Case study

Pages: 38 (4179 words) Published: October 22, 2013
Kohl’s Corporation and Dillard’s Inc.—
Financial Statement Analysis
Teaching notes:
This case uses the multiplicative version of the DuPont model to analyze operations at two retail companies. Both companies have very straightforward financial statements and most students are familiar with the companies. The analysis can be as simple or as multi-faceted as instructors choose. The case begins with the qualitative side of financial statement analysis. The questions here are unstructured so that instructors can tailor the case to their preferences. The case then walks students through analyses of profitability, asset efficiency, leverage, and cash flow.

A common mistake is to calculate ratios without using the average balance sheet numbers. To facilitate this analysis, we added a third year to both companies’ balance sheets. The numbers for Dillard’s for 2005 have been modified to reflect the 2007 restatement. See note 2 to Dillard’s 10-K. The case includes all of footnote 1 (Significant accounting policies) for both companies. That way, instructors can encourage or require students to contrast and compare accounting policies between the two companies. We also included the long-term debt footnotes and the footnote detailing leases and other commitments. For Dillard’s we include footnote 2 that details the restatement in the financials. This footnote informs our restatement of the 2005 balance sheet. Instructors can students go to www.sec.gov for the companies’ entire annual reports.

About tax rates: Both companies’ effective tax rates and statutory rates are essentially the same. Students can calculate the effective tax rates from the income statement and instructors can discuss the difference between statutory rates and effective rates. No questions explicitly require students to use tax rates.

About Operating Leases: Both companies have operating leases primarily related to store space. The case does not explicitly require the leases be capitalized but the solution shows that the liquidity and solvency ratios are slightly changed by doing so. We make the following assumptions: •

To discount the future lease payments, we use the interest rate implicit in each company’s capitalized leases. As you would expect, the rate is higher for Dillard’s because of higher leverage and weaker credit ratings. These rates are: Kohl’s 7.93% and Dillard’s 9.37%. Instructors may choose to give these rates to the students in advance.

We assume that the payments due each year from year 6 and beyond are approximately the same amount as in year 5. Thus, for Dillard’s the last payment will occur in 2013: \$33,143 / \$34,118 = 1. For Kohl’s, there will be 18.92 payments, which we rounded up to 20 for the case instructions.

Kohl’s Corporation & Dillard’s Inc.—Financial Statement Analysis 1

Kohl’s Corporation and Dillard’s Inc.—
Financial Statement Analysis
a. Industry Analysis
There are several recent macroeconomic factors that have affected the retail department store industry. First, rising energy costs have created a cash crunch on the lower and middle class. In addition, increased interest rates and a slowdown in the housing market have added to consumers’ woes. The retail department store industry is divided into four main segments: discount, moderate, better, and luxury. The industry is mature and highly competitive. Consequently, retailers find it difficult to raise their prices. Instead, retailers focus on strategies to keep costs low, generate savings through improved economies of scale, reduce staffing levels, and expand stores in highly profitable and promising areas (Standard & Poors). Deflationary pressures, a result of declining volumes and prices, have led to higher expense ratios (SG&A expenses divided by...