Case : Riding the Merry-Go-Round
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-GoRound. The company's stock rose $2.25, or 15 percent, to $17 on the day of the Chess King news. Merry-GoRound 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.
Required:
In retrospect, can you identify any advance warning at the date of the financial statements of the company's impending bankruptcy?