Financial Management -II

Section 1 Group B1
Case Sears, Roebuck And Co. Vs. Wal-Mart Stores, Inc

The case is a comparison of financial health and efficiency of two major retails giants, Sears, Roebuck
and Co and Wal-Mart Stores. While Wal-Mart is acknowledged as the powerhouse of the U.S. retailing
industry, Sears ROE exceeded that of Wal-Mart. Don Edwards is assigned the task of analysing the
records and current position of the two companies. The analysis and recommendations thus made
could be used as a base for buying and selling decisions of the shares of the two companies.

Following is a comparison of the financial position of the two companies:

Ratio Analysis Sears Walmart

1997 1996 1998 1997
Current Ratio 1.94 1.90 1.34 1.64
Quick Ratio 1.62 1.59 0.20 0.19
Asset Turnover 1.07 1.05 2.60 2.65
Inventory Turnover 5.31 5.36 5.66 5.25
Return on Sales 2.88% 3.34% 2.99% 2.91%
Return on Assets 3.07% 3.51% 7.77% 7.72%
Return on Equity 20.27% 25.70% 19.06% 17.83%
Financial Leverage 6.60 7.31 2.45 2.31

A higher current ratio for Sears (1.94 vs 1.64) indicates that the company has a lot of money tied up in
non-productive assets. Most of the current assets is in the form of credit card receivables. The
receivables for Sears is about 25 times higher than Walmart. This is as a result of the companys
initiative to improve sales by offering its customers the flexibility to pay for merchandise gradually
over time through the companys proprietary credit card. The sooner this is converted to cash, the
better the company can make use of its high current ratio.

Asset Turnover for Wal-Mart has been more than twice. Thus Wal-Mart has used its assets efficiently
and converted to sales two times over what Sears has managed to do.

The above is validated again by the Return on Assets of both the companies. While Wal-Mart has an
ROA of 7.77%, Sears has managed only a half of it at 3.07%. Sears has a lower earning power when
compared to Wal-Mart.

A higher ROE of Sears however indicates that the company has effectively used its shareholders
money to generate income. But it must also be considered that the net income generated by Sears ($
1,188) is less than that of Wal-Mart ($3,056). The higher ROE figures for Sears could also mean that
the equity base of Sears is low in comparison to Wal-Mart, ($5,862 vs $18,503).

Sears has a high financial leverage. It is the ratio of the companys total assets to its stockholders
equity. A higher ratio indicates that the company has financed most of its assets through debt or
borrowing. The figures are in agreement with the low equity base of Sears.
Du Point analysis: