FINANCIAL ANALYSIS OF SEARS VS. WAL-MART

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 19 (5351 words) Published: October 4, 2004
FINANCIAL ANALYSIS OF SEARS VS. WAL-MART

Table Content

Background Analysis------------------------------------------------ 3

Financial Ratio analysis--------------------------------------------- 4

Weighted Average Cost of Capital (WACC)--------------------- 12

Working Capital Management--------------------------------------20

Dividend Policy and Tax Treatment------------------------------- 23

Conclusion------------------------------------------------------------24

Background Analysis

Wal-Mart

Wal-Mart Stores, Inc., incorporated in 1969, is an international retailer. In the United States, the Company operated 1,568 discount stores, 1,258 Super centers, 525 SAM's CLUBs and 49 Neighborhood Markets as of January 31, 2003.

Wal-Mart's greatest advantage is having great bargaining power with suppliers to get the lowest price so they can pass it on to the customer. To further this, Wal-Mart is continuing to lower prices, offer newer and up to date products through their global suppliers' sourcing network.

Sears

In 1886 Sears began the R.W. Sears Watch Company in Minneapolis. Sears, Roebuck and Co was officially formed in 1893. Sears is a leading retailer of apparel, home and automotive products and services, with annual revenue of more than $40 billion. Sears operated 863 mall-based retail stores, most with co-located Sears Auto Centers, and an additional 1,200 retail locations including hardware, outlet, tire and battery stores as well as independently owned stores, primarily in smaller and rural markets.

The two retailers, Sears, Roebuck and Co. and Wal-Mart Stores, Inc., have a very similar value for return on equity in the recent fiscal years. We are using the past 5 years information to analyze the strategies and accounting policies for each company, and better understand the companies' performance and predict the companies' trend in the future for each firm. This case provides a good introduction regarding the combination of such information to create a powerful tool for financial statement analysis.

Profitability analysis

Exhibit 1-1 Comparison of profitability ratios

2002 2001 2000 1999 1998

SEARS WMT SEARS WMT SEARS WMT SEARS WMT SEARS WMT

ROS 3.3% 3.06% 1.79% 3.29% 3.29% 3.26% 3.69% 3.22% 2.63% 2.99%

Gross margin 44.0% 22.2% 41.3% 22.5% 38.2% 22.5% 39.4% 22.2% 38.3% 21.9%

operating profit/sale 5.9% 4.9% 3.0% 5.3% 5.4% 5.5% 6.1% 5.2% 4.7% 4.9%

EBIT/sales 8.7% 5.6% 6.4% 6.1% 8.5% 6.2% 9.4% 5.8% 8.3% 5.5%

EBITDA/sales 10.8% 6.8% 8.5% 7.3% 10.6% 7.4 % 11.5% 7.2% 10.4% 6.9 %

Return on sales

ROS ratio compares after tax profit to sales, it displays the proportion of each dollar of revenue is available for the owners after all the expenses are paid to other suppliers. ROS can help us determine if companies are making enough of a return on sales effort. From the exhibit 1-1, it shows that though the year 1998 War-Mart is higher than Sears. But from fiscal year 1999, Sears had caught up with Wal-Mart. In 2001 Sears dropped to 1.79% from 3.29% and comparing with Wal-Mart's 3.29, that's because in 2001 Sears began reviewing product offerings in an effort to remove unprofitable merchandise offering as well as eliminate merchandise lines that were not relevant to Sears' customers. Sears undertook a repositioning of full-line store, resulting in an increase in the over all profitability in 2002. From view of Wal-Mart, the growing steadily but lower than Sears, that's because profitability of Wal-Mart depends on their competitive situation.

Gross Margin

The gross profit margin ratio indicates how efficiently a business is using its materials and labor in the product process. It shows the percentage of net sales remaining after subtracting cost of goods sold. A higher gross profit margin indicates that a business can make a reasonable profit on sales, as long as it keeps overhead cost in control. A low margin could indicate companies are underpricing. A high...
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