Getting Started as a Retail Analyst

Using SEC Filings, Chain Store Age, and Internet Sites

Growth in Sales for Chain Retailers

• Increasing the number of stores

• Adding a new store format

• Increased sales promotion

• Changing the merchandise mix

Exam Data III

• Select three publicly traded retailers, which compete within an overlapping merchandise line.

• Prepare an exhibit (table) tracking their performance on 5 components of the Strategic Profit Model and

• Gross Margin (or gross profit if shown), turnover, and GMROI.

• Optional: Accounts payable and selling space (GMROS)

• Select a consecutive span of years including the most recent (2005) and 2002.

EDGAR

• “Search the EDGAR Database”

• “Companies and other filers”

5200 6  Retail-Building Materials, Hardware, Garden Supply

5211 6   Retail-Lumber & Other Building Materials Dealers

5271 2   Retail-Mobile Home Dealers

5311 2   Retail-Department Stores

5331 2   Retail-Variety Stores

5399 2   Retail-Misc General Merchandise Stores

5400 2   Retail-Food Stores

5411 2   Retail-Grocery Stores

5412 2   Retail-Convenience Stores

5500 2   Retail-Auto Dealers & Gasoline Stations

5531 2   Retail-Auto & Home Supply Stores

5600 2   Retail-Apparel & Accessory Stores

5621 2   Retail-Women's Clothing Stores

5651 2   Retail-Family Clothing Stores

5661 2   Retail-Shoe Stores

5700 2  Retail-Home Furniture, Furnishings & Equipment Stores

5712 2   Retail-Furniture Stores

5731 2   Retail-Radio, TV & Consumer Electronics Stores

5734 2   Retail-Computer & Computer Software Stores

5735 2   Retail-Record & Prerecorded Tape Stores

5810 5   Retail-Eating & Drinking Places

5812 5   Retail-Eating Places

5900 2   Retail-Miscellaneous Retail

5912 1   Retail-Drug Stores and Proprietary Stores

5940 2   Retail-Miscellaneous Shopping Goods Stores

5944 2   Retail-Jewelry Stores

5945 2   Retail-Hobby, Toy & Game Shops

5960 2   Retail-Nonstore Retailers

5961 2   Retail-Catalog & Mail-Order Houses

Gross Margin

• Sales revenue minus cost of goods sold

• Selling price*quantity - cost*quantity

• Percent gross margin=gross margin/revenue

Turnover

• “True” measures of turnover

@Cost@Retail Inventory

goods ofCost

Inventory

revenue Sales

inventory Units

sold Units

GMROI

• “Gross margin return on inventory”

@CostInventory

revenue Sales

revenue Sales

margin Gross

Days Payable

• Indication of how long a firms taking (on average) to pay bills, or comparison of how it’s using suppliers to finance inventory.

90)or (365Dayssold goods ofCost

payable Accounts

Gross margin

• Three components:– Reflects the service outputs provided by an institution to its

buyers– Risk

• Perishability• Pre-sold, bespoke• Brand strength

– Competition

• Different from initial markup, closer to maintained markup

Factors Affecting Gross Margin

• Competition: Higher the competition—the lower gross margins, more intensely distributed brands have low margins.– Differentiated merchandise

• Risk of the merchandise: Higher risk, higher markups… (and greater markdowns)

In-store allocation of resources among lines

• Ratio analysis:

• GMROI = gross margin/inventory

• GMROS = gross margin/selling space

• GMROL = gross margin/employee unit

• These decisions are set with regard to the design of the format, and modifications to the format must address these criteria

Inventory Performance

Assets turnover = Net sales / total assets

Inventory turnover =Units sold / units in inventoryCost of goods sold / average inventorySales / inventory @ retail

Return on assets =Net profit / total assetsNet profit margin x assets turnover

Return on Net Worth =

11.11%

Return on Assets

=5.616%

Profit Margin

1.8%

Asset Turnover=3.12

47,145/15,092 Financial Leverage

15,092/7,625

Gross Margin=10.7%

(47,145M-42,092M) 47,145

Turnover=11.5

(42,092M)

3,644M

COSTCO 2004

Return on Net Worth =

13.98%

Return on Assets

=8.75%

Profit Margin

5.7%

Asset Turnover=1.54

10,282/6,698 Financial Leverage=1.60

6,698/4,191

Gross Margin=33.0%

(10,282M-6,887M) 10,282M

Turnover=4.28

(6,887M)

1,607M

KOHLS 04

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

258,1424,557,112

258,1422,914,662

258,1421,685,503

4,557,1122,914,662

2,914,6621,685,503

5.66%

8.86%

1.56X

1.73X

15.32%

KOHL’S CORP '99

Leverage: Total Assets/Net Worth

• Ratio illustrating the use of debt by the retailer.

• Provides a measure of market assessment of the risk of the operation, the higher the proportion of apparel in inventory, the lower ratio of financial leverage.

• ROA x Leverage = Return on Net Worth

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

5,809 542,016

5,809254,116

5,80989,774

542,016254,116

254,11689,774

1.07%

2.28%

2.13X

2.83x

6.45%

Hastings 2005

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

3,056104,859

3,05639,604

3,05617,143

104,85939,604

39,604

17,143

2.91%

7.72%

2.65x

2.31x

17.83%

WAL*MART '97

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

258,1424,557,112

258,1422,914,662

258,1421,685,503

4,557,1122,914,662

2,914,6621,685,503

5.66%

8.86%

1.56X

1.73X

15.32%

KOHL’S CORP '99

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

452,8595,284,381

452,8592,626,927

452,8591,654,470

5,284,3812,626,927

2,626,927

1,654,470

8.57%

17.24%

2.01x

1.59x

27.37%

THE GAP, INC. '97

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

56523,649

56522,088

5655.952

23,64922,088

22,088

5,952

2.39%

2.56%

1.07x

3.71x

9.50%

J.C. PENNEY '96

Profit margin

Asset turnover

Return on assets

Leverage

Return on net worth

1,27138,236

1,27136,167

1,2714,945

38,23636,167

36,167

4,945

3.32%

3.51%

1.06x

7.31x

25.66%

Sears '96

Routes to higher financial performance: Increasing the Profit Margin

• Increasing the Gross Margin– Smarter purchasing: fewer discounts and reductions– Differentiating the merchandise reduces price competition– Vendor discounts/concessions

• Reducing Expenses– "Flexible" employee scheduling– Incorporating a commission portion into compensation– Reducing store hours during slack periods– Shifting functions to suppliers

Routes to higher financial performance: Increasing the Asset Turnover

• Increasing Sales:– "High velocity retailing," lower margins

• Reducing Investments in Assets– Lower investments in inventory, supplier retains title to some goods.– Lease rather than own, such as build the store, sell it, and lease it back

from owners.– Minimize investments in practices not core to operations, such as

distribution.– Distribute retained earnings ("cash") to owners in form of dividends.

• In short, reduce investment in assets that come at the expense of investments in inventory.

Routes to higher financial performance: Increasing Financial Leverage

• Expand assets through the use of debt rather than equity instruments for inventory:– Increase accounts payable

– Increase use of notes payable

• Use debt financing for investment in real estate.• Utilize debt financing to the point where increased

interest expenses hurt return on net worth.