Sears vs. Wal-Mart
Sears and Wal-Mart are both nationwide retailers, but their similarities are only skin deep. Sears started to lose its dominance in the early 1980s. In an attempt to boost the dwindling market share, Sears started to issue proprietary Sears Card, which gave customers payment flexibilities. A new slogan focusing on the "softer side of Sears", and a revised product mix, were created to appeal to the middle-class female shoppers. On the other hand, Wal-Mart focused to achieve efficient operations, vertical integrations and high bargaining power, which allowed a low cost approach. The slogan "Always low prices" was realized by Wal-Mart’s ability to deliver high "value for money" to customers across genders. Wal-Mart did not issue its own proprietary credit cards. While Wal-Mart had become a powerhouse, Sears had been struggling. Yet, Sears’ 22% ROE trumped Wal-Mart’s 19.7%. The two companies were drastically different, and would require the ROE to be broken down into its components to reveal the true driving forces. Exhibit A shows that the two companies had almost identical net profit margin (ROS). Wal-Mart’s had high asset utilizations (ROA and Asset Turnover), while Sears’ high financial leverage of 6.6 contributed to the high ROE. In conclusion, Wal-Mart depended on its efficient operations to provide strong returns, while Sears used debt financing to drive its ROE. More ratio analysis can reveal the true strengths and weaknesses of the two companies. Below highlighted some ratios (see Exhibit B) that are important in assessing Sears and Wal-Mart current and future value creations abilities: · Sears relied heavily on debt financing. Compared to ROE, Return on Invested Capital (ROIC) is a superior indicator because ROIC includes long term debt in the denominator. Securitization requires a repayment, Interest Coverage Ratio, Current ratio and Debt Cash Flow Coverage (OCF/Debt) can be used to determine its financial soundness in...
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