Analysis:

Wal-Mart operates fewer stores than Sears but is ahead in terms of total selling area by a ratio
of 3.4:1. Between 1995 and 1997, Sears retail store revenue per selling square foot
was not only lower than that of Wal-Mart but in decline.

Sears allows customers to pay for merchandise over time if they use the companys
proprietary credit card. Sears opened 24 million new credit card accounts over a 3 year period
and had 27 million active customer credit accounts with an average balance of $1058 in 1997.
The balance on credit cards accounted for 90% of the total receivables. In contrast, Wal-Mart
does not have their own proprietary credit cards and its customers may use a MasterCard with
a Wal-Mart logo that is issued by the Chase Manhattan Bank.

Sears total revenues of $41 billion were a third of Wal-Marts revenues. 55.1%
of sales were charged to a Sears Card. 12% of total revenues came from credit operations.
Sears was able to reduce risk and generate revenues through securitization whereby
receivables were converted to pass through certificates sold to third partiers and this was
reported as sales for financial statement purposes. Cost of sales was equivalent to 65% of total
revenues.

Bad debts cost Sears approximately $1.5 billion. Provision for uncollectible accounts was 31%
of credit revenues, and the delinquency rate went up to 7% from 5.4% the previous year. At
200 days Sears average receivables collection period was very high when compared to
Wal-Marts 3 days. Sears1997 net income of 1.19 billion was down $83 million
or 6.5% from 1996. Cash outflow from operating activities exceeded inflow by $556

million.

In 1998, Wal-Mart generated net income of $3.5 billion and its total revenues increased by $13
billion from the previous year to reach $118 billion. Cost of sales was equivalent 78% of total
revenues. The company repurchased 44 million shares for $1.57 billion.

At 200 days Sears average receivables collection period was very high when compared
to Wal-Marts 3 days. Wal-Marts inventory turnover of 5.78 edged out
Sears 5.55, leading to a 3 day difference in the average number of days in inventory.
Wal-Marts return on asserts of 0.083 was higher than Sears 0.032. Due to
Sears heavy reliance on debt its debt service coverage ratio was 1.1 whereas Wal-
Marts was 11.7.

With the exception of ROE, most financial ratios and even absolute values bear testimony to
Wal-Marts recognition as the leader in the retailing industry. The reason behind
Searss higher ROE can be explained by a comparison of the 3 ratios that constitute the
ratio known as DuPont identity that is profit margin, asset turnover and equity multiplier.
While both firms had similar profit margins, Wal-Marts asset turnover was 2.8
compared to Sears 1.1 due to the firms effective utilization of assets and lease
agreements to facilitate revenue generation.
However, Sears equity multiplier of 6.6 exceeded that of Wal-Mart which had a equity
multiplier of 2.5. In the case of this ratio, a high value indicates that a greater portion of assets
have been financed with capital other than equity. A greater proportion of Wal-Marts
assets were financed through equity compared to Sears.

Due to Sears heavy reliance on debt, its debt service coverage ratio was 1.1 whereas
Wal-Marts was 11.7. High debt and low equity levels improved Sears ROE but
the company is relatively more risky. However, its earning per share of $3 was higher than
Wal-Marts $1.6, as

was its dividend per share which was $1.13 compared to $0.27 for Wal-Mart.