Ocean Carriers

The Wal-Mart vs. Sears Dilemma

As the newest member of the Smith, McCormley, and Mashek Investments analysts' team, I have been given the task to review the financials of Sears Roebuck and Co. and Wal-Mart Stores, Inc. Upper management recently received DuPont Equation numbers that showed Sears out performing Wal-Mart over the last two years (20.76% to 19.06% in 1997, and 25.70% to 17.83% in 1996). The company has invested much of its retailing funds into Wal-Mart and wants to reconsider that position and consider Sears. It believes that Sears has made some recent positive changes to position themselves for future growth and to compete for some of Wal-Mart's retailing success. I have attached a spreadsheet of financial data and ratios to support my analysis to determine which company will be the true retail superpower in the future.

Although both companies are retailers, they do have some significant differences in the way they do business. Wal-Mart's retail strategy revolves around three different types of stores: 1) Sam's Club membership warehouses, 2) Wal-Mart discount stores, and 3) Wal-Mart Supercenters. Wal-Mart is known as always having the low price because that in its marketing slogan. Whereas Wal-Mart relies on retailing to generate revenue, Sears generates revenue through 3 different types of business: retailing, services, and credit card. Also, Sears's credit business revolves around its proprietary credit card, the Sears Card. Sears offers the Sears Card because it believes it "makes it more attractive for customers to purchase goods and services from the Retail and Services Businesses" . Therefore, it should be noted that Sear's credit business is tied in directly with the retail and service business, including future growth. Because Wal-Mart's and Sear's businesses are not identical additional caution must be taken when comparing ratios. For instance, Sears reports retail and service revenue as one on its balance sheet, therefore ratios that consider revenue may appear favorable to Sear's retail activity when compared to Wal-Mart's.

The attached spreadsheet has many different ratios to compare the performance of Wal-Mart and Sears for 1996 and 1997, with initial remarks included. Many of the ratios do not differentiate one company from the other, so the focus will go to the ones that do.

1. Total Assets Turnover Ratio

2. Debt Ratio

3. Days Sales Outstanding

4. Times Interest Earned Ratio

5. Return on Assets

6. DuPont Equation (Return on Equity)

7. Earnings Per Share

8. Revenue Percentage Gain and Recommendation

1. Total Assets Turnover Ratio

1997/98 Total Assets Turnover: Sales/Total Assets

SALES TA

Sears 36,371 38,700 0.94

Wal-Mart 117,958 45,384 2.60

1996/97 Total Assets Turnover: Sales/Total Assets

SALES TA

Sears 33,751 36,167 0.93

Wal-Mart 104,859 39,604 2.65

Wal-Mart's Total Asset Turnover (TAT) Ratio is almost three times that of Sears. This means that Wal-Mart is doing a much better job of utilizing its assets to generate sales than Sears. Sears should consider perusing more aggressive sales goals or liquidate some of its assets to compete with Wal-Mart. From a pure retailing standpoint, Sear's TAT is somewhat inflated because the service sales are included in this total, which only makes the ration worse for Sears.

2. Debt Ratio

1997/98 Debt Ratio: Total Liabilities/Total Assets

TL TA

Sears 32,838 38,700 85%

Wal-Mart 26,881 45,384 59%

1996/97 Debt Ratio: Total Liabilities/Total Assets

TL TA

Sears 31,222 36,167 86%

Wal-Mart 22,461 39,604 57%

Sear's debt ratio is very high (85% in 1997 and 86% in 1996) compared to Wal-Mart's (59% in 1997 and 56% in 1996). Sears is a company that is financed by debt, which means its interest expenses are higher. Higher interest expense erodes net income. Sear's interest expense compared to its revenue and net income is far higher than Wal-Marts. For instances in year 1997 alone, Sears had revenues of 41,296, income before taxes of 2,100, and interest expense of 1,409. Sear paid 3.41% of its revenue to interest expense (1409/41,296). Wal-Mart only paid .47% of its revenue to interest expense (555/119299). Additionally, creditors may be less inclined to loan money to Sears because of the risk associated with a company that has a high debt ratio.

3. Days Sales Outstanding

1997/98 Days Sales Outstanding: Receivables/(Sales/365)

REC SALES

Sears 20,178 36,371 202.50

Sears (no CCR) 335 36,371 3.36

Wal-Mart 976 117,958 3.02

1996/97 Days Sales Outstanding: Receivables/(Sales/365)

REC SALES

Sears 19,638 33,751 212.38

Sears (no CCR) 335 33,751 3.62

Wal-Mart 845 104,859 2.94

Days Sales Outstanding is only shown because at first glance the numbers are very different. However, Credit Card Receivables should