Dupont Analysis on Jc Penney and Nordstrom

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Dupont Analysis
J.C. Penney's, Inc. versus Nordstrom, Inc. | Fiscal years 2005 and 2004 Refer to Figure 1.
During fiscal year 2005, both J.C. Penney's Inc. ("Penney's) and Nordstrom, Inc. ("Nordstrom") provided similar and high returns on their shareholder investments, at 27% and 26%, respectively. Both companies' 2005 returns on equity ("ROE's") are up from prior year. While Nordstrom posted a significant increase in ROE by 20% over prior year, Penney's ROE is up 152% over its 2004 ROE.

While it is notable that both companies have strong 2005 ROE's and have increased their ROE's since 2004, there is a very large variance in ROE growth between the two companies. This suggests that although the 2005 ROE's are similar, the companies must have taken different paths to achieve these returns. Overall differences in net income reflect that Nordstrom saw its earnings driven by performance on continued operations, while Penney's achieved its result by showing earnings from discontinued operations. Also notable is that Penney's reduced its owners' equity from 2004 to 2005 while Nordstrom increased its owners' equity.

Further analysis using the Dupont Model reveals that Nordstrom managed its assets more efficiently than Penney's in 2005 and 2004 as shown by its higher return on assets ("ROA") (11.19% vs. 8.73% for 2005 | 8.56% vs. 3.71% for 2004). Penney's also relied more heavily on leverage than did Nordstrom in both years, with a higher capitalization ratio (3.11% vs. 2.35% for 2005 | 2.91 vs. 2.57 for 2004).

Nordstrom's advantage in ROA was driven primarily by its higher asset turnover when compared to Penney's (1.57 times vs. 1.51 times in 2005 | 1.55 times vs. 1.28 times in 2004). Asset turn in general was driven in both years by Nordstrom's much higher inventory turnover (5.11 times vs. 3.55 times for 2005 | 4.97 vs. 3.54 for 2004). The effect on ROA was offset in 2005 by Penney's reduction of cash balances primarily to repurchase common stock during 2005. Given the variances in cash, analysis reveals that Nordstrom has a much lower investment in inventory necessary to generate sales than does Penney's.

Additionally, Nordstrom has a stronger profit margin than Penney's (7.13% vs. 5.79% in 2005 | 5.53% vs. 2.9% in 2004) also driving ROA. Although Penney's enjoyed a more favorable cost of sales than Nordstrom in both years, it is outweighed by Penney's higher selling, general and administrative, interest and bond costs, as a percentage of sales. Nordstrom also enjoyed higher income from its other activities in both years ("other income and finance charges") than did Penney's.

Penney's higher reliance on leverage (higher capitalization ratio) is primarily driven by a more clear reliance on debt. At the end of 2005 Penney's had a long-term debt to assets ratio of .28 when compared to Nordstrom at .13. There was less of a variance between the companies at the end of 2004, but Penney's still exceeded Nordstrom at .25 versus .20. Penney's also had lower interest coverage in 2005 at 8.8 times when compared to Nordstrom's 19.7 times. 2004 was similar with Penney's showing a lower interest coverage ratio of 3.11 compared to Nordstrom's 8.42. The debt has allowed Penney's to focus on increasing ROE by relying less on shareholder investments. In fact, Penney's has been able to reduce its overall equity by repurchasing common stock shares. This has required Penney's to maintain a higher solvency position than Nordstrom as evidenced by Penney's higher current and quick ratios at the end of both years. While both companies have strong and growing ROE's, Nordstrom demonstrates greater efficiency in management of its assets and relies less on leverage than does Penney's. We also notice a more drastic change in the ratios of Penney's from 2004 to 2005, and a more consistent trend with Nordstrom for the same periods.

Figure 1.
Ratios for Dupont Analysis
Return on owners' equity
Net income 1 ,088 524 551 3 94
Owners' Equity 4 ,007...
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