Roebuck and Co. vs. Wal-Mart Stores, Inc.

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Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc.

The Sears/Wal-Mart case is a good opportunity for you to dive into financial statements and begin looking closely at corporations. Put yourself in the shoes of Don Edwards, who we learn is a newly hired analyst at a big investment bank. His assignment, as is yours in this case, is to compare Sears and Wal-Mart using the materials that are included with the case study. The topics we will have covered in class will prepare you to effectively evaluate these companies.

My role in this exercise is as your supervisor at the investment bank. I will be reviewing your case write- up as a supervisor might review an analysis you’ve prepared for your job. Ultimately, for this assignment you will be evaluated based on how well you respond to the questions below as well as the thoughtfulness of your overall analysis of the case.

Please address the questions/considerations below in your write-up of the Sears/Wal-Mart case study.

1. How are the retailing strategies for Sears and Wal-Mart similar? How are they different? Be sure to also look at their financial statements when addressing this question, noting anything that might stand out.

2. You are told in the case introduction that Don Edwards conducted an ROE analysis and found that Sears’ ROE (22%) was greater than Wal-Mart’s (20%). How might Don/you probe deeper into the companies’ ROE results using any of the financial statement analysis tools from Chapter 4 of the textbook?

3. For any/all financial analyses you conduct in evaluating the companies, you should be prepared to explain why you choose to perform the particular analysis, what the results of the analysis suggest, and what limitations there might be in using the analysis. Remember, you are writing this to assist Don’s/your supervisor (that’s me!) in determining whether the firm should recommend a buy or sell for the companies.

4. When you perform the analysis/analyses, be sure to show your math so I can follow how you arrived at your result(s). For instance, if you were to use the Current Ratio in your analysis, and let’s say that current assets = $120 and current liabilities = $100, I would expect you to write your results as follows in the text of your assignment: “The Current Ratio is 1.2 ($120/$100).”

Additionally, I am expecting you to structure your case study assignment with the following sections:

• Introduction/Background: Introduce the case and provide brief background details to help setup your analysis. This is also a good time to tell your reader how you plan to
• Analysis: Provide data or other analysis to arrive at an informed recommendation or recommendations.
• Recommendation(s): Provide the reader with your recommendation(s) based on your well- reasoned analysis from the prior section. Be sure that your recommendation(s) is/are supported by your Analysis section.

Sample Solution

Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc.: A Comparative Analysis

Introduction/Background:

This case study examines two retail giants, Sears, Roebuck and Co. (Sears) and Wal-Mart Stores, Inc. (Wal-Mart), comparing their financial performance and strategic approaches. As an investment analyst, I am tasked with evaluating these companies to determine potential investment opportunities.

Analysis:

  1. Retailing Strategies:

While both companies are large retailers, their strategies differ:

Similarities:

  • Focus on general merchandise:Both offer a wide variety of products, including apparel, electronics, and home goods.
  • National presence:Both have a broad geographic footprint across the United States.

Differences:

  • Pricing strategy:Wal-Mart emphasizes everyday low prices (EDLP), offering consistently low prices to attract customers. Sears leans towards a high-low pricing strategy, featuring regular sales and promotions alongside higher base prices.
  • Target market:Wal-Mart targets value-conscious consumers, while Sears historically catered to a middle-class market.
  • Store format:Wal-Mart primarily operates large, warehouse-style stores, while Sears traditionally had a mix of department stores and smaller specialty stores.
  • Financial statements:Analyzing their financial statements reveals differences in inventory turnover ratio: Wal-Mart’s is significantly higher (indicating faster inventory movement) than Sears’s. This aligns with their respective pricing strategies.
  1. ROE Analysis and Further Investigation:

While a higher ROE for Sears (22%) compared to Wal-Mart (20%) might seem initially favorable, additional analysis is crucial. Here’s how we can delve deeper:

  • DuPont Analysis:Break down ROE into its components: Net profit margin, total asset turnover, and financial leverage. This allows us to understand the drivers behind the ROE difference. For example, a high-debt level (financial leverage) could inflate ROE for Sears, even if their profitability is lower than Wal-Mart’s.
  1. Additional Analyses:
  • Profitability Ratios:Calculate and compare gross profit margin and net profit margin to assess their respective efficiency in generating profits from sales.
  • Solvency Ratios:Analyze the current ratio and debt-to-equity ratio to evaluate their short-term liquidity and long-term financial stability.
  • Efficiency Ratios:Assess inventory turnover ratio and receivables turnover ratio to understand their inventory management and credit collection practices.

Limitations:

Financial ratios only provide a partial picture and should be interpreted with caution. Other factors like brand reputation, market trends, and management quality also influence investment decisions.

Recommendation(s):

Based on the limited information provided, a comprehensive recommendation for buy or sell cannot be made. However, the initial analysis suggests potential areas for further investigation:

  • Profitability:A deeper dive into profit margin analysis is necessary to understand the true profitability picture beyond ROE.
  • Efficiency:Comparing key efficiency ratios like inventory turnover and receivables turnover can reveal potential operational strengths or weaknesses.
  • Financial health:Analyzing solvency ratios can help determine the financial stability of each company and their ability to meet debt obligations.

Conclusion:

Investing in either Sears or Wal-Mart requires thorough analysis beyond a single metric like ROE. By conducting additional financial statement analysis and considering other factors, investors can make informed investment decisions based on their risk tolerance and investment goals.

 

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