrics before being shipped to the company's warehouse in London. The

relatively low raw materials and labor cost during this period enabled Grace brands to achieve an

average gross profit ratio of 80%. However, the ban on Uzbekistan cotton procurement has led to

the company sourcing raw materials elsewhere, significantly reducing its gross profits.

The COVID-19 pandemic presents another challenge for Grace Fashion Limited. Most of

the company's customers are based in continental Europe, mainly Germany, Netherlands, and

France. The company receives most of its orders through its website, and the goods are shipped

to clients after an agreed number of days. However, due to the pandemic's effect, the number of

orders has plummeted significantly, reducing reported annual sales. Additionally, the pound

sterling depreciation against the euro currency has negatively impacted the company's sales.
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Case Study: Grace Fashion Brand
The company is also facing a crossroads on whether to continue with the existing luxury brand

strategy or change its pricing policy to penetration pricing to maintain its market share. Grace

Jackson is considering diversifying into other sectors or expanding into other segments operated

by its competitors. For instance, there are opportunities to expand the retailing arm dealing in

watches and jewelry to handle retail fashion, wines & spirits, and perfume & cosmetics.

However, for any of the expansion plans mentioned above to be carried out, fresh capital must be

injected into the business, either in the form of short-term, medium-term, or long-term capital or

a combination of all of them.

Working capital management is also a significant challenge facing Grace Fashion

Limited. Although the company now sources its primary raw materials, such as leather, wool,

silk, cotton, and bast fibers, from producers in Japan, Grace Jackson recently learned that she

could source these items for less than half the current prices from Brazil, Bénin, Thailand, and

Vietnam. However, any change in suppliers would require the company to adjust its procurement

and storage unit and assess the risks associated with new suppliers, including quality control and

delivery times.

One possible solution to address the management structure challenge at Grace Fashion

Limited is to consider hiring additional managers. This will help manage the business's day-to-

day operations and enable the current owner and manager, Grace Jackson, to delegate tasks and

responsibilities to prevent burnout. It will also facilitate the implementation of a succession plan

to ensure the company's long-term sustainability. This will enable the company to have a clear

chain of command and ensure that all employees are accountable to someone.

To address the challenges of raw material sourcing, Grace Fashion Limited should

consider diversifying its suppliers to reduce its dependence on a single supplier. This will help
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Case Study: Grace Fashion Brand
mitigate the risk of supply chain disruptions and ensure a steady supply of raw materials.

Additionally, the company should assess the risks associated with new suppliers, such as quality

control and delivery times, before finalizing any new supplier contracts. This will enable the

company to make informed decisions and minimize the likelihood of supply chain disruptions.

Profitability Analysis

Profitability ratios are critical financial metrics that reflect a company's ability to generate

earnings in relation to its revenue, assets, and equity. In this section, we will analyze the

profitability ratios of Grace Fashion Limited, interpret their implications, and provide

recommendations for improving profitability.

Gross Profit Margin is the ratio of gross profit to revenue, and it indicates the percentage

of revenue that remains after deducting the cost of goods sold. In the case of Grace Fashion

Limited, the Gross Profit Margin was high at 50% in 2019, indicating that the company had a

healthy margin of profit to cover its operating expenses and other costs. However, the Gross

Profit Margin fell to 46.86% in 2020 and 41.24% in 2021, suggesting that the company's costs of

goods sold increased or its pricing strategy was ineffective. Notably, the Gross Profit Margin is

projected to increase to 53.33% in 2022, indicating that the company has taken some measures to

address its profitability issues.

The high Gross Profit Margin of Grace Fashion Limited indicates that the company

operates in the market's luxury segment, which is a common characteristic among luxury brands

(Heine, 2011). It means that the company has a high margin of profit to cover its overhead costs

and invest in growth opportunities. However, the falling trend of the Gross Profit Margin implies

that the company is facing challenges in maintaining its profitability due to various factors.
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Case Study: Grace Fashion Brand
The turnover trend for Grace Fashion Limited shows a decline in revenue from 2019 to

2021, as evidenced by the figures of 1,400, 1,750, and 1,455 for the respective years. This drop

in turnover is a significant factor that affected the company's profitability. It is essential to note

that the COVID-19 pandemic impacted the fashion industry, and the UK's exit from the

European Union could have contributed to the drop in turnover. The drop in turnover affected the

company's revenue and profitability, as seen in the declining Gross Profit Margin, Operating

Margin, Net Profit Margin, Return on Assets, and Return on Equity ratios.

The Operating Margin is the ratio of operating income to revenue, and it indicates the

percentage of revenue that remains after deducting operating expenses. The Operating Margin

for Grace Fashion Limited was 21.43% in 2019, indicating that the company was earning a

healthy profit from its operations. However, the Operating Margin fell to 21.26% in 2020 and

further to 7.22% in 2021, indicating that the company's operating expenses increased or its

revenue declined.

The negative Operating Margin projected for 2022 (-29.17%) indicates that the

company's operating expenses will exceed its revenue, which is a concerning trend. This

suggests that the company may need to evaluate its cost structure and find ways to cut expenses

or increase revenue. For example, Grace Fashion Limited could consider reducing its marketing

expenses or finding new sales channels to increase its revenue.

In addition, the current ratio, which measures the company's ability to pay its short-term

debts, has steadily increased from 2019 to 2021 but is projected to decrease significantly in 2022.

This could indicate that the company may be facing cash flow issues soon.

The pandemic may have significantly impacted Grace Fashion Limited's supply chain,

causing disruptions and increasing costs. It may also have affected consumer behavior, leading to
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a decrease in demand for luxury fashion items. As a result, the company may have had to

decrease prices to remain competitive, which would negatively impact its gross profit margin.

Grace Fashion Limited could consider implementing cost-cutting measures to address

declining profitability, such as reducing overhead costs, renegotiating supplier contracts, or

streamlining its operations. The company may also want to explore new revenue streams, such as

expanding into new markets or product lines.

In summary, the analysis of Grace Fashion Limited's profitability ratios reveals a

declining trend, particularly in the gross profit margin, operating margin, net profit margin, and

return on assets and equity. The projected negative operating margin for 2022 highlights the need

for the company to evaluate its cost structure and explore ways to increase revenue. The impact

of the COVID-19 pandemic on the company's profitability should also be considered. Grace

Fashion Limited should consider implementing cost-cutting measures and exploring new revenue

streams to improve its profitability.

Qualitative performance

Grace Fashion Limited can use the Balanced Scorecard (BSC) approach, which

incorporates cause-and-effect relationships, to evaluate its qualitative performance. The BSC

approach aligns the company's strategic objectives with its operational activities by considering

various perspectives, including financial, customer, internal processes, and learning and growth

(Ayoup, Omar, and Abdul Rahman, 2016). Kaplan and Norton (2008) illustrated the cause-and-

effect relationships in a diagram called "Mapping strategic themes," which is a strategy map

specifying the objectives for which the BSC measures and targets are set. By utilizing this

approach, Grace Fashion Limited can better understand its performance from a holistic

viewpoint.
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To apply the BSC approach to Grace Fashion Limited, the company's strategic objectives

were first identified, including its mission to design and produce high-quality fashion products

that meet the needs of its customers and its vision to become the leading fashion brand in the

luxury market segment. Key performance indicators (KPIs) were then identified for each of the

four perspectives of the BSC.

The financial perspective of the BSC includes KPIs related to the company's financial

performance, such as gross profit margin, return on investment (ROI), and revenue growth rate.

The customer perspective focuses on KPIs that measure the company's success in meeting

customer needs, such as customer satisfaction, retention, and market share. The internal

processes perspective includes KPIs related to the company's operational processes, such as

manufacturing lead time, production efficiency, and quality of finished products (Maude, 2010).

The learning and growth perspective focuses on KPIs that measure the company's ability to

innovate and grow, such as employee training and development, employee satisfaction rate, and

innovation and creativity.

An evaluation of Grace Fashion Limited's performance in each of the four perspectives of

the BSC reveals areas of strength and areas for improvement. The company's strong financial

performance is evident in its high gross profit margin and ROI. However, the revenue growth

rate could be improved, indicating a need for a more effective marketing strategy. In terms of the

customer perspective, Grace Fashion Limited has a high customer satisfaction rate and market

share. However, the customer retention rate could be improved by addressing issues such as

product quality and customer service. From the internal processes’ perspective, the company's

manufacturing lead time and production efficiency are strong, but there is room for improvement

in the quality of finished products.

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Case Study: Grace Fashion Brand
Finally, from the learning and growth perspective, Grace Fashion Limited has a robust

employee training and development program and a high employee satisfaction rate. However,

there is a need for more innovation and creativity to keep pace with changing customer

preferences. Grace Fashion Limited has a strong employee training and development program

and a high employee satisfaction rate. However, there is a need for more innovation and

creativity to keep pace with changing customer preferences and market trends. The company can

encourage innovation by creating cross-functional teams and providing them with the necessary

resources and support to generate and implement new ideas. Additionally, the company can

collaborate with external partners, such as suppliers and designers, to bring new perspectives and

ideas to the organization. Grace Fashion Limited can remain competitive in the dynamic fashion

industry by fostering a culture of innovation and creativity.

It is worth noting that the BSC approach has its limitations and criticisms. One criticism

is that the approach relies heavily on cause-and-effect relationships, which may not always be

clear or accurate (Nørreklit, 2000). Additionally, the top-down approach may not always be

suitable for all organizations, especially those with complex and diverse operations. Despite

these limitations, the BSC approach remains useful for organizations to align their strategic

objectives with their operational activities and monitor their performance from multiple

perspectives.

In conclusion, the BSC approach provides a comprehensive framework for evaluating an

organization's performance from multiple perspectives. For Grace Fashion Limited, the approach

was used to identify key performance indicators for each of the four perspectives of the BSC and

evaluate the company's performance in each area. Based on the evaluation, recommendations

were provided for improving the company's performance in critical areas. By implementing these
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Case Study: Grace Fashion Brand
recommendations and fostering a culture of innovation and creativity, Grace Fashion Limited

can enhance its competitiveness and achieve its mission and vision in the luxury fashion market

segment.

Working Capital Management

Working capital management is a critical aspect of any business. It involves managing

day-to-day finances, short-term assets, and liabilities and ensuring enough liquidity for growth.

Managing its working capital has been challenging for Grace Fashion Limited, with a current

ratio of 1.99 in 2020, indicating potential liquidity problems. The ban on importing cotton from

Uzbekistan has led to increased raw material costs, negatively impacting the company's gross

profits. In addition, the COVID-19 pandemic has reduced sales and negatively impacted the

company's reported annual sales due to the pound sterling depreciation against the euro.

To improve the company's working capital management, there are several steps that

Grace Fashion Limited can take. Firstly, the company needs to reduce inventory levels. This can

be achieved by reviewing its inventory management practices and implementing a just-in-time

inventory system. By reducing inventory levels, the company can free up cash that can be used

for other business operations. Additionally, the company can improve accounts receivable

management by implementing stricter credit policies, invoicing customers promptly, and

following up on late payments.

Exploring alternative sources of raw materials can also help the company manage its

working capital. The ban on importing cotton from Uzbekistan has increased raw material costs

for Grace Fashion Limited. By exploring alternative sources of raw materials, the company can

reduce its dependence on Uzbekistan and potentially reduce its raw material costs. This can be
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Case Study: Grace Fashion Brand
achieved by sourcing raw materials from other countries or exploring alternative materials that

can be used in the company's manufacturing processes.

Raising capital is also essential to working capital management for Grace Fashion

Limited. The company needs to raise capital to address its challenges and finance its future

expansion plans. There are various options that the company can consider, such as issuing

shares, bank loans, debentures, factoring, and leasing.

After evaluating the options, we recommend that Grace Fashion Limited issue new shares

to gain additional capital without taking on debt. This approach will allow the company to raise

capital without adding to its debt levels, which will help reduce its financial risk. However, the

company must be careful about diluting current shareholders' equity and ensure the new shares

are issued at an appropriate price to attract investors.

Finally, the company needs to consider market conditions, regulatory requirements, and

investor sentiments when managing the additional capital effectively and achieving its growth

objectives. The company must evaluate market conditions to determine the best time to raise

capital and the optimal amount. The company must also ensure that it complies with regulatory

requirements when raising capital to avoid legal issues. Additionally, the company needs to

consider investor sentiments to determine the best way to structure its capital-raising efforts and

attract investors.

Conclusion

In conclusion, Grace Fashion Limited is facing a growth crisis due to various challenges,

including prohibiting cotton importation from Uzbekistan, the COVID-19 pandemic, and

working capital management. The adverse impact of these challenges on the company's

profitability is evident from the decline in various profitability ratios. Therefore, to address these
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challenges and enhance its overall performance, Grace Fashion Limited should consider adopting

the following recommendations:

First, diversifying its products and services to serve a wider market and reducing its

reliance on the luxury market segment; secondly, exploring new markets to expand its customer

base beyond continental Europe, where most of its customers are located. Thirdly, sourcing raw

materials from countries that offer lower prices decreases production costs—fourthly, improving

working capital management by optimizing inventory levels, reducing accounts receivable, and

negotiating better supplier payment terms. Finally, raising additional capital through a

combination of short-term, medium-term, and long-term financing options to support its

expansion plans and working capital requirements.

The future of Grace Fashion Limited hinges on its ability to adapt to changing market

conditions, innovate, and uphold high standards of quality and customer service. By

implementing the recommendations provided in this report, the company can enhance its

competitiveness, profitability, and long-term sustainability in the fashion industry.

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Case Study: Grace Fashion Brand
Reference

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Appendix

2019 2020 2021 2022 (Projected )

Turnover 1,400 1,750 1,455 600

Cost of sales 700 930 855 280

Gross Profit 700 820 600 320
Operating Expense -400 -448 -495 -495
Profit Before Taxes 300 372 105 -175
Taxation -57 -71 -19 15
Profit after Tax 243 301 86 -160
Total Assets 845 975 985 825
Total Equity 845 975 985 825

2019 2020 2021 2022 (Projected )

Gross Profit Margin 50.00% 46.86% 41.24% 53.33%
Operating Margin 21.43% 21.26% 7.22% -29.17%
Net Profit Margin 17.36% 17.20% 5.91% -26.67%
Return on Assets (ROA) 28.76% 30.87% 8.73% -19.39%
Return on Equity (ROE) 28.76% 30.87% 8.73% -19.39%