Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc.
FIN 490 Fall 2013
Nanxun An, nan3, UIN: 659073843
Luke Gu, conggu2, UIN: 652690239
Di Jin, dijin1, UIN: 652831461
Weiyi Sun, wsun23, UIN: 677661443
Question 1: RETAIL STRATEGY SEARS VS WALMART
Generally speaking, the difference of retailing strategies between Sears and Wal-Mart can be divided into five aspects.
* Stores and Retail Area
Sears: The Number of stores has gone up by 15% in 2 years. The number of stores at the end of 1995 is 3070 and it has gone up to 3530 by the end of 1997. Meanwhile, the retailing space has increased from 81.4 million sq. feet to 92.7 million sq. feet during the ...view middle of the document...
Wal-Mart: Wal-Mart utilizes a MasterCard to its clients with the company’s logo on it. The card is issued by Chase Manhattan Bank. The risk of late payments or failure to make payments is also borne by Chase Manhattan Bank.
Sears: Segmentation for reporting is done on the basis of business segments. Thus the segments here are: retail, services and credit card.
Wal-Mart: Segmentation is done on the basis of the type of store: thus we have the Wal-Mart discount store, Sam’s club membership warehouses and Wal-Mart supercenters.
* Charged Fees to Suppliers
Sears: Sears charges slotting fees, promotional, advertising and stocking fees as per a widespread industry practice.
Wal-Mart: Wal-Mart differs from its competitors by charging no fees to suppliers. Wal-Mart pays the supplier only for the actual cost of the goods themselves.
Question 2: DUPONT BREAKDOWN
To determine what is driving the individual performance of Wal-Mart and Sears during fiscal 1997, we use the 3-step Dupont method by breaking down ROE into 3 factors influencing company’s performance: profitability (measured by profit margin), operating efficiency (measured by asset turnover), and financial leverage (measured by equity multiplier).
ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets / Equity)
| Sears | Wal-Mart |
Sales | 41,296 | 117,958 |
Net income | 1,188 | 3,526 |
Average total assets | 37,434 | 42,494 |
Average equity | 5,404 | 17,823 |
Profit margin | 2.88% | 2.99% |
Asset turnover | 110.32% | 277.59% |
Financial leverage | 692.76% | 238.42% |
ROE | 21.99% | 19.78% |
* Both Sears and Wal-Mart have very low profit margin on sales and relatively high turnover, which is in line with expectation of typical retail operations.
* Wal-Mart is selling a significant multiple of its assets during fiscal 1997. It has higher asset turnover ratio at 2.78, compared to Sears’ 1.10. Wal-Mart’s high operational efficiency helps the company to generate acceptable 19.8% return on equity.
* Given the high turnover of Wal-Mart, it is important to study the company’s same store sales as it is an indicator that the company is generating greater profits from existing stores.
* Sears relies on its high financial leverage to derive competitive ROE. It has a high level of leverage of 6.93, compared to Wal-Mart’s 2.38. Although Sears enjoys a lucrative return on equity at 22%, the company is very vulnerable to changes in economy due to its risky position associated with its high leverage.
* Wal-Mart’s leverage stay at a reasonable 2.38, indicating a sound financial position.
* We notice that about 12% of Sear’s revenue is from its credit card business. Therefore, a final conclusion can only be reached if we can compare two companies’ retail business, excluding other business such as credit card operation.
Question 3: CASH CONVERSION CYCLES
Cash conversion cycle consists of days...