SCMHRD

FSA
Sears vs Walmart

Syed Tarab Ahmed 2010A36 Amrish Kumar 2010B09 Abhishek Maheshwari 2010B25 Karan Saini 2010B38 Shivangini Vardhan 2010B44

ANSWER 1:

RETAIL STRATEGY SEARS VS WALMART

Sears Stores and Retail Area : The no. of stores has gone up by 15% in 2 years. No. of stores at the end of 1995 were 3070 and they have gone up to 3530 by the end of 1997. However the retailing space has increased from 81.4 million sq. feet to 92.7 million sq. feet during the same period, registering an increase of 13.80% in 2 years. Leasing Policy has greater effect on income statement : Operating leases have increased from 357 million in 1995 to 439 million in 1997, registering an increase of 23% over 2 years. Capital leases have increased from 433 million in 1996 to 498 million in 1997, an increase of 15% over 1 year. Higher rentals and lower depreciation. Riskier Credit Cards policy: Sears bore the risk of default by customers in making payments and asking customers to pay over time. Segmentation : Segmentation for reporting was done on the basis of business segments. Thus the segments here are: retail, Services and credit card. Charged Fees to suppliers : Sears charged slotting fees ,promotional, advertising and stocking fees as per a widespread industry practice.

Walmart Stores and Retail Area: The no. of stores has gone up barely by 5.17% in 2 years. No. of stores at the end of January 1996 were 2667. They have gone up to 2805 by the end of January 1998. However the retailing space has increased from 278 million sq. feet to 313 million sq. feet during the same period, leading to an increase of 12.58% in the retail sales area. Leasing Policy : Operating leases have increased from 531 million at the end of January 1996 to 596 million at the end of January 1998, registering an increase of 12.24% over 2 years. Capital leases have increased from 2782 at the end of January 1997 to 3040 at the end of January 1998, an increase of 9.27% over 1 year

Credit Cards : the risk of late payments or failure to make payments was borne by Manhattan bank. Segmentation: Segmentation here was done on the basis of the type of store: thus we have the Wal-Mart discount store, Sams club membership warehouses and Wal-Mart supercenters. No fees charged : Wal-Mart differs from its competitors by charging no fees to suppliers. Walmart pays the supplier only for the actual cost of the goods themselves.

Q-2. What is driving the performance of the two companies during fiscal 1997, in terms of ROE?
Answer: The Dupont Analysis, by breaking up ROE into 3 factors tells us the primary reason for the

rise/fall in ROE. ROE is defined as Net Income/Shareholders Equity Or, ROE = Net Profit Margin*Asst Turnover*Leverage

ROE = Net Income/Net Sales* Net Sales/Asset * Asset/Shareholders Equity If a companys ROE increases due to increase in Net profit margin or return on asset turnover then it is very positive for the company. But increase in ROE due to increase in leverage makes the company more vulnerable to changes in the economy. Below are the net profit margin, asset turnover and leverage of Walmart and Sears before and after modification Ratios Sales Net Profit Average Total Assets Networth Net Profit Margin Asset Turnover Leverage (Equity Multiplier) ROE Walmart $1,17,958 $3,526 $42494 $18503 2.99% 2.78 2.30 Sears $41,296 $1,188 $37433.50 $5862 2.88% 1.10 6.40 Walmart(Post modification) $1,17,958 $3,524 $42494 $18503 2.99% 2.78 2.30 Sears(Post modification) $41,296 $1,303 $37433.50 $5862 3.16% 1.10 6.40

19.06%

20.27%

19.06%

22.23%

Walmart has higher efficiency in utilizing its assets to generate sales as compared to Sears. Therefore the efficiency with which Walmart is using its asset in creating value for the company is better than that of Sears. The primary reason Sears is reporting a higher ROE is due to its highly leveraged position. It has a leverage of 6.40 as compared to that of Walmart of mere 2.30. A highly leveraged firm is very vulnerable to changes in the economy as well as interest rate movements. Sears is facing several other problems like low asset turnover ratio, low interest coverage ratio and high cash to cash cycle. Hence we can safely conclude that though Walmart is projecting a lower ROE, it is financially more sound than Sears. Also Sears is dependent on its credit card business for sales whereas Walmart relies on lower prices which results in higher sales leading to higher profitability.

 But the real comparison of Sears and Walmart could be done only if we compare the retail business of Sears with that of Walmart. Since Sears revenue includes revenues from credit card operations as well, it is reasonable to compare only the retail revenues of both the companies. SEARS DUPONT ANALYSIS FOR ITS RETAIL BUSINESS Net Income/Sales

ROE =

Sales/Assets Asset Utilization

* Assets/Equity

Return on Sales Avg. Equity Avg. Assets ROE Dupont ROE 5,403.5 15,072.5 10.99% 0.016 10.99%

* 1,188.0

Leverage

2.41

2.79

As we can from the revised Dupont analysis of Sears, the ROE has gone down from 22% to 11% i.e., nearly halved. When we compare this figure with that of Walmart, which has an ROE of 19% for its retailing Business, we can infer that Walmarts retailing business is performing better than that of Sears and so as an Analyst, we can say that Walmart could prove to be a better retailing company than Sears in terms of profitability parameters. The credit card business is driving the profitability of Sears whereas Walmarts profitability is driven by lower Prices.

ANSWER 4 The current performance of both the companies can be reliably evaluated by using ratio analysis as a tool. Evaluation of current performance refers to the comparison of a companys performance over years. Also since the accounting policies of a company remain same over the years, the comparison becomes more useful. The various ratios of the two companies have been analyzed over 1996 and 1997 and important conclusions have been drawn: Ratio Analysis of Sears, Roebuck and Co. 1) Study of Profitability Gross Profit Margin (GPM) :The gross profit margin ratio shows the profits relative to sales after the direct production costs are deducted. The Gross Profit Margin ratio of Sears, Roebuck and Co. has increased from 34.61% in 1996 to 35.18% in 1997. This increase suggests that the production operation has been smooth and the profit margin of the company has increased. In case of Sears it is seen that the increase in sales revenue from 1996 to 1997 is 8.49% whereas the increase in operating cost from 1996 to 1997 is only 7.55%, hence suggesting an increased gross profit margin on sales. Net Profit Margin (NPM): The Net Profit Margin Ratio shows the earnings left for shareholders as a percentage of sales. The Net Profit Margin of Sears has reduced from 3.34% in 1996 to 2.88% in 1997. It is seen that though the sales revenue of Sears has increased by 8.49% from 1996 to 1997 but the total cost over these years has increased by 9.23% which is more than the increase in sales and hence reducing the percentage of earnings left for shareholders. Looking at the constituents of total cost it is found that two components Provision for bad debts and Depreciation and Amortization have increased by 57.77% and 12.76% respectively which is much higher than the percentage increase in sales revenue. Also the reaffirmation charge of $475 million has pulled the total cost upwards. Growth of NPM : The NPM grew by 19.35% in 1996 over 1995 whereas the NPM reduced by 6.99% in 1997 over 1996. The out of proportion increase in total cost in 1997 has been attributed to the above mentioned reasons. Growth of GPM :The GPM grew by 12.85% in 1996 over 1995 and in 1997 it grew by 10.26% over 1996. Hence the pace of growth has slowed down which is normal as the industry matures and the profit margins become lesser. Growth of Sales : The sales in 1996 grew by 9.27% over 1995 but this growth has slowed down in 1997 to 8.49% over 1996. Return on Assets (ROA): The ROA in 1996 is 5.97% whereas in 1997 it has come down slightly to 5.62%. 2) Study of Activity / Turnover

 Current Ratio & Quick Ratio : The current ratio is a measure of the firms liquidity. The current ratio of Sears is almost constant over 1996 and 1997 and has just moved from 1.903 in 1996 to 1.943 in 1997. The Quick Ratio also is almost constant and has moved from 1.509 in 1996 to 1.511 in 1997. Inventory Turnover Ratio :The Inventory Turnover Ratio of Sears is also almost unchanged from 8.193 in 1996 to 8.187 in 1996. The Average number of days the inventory is in stock is also almost the same 44.551 in 1996 and 44.582 in 1997. Payables Turnover Ratio : The average number of days for which payables are outstanding has reduced from 105.955 in 1996 to 89.171 in 1997. This indicates that the payment to creditors is made faster which can be seen from the reduced average creditors from 1996 to 1997. Working Capital Turnover & Fixed Asset Turnover : Not much change is seen in the working capital turnover and the fixed asset turnover ratios also. The working capital turnover ratio has slightly reduced from 2.820 to 2.773 from 1996 to 1997. Whereas, the Fixed Asset Turnover ratio has slightly increased from 5.585 to 5.617 from 1996 to 1997. 3)Study of Solvency Debt to Total Capital :The debt to total capital ratio has reduced slightly from 0.750 in 1996 to 0.746 in 1997. Hence the proportion of debt in the total capital has slightly reduced, though there is not much change in the composition of debt between current and long term debt. Debt to Equity : The Debt to equity ratio has come down from 5.484 in 1996 to 4.923 in 1997. This is attributed to an increase in the total equity in the capital of Sears. Long Term Debt to Equity : The LT Debt to Total Equity has reduced from 2.461 to 2.230 from 1996 to 1997. Here we see that although there has been an increase in the LT debt from 1996 to 1997 but the increase in equity is more and thus the ratio is pulled down. Times Interest Earned : In 1996 the EBIT was 3.053 times the Interest earned. Whereas in 1997 the EBIT was 3.385 times the interest earned. This can mainly be attributed to the increase in EBIT in 1997. Fixed Charge Coverage : The Fixed Charge Coverage for any firm shows its capacity to service the debt. This ratio for Sears is below 1 in 1996 which clearly shows its inability to service the debt and moreover this ratio is worsened in 1997 and has become 0.736. Ratio Analysis for Wal-Mart Stores, Inc. Gross Profit Margin (GPM) : The GPM Ratio of Wal-Mart has shown a slight increase from 20.36% in 1996 to 20.79% in 1997. This is because the sales have increased by 14.85% from 1996 to 1997 whereas the operating cost has increased by only 12.34%. Hence the profit margin on sales has increased.

 Net Profit Margin (NPM) : The NPM of Wal-Mart was 2.94% in 1996 and has slightly increased in 1997 to 2.99%. This is because the total increase in sales from 1996 to 1997 is more than the increase in the total cost over that period. Growth of NPM : The NPM grew by 11.99% in 1996 over 1995 whereas the NPM growth is 16.90% in 1997 over 1996. This acceleration in the growth of the NPM is favorable for the company. Growth of GPM : The GPM grew by 11.65% in 1996 over 1995 and in 1997 it grew by 14.85% over 1996. Hence the pace of growth has increased again pointing at the companys good performance. Growth of Sales : The sales in 1996 grew by 12.00% over 1995 and this growth increased in 1997 to 12.49% over 1996. Return on Assets (ROA) : The ROA has increased from 9.17% in 1996 to 9.68% in 1997 again indicating the good performance of the company. 2)Study of Activity / Turnover Current Ratio & Quick Ratio :The current ratio is a measure of the firms liquidity. The current ratio of Wal-Mart has reduced from 1.642 in 1996 to 1.338 in 1997. This is because of the increase in the current liabilities of the firm. The Quick Ratio though has increased from 0.158 in 1996 to 0.168 in 1997 in spite of an increase in the current liabilities. This is due to an increase in the quick assets which is more than an increase in the current liabilities. Inventory Turnover Ratio : The Inventory Turnover Ratio of Wal-Mart has increased from 6.596 in 1996 to 7.150 in 1997 and hence the average number of days for which the inventory is in stock has reduced from 55.335 in 1996 to 51.047 in 1997. This can be attributed to the increased sales for Wal-Mart. Payables Turnover Ratio : The average number of days for which payables are outstanding has increased from 47.89 in 1996 to 56.125 in 1997. This indicates that the payment to creditors is made slower than 1996 which can be seen from the reduced average creditors from 1996 to 1997. Although this change is beneficial for the company but it has to be assured that the creditors approve of it. Working Capital Turnover & Fixed Asset Turnover : The working capital turnover ratio has increased significantly from 14.903 in 1996 to 21.435 in 1997. This change can be attributed to the increase in sales from 1996 to 1997. Also there is a significant increase in the current liabilities from 1996 to 1997 which has led to an increase in the turnover of working capital. The Fixed Asset Turnover ratio has slightly reduced from 5.159 to 4.997 from 1996 to 1997. This can be attributed to an increase in the fixed assets which is more than the increase in sales.

3) Study of Solvency Debt to Total Capital :The debt to total capital ratio has increased marginally from 0.530 in 1996 to 0.532 in 1997 indicating that the proportion of debt in the capital of the firm is almost the same. Debt to Equity : The Debt to equity ratio has increased from 1.223 in 1996 to 1.304 in 1997. This is attributed to an increase in the debt component in the capital of Wal-Mart. Long Term Debt to Equity :The LT Debt to Total Equity has reduced from 0.584 to 0.523 from 1996 to 1997. Here we see that although there has been an increase in the LT debt from 1996 to 1997 but the increase in equity is more and thus the ratio is pulled down. Times Interest Earned: In 1996 the EBIT was 11.423 times the Interest earned. Whereas in 1997 the EBIT was 14.661 times the interest earned. This can mainly be attributed to the increase in EBIT in 1997 and the reduction in interest expense. Fixed Charge Coverage :The Fixed Charge Coverage for any firm shows its capacity to service the debt. This ratio for Wal-Mart has reduced very slightly from 4.498 in 1996 to 4.493 in 1997.

Answer 3 & 5.xls