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Settlement of NY real estate litigation
The Vermont Teddy Bear Company's settlement for their closed down New York retail store is a positive step for the company. In March of 2005, the Company continued its settlement discussions with the Company and on April 27, 2005, the Company entered into final settlement of its litigation relating to a former lease for retail space in New York City. Under the terms of the settlement, the Company paid its former landlord $1.15 million when the settlement agreement was executed, including the release of a $150,000 security deposit previously held by the landlord, and the Company will pay the landlord an additional $1.2 million on or before March 15, 2006, without interest ("Vermont Teddy", 2005). While this negatively affected net income for the third quarter in 2005, it also signals an end to litigation expenses and loss of executive focus due to this issue. It
was a good move to get this over with but it lasted for almost 5.5 years and drained the company of both human and financial resources.
Taking the Vermont Teddy Bear Company private was a bold but in the short-term positive move for the company by CEO Elisabeth Robert. Going private will allow the company to focus on execution instead of short-term strategies to pacify Wall Street. Instead of wasting valuable executive time and effort on quarterly financial calls the Vermont Teddy Bear Company is free to follow its long-term plan and execute without the Wall Street push for short term gains. The company wanted to invest in its own infrastructure expansion and improvement but as a public company this would have incurred the wrath of Wall Street. "We were hoping to get [Vermont Teddy Bear] out of the tyranny of quarterly earnings," says founder Chris Covington (Sheahan, 2005). Additionally, the Sarbanes-Oxley Act was set to put tremendous pressure on the company. From both a manpower and financial resource perspective, this Congress enacted law was going to be more than the company could bear (no pun intended). "The prospect of having to enact section 404 [regulations] was onerous on a company like ourselves," says CEO Elisabeth Robert (Sheahan,2006). The sale closed in September of 2005
800-Flowers is a huge threat to the long-term health of the company. They have 120 retail outlets compare with 0 for VTB.
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Negative Consumer Reaction
VTB learned a valuable lesson about consumer and community reaction when for Valentines Day in 2005 the company released a bear in a straight jacket. While the bear was supposed to show that the sender is "crazy about you", some mental heath providers and patients found the bear very offense and called for it to be removed from the market. The company did agree to remove the bear from its product lists but not until after Valentine's Day. As it turned out, this particular product was a top seller for the holiday. This brings a murky point to the surface. At what point to creative genius pose a risk to the company by inciting public angst.
Possible loss of financing
While going public was a great idea according to most, the potential for financing is greatly diminished. As a public company obtaining financing was fairly easy. Banks already knew the companies financial position. As a private company the transparency is no longer there because they do not release financial information. As a result, VTB will have to rely heavily on the Mustang Group that took it private for financing. While that sounds like it should be easy, what happens to the company if the Mustang Group overextends itself or the private equity market dries up? VTB will be forced to look for alternative financing. Because they are a private company the interest rate may be higher and therefore the financing could end up costing more.
Build-A-Bear is moving very fast in the retail industry. The novel thought of a store where children can go and build their own customized bear must be scary for VTB. More importantly Build-A-Bear is aggressively expanding and trying to get into every mall in the country. Currently they have 190 retail stores in the US and Canada and they are expanding internationally into Japan, Denmark, Australia, and France. With revenues of $302 million in 2004 Build-A-Bear is a sleeping giant.
With the almost unheard of rise in fuel costs, most transportation companies have had to pass the cost increase on to their customers. This means that every bear shipped out is more expensive to ship; and that expense is going up. At some point VTB may have to raise its prices when it can no longer absorb the increased costs from supplier FedEx.
Internal Factor Analysis Summary
Internal Factors Weight Rating Weighted Score Comments
Modular Manufacturing 0.20 4 0.8 Doubled Effeciency
Product Line 0.20 4.5 0.9 Outstanding. 27% revenue increase
Calyx & Corolla Floral 0.20 5 1 Cash Cow! Margins at 50%+
Employee Relations 0.20 4 0.8 Employees love to work here
Global reach 0.20 4.5 0.9 Non-existant
Total Score 1.00 4.4
Modular manufacturing places workers in "mods" as they are called in the company. This setup has allowed VTB to double its production while keeping costs relatively flat. This also helps to foster and more collaborative environment where teamwork is valued about individual skill. Modular manufacturing is also on of the main drivers behind employee relations and why employees love their job. The modular approach helps to empower each team to do what is necessary to get the job done.
While most people can call almost every other part of VTB's operation into question, very few if any could question the strength of their product line. This is the company's greatest resource. The creative genius that is cultivated in the design group is a testament to the company's sense of culture and creativity. The product line is the glue that keeps VTB together and solid.
Calyx and Corolla Floral
The acquisition of Calyx and Corolla was an ingenious move by Roberts. This allowed VTB to increase their competitive advantage with 800-Flowers and others. Additionally, Calyx and Corolla is a cash cow with margins approaching 50%. VTB will need this cash to fuel its expansion plans as well as to further other long-term strategies.
You can tell that the employees of VTB really enjoy their jobs. The team-based atmosphere, community involvement, and sense of empowerment really super-charge this team. Furthermore, during the holiday season even the executives leave their offices and go down to the manufacturing floor to stuff teddy bears (Sheahan, 2006). That is a powerful message indeed that leaves the frontline employee with a sense of pride in their jobs knowing that the CEO came and helped out when they needed it.
VTB is really allowing the competition (800-Flowers and others) to gain valuable advantages in overseas markets such as Japan, Denmark, South Korea, and Australia. Without an immediate focus on entering these markets with extreme determination, VTB may find that they are locked out of the when they do try to enter. This will cause the cost of entry to go up to a point where it is no longer financially feasible to expand internationally.
Conclusions and Recommendations
While it is clear that VTB is a very viable business, there are some concerns about their long-term success. With no plans to expand operations into the international market VTB is leaving itself very vulnerable to its competitors. Once they are entrenched it will be very hard to compete with them in a given area. The company should immediately begin planning and searching for financing to expand overseas.
VTB's product line is unquestionable. However, the company is too reliant on seasonal activity. It would be in their best interests to either continue to diversify into other market segments or expand their product line to include customized bears for corporate purchasing or special events. This is where the company could make very good use of the cash that Calyx and Corolla is generating.
At some point VTB is going to have to increase the cost of the bears to keep margins in line due to rising delivery costs that are spurred upward due to fuel cost increases. If VTB is not going to enter the international market then they could use some of the cash from Calyx and Corolla to offset the losses. While their competitors increased prices; keeping prices at the current level would give VTB an advantage. Once fuel costs go back down their competitors will either lower their prices or enjoy the larger margins. However, VTB should see a market share increase by keeping their prices steady while the competition raises theirs.
Perhaps in the future the company can have future product considerations ran past the legal department or an outside firm. This would help alleviate some of the potential for VTB to go in the wrong direction as with the "crazy bear". While the company was not placed in any legal situation as a result it is only prudent to cover their bases to hedge any exposure to future liabilities.
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The Vermont Teddy Bear Co.®, Inc. Announces Acquisition Of Calyx & Corolla Floral Delivery Business retrieved on 5/7/06 from http://www.tsgequity.com/News/pr030902.html
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