Walmart vs Sears: Profitability Analysis

1202 Words Sep 4th, 2012 5 Pages
EXECUTIVE SUMMARY

This report is intended analyze and compare the operating profitability of Sears, Roebuck and Co. (SRC), and Wal-Mart Stores Inc. (WM) for the accounting periods of 1996 and 1997.

It is concluded that:

• SRC offers superior returns on common equity (ROCE). This undoubtedly reflects the greater amount of debt in the capital structure vis a vis WM, and a stronger gross margin. However, SRC’s ROCE has declined in the last year mainly because a reaffirmation charge (40% of Net Income) generated in lawsuits and a possible violation of the United States Bankruptcy Code. We need to highlight the uncertainty associated with the reaffirmation charge; this means that the actual results can differ from the
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Sears, on the other hand, has an important gap of 84 days between days receivable and days payable.

Days inventory are the same in both companies: on average they turn over their inventories in two months. Analysis shows that both companies have a positive Cash Conversion Cycle (CCC), which means that they require external sources of financing for their working capital needs. In both cases, this gap is covered with debt (100% short term debt in the case of WM, and both short term and long term debt in the case of SRC).

Current ratios were also calculated. Both SRC and WM have had acceptable current ratios for the last two years.

SRC’s current ratio looks healthier because of the important amount of receivables in the balance sheet (which it appears are not fully matched with current liabilities, as SRC is using long term debt to finance a portion of its short term assets).

The cash generation capacity of each company is also considered.

WM shows a steady increase in the amount of cash generated by operating activities in the last three years, while SRC shows a negative operating cash flow in 1997. During this last year, WM used its operating cash flow to finance both new expansion activities and financing activities (mainly a stock repurchase plan). SRC, on the other hand, had to take new

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