Jennifer Smith Sears Vs Walmart case study 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: Walmart Wal-Mart operates fewer stores than Sears but is ahead in total sales at a ratio of 3.4:1. While both firms had similar profit margins, Wal-Mart’s asset turnover was 2.8 compared to Sears’ 1.1 due to Wal-Mart’s assets and lease agreements to facilitate revenue generation. Wal-Mart does not have their own credit cards and its customers may use a MasterCard with a Wal-Mart logo that is issued by the Chase Manhattan Bank. 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. Analysis: Sears Sears’ retail store revenue per selling square foot was lower than Wal-Marts. Sears allows customers to pay for merchandise over time if they use the company’s proprietary credit card. Over a 3 year period, Sears opened 24 million new credit card accounts 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. 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 by converting receivables to pass through certificates sold to third partiers and reported it as sales. Cost of sales was equivalent to 65% of total revenues. Sears had a greater portion of assets that have been financed with capital other than equity. A greater proportion of Wal-Mart assets were financed through equity compared to Sears. So: The Total Debt ratio of the two companies is comparable. The Interest Earned is seen to be very high for Wal-Mart and compared to Sears , which shows there is a big enough gap between the amount to be paid off for interest and what is being generated in terms of debt. The Cash Coverage Rate of Wal-Mart is much higher as compare to Sears and is an indication that the company can easily pay off its interest on borrowings as compare to Sears. The accounting for land may explain some why Sears has what appears to be an unusually high ROE. The accounting for land is that when you buy it, you pay cash for the cost and then add that cost to your assets and then you never depreciate it, or mark the balance sheet number up as the value of the land rises over time. Sears is far older than Wal-Mart. As a result, to the extent that Sears has old land costs on its balance sheet, Sears land account is far more understated than is WalMart.
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