MS 5242 FINANCIAL ANALYSIS APPLICATION

INSTRUCTOR M. Thenmozhi

CASE REPORT- SEARS AND WALMART

CASE

Team Members Name:

MS14A051 ROHAN SAMRIA
MS14A052 SANJAY V K
MS14A053 SHAKEEL MOHAMMED HANIF S
MS14A055 SIDDHARTH MALANI
MS14A056 SREE VISAKH J

1. How do the retailing strategies of Sears and Wal-Mart differ?

a) Wal-Mart focusses more on Cost leadership strategy whereas Sears
focuses more on product differentiation strategy. As noted from income
statement Sears spend around 23% of their Sales value on Selling and
admin costs whereas Wal-Mart spent only 16% of their sales amount on
Selling and Admin costs.
b) Sears has large product mix which includes Retail, Services and Credit
Cards. Wal-Mart only has retailing business.
c) Sears stores were located mostly in shopping malls whereas Wal-Mart
had their own stores.
d) Wal-Marts slogan Always low prices focuses on competitive price for
everything. Searss slogan says Come see the softer side of Sears
which reflects the companys commitment to updating its merchandize
selection.
2. Wal-Marts average return on equity for the 1997 fiscal year
was 19.7% [$3,525/($18,503+17,143)/2] while Sears average
return on equity over roughly the same period was 22.0%
[$1,188/($5,862+$4,945)/2]. Don Edwards was puzzled by
these numbers because of Wal-Marts reputation as a premier
retailer and Sears financial difficulties not long ago. What is
driving the performance of these two companies during fiscal
1997?
a) Wal-Mart has high equity financing as compared to Sears. Sears
relies mostly on short term debts. It can prove to be a fatal for the
company as financing the short term debt can be expensive. Also, it
signals a risk taking approach by the company which some of the
investors may not be interested in.
b) Most of the sales that Sears generated are from proprietary credit
card (55.1%). Major portion of this sale are accounts receivable.
Although its appearing that Sears is generating sales but it may
face cash crunch if they fail to collect the receivables. Wal-Marts
financial status appears much better and steadier in comparison to
Sears.
c) Comparison of the two ratios is not justified. Sears profit also has
non-comparable gains. Wal-Marts profit comes only from retail
stores. So comparison between same business type should be done
rather taking the whole profit for Sears.

3. What ratios are most important in assessing current and

predicting future value creation for Sears? For Wal-Mart?
Sears has its large amount of sales from the Sears proprietary card.
Hence profit ratios and turn over ratios will not be useful to compare
the current or future value creation for Sears.
Hence the important ratios for creation would be: Liquidity Ratios and
Solvency Ratios.

4. How useful are financial ratios in evaluating the current

performance of each of the two companies?
Profit Margin for Sears has decreased which is not a positive indicator
for the company. Higher the PM, better it is for the company. PM has
increased for Wal-Mart. Hence, it is positive for the company.
Return on Capital employed has decreased. It has increased for WalMart which is a positive indicator for the company.
Financial Ratios are useful in evaluating the current performance of the
company but financials should be vertically normalized first. Income
statement items should be expressed as a percentage of sales and the
balance sheet items should be expressed as a percentage of assets.
5. How useful are financial ratios in comparing the relative
performance of these two companies?
Good. But simply compared side-by-side is not enough. Since they are
financed differently, the analyst must investigate further and
understand what the numbers imply. The ratios are very useful as long
as we understand the business practices practiced by both companies.
For example Searss AR is distorted by the credit balances.
Furthermore, it is hard to size up Searss earning power when more
than half of the revenue is on a proprietary credit card. This makes the
use of Profit Ratios and some Turnover ratios less convincing.
Profit Margin for Wal-Mart in the year 1997 is better than that of Sears
which indicates that the amount of profit Wal-Mart has made in that
year with respect to the revenues is better for Wal-Mart.

Sears December
1996
Profit Margin
EPS
Return on
Capital
Operating profit
on sales
Current Ratio
Debt to Equity
ratio
Asset Turnover
Wal-Mart January
1997
Profit Margin
EPS
Return on
Capital
Operating profit
on sales
Current Ratio
Debt to Equity
ratio
Asset Turnover

3.3%
3.25

Sears December
1997
2.8%
3.04

16.7%

14.5%

8.9%

8.3%

1.90280
9
2.46107
2

1.943129
2.229785

2.8%
1.34

Wal-Mart January
1998
2.9%
1.57

13.71%

14.19%

3.69%

3.67%

1.64
0.58426
2
2.68%

1.94
1.338313
2.62%