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Sears, Roebuck And Co. Vs. Wal-Mart Stores, Inc - Book Report. Print version essay

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Sears, Roebuck And Co. Vs. Wal-Mart Stores, Inc

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Category: Business Autor: anton 13 January 2011 Words: 632 | Pages: 3

Sears, Roebuck and Co. Vs. Wal-Mart Stores, Inc Problem: Don Edwards, a recent MBA graduate has been asked to analyze the financial performance of Sears and Wal-Mart. Although Wal-Mart is the industry powerhouse, its 20% return on equity (ROE) lags behind that of Sears 22%. Analysis: 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 companys 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-Marts 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-Marts 3 days. Sears1997 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 income of $3.5 billion and its total revenues increased by $13 billion from the previous year to reach $118 billion. Cost of sales was equivalent 78% of total revenues. The company repurchased 44 million shares for $1.57 billion. At 200 days Sears average receivables collection period was very high when compared to Wal-Marts 3 days. Wal-Marts inventory turnover of 5.78 edged out Sears 5.55, leading to a 3 day difference in the average number of days in inventory. Wal-Marts return on asserts of 0.083 was higher than Sears 0.032. Due to Sears heavy reliance on debt its debt service coverage ratio was 1.1 whereas WalMarts was 11.7. With the exception of ROE, most financial ratios and even absolute values bear testimony to Wal-Marts recognition as the leader in the retailing industry. The reason behind Searss higher ROE can be explained by a comparison of the 3 ratios that constitute the ratio known as DuPont identity that is profit margin, asset turnover and equity multiplier. While both firms had similar profit margins, Wal-Marts asset turnover was 2.8 compared to Sears 1.1 due to the firms effective utilization of assets and lease agreements to facilitate revenue generation. However, Sears equity multiplier of 6.6 exceeded that of Wal-Mart which had a equity multiplier of 2.5. In the case of this ratio, a high value indicates that a greater portion of assets have been financed with capital other than equity. A greater proportion of Wal-Marts assets were financed through equity compared to Sears. Due to Sears heavy reliance on debt, its debt service coverage ratio was 1.1 whereas Wal-Marts was 11.7. High debt and low equity levels improved Sears ROE but the company is relatively more risky. However, its earning per share of $3 was higher than Wal-Marts $1.6, as
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Sears, Roebuck And Co. Vs. Wal-Mart Stores, Inc - Book Report. Print version essay

was its dividend per share which was $1.13 compared to $0.27 for Wal-Mart.

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