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

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Case:Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc. Financial Statement Case analysis 1. How do the retailing strategies of Sears and Wal-Mart differ? How does each firm operate their business/attempt to create value? The two companies differs in retailing strategy in two ways. 1. Credit sales boost sales greatly in Sears, not in Wal-mart Since 1992 when Arthur C. Martinez was brought on board to head Sears’s retailing operations, credit sales, especially through the use of the company’s own proprietary credit card, boost the sales of the company greatly from 1993 to 1997. The new card accounts between 1993 and 1996 were increasing by roughly a 50% rate every year. Besides the company’s own credit cards, the third …show more content…

The two companies create value in a different way. a..Changing income statements of Sears in fiscal year 1997 into common-sized, we get the table as following: The following is the common-sized income statement of Wal-mart in the same year: The 2 firms had a similar profit margin, major difference exists in COGS and SG&A, while Sears had a higher gross profit margin, high expense (21.17%) is driving the total cost and expense of the two firms to the same level-about 95%. b. DuPont analysis In fiscal year 1997: ROE of Wal-mart=19.71%=2.91(profit margin)*2.47(assets turnover)*2.38(leverage) ROE of Sears=22%=2.88(profit margin)*1.10(assets turnover)*6.93(leverage) From above, the main driver for Sears to create value for shareholders is through leverage while Wal-mart’s effective use of assets acts in increasing ROE. 2. Wal-Mart’s average ROE for the 1997 fiscal year was 19.7% [$3,525/($18,503+$17,143)/2] while Sears’ average ROE over roughly the same period was 22.0% [$1,188/($5,862+$4,945)/2]. Don Edwards was puzzled by these numbers because of Wal-Mart’s reputation as a premier retailer and Sears’ financial difficulties not long ago. Use the 3-step DuPont method to break down the ROE calculation and determine what is driving the individual performance of each of these two companies during

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