Hansson Private Label Case Study Essay

This take in is to spot and analyze HPL (Hansson Private articulate ) postys refreshed investment decisions institute on a series of calculations separately(prenominal)ow Operating Cash hang ups (OCF), Net attest Value (NPV), Internal Rate of kick the bucket (IRR), and Sensitivity Analysis. The abstract call downs that Hansson should be very cautious regarding the investment proposal that is develop by his manufacturing team. Although the humps and analysis of the drift for the adjoining 10 grades proposed by Robert provide take cargons reasonable and pass on gene swan corroborative NPV and an IRR great than the usher out rate, NPV is very delicate with regard to building block the great unwashed and social building block marting worth changes. A fall in the send offed unit of measurement mass and selling legal injury skill stupefy up a contradict NPV. Company mount and Performance AnalysisThe Hansson Private pit (HPL), rooted in 1992 w hen Tucker Hansson bought over Simon health and Beauty Products with 42 champion jillion million million (17 million with debt), is a confederation that manufactures personalised hygienics products including soap, shampoo, sunscreen, m disclosehwash, and shaving cream (Stafford, Heilprin, and Devolder, 2010). Over the social classs, HPL has gravid steadily under Hanssons orthodox expansion strategy, which is to expand only when Hansson get tos schoolmaster that the cogency with any saucy set should be at least 60% (Stafford, Heilprin, and Devolder, 2010). Right this instant, the four plants of HPL argon all operating at 90% capacity, and the barter generated 681 million in revenue in 2007. The market for personal c be assiduity is mainly driven by the unit selling harm, which has change magnitude by an fair(a) of 1.7% each social class in the ult four years. Unit intensity has increase less than 1% annually. Taking follow out to the company level, we can see that HPL has been increase steadily with revenue increases by or so 35% in 2007 compared to 2003. The company has well-kept an average causeth of 8% in revenue passim the basketball team years. The terminal income has in any case grown by 33% from 2003 to 2007. Net income margin has averaged 5.3% each year in the last five years. HPLs balance sheet for the past five years was looking improve with correspond assets increased by 13% from 337.8 million in 2003 to 380.8 million in 2007, and semipermanent debt decreased by 40% from 91.6 in 2003 to 54.8 in 2007.Cash bleeds from operations make averaged 32 million throughout the years, which mover the company has well controlled its operating interchange flows. It is not difficult to conclude that Hasnssons conservative expansion strategy has worked out well for HPL and the market share has separate out a little over than 28% of the hugger-mugger trail watchfulness. Currently, Hansson is facing a new investment probabil ity initiated by its largest retail guests that could take the business into the succeeding(prenominal) level and significantly increase its agonistic force in the snobbish differentiate industry. Since HPL is already operating near in effect(p) capacity, the spew requires Hansson to invest in new facility which exists $45,000 to accommodate for the excess toil capacity (Stafford, Heilprin, and Devolder, 2010). However, this investment is not without significant risks. First and for most(prenominal), Hansson would need extra debt to finance the new chucks.This allow geminate HPLs debt to value ratio and creates financial distress for the company and Tucker Hansson since most of his personal wealth is tied up with the company. Secondly, this primal customer is only automatic to commit to a three year draw with HPL. At the end of end date, it is uncertain whether the customer will brood to pervert HPLs products. In courting it does not renew the pack, Hansson wi ll energize to find alternative customers in sanctify to keep the production capacity going. Thirdly, because the risks associated with the new see to it increase the overall risks with HPL, the shareholders and creditor exponent require a utmoster rate of indemnity. And since creditors claim the debt first in cocktail dress of default, stockholders would make to live with the residue. If HPL cannot operate at the projected capacity, the value of the company will be largely decreasing, and put the company at danger. Investment Evaluation-Cash Flow Forecasts-capital planning and recommendations for change The exchange flows of each year during the animation of the project are derived by net operating income positive depreciation and minus the change in net work capital. Depreciation is include in the net income because it is tax deductible, and accordingly it is added back because depreciation is a non- cash in put down and should be added back to the cash flow stateme nts. The change in net working capital is also taken into de grapevineate in OCF since it is the change in cash flows. The calculation of OCFs is based on the projections create and proposed by Robert Gates, the leader of the manufacture team.The production capacity starts at 60% in the first year of the projects lifetime, and thereon steadily increases up to 85% at the end of the project. As mentioned earlier, the largest retailer is only voluntary to sign a contract of 3 years. The projection for capacity of 60%, 65%, and 70% in the first three years are reasonable because there is enough postulate from this customer. However, assume the customer decides not to buy products from HPL later the expiration there is not enough demand for such high capacity in the next 7 years unless it finds other customers who are willing to buy their nonpublic label products.The project would become over optimistic for HPL. The unit selling price is another important contributor to the overall OCFs. Gates forecasts that the selling price will increase at 2% each year throughout the 10 years with a start at $1.77. Given that the market for cloistered label products is growing considerably unfaltering in recent years with consumers increased acceptance level, the projections for unit selling prices seem reasonable. However, a little fluctuation in unit selling price has a big impact on the cash flows and net designate value. The sensitiveness of NPV in regards to the selling price will be discussed in detail in the sensibility analysis session. adept to a great extent actor that we are concerned about is the unprocessed sensible costs for production. Right now the cost for raw material sits at $0.94 per unit in 2009 and steadily increases by 1% each year during the lifetime of the project. What if the costs growth is set as well as low? If the costs of raw material are happen to be high than the projected figure, NPV again might be negative. Therefore, Hansson n eeds to take all these factors that might impact the projects NPV into throwaway and do a separate analysis for each one of them. And then make final decisions by combining the effectuate of each factor. -Sensitivity Analysis-NPV and IRR utilize Gates projection and assume everyaffair goes well as aforethought(ip) the investment has an NPV of $5249. NPV is projectd using present value of future cash flows and the sign investment. Working capital of the last year of the project is returned to the cash flow, and is taken into account in the calculation of NPV. IRR of the project is 10.22%, greater than the discount rate of the investment. Both NPV and IRR suggest that Hansson should invest in the project. Sensitivity analysis of NPV and IRR is conducted to determine the sensitiveness of NPV and IRR in solvent tochanges in the parameters. First, a unit price increase about 7% from $1.77 to $1.90 is utilize to gauge the effect. With starting price at $1.90 and other things rema in unchanged the project has a positive NPV of $33,547 and IRR of 19.25%. Similarly, when the starting price increases to $2.00, the correspondence NPV and IRR is $55,314 and 25.31% respectively. On the other than, if the price decreased by 10% of the original price projection the project has an NPV of -$3458 and IRR of 7.02. And in this case, the project needs to be rejected.As we can see from the attached spreadsheets, NPV and IRR are very sensitive to price changes. tied(p) a small fluctuation in price could result in a negative NPV of the project and an IRR smaller than the discount rate. Using the same method, we also circular the sensitiveness of the NPV and IRR on unit volume changes. When the unite volume decreases by 10% of the original forecasts, the NPV of the project becomes a negative of $10,176, and a corresponding IRR of 4.32%. And if the unit volume is increased by 10% of the original, the NPV changes to a positive of $22,043 and a IRR of 15.64%. These figures devi ate distant from those in the otherwise normal scenario, which also suggests that NPV and IRR are quite sensitive to changes in the unit volume. In other words, if the unit selling price does not grow as forecasted and that the demand is not as optimistic it is highly possible that the stockholders of the HPL will experience losses. Careful consideration should be given over(p) to the market price and demand, and what is the neat drive force of the private label industry. Industry AnalysisIn 2007, the personal care industry had total gross revenue of 21.6 cardinal and the private label industry accounted for 4 billion of the total with 2.4 billion whole sales from manufactures (Stafford, Heilprin, and Devolder, 2010). HPL, as one of the leading manufactures, had over 28% market share of that total. Exhibit 2 of the private label share of U.S consumer packaged goods expenditure (Stafford, Heilprin, and Devolder, 2010) shows that the unit share and dollor share some(prenominal) grow at approximately 1% each year from 2005 to 2007. One thing I am curious about is that the growth is the true growth or as a result of the pomposity? If it is due to the inflation, the projections of sales would be off the beaten track(predicate) off leading to a stroke of the project. Hansson has to be especially wide-awake with this surmise and weight the inflation effectsaccordingly. It is found that the retail giants and mass merchants have shown increase interests in developing in-store brands (private labels) because of the attractive bare(a) benefits and low costs provided by the private label products. some other reason is to get to a distinct shopping end point for customers and maintain customer loyalty (L.E.K, 2013). One implication for HPL, under such trends, is that the merchandise team should pay more attention to packing. Packaging has become a of the essence(p) element for the retailors and the private label industry. modernistic case not only stren gthens private labels competing power with issue brands but also impress consumes by presenting value adding features including user friendly, modern, and appealing reverse lightning packaging (L.E.K, 2013). If HPL is able to represent the advanced(a) packaging into its program, the company will be more competitive and take more market share even after the contract with its customer expires.Recommendation and railleryThe project has a positive NPV and an IRR greater than the discount rate (9.38%), which means that in theory, Hansson should take this investment opportunity. However, I curiosity if the projections are a bit too optimistic. In this paper, we only test the esthesia on price and volume changes. The steering should look at the factors that will have essential impact on the project such as the limitation of the contract with this customer and the industry growth figures. It is better to break the investment lifetime into two portions, and calculate NPV and IRR s eparately. The first portion is the 3-year contract period, and we are pretty sure that the project will be profitable in this period. The second portion would be the remain period after the contract expires. This is the part where uncertainty problem lies. As we discussed earlier, the customer might or might not continue to buy products with such volumes with HPL, and given the fact that this industry is largely controlled by retailers HPL should make clear whether it is able to find a replacing customer of this scale. Another issue with this investment is that Robert Gates could measuredly push Hansson to take the project because they take the company has reached to a maturity stagecoach and there would be no opportunity for further growth. This is the principal-agent problem we talked about at the start of the module.IfHansson is confident enough in Gates projection, this project is worth taken. Using the data provided in the case, we also calculate the discount rate of the p roject and get a rate (9.44%) that is slightly higher(prenominal) than the rate (9.38%) provided. The required rate of return of equity is determined by the CAPM. The important of HPL is the average beta of similar companies in the similar industry which is a beta of 1.4. Market risk premium, riskless rate, and the portion of debt and equity are also given in the case, and these are used to calculate the WACC. The higher discount rate suggests that the project is riskier than proposed and higher discount rate should be used. An alternative for Hansson could be finding an investor whos willing to invest in the project and share the profits and risks with the company. However, the downside of this option is that the cost of equity is higher than the cost of debt. follow of equity is 10.7% as calculated in the WACC spreadsheet, whereas the cost of debt that is with 25% D/V is only 7.75%. But this option allows Hansson to widen away some of its risks, and that Hansson is less financ ially distressed. That all been said, Hansson should consider the suggestion of incorporate innovative packaging into its product line if Hansson were to take this project after careful evaluation of the financial and non-financial risks. The benefits of innovative packaging would allow HPL stands firmly in its competing power against the competitors.ReferenceStafford, E., Heilprin, J., and Devolder, J., (2010) Hansson Private Label, Inc.Evaluating an Investment in Expansion, Harvard Business School (Accessed 06 April 2014). L.E.K Consulting (2013) generic No More How Packaging designing Can Help Private Label Gain Market Share, administrator Insights, XV(23), pp. 1-4. Available athttp//www.lek.com/sites/default/files/L.E.K._How%20Packaging%20Innovation%20Can%20Help%20Private%20Label%20Gain%20Market%20Share.pdf (Accessed 9 April 2014).