Baby Dolls. 4 Session 1.

P&L analysis

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Based on Exhibit 3: The sales are considered to be stagnating, although the advertising and marketing expenses decrease (should at least be at the same level to support sales). Decrease in overheads we consider to be too optimistic no details on potential economies is provided Significant increase in financial expenses is expected mainly related to the gap between days of receivables and payables (growing financing requirements). This negative trend will continue along with sales growth unless we equilibrate the payment terms policy (clients Vs suppliers) Decrease in ROS mainly driven by the decrease in Gross Margin. BS analysis

2.

The company does not have enough own funds to finance the operations. The only months when the company has cash surpluses - between March and May. Mismatch between trade payables payment terms are significantly worse comparing to receivables collection ones. Currently the company is growing, financing its operations through the use of credit. The credit has helped the company to operate during peak seasons resulting in significant financial expenses (related to borrowed funds). This practice does not seem to be sustainable in the medium term. Last year, the company almost reached the limit of financing (20 million), thus is unlikely that the company will be able to grow if it continues to finance its operations in this way. Baby dolls needs to reformulate its cash management policy in order to start generating cash and to have a sustainable business model. One of the ways of doing that relates to receivables collection days improvement (decrease of days of collection). Inventory days do not represent an issue. Given the seasonality of the business, the best 2 months to understand companys financial requirements we consider December and January, as this are the critical months in terms of operational cycle (with the lowest number of (NFO-WC)). 3. China P&L forecast

In terms of expected profit, it is worth to move to China, as the expected profit would be four times the one expected in Spain, although credit line limit would require reconsideration (significant increase due to prepayments required) 4. China BS forecast

Comparing NFO, WC and Credit required for operations in China, we noticed that in absolute terms, main items tend to increase in China scenario. Furthermore, in case we move the operation to China, we may face financial problems lack of free financing in the form of trade payables our funding would be based only on external loans. In addition, between November and January, the Credit needed would be much higher than EUR 20 M.

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6.

China an option? We would not recommend moving the operation to China, based on the following assumptions: a. Operations: no experience managing operations overseas and probable loss of flexibility b. HR: no experience doing business in China. Moreover, they may have different labor laws than Spain. c. Financing: need for financing would be higher than current. Prepayments may damage our financial stability since our cash collections cycle is very long (120 days) d. Sales: need for better planning due to more transportation time. Most risky month

December, since our receivables balance reaches its peak. In case of none payments / delay in payments from our clients we will not be able to pay to our bank and execute other payments