Sears vs. Walmart

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Financial Performance Comparison
Profit Margin
Profit Margin, Sears Co.|
 | 1997|  | 1996|  | 1995|
Net income| 1,188| -6.53%| 1,271| -29.43%| 1,801|
Total revenues| 36,371| 7.76%| 33,751| 8.41%| 31,133| Profit Margin| 3.27%|  | 3.77%|  | 5.78%|

This Profit Margin ratio is acceptable, though not high. The result means that for each dollar of sales at Sears Co., the company earns only 3.27 cents in 1997, compared to 3.77 cents and 5.78 cents in 1996 and 1995 respectively. This slim and downward trend profit margin obviously won't make its investor happy. Profit Margin, Wal-Mart Inc. (Fiscal years ended Jan 31)|

 | 1998|  | 1997|  | 1996|
Net income| 3,526| 15.38%| 3,056| 11.53%| 2,740|
Total revenues| 119,299| 12.36%| 106,178| 12.03%| 94,773| Profit Margin| 2.96%|  | 2.88%|  | 2.89%|

Assets Turnover Rate
Assets Turnover Rate| Sears| Wal-Mart|
| 1997| 1996| 1997| 1996|
Sales| 36,371| 33,751| 119,299| 106,178|
Total Assets| 38,700| 36,167| 45,384| 39,604|
Assets Turnover|  | 0.94| 0.93| 2.63| 2.68|

The net income increases in parallel with the total revenue’s increase, which is a positive indicator. There is no significant difference in profit margin between Sears and Wal-Mart. The upward trend PM together with unbeatable assets turnover rate, make Wal-mart ahead of Sears. Sears’ high margin won't necessarily earn healthy returns for its shareholders. It all depends on the assets turnover they are able to maintain given that level of profit margin. However, Sears’ ROE is 22% in 1997, exceeded Wal-Mart’s ROE of 20%. To investigate this, we believe the disaggregation analysis should be introduced.

ROE Disaggregation Analysis
ROE = Profit Margin * Assets Turnover * Leverage Ratio
Return on equity being made up of three parts - profit margin, asset turnover rate, and leverage. Breaking ROE into these component parts not only allows investors to determine...
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