Sears, Roebuck And Co. Vs. Wal-Mart Stores Harvard Case Solution & Analysis

Sears, Roebuck And Co. Vs. Wal-Mart Stores Case Solution

Question 3

Sears had become one of the world’s largest retailers by expanding its sales through diversification of products, such as: household appliances, apparel, jewelry, cosmetics, hand tools, cookware and bedding. The case study reveals that Sears was faced with a cost increase problem in the fiscal year 1997 due to lawsuits, sales in Mexico and credit collectibles. In addition to this, the payment facility granted by Sears to its customers was also a reason behind high costs. These situation lead towards higher debt portion and decreased cash flows for the company. As, these problems occurred due to liquid market security, so in order to assess the value creation for Sears, it is suggested to use the following ratios:

  • Profit Margin: which measures how much net income has been generated by the company as a percentage of total sales.
  • ROE: which would assess the company’s probability, i.e. how much net income is generated by the company through the utilization of each dollar of an equity.
  • Asset Turnover Ratio: which is used to assess the company’s efficiency in generating sales by utilizing each unit of an asset.
  • D1`qays sales outstanding: As the company is more focused on providing credit facility in making payments, so it is necessary to determine how many days the company could take to convert its accounts receivables into cash.
  • Liquidity Ratios: including the current ratio or quick ratio, should be used, which would determine the ability of the company to pay for its current liabilities from its current or quick assets, respectively.
  • Solvency Ratios: including debt to total assets ratio and debt to equity ratio, which would show the leverage position of the company.

Similarly, Walmart also focused on diversifying the product portfolio, but through its own retail stores. Though Walmart’s liquidity position is sound due to the strict collection policies, the only ratios which need to be used for assessing Walmart’s current and future value creation should be profitability ratios (Profit margin, ROE, ROA), turnover ratios, i.e. asset turnover ratio and solvency ratio,i.e. leverage ratio.

Question 4

The financial ratio analysis is a useful tool in measuring the current performance of the company as compared to its previous years. As shown in ratio analysis (Appendix 1), the profit margin for Sears has decreased from 3.34% in 1996 to 2.88% in 1997, which is not a positive sign for the company. However, Walmart’s profit margin has increased from 2.88% to 2.96% from 1997-1998, which is a positive indicator of Walmart’s profitability assessment. Similarly, operating profit margin for Sears has decreased, while Walmart’s operating margin has increased. The other profitability ratios including ROA, ROE and EPS have increased for Walmart but have decreased in case of Sears. Sears and Walmart can focus on the parts which are required to be fixed in order to come up with a solution. In addition to this, these ratio will guide the companies about the areas which should be ignored. For instance, through profitability ratios; Sears would come to know about the problem of reduced profitability as compared to previous years, which will guide the company in making decisions regarding the improving of its profitability.

Question 5

Financial ratio analysis are also useful in comparing the performance of the two companies, i.e. through financial ratios we can determining which firm is performing better in terms of profitability, liquidity, solvency and efficiency in managing its assets. For instance: the operating profit margin, net profit margin, return on assets, return on equity and earnings per share, all ratios are greater in case of Walmart as compared to Sears. It means that Walmart had a higher profitability as compared to Sears in 1997. Similarly, Walmart’s solvency position was better as compared to Sears, as the equity financing of Walmart was greater than Sears. Sears was mostly relying on short term debt obligations, as it was offering credit facilities to its customers. However, Walmart was not offering credit facilities, as a result of which the debt portion in Walmart is relatively lower.

Question 6

Sears financial data from 2013-2017, shows that the company had been facing great challenges from several years. First of all, the sales of the company have declined each year from 2013-2017, as a result of which it is unable to bear its operating expense. In 2017, the company had incurred greater operating expenses than its sales.. It is because the company had been facilitating its customers through credit facilities and was unable to collect its accounts receivables. In order to support its operations, the company started relying on short term and long term credit facilities. The company’s total assets were financed with 85% debt in the fiscal year 1997, which shows that the company’s solvency position was very weak. These all situations led the company towards filing for bankruptcy, as it was unable to generate considerable revenue and net income from its operations...................................

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