Clarkson analysis
Sears,Roebuck and Co vs Wal-Mart Stores Inc. Case
Summary of Issue
Evaluate and contrast the financial performance of the two major retailers, Sears and Wal-Mart, including identifying differences in their respective retailing strategies.
Analytical Approach
A number of ratios could be calculated to compare the two retail companies but, given the importance of return on equity (ROE) as an indication of the creation of value, it was decided to focus first on this ratio through a Du Pont analysis:
Du Pont: Wal-Mart:
3,526/117,958 * 117,958/42,494 = 0.0834 * 42,494/17,823 = 19.7% .03 2.78 2.38
Du Pont: Sears:
1,188/41,296 * 41,296/37,433.5 = 0.0319 * 37,433.5/5,403.5 = 22.0% .029 1.10 6.93
The above analysis highlighted that the asset utilization of Wal-Mart appears much better than Sears (2.78 vs 1.10). Secondly, Sears is making much more use of debt in its capital structure as reflected by the equity multiplier of 6.93 vs 2.38.
Drilling down, firstly in the asset utilization area, the following ratios were calculated: Walmart Sears
Days Inventory 16,845/(93,438/365) = 66.8 69
Days Receivable 3 244
Days Payable 36 91
Cash Conversion Cycle 33 222
Sales/Fixed Assets (incl. capital leases) 5.37 6.72
It is clear from the above that Sear’s has a greater investment in working capital, specifically as a result of the high days receivable number.
Secondly, the Times Interest Earned ratio was calculated to give an idea as to the riskiness of the higher leverage (debt) of Sears: Walmart Sears
Interest Coverage (EBIT/Interest) 8.3 2.41
(included capital lease charge for Wal-Mart)
This interest coverage ratio indicates that Sears needs to reduce the level of debt in order to create greater cushion given a downturn in business (in other words, have interest cost represent a lower proportion of EBIT).
As the Credit Card Business of Sears is
Summary of Issue
Evaluate and contrast the financial performance of the two major retailers, Sears and Wal-Mart, including identifying differences in their respective retailing strategies.
Analytical Approach
A number of ratios could be calculated to compare the two retail companies but, given the importance of return on equity (ROE) as an indication of the creation of value, it was decided to focus first on this ratio through a Du Pont analysis:
Du Pont: Wal-Mart:
3,526/117,958 * 117,958/42,494 = 0.0834 * 42,494/17,823 = 19.7% .03 2.78 2.38
Du Pont: Sears:
1,188/41,296 * 41,296/37,433.5 = 0.0319 * 37,433.5/5,403.5 = 22.0% .029 1.10 6.93
The above analysis highlighted that the asset utilization of Wal-Mart appears much better than Sears (2.78 vs 1.10). Secondly, Sears is making much more use of debt in its capital structure as reflected by the equity multiplier of 6.93 vs 2.38.
Drilling down, firstly in the asset utilization area, the following ratios were calculated: Walmart Sears
Days Inventory 16,845/(93,438/365) = 66.8 69
Days Receivable 3 244
Days Payable 36 91
Cash Conversion Cycle 33 222
Sales/Fixed Assets (incl. capital leases) 5.37 6.72
It is clear from the above that Sear’s has a greater investment in working capital, specifically as a result of the high days receivable number.
Secondly, the Times Interest Earned ratio was calculated to give an idea as to the riskiness of the higher leverage (debt) of Sears: Walmart Sears
Interest Coverage (EBIT/Interest) 8.3 2.41
(included capital lease charge for Wal-Mart)
This interest coverage ratio indicates that Sears needs to reduce the level of debt in order to create greater cushion given a downturn in business (in other words, have interest cost represent a lower proportion of EBIT).
As the Credit Card Business of Sears is