Mr.

Juicewallah’s Dilemma – Tiffany versus Wal-Mart

Mr. Sanjay Juicewallah, CEO of Mohali Juice Company, was relaxing in the evening but his mind
was not at rest. Mohali Juices had come a long way from its modest origins and he had been
thinking about the next big move for his company. He wanted to diversify the company into
retail operations but had no idea about what type of business model to pick. He had asked two
of his bright young executives, Ms. Smart and Mr. Quick to present him with an analysis of two
successful retail companies, Tiffany and Wal-Mart, to understand their contrasting strategies.
To keep the exercise focused, Mr. Juicewallah asked Ms. Smart and Mr. Quick to think of the
following based on what he had learnt in a Khan Academy lecture on financial strategy. Mr.
Juicewallah felt that focusing on specific ratios would be important to support any conclusions.

1. Which company was more successful based on return on equity (ROE)?

2. What could be the differences in strategy that explain the differences in ROE?
Specifically, how much of the ROE was due to operations versus financing?
3. What could be the risks that arise from the operating and financing strategy for each
firm?

Ms. Smart and Mr. Quick decided that they would first compute the following ratios and then
think about the takeaways.

A. Compute the Return on Equity and decompose it into the elements of profit margin,
asset turnover and leverage for each company. What do these numbers reveal about
the strategy of each company?
B. Compute the Return on Assets and decompose it into the ratios that explain unlevered
profit margin and asset turnover for each company. Do the expense and turnover ratios
explain the differences in the ROA of the two firms?
C. Compute the solvency and liquidity ratios for each firm. What is the financial leverage of
each firm and are they able to meet their financial obligations?

©SHYAM V. SUNDER Page 1 of 7

Company background

WAL-MART

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company
operates discount stores, supermarkets, supercenters, hypermarkets, and warehouse clubs. It
offers grocery products, including meat, produce, bakery, dairy, frozen foods, and beverages.
The company also provides electronics, toys, cameras and supplies, stationery, automotive,
hardware and paint, and sporting goods, as well apparel. It operated 11,527 stores under 63
banners in 28 countries and e-commerce Websites in 11 countries. Wal-Mart Stores, Inc. was
founded in 1945 and is headquartered in Bentonville, Arkansas. It is the largest retail store
chain by volume of sales and made famous the slogan of “Every-day low prices”. According to
the company, “We are able to lower the cost of merchandise through our negotiations with
suppliers and by efficiently managing our distribution network. The key to our success is our
ability to grow our base business”.

TIFFANY

Tiffany & Co. designs, manufactures, and retails jewelry worldwide. Its jewelry products include
fine and solitaire jewelry; engagement rings and wedding bands; and non-gemstone, sterling
silver, and gold jewelry. The company also sells some select high luxury goods such as
timepieces, leather goods, silverware, and china. The company offers its products mainly
through retail sales and also sells through catalogs and the internet. It operated 124 stores in
the Americas, 81 stores in the Asia-Pacific, 56 stores in Japan, 41 stores in Europe, and 5 stores
in the United Arab Emirates. Tiffany & Co. was founded in 1837 and is headquartered in New
York, New York. The company is associated with exclusive style and elegance and is famous
from packing its jewelry in boxes with the distinctive “Tiffany Blue” color. According to Tiffany
their core strategy is to enhance customer awareness of “the company trademark, its heritage,
its products and its association with quality and luxury”, to “enhance the customer experience
through engaging service and store environments”, and to “maintain substantial control over
product supply through direct diamond sourcing and internal jewelry manufacturing”.

©SHYAM V. SUNDER Page 2 of 7

 WAL-MART STORES, INC.

Consolidated Balance Sheets

(Amounts in millions)
January 31, 2002 2001
Assets
Current Assets
Cash and cash equivalents 2161 2054
Receivables 2000 1768
Inventories
At replacement cost 22749 21644
Less LIFO reserve 135 202
Inventories at LIFO cost 22614 21442
Prepaid expenses and other 1471 1291
Total Current Assets 28246 26555
Property, Plant and Equipment, at Cost
Land 10241 9433
Building and improvements 28527 24537
Fixtures and equipment 14135 12964
Transportation equipment 1089 879
53992 47813
Less accumulated depreciation 11436 10196
Net property, plant and equipment 42556 37617
Property Under Capital Lease
Property under capital lease 4626 4620
Less accumulated amortization 1432 1303
Net property under capital leases 3194 3317
Other Assets and Deferred Charges
Net goodwill and other acquired intangible assets 8595 9059
Other assets and deferred charges 860 1582
Total Assets 83451 78130

©SHYAM V. SUNDER Page 3 of 7

 Liabilities and Shareholders’ Equity
Current Liabilities
Commercial paper 743 2286
Accounts payable 15617 15092
Accrued liabilities 7174 6355
Accrued income taxes 1343 841
Long-term debt due within one year 2257 4234
Obligations under capital leases due within one year 148 141
Total Current Liabilities 27282 28949
Long-Term Debt 15687 12501
Long-Term Obligations Under Capital Leases 3045 3154
Deferred Income Taxes and Other 1128 1043
Minority Interest 1207 1140
Shareholders’ Equity
Preferred stock ($0.10 par value; 100 shares authorized,
none issued)
Common stock ($0.10 par value; 11,000 shares
authorized, 4,453
and 4,470 issued and outstanding in 2002 and 2001, 445 447
respectively)
Capital in excess of par value 1484 1411
Retained earnings 34441 30169
Other accumulated comprehensive income -1,268 -684
Total Shareholders’ Equity 35102 31343
Total Liabilities and Shareholders’ Equity 83451 78130

©SHYAM V. SUNDER Page 4 of 7

 WAL-MART STORES, INC.
Consolidated Statements of Income

(Amounts in millions except per share data)

Fiscal years ended January 31, 2002 2001 2000

Revenues
Net sales 217,799 191,329 165,013
Other income-net 2,013 1,966 1,796
219,812 193,295 166,809
Costs and Expenses
Cost of sales 171562 150255 129664
Operating, selling and general and administrative expenses 36173 31550 27040

Interest Costs
Debt 1052 1095 756
Capital leases 274 279 266
209,061 183,179 157,726

Income Before Income Taxes, Minority Interest and

Cumulative Effect of Accounting Change 10,751 10,116 9,083
Provision for Income Taxes
Current 3712 3350 3476
Deferred 185 342 -138
3897 3692 3338

Income Before Minority Interest and

Cumulative Effect of Accounting Change 6,854 6,424 5,745
Minority Interest -183 -129 -170

Income Before Cumulative Effect of Accounting Change 6,671 6,295 5,575

Cumulative Effect of Accounting Change, net of tax benefit of
-198
$119
Net Income 6,671 6,295 5,377

©SHYAM V. SUNDER Page 5 of 7

 TIFFANY & CO. AND SUBSIDIARIES

[ CONSOLIDATED BALANCE SHEETS ]

January 31,
($ in thousands, except per share amount) 2002 2001
ASSETS
Current assets:
Cash and cash equivalents 173,675 195,613
Accounts receivable, less allowances of $6,878 and $7,973 98,527 106988
Inventories, net 611,653 651717
Deferred income taxes 41,170 28069
Prepaid expenses and other current assets 29,389 22458

Total current assets 954,414 1,004,845

Property, plant and equipment, net 525,585 423,244
Deferred income taxes 4,560 7,282
Other assets, net 145,309 132,969

1,629,868 1,568,340

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Short-term borrowings 40,402 28,778
Current portion of long-term debt 51,500 --
Obligation under capital lease -- 40,747
Accounts payable and accrued liabilities 161,782 189,531
Income taxes payable 48,997 42,085
Merchandise and other customer credits 38,755 36,057
Total current liabilities 341,436 337,198

Long-term debt 179,065 242,157

Postretirement/employment benefit obligations 29,999 26,134
Other long-term liabilities 42,423 37,368
Commitments and contingencies

Stockholders' equity:
Common Stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 145,001 and 145,897 1,450 1,459
Additional paid-in capital 330,743 318,794
Retained earnings 743,543 630,076
Accumulated other comprehensive (loss) gain:
Foreign currency translation adjustments (45,306) (24,846)
Cash flow hedging instruments 6,515 --
Total stockholders' equity 1,036,945 925,483

1,629,868 1,568,340

©SHYAM V. SUNDER Page 6 of 7

 TIFFANY & CO. AND SUBSIDIARIES

[ CONSOLIDATED STATEMENTS OF EARNINGS ]

Years ended January 31,

(in thousands, except per share amounts) 2002 2001 2000

Net sales $1,606,535 $1,668,056 $1,471,690
Cost of sales 663,058 719,642 650,010
Gross profit 943,477 948,414 821,680
Selling, general and administrative expenses 633,580 621,018 564,797
Earnings from operations 309,897 327,396 256,883
Interest expense and financing costs 19,834 16,207 15,038
Other expense (income), net 751 -6,452 -6,213
Earnings before income taxes 289,312 317,641 248,058
Provision for income taxes 115,725 127,057 102,379
Net earnings $173,587 $190,584 $145,679

©SHYAM V. SUNDER Page 7 of 7