Wal-Mart Target
Wal-Mart and Target are two of the leading retailers in the world. Wal-Mart is one of the world's largest companies and Target is one of its primary competitors. While the both succeed based on similar competencies in logistics and merchandising, there are significant differences between the two that lead to different financial results. Wal-Mart is by far the larger, and this allows it to execute the cost leadership business model more effectively, leveraging economies of scale. Wal-Mart is also more diversified -- it operates internationally while Target does not, is stronger in groceries and has a much stronger online business. The purpose of a financial analysis of these companies is to determine which of the two is stronger financially. The analysis aims to answer the question of how the strategic differences between the two companies translates into differences in financial performance. This information is of particular use to potential investors that have an interest in a retailing business and might therefore benefit from a direct comparison between the two companies.
Recent Performance
The economic downturn that began in 2008 and its aftermath have had a significant impact on a number of businesses, and major retailers are no exception. The ability of a firm to weather a financial crisis is an important element in its financial strength. Wal-Mart's revenues did not decline during any fiscal year of the past five, nor did its net income. Wal-Mart saw revenue increase 7.2% in 2009, 0.9% in 2010 and 3.4% in 2011. Wal-Mart profit increased 5.1% in 2009, 7.4% in 2010 and 14% in 2011. That Wal-Mart's profit improved at a faster rate than its revenues is noteworthy. This can be attributable to improvements in its gross profit, reflecting Wal-Mart's ability to leverage its superior pricing power to increase profits even when revenues are all but flatlining.
For Target, the company saw revenue increase each year of the past five, but saw its profits decrease in 2009 and only in 2011 rebound to pre-crisis levels. The company's revenues increased 2.5% in 2009, 0.6% in 2010 and 3.1% in 2011. Target's net income declined 22.2% in 2009, then increased 12.3% in 2010 and 17.3% in 2011. These figures show that Target's profit is more volatile than its revenue, decreasing at a faster rate when times are tough and then increasing at a faster rate when the economy begins to show signs of improvement. The company's gross profit fell in 2009 to 29.5% from 30.1% the previous year, but rebounded to 30.6% by 2011. This indicates that Target perhaps does not have the same strong pricing power as Wal-Mart. This is to be expected, as Target simply does not have the economies of scale in purchasing and distribution that Wal-Mart has.
Ratio Analysis
Ratio analysis is the process of deriving financial ratios from a firm's published financial statements. These ratios are compared across the firm's history, across its industry and across business norms. The ratios provide insight into a number of different elements of the financial condition of the firm -- its liquidity and solvency, its profitability, its investment returns and its operating performance (Loth, 2011). By using this form of analysis, the two firms of Wal-Mart and Target can be compared against one another, despite their vastly different sizes and slightly different businesses. For the investor, this approach is reasonable since in all likelihood only one of these two firms would be chosen for any given portfolio.
The first set of ratios to be calculated is the liquidity ratios. The liquidity ratios measure the ability of the company to meet its financial obligations for the coming year. These obligations are met by converting current assets (those with under one year to cash conversion) to cash. Thus, there are three different liquidity ratios -- the current ratio, the quick ratio and the cash ratio. The current ratio measures the current assets divided by the current liabilities. For Wal-Mart, this was 0.88 for 2011, 0.86 for 2010, 0.88 for 2009 and 0.82 for 2008. This shows that Wal-Mart has experienced a relatively stable current ratio that has seen some improvement over the past few years. The quick ratio for Wal-Mart in 2011 was 0.26 in 2011, 0.27 in 2010 and 0.26 in 2009. The cash ratio for Wal-Mart was 0.13 in 2011, 0.14 in 2010 and 0.13 in 2009. All of Wal-Mart's liquidity ratios are stable, and have been so through the financial crisis....
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