Neicy972 --
Financial ratios are tools to measure the health of a business but can
be pushed one way or another by managers. For example, lots of effort
by management in a factory goes to getting inventories near zero near
the end of the year so that the balance sheet looks cleaner than
day-to-day management might be. And retailers might show good cash
positions but be endangering their long-term business by paying
suppliers late.
The U.S. SBA has a good site listing the popular financial ratios and
how they're applied. I've plucked out 3 liquidity and safety
measures; 2 profitability measures; and one inventory measure.
Because these are retail firms, with most sales in cash, I've ignored
measures like Accounts Receivable. This could mask financial troubles
-- particularly if a retailer has a large number of credit card
accounts that are delinquent.
Small Business Administration (SBA)
"Financial Ratios and Quality Indicators," (Aug. 10, 2001)
http://www.onlinewbc.gov/docs/finance/fs_ratio1.html
Note too, that alternate retail models can take advantage of different
ways to run a business. Costco scores low on gross margin measures
against these 4 companies but does very well with returns on assets:
Google Answers
"Example by Omnivorous," (Dec. 26, 2003)
http://answers.google.com/answers/threadview?id=290394
And a final comment: the ratios used here ignore some measures that a
Wall Street analyst would consider key, such as year-over-year growth
or same-store sales growth. However, those are more operating or
strategic measures than they are financial measures.
FINANCIAL RATIOS
=================
CURRENT RATIO: recommended because it's a good overall measure of
liquidity. Definition: Current Assets/Current Liabiities
QUICK RATIO: can this retailer pay existing obligations without
handicapping the business by liquidating inventory (usually at a
discount)? Definition: (Cash + Accounts Receivable)/Current
Liabilities
DEBT COVERAGE RATIO: a measure of how well cash flow covers major debt
obligations. This measure picks up the positive impact of
depreciation, which doesn't use cash. We'll use the short-term debt
in this measure, eliminating the impact of the long-term mortgages.
Definition: (Net Profit + Non-cash expenses)/ST Debt.
GROSS MARGIN: either COGS-to-Sales or Gross Profit Margin tell what
impact the retailer is having on the market. The former is easier to
measure but most analysts use Gross Margin to compare different
industries and companies within industries. Definition: Gross
Profit/Total Sales
SG&A to SALES: a measure of overhead or fixed costs. Unlike the other
measures, the smallest number wins in this category. Definition: SG&A
Expenses/Sales
DAYS IN INVENTORY: how efficient a retailer is in turning inventory is
a critical measure. Another common comparison measure for retailers
is Sales per Square Foot -- but this one is easier to calculate from a
balance sheet. Again, a lower number means fewer days of slow-moving
inventory. (Definition: Average Inventory/COGS) x 365 days.
So, in summary, here's what we need to know about each of the 4 companies:
? CA
? CL
? Cash
? Accounts Receivable
? Net profit
? Gross Profit
? Depreciation & amortization (non-cash expenses)
? Debt
? COGS or Gross Profit
? Total Sales
? Inventory
? SG&A Expenses
We'll pull together the numbers from the 2003 annual reports, then
rank each of the retailers on a 1-4 basis. There are some notes
necessary for these financials, including that Sears includes $4.752
billion in credit card and financial revenues. The other companies
have similar businesses but it's not included in earnings numbers.
The original data comes from these sources:
Kohl's 2003 Annual Report
http://ir.10kwizard.com/files.php?source=230
Sears Form 10-K
http://adp.mobular.net/adp/24/13/18/
Federated Financial Performance
http://www.federated-fds.com/ir/performance1.asp
TJX Companies (see pages F-3 and F-4 in the Form 10K):
http://www.sec.gov/Archives/edgar/data/109198/000095013504001661/b49914tje10vk.htm#011
I've summarized the numbers in this spreadsheet, then ranked each of the companies:
http://www.mooneyevents.com/ratios.xls
IS TJX BETTER OR WORSE OFF FINANCIALLY?
========================================
"Are retail sales rising or falling?" one might ask in order to answer
this question.
TJX, the parent of apparel outlet TJ Maxx, is a low-margin apparel
outlet operating a successful business model. You can see the low
margins in the Gross Margin category -- but it's not too worrisome if
you look at SG&A costs. A firm can be profitable by holding down
those costs. In addition, TJX holds down its costs by turning
inventory quickly -- it has the best performance of the retailers by
far. That margin over its nearest competitor would improve
substantially if we cut the almost $4.8 billion of financial revenues
out of the Sears model.
The company has ample cash to cover lease and other short-term debt
obligations but the Quick ratio is worrisome -- that inventory needs
to continue to turn in order for cash to come in to pay those
suppliers. If a slowdown in retail spending occurred, one of the
first questions a Wall Street analyst would have is, "Will it hurt the
discounters or the broad-line stores (like Federated) first?"
TJX has obviously built itself a profitable business in this retail
environment, but so too have the 3 competitors. However, it's easy to
see how discounters can survive against the old-line department stores
like Federated, with high margins and slow-moving inventory.
Google search strategy:
Financial ratios
2003 annual reports from company Investor Relations pages or the SEC Edgar database
Best regards,
Omnivorous-GA |
