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by The Value Core

Transforming a Leading Home Store Brand: From Debt-Driven Struggles to Profitability

  • Service Line
  • FP&A
  • December 2022
  • Industry
  • Home Store
FP&A Services

TL;DR

A leading home store brand in Pakistan was EBITDA positive but struggled to achieve profitability due to high interest expenses. Excessive showroom inventory tied up cash, forcing reliance on financing. By providing FP&A services, we minimized inventory, introduced a digital catalog, and suggested a secondary DIY furniture business model. These changes improved cash flow, reduced debt, and enabled the company to retain profits for growth.

Overview

A well-known home store brand in Pakistan, despite being EBITDA positive, faced profitability challenges as interest expenses consumed a significant portion of its earnings. The company’s large showrooms with excessive displays tied up working capital, creating a cycle of debt and limited scalability. Through FP&A services, we redesigned their financial and operational model to optimize inventory, improve cash flow, and reduce debt, resulting in long-term profitability and operational efficiency.

The Challenges

  • Inventory Tied Up Cash:

    • Showrooms displayed a full set of every product, from glassware to fully assembled furniture like beds and sofas.
    • These unsold display items consumed significant cash, contributing to working capital constraints.

  • High Financing Costs:

    • With cash locked in inventory, the company relied heavily on financing, leading to high interest costs and reduced profitability.

  • Operational Inefficiency:

    • Damaged inventory and limited working capital made it challenging to expand operations profitably.

  • Premium Pricing:

    • The high price points restricted demand, limiting cash flow and growth potential.

Our Approach

1. Streamlined Inventory Management

  • We recommended reducing the number of items physically displayed in showrooms.
  • A digital catalog was introduced to showcase the product range, limiting showroom inventory and freeing up cash.

2. Introducing a DIY Furniture Model

  • Inspired by IKEA, we proposed launching a DIY (Do-It-Yourself) furniture line at competitive prices to attract a wider customer base.
  • This new product line enhanced inventory turnover and improved cash inflows.

3. Financial Model Revamp

  • Our FP&A services included developing a comprehensive financial model focused on optimizing cash flow, reducing debt, and managing inventory levels efficiently.

4. Structured Debt Repayment Plan

    • With better cash flow from optimized inventory and increased sales, we outlined a structured plan to pay off existing debt and reduce reliance on financing.

The Results

  • Debt Reduction:

    • Streamlined inventory and increased sales enabled the company to pay off a significant portion of its debt, moving closer to a debt-free position.

  • Improved Cash Flow:

    • Reduced interest costs and faster inventory turnover created steady cash inflows, freeing up working capital for expansion.

  • Profitability Achieved:

    • Interest expenses no longer eroded profits, allowing the company to enjoy and reinvest its earnings.

  • Enhanced Customer Experience:

    • The digital catalog simplified the shopping process, while the DIY product line attracted price-conscious customers and boosted demand.

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