Notes on Case
“Jiffy Lube International, Inc.”
Uses of the Jiffy Lube International. Inc. Case
This case is a continuation of the Hindman & Company (Chapter 14) and the Bridge Capital Investors (Chapter 15) cases. Picking up Jiffy Lube International and James Hindman’s progress in 1987, the company, JLI, is reviewing market forecasts and their tremendous success over the last year in hopes of formulating a strategic as well as financial plan for the future. After JLI closed the $10 million private placement, discussed in the Bridge Capital Investors case, the case documents the initial public offering and a secondary offering. Thus, this series of cases continue to introduce a wide range of financial sources.
Positioning and Objectives
This case drives home the fact that business strategy sets the requirements and the pace for the financial strategy. This case is particularly powerful because these issues are complicated and enriched by the rapid growth plan chosen by Hindman.
Preparation Questions
Students are asked to consider the following questions:
1. Evaluate Jiffy Lube International’s performance, opportunities, and financial strategy.
2. What should Hindman do?
3. What should Don Remey do in order to realize his investment objectives?
4. As a new outside director to Jiffy Lube International, what questions would you raise and what recommendations would you offer to management?
Class Discussion
Introduction/Current Situation
Begin the discussion by asking a student how JLI has done since the BCI case (December 1985). Briefly the following key points should be covered:
In 1987, JLI had close to 600 units—rapid growth strategy met. Amid increased competition, JLI has maintained a 63 percent market share. Consultants had predicted that this quick-lube market will continue to grow.
Follow-up by asking how Hindman has financed this growth. The time lines of the financings can then be listed on the board.
December 1985 Private Placement $10 million
Pennzoil Real Estate 100 million
June 1986 Initial Public Offering 28 million
July 1987 Secondary Offering 35 million
TOTAL 175 million
Another interesting way to stimulate the discussion is to take a vote on the question: Are they on the right track? How many students think they are growing too fast? Just about right? Too slow? Another question to take a vote on is Who would be a buyer? A seller of the stock? These questions are a wonderful launching point for a discussion of strategy and the financial requirements necessary to execute a rapid growth strategy.
Strategic Planning
Some questions to start off the discussion might include:
· What will Hindman say in the board of directors meeting?
· What should he say? What should he do? Why hasn’t he?
· What issues do you as a member of the board of directors want to have surfaced?
· Why hasn’t Hindman brought these issues up?
· What can we anticipate? What should we focus our attention on?
In some classes, I have asked students to prepare in advance a growth strategy, including the specific number of units and the sales targets for the next four years. In addition, I have asked students to come to class with a financing plan (How much? For what? When?) to execute their growth strategy. The votes taken earlier, usually help to identify contrasting viewpoints to be drawn out at this time. What assumptions have Hindman and the “growing just right” voters made? What can go right? What can go wrong?
Characterizing Hindman can be useful in hypothesizing about what will happen in the meeting and in the future of JLI. What kind of player is Hindman? Is he risk adverse or not? Hindman was not satisfied with his accomplishments in the nursing home business, so he is building JLI. How far is he willing to go to make this a success? One quote that I have used to get students to think about themselves and the entrepreneur in the case is by George Bernard Shaw:
The reasonable man adapts himself to the world; the unreasonable man attempts to adapt the world to himself. Therefore, all progress depends on the unreasonable man.
How willing is Hindman to attempt to make the world adapt? What does that mean now versus when he was starting with his first unit? How far has he gone? Can he turn back at this point? How much further can he go? Is he a simple example of progress? Is there a point where “constructive destruction” becomes simply destruction?
Jiffy Lube International Figure #1
Jiffy Lube International
1985 / 1986 / 1987 / 1988# of Service Centers / 208 / 348 / 561 / 823
Total Sales (millions) / $14.5 / $29.5 / $44.1 / $78.2
Net Income (000s) / $603 / $1,212 / $3,466 / $6,909
Earnings per Share / $0.09 / $0.16 / $0.28 / $0.44
Total Assets (millions) / $34.2 / $50.7 / $102.4 / $225.8
(Also presented as Transparency Master 16-9 in Part IV of this manual.)
Jiffy Lube International Figure #2:
Jiffy Lube International (millions)
1985 / 1986 / 1987 / 1988Working Capital / $.375 / 4.5 / 2.8 / 11.98
Long-term & Sub-debt / $10.2 / 19.7 / 26.7 / 79.2
Capital Lease Obligations / $2.3 / 9.6 / 19.0 / 36.1
Stockholders Equity / $4.5 / 6.8 / 39.5 / 79.4
Max. Stock Price / n.a. / 18.00 / 36.00 / 25.25
(Also presented as Transparency Master 16-10 in Part IV of this manual.)
These figures summarize the financial highlights. Usually it works well to cover the 1987 and 1988 figures later in the discussion. Clearly, JLI has crafted an aggressive growth strategy which has been successful in an emerging market, but at what cost?
Jiffy Lube International Figure #3:
Jiffy Lube International
Free Cash Flow Characteristics (000s)
3/31/86 / 3/31/87 / 3/31/88Net Income / $1,212 / 3,466 / 6,909
Plus Interest / 1,197 / 1,362 / 2,138
Plus Taxes / 720 / 3,333 / 5,003
Earnings Before Interest and Taxes / 3,129 / 8,161 / 14,040
Earnings Before Interest After Taxes* / 1,689 / 5,386 / 9,266
Plus depreciation and amortization / 1,140 / 1,261 / 2,773
2,829 / 6,647 / 12,309
Change in Working Capital / 4,492 / 2,760 / 11,983
Present Working Capital
(Current Assets less Current
Liabilities) less prior fiscal Year
Working Capital / (357) / (4,492) / (2,760)
Change in Working Capital / 4,135 / (1,732) / 9,223
Less Change in Working Capital / (4,135) / 1,732 / (9,223)
Less Capital Expenditures / (14,695) / (42,077) / (83,886)
Less Change in Other Assets / (2,338) / (10,466) / (17,468)
(18,339) / (44,164) / (98,518)
*tax rate assumed are 34 percent for 1988 and 1987, and 46 percent for 1986.
(Also presented as Transparency Master 16-11 in Part IV of this manual.)
These figures bring to light an interesting question: How costly is a growth without profitability?
Harvest Issue
How would you harvest your investment if you are Don Remey of BCI? (Assume that 25 percent of their holdings was sold at the IPO.) Would you sell at the time when the consultants are cultivating a buying public for your holdings? Should you sell when the market is booming? Would you be selling your upside?
As a stockholder, would you advise Hindman to stay the course? How sustainable is this growth strategy?
Handout Case B (Supplement 292-117 available from Harvard Business School case services.)
The growth strategy has been successful as the service centers reach 823. The profitability of the units have increased (double projections!). But, a look at the balance sheet reveals two entries: accounts and fees receivable $19,753 and note receivable 11,844, totaling $31,597 (late payments from franchisees?) Also an increase in the allowance for doubtful accounts ($2,054) suggests that the quality of the franchisees is dropping as the number of units is increasing. The investment in advances to affiliates seem to collaborate these assumptions, which had the attention of short sellers in the summer of 1988. (See Kevin G. Salwen, “Jiffy Lube Raises Some Eyebrows With Loans To Its Franchisees For Their Upfront Expenses,” The Wall Street Journal). Meanwhile long-term debt jumped from $26 million in 1987 to $79 million in 1988. How forgiving is this type of financing? What has to happen to sustain growth? What are the risks for the company, lenders, and shareholders?
When Steve Spinelli, president of the franchisee associate, (now Assistant Professor and John H. Mueller Term Chair in Entrepreneurship at Babson College and co-author of New Venture Creation) spoke in class once, he commented that from the beginning Hindman had put the number of units up on a bulletin board in the reception area. But once the company went public, he kept track of the share price instead. That simple observation gives a bit of insight into the motivations and how the incentives changed over time.
The final straws were the $78.9 loss in fiscal year 1989, default on $131.9 million in long-term debt, franchisee leases increased to $43.5 million, accounts receivable also rose from 87 to 108 days, operating under forbearance agreements on $54 million, and cash dropped to a low of $6.2 million. In 1990 these forced Hindman to restructure JLI.
Pennzoil acquired 80 percent of JLI and control over the board of directors. The debt was restructured, such that Pennzoil cancelled $15 million of the subordinate convertible debentures and paid $28.5 million in cash. The unsecured lenders cancelled $69 million for $30.8 million and $27.8 million in unsecured notes at 12 percent for seven years. Litigation and class action suits followed, as Forbes (December 8, 1990) reported that franchisees were suing Pennzoil for hundreds of millions for starting a policy whereby their own chain was in direct competition. In 1991, Pennzoil bought out all the remaining public shareholders.