1. Read the first para of the case.

As an analyst with an investment bank Don Edwards needs to prepare a report highlighting
contrasting the financial performance of Sears and Wal Mart. The report of Don Edwards would
be used as an input to buy/sell side recommendations of the two companies.
Although it is mentioned that the ROE of Sears which is 22.2%(Page 4) and is greater than that of
ROE of Walmart which is 19.1%, it is not sufficient to analyze the performance of the 2
companies. There are many factors which the ROE doesn’t consider like the risk and the amount
of invested capital which can be used to determine its effect on the share holders’ value. Hence it
is important to calculate other ratios and do a comprehensive comparative analysis of the firms
to finally arrive at a conclusion.

Sears, Roebuck and Co. Wal-Mart

Stores primarily located in shopping malls Stand alone super-stores
Try to diversify into financial services and real Never tried to move away from core retailing
estate but failed but expanded into Sam’s club membership
warehouses and Wal-Mart super centres
Sears was split into retail service and credit No such definite split
businesses
In addition to Namesake stores it had four No speciality chains
speciality chains : Home furnishings, hardware,
tyres and batteries and auto parts
Sears tried to appeal to target audience of Wal-Mart always projected its competitive
middle class female shoppers by using slogan “ pricing in the slogan “Always low prices”
Come see the softer side of Sears”
Offered customers more flexibility to pay over Wal-Mart customer could obtain a Master card
time through the company’s proprietary credit which was issued but Chase Manhattan Bank
card
Sold a portion of its domestic customer Chase Manhattan Bank completely bore the risk
receivable balances through SRFG inc. to a of the card user either making late payments or
master trust, still it bore a major amount of the failing to pay
credit risk, in 1997 Sears retained interest in
transferred credit card receivable= 1056 million
and credit card receivable =2285 million
2.

3. The tools which can be used are

Trend Analysis
Common Size Analysis
Percent Change Analysis
Dupont Chart
Comparitive Ratios
Benchmarking
(All given in book Page 411)

Moreover various ratios related to liquidity, asset management, debt management, profitability
and market value can be used for analysis.
4. Ratios are tools which can be used to analyze financial statements. Under the different heads
different kind of ratios can be used:
 1. To check a liquidity of a firms assets ( Liquidity ratios )
2. To check how effectively the firm is managing its assets (Asset management ratio)
3. To check the financial leverage of a firm (Debt management ratio)
4. To check combined effect of liquidity, asset management and debt on its operating results
(Profitability ratio)
5. To relate the firm’s stock price to its earnings, cash-flow and book value per share (Market
value ratio)

Thus ratios are used by:

1. Managers who analyze control and improve their firm’s operations with their help
2. Credit analyst (Bank loan officers and Bond Rating analyst) to ascertain a company’s ability to
pay its debts
3. Stock analyst interested in the company’s efficiency, risk and growth prospects
4. Investor for predicting the future prospects of the company

5.

Ratios Sears Walmart

1997 1996 1998 1997
Current ratio 1.9 1.9 1.3 1.6
Acid test 1.62 1.59 0.17 0.15
Inventory turnover =
sales/inventory 7.21 7.26 7.15 6.6
Days sales outstanding
= receivables/average
sales per day 235.7 236.89 3.02 2.94
Fixed assets turnover
= sales/net fixed
assets 5.67 5.74 5 5.34
Total assets turnover =
sales/total assets 0.94 0.93 2.6 2.64
Debt ratio = total
liabilities/total assets 0.85 0.86 0.32 0.28
EBITDA 4295 4167 5719 4877
Profit margin on sales
= net income available
to stock holders/sales 3.28% 3.76% 2.98% 2.91%
Return on total
assets=net income to
stock holders/total
assets
5.25% 5.77% 8.14% 9%
return on common
equity=net income to
stock
holders/common
equity
20.20% 25.70% 19% 17.80%
 p/e ratio=price per
share/earnings per
share 3.3 3.1 0.229438 0.253599

6. Answer 6:

In retail industry the most important ratios are:

1. Current ratio
2. Acid test ratio
3. Inventory turn over
4. Days Sales Outstanding
5. Debt ratio
6. EBITDA Coverage
7. Profit margin on sales
8. Return on total assets
9. Return on common equity
10. Price/earning

Most important are given in bold.

7. Acid Test Ratio – How much inventory is being sold and how much is left over ( in Numerator). As
we can see, the Acid test ratio is very less for Walmart. Hence there is a liquidity problem for
Walmart.
Inventory Turn Over – Again how much inventory is sold out and restocked. While Walmart has
improved in this aspect, Sears has not done so well.
Days Sales Outstanding – Very high for Sears because of credit payments and high value of
receivables. High effect on numerator.
Debt Ratio – Sears operates on debts and is more riskier than Walmart.
Profit Margin on Sales – Margin for Sears is decreasing whereas for Walmart its increased.
Price/earning ratio – Higher for Sears showing better growth prospects.

Please analyse and see these six ratios well.

8. Since we have to decide on investing on the firms , prima facie look is not enough. A thorough
analysis is required.

1.Wal-Mart used CA 5 times more efficiently to generate Sales than Sears.

2.Wal-Mart had less debtors compare to Sears.
3.The higher Sales/Assets ratio for Wal-Mart indicates that the operational efficiency is better and
returns from fixed assets in higher when compared to Sears.
4.The analysis also shows that the current assets have not generated enough sales/revenue for Sears
when compared to that of Wal-Mar
5.The sales/cash for Sears shows that there has been increase in sales but a decrease in the cash
collections for the year 1997, and this is in sharp contrast to the previous year, which in turn can lead
to a liquidity crisis. At the same time, Wal-Mart continued to maintain almost high ratio for the
consecutive years.