Retail Strategy Financial Analysis

Retail Strategy Financial Analysis
Walmart, Costco, Target, Macys
Calculated Finances
Table One:
Wal-mart Benchmark Over Time
2013
2012
2011
Gross Margin Percentage
24.9%
25.0%
25.3%
Operating Expenses Percentage
18.9%
19.1%
19.3%
Operating Profit Margin Percentage
5.9%
5.9%
6.1%
Net Profit Margin Percentage
3.6%
3.5%
3.9%
Inventory Turnover*
8.0
8.2
8.6
Asset Turnover
2.3
2.3
2.3
13.7%
13.7%
14.1%
8.4%
8.1%
9.1%
Profit Margin Management
Asset Management
Return on Assets (ROA)
ROA (Operating Profit Margin * Asset
Turnover)
ROA (Net Profit Margin * Asset Turnover)
*Use the inventory amount on the balance sheets and complete the calculation of COGS divided by the inventory dollar amount. This will not
be a true inventory average.
Table Two:
Retailer Benchmark Comparison
Wal-ma
rt 2013
Costco
2013
Target
2013
Macy’s
2013
Profit Margin Management
Gross Margin Percentage
24.9%
12.6%
31.0%
40.3%
Operating Expenses Percentage
18.9%
9.7%
23.7%
30.7%
Operating Profit Margin Percentage
5.9%
2.9%
7.3%
9.6%
Net Profit Margin Percentage
3.6%
1.9%
4.1%
4.8%
8.0
11.6
6.4
3.1
Asset Management
Inventory Turnover *
Asset Turnover
2.3
3.5
1.5
1.3
13.7%
10.1%
11.2%
12.7%
8.4%
6.7%
6.2%
6.4%
Return on Assets (ROA)
ROA (Operating Profit Margin * Asset
Turnover)
ROA (Net Profit Margin * Asset Turnover)
*Use the inventory amount on the balance sheets and complete the calculation of COGS divided by the inventory dollar amount. This will not
be a true inventory average.
Retailer Overview
Walmart
Target market
Walmart’s target market is the working class citizen. Their customers are looking for great deals and a centralized location in which they can do all of their shopping. Moms control over 80% of household spending which makes them the essential consumer to Walmart. Today’s millennial mother is essential to Walmart’s growing success; and Walmart is the biggest marketer to mom’s in the world. Walmart understands that today’s mom is overwhelmed and under pressure; ultimately today’s mom is stressed out. The new millennial mom is comfortable with being imperfect. Mom’s have a great impact on the way that Walmart’s advertise and they try to truly understand today’s mom before they generate new approaches, advertising, and marketing techniques.
Retail format
Walmart is an American multinational retail corporation that operates discount department stores and warehouse stores. Walmart is the world’s second largest, public corporation. Walmart has been noted many times as the largest retailer in the world. Along with Walmart’s department store feel, Walmart is also the largest grocery retailer in the world. The company also owns and operates Sam’s Club retail warehouses in North America.
Sustainable competitive advantage
Walmart gas adopted a cost leadership strategy to achieve competitive price points, and remain one of the most inexpensive retailers in the world. They strive to offer the lower cost to their price sensitive consumer. Walmart has been reducing its cost of operations to see higher profits and increase their overall market share. Walmart has gained benefits from economies of scale, and is able to help lower their prices when compared to other discount retailers. Walmart is able to spread fixed cost over its large quantity of product to lower its cost per unit. This bargaining power with suppliers is a key advantage that Walmart has over its competitors and most other players in today’s retail market.
Costco Wholesale Corporation
Target market
Costco’s target market is gaining people for membership. Often one person in a family is a member of Costco. Memberships are purchased in advance, and can be of different levels. Costco targets independent small business owners who typically have $100,000 in personal income. Costco’s competitive advantage for this target market is that they offer bulk supplies for day to day business operations, and then moved into supplying high end luxury merchandise to make Costco their customers one stop shop. Their focus on the highend demographic is what differentiates Costco from other discount retailers and competitors.
Retail format
Costco is America’s largest wholesaler by revenue. Costco is a membershiponly warehouse club that offers a wide selection of merchandise, and offers products in bulk. The company runs more than 500 stores, most of which are located in the United States. Costco operates 155,000 square foot warehouses that consist of commodity items. Costco offers many food products, offers large frozen food section, carries household supplies and also offers an array of special, more “unique” items such as TVs, jewelry, and even Ipods. Costco carries only 4,000 SKUs. Private label merchandise accounts for 15 percent of its overall commodity sales. Costco is able to cut cost by operating with fewer employees than other retailers such as Sam’s Club. Costco is also committed to healthy products.
Sustainable competitive advantage
According to MSN Money, Costco isn't just riding this broader economic trend to bigger profits it's also stealing customers from lowprice rivals, including Walmart.” Costco is able to remain so competitive in today’s marketplace because they have a clear focus on low cost deals. Costco has never frayed from its nofrills, basic and lowcost merchandise assortment. Costco also has an urban reach. Costco has warehouses that are located in various cities. On the other hand, Walmart and other retailers have been known to stick to more rural areas. Costco also pushes its membership dues. This is a great source of revenue for the retailer. On top of this, Costco operates on a very low overhead. Therefore Costco’s revenue makes them America’s largest wholesaler.
Among its customers, Costco is seen as a highend yet low cost store. Customers expect that products are of high quality and yet cheapest available. The notion that Costco is lowcost/highquality leads customers to make impulse purchases that would otherwise not occur, and do not occur in Costco’s competing stores. Target Corp.
Target market
Target shoppers have a median age of 46, which are the youngest target market for major
retailers. The median household income of someone who shops at Target is $55,000. Half of
target shoppers and employed in professional and managerial positions. 90 percent of Target
shoppers and females, and 38 percent have children at home. Target shoppers are cautious of
how they spend their money, but are also interested in making the “better” purchase as
opposed to the “cheaper” purchase. Target shoppers are active members in their communities
and values how involved with the community Target is. The Target customer is very trend savvy
and values style.
Retail format
Target has been extremely successful in being cheap yet chic. Target is the nations leading
“fashion-forward” discount retailer. Target operates more than 1,785 Target and Super Target
stores across the nation, as well as operates a large online business. Target also offers many
different sections of its store, from electronics, to pharmacy, to groceries. Target also offers
various in-store amenities, such as dining, and photo labs. Target puts a large amount of its
advertising efforts into the holiday and holiday shopping. Target puts its revenues back into the
store, the store format, and their collaborations to ensure that they are giving their customers
the best possible shopping experience.
Sustainable competitive advantage
Target has found a niche in offering more upscale, trend-driven merchandise. With various
licensing agreements and collaborations, Targets creates buzz over merchandise that can only
be found at Target. Target also offers a debit card and loyalty care that are only good at target
and save their customers 5% off all purchases. This is a huge advantage for families who do the
majority of their shopping at Target. Target has been expanding its grocery section and
remodeling its current store layout to make for a one stop shopping experience, and expand
into the Canadian market.
Macy’s Inc.
Target market
Macy’s target market is a female shopper between the ages of 25 and 54. This woman typically
works outside of the house and has a family. She has an average household income of $75,000
or more. Macy’s anticipates that this woman will spend $5,000 at Macy;s on herself and/or her
family.
Retail format
Macy’s is owned by Federated Department Stores and was acquired in 1994. The regional
department store chain of Macy’s was operated autonomously. Macys has its own buying and
distribution systems. All of Federated Department stores rebranded its regional department
stores to Macy’s in 2005. Macy’s currently operates two national retail chains, Bloomingdales
and Macys. Bloomingdales and Macys are two of the most recognizable retailers in the industry,
and their names hold the notion of great value and merchandise. Macys Group operates more
than 850 stores with greater than $27 billion in annual sales. Macys has recently been making
attempts at remodeling their stores to match their target markets needs more specifically, and
offer amenities that their shoppers desire.
Sustainable competitive advantage
Macys has developed private-label and exclusive merchandise, such as Style & Co clothing brand,
I.N.C., and The Cellar that account for 33 percent of the retailers sales. The private brands sales
rate has grown three times faster than national labels have. Macy’s and Bloomingdales provide
a high level of personalized customer service, and offer personal shopping to their customers to
streamline the shopping process. Sales associates keep in touch with loyal shoppers and their
most valued “clients” to invite them to various in-store events and to ensure that they are
satisfied.
Financial Analysis
Gross margin percentage:
Gross Margin Percentage reflects the percentage of sales minus the cost of goods sold.
It is found by subtracting the cost of goods sold from net sales and then dividing that number
by net sales. It is important to evaluate gross margin percentage because it shows how well
they are managing their cost of goods sold. Macy’s had the highest GM% of 40.3%. This is
because Macy’s sells higher quality and brand items so they have a lower cost of goods sold as
compared to their sales. Costco had an extremely low GM% at only 12.6%. Costco has the
lowest gross margin percentage because their cost of goods sold is very high. They do not sell
their items at a price much higher than what they had cost. Target had a middle GM% of 31%. In
2013 WalMart had a lower GM% of 24.9%.
Operating expenses percentage:
Operating expenses entails the expenses of keeping a company going day to day, this
includes rent, transportation costs, and payroll. The operating expenses contribute to what will
be the company’s profit. If a company has high operating expenses, they will have a much lower
profit margin percentage than a company with minimal operating expenses. Macy’s had a
whopping 30.7% in operating expenses. Macy’s has a large sales staff, and has to pay more than
other stores to pay for their prime locations. They also have more high maintenance stores with
quality interiors that need upkeep. Costco had only 9.7% in operating expenses because they
run very low maintenance stores with few sales people. Target fell in the middle again with
23.7% in operating expenses. This makes sense because Target focuses less on their interior
than Macy’s does but more than Costco. A large part of Target’s operating expenses would be
spent on rent because they pay close attention to location. Walmart 2013 has 18.9% in
operating expenses, which makes sense because they have interiors very similar to Costco, only
slightly higher quality. Walmart also spends rent money to get good locations just like Target.
Operating profit margin percentage/net profit margin percentage:
Operating profit margin percentage is the gross margin minus operating expenses
divided by net sales. This shows the profit minus all expenses. It is clear that a company would
want a higher operating profit margin percentage because that means that they have a higher
profit. Target has a 7.3% operating profit margin percentage, Costco has 2.9%, Macy’s has 9.6%,
and Walmart has 5.9%. This means that Macy’s has the largest operating profit margin because
they have low cost of goods sold and high sales. They have high operating expenses but not
high enough to take away from their high sales. Costco has the lowest operating profit margin
percentage because they have the lowest gross margin percentage and took a hit with their
operating expenses.
Inventory turnover:
Inventory turnover measures how many times a company’s inventory is sold and
replaced over a period. It is cost of goods sold divided by merchandise inventory dollars. A
company strives for quicker inventory turnover and can use it to see how much they need to
order to be manufactured. Walmart had an inventory turnover of 8.0, Macy’s had a 3.1, Costco
had an 11.6, and Target had a 6.4. Macy’s had the quickest inventory turnover meaning that they
sold through their inventory faster than any of the other stores analyzed. Following the trend,
Costco was Macy’s opposite and had the highest and slowest inventory turnover. Costco sells
out of its inventory much slower than the other stores analyzed.
Asset turnover:
Asset Turnover is a retailer’s net sales divided by its assets. This financial measure
assesses the productivity of a firm’s investment in its assets and indicates how many sales
dollars are generated by each dollar of assets. Therefore, Walmart 2013 has an asset turnover of
2.3, therefore it generates $2.3 in sales for each dollar invested in the firm’s assets. Similarly,
Costco has an asset turnover of 3.5, Target has 1.5 and Macy’s 1.3. This means that Costco has
the highest asset turnover, meaning they generate the most sales for each dollar invested into
the firms assets.
ROA:
The ROA is determined by two sets of activities - profit margin management and asset
turnover management- and that a high ROA can be achieved by various combinations of net
profit margins and asset turnover levels. Macy’s has an ROA of 11.2%, Target has 12.7%, Costco
has 10.1%, Walmart 2013 has 13.7%. This shows that Walmart has the highest ROA, and Costco
has the lowest ROA.
Purpose and Findings
Analyzing a company’s profit margins is essential to understanding and controlling a
firm’s profitability. To find what a company’s profit margin is, you just divide sales from
operating income. In short, it is the revenue that is left over after paying off variable costs. It
measures the profit made on each dollar spent. While analyzing these retailers based on their
profit margin’s, Macy’s proves to have the highest net profit margin at 4.8%. The higher the net
profit margin percentage is, the better the company is doing financially.
Asset management is crucial to the success of any retailer. Having the right product at
the right time is the key to success. Each retailer has a different approach to asset
management. For example, Costco’s strategy is carrying everyday items in bulk; while Macy’s
strategy is carrying smaller quantities of fashion forward items. Costco has a wider variety of products in comparison to Macy’s as well as cheaper prices which allows for customers to spend more money at Costco than Macy’s. Costco deals heavily with food; therefore, predicting how much
product is needed within any given time is vital. Once the expiration date on a food item has
expired, it must be thrown out; while, Macy’s has the leeway of just putting a product on sale if
it does not sell quickly. Costco has less fixed assets, including; store design/displays, minimal lighting, concrete floors, and less designoriented fixtures than Macy’s. Macy’s has more SKU’s, therefore, puts a lot of money into their inventory. Costco has less SKU’s; however, turns much faster than Macy’s. Therefore, Costco has better financial performance when referring to asset management. Their asset turnover is the fastest amongst these retailers, at a high of 3.5. They understand their strengths lie within less SKU’s and a higher turn. They do a phenomenal job at asset control.
Throughout the course of this semester, M312 has discussed the nature of large
retailers and the advantages and disadvantages of each. Having previous knowledge, as well as,
shopped at most of these retailers we thought we had a relatively good grasp on each.
However, there was so much more to learn this past semester. One fact in particular was how
immense WalMart really is. This final project reiterated this fact and proved to have the best
overall financial performance in regards to return on assets (ROA). WalMart scored a high 13.7%
ROA. ROA is determined using two factors; profit margin and asset turnover levels. WalMart
has high profit margins and a fast turnover; therefore, overall WalMart proves to be the most
financially sound and successful retailer.

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