Financial Performance Comparison
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 Walmart 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
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 company’s 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-Mart’s 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-Mart’s 3 days. Sears’1997 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
Sears Current Ratio Current Assets 30682 1 .943129 Current Liabilities 15790 The current ratio of Sears for the year 2007 is arrived at by dividing the current assets of that year amounting to 30 ,682 by the current liabilities of the same year amounting to 15 ,790 . The results is 1 .94 times . This is a good indication that...