Financial Analysis Snapshot

As the CFO of a family owned, regional mass merchandise retailer. You operate in a very competitive market against a host of large national retailers. Your CEO is a big believer in learning from players of all sizes, and is requesting your analysis and guidance. Begin by taking a close look at Walmart (NYSE: WMT) and JC
Penney (NYSE: JCP).

You have decided to organize your work into TWO components:
Part A: Financial Analysis Snapshot of key data from the annual reports
Part B: Executive Memo

Part A: Financial Analysis Snapshot Submission Requirements
 NOTE: All work is to be completed and submitted in the Excel template

Go to the Investor Relations section of each company’s website and download their annual reports. You may need to download more than one report to get all required historical data.

• Use the Annual Reports/10K to populate the Excel template. Some entries simply require finding the respective line item amounts, while others will require calculations (these are indicated in in template). Note that some historical data and ratios have already been provided in the template.

Part B: Executive Memo

Present a synopsis of your analysis in an executive memo. You may organize the memo as you see fit, but it must follow the principles of good business communication. To support your executive memo, highlight the key points of your findings. The requirements for each component are outlined below.

Executive Memo:

1. Profitability/Net Income Margins
    What are the after-tax net income margins (i.e., net profit margins) for both companies?
    How do they compare?
    Who achieves the higher net income margin? Why?
   Tip: Analyze the major cost structure line items in the income statement (COGS, SG&A, interest, other, and taxes) as percentages of net sales, so you can identify reasons for better net income margins. Identify and comment on the differences. You may not know why a particular cost item like COGS is higher or lower, and that’s okay. Your CEO only wants to know which cost-structure items are higher or lower for each company.
2. Inventory Management
    Who does a better job managing their inventory (Inventory Days on Hand ratio)?
    What are their respective 3-year trends for Inventory DOH?
    What options could the company consider to improve inventory management?
3. Cash Is King
    How much net cash from operations did each company generate last year?
    Which company has done a better job generating cash from operations?
    In layman's terms, how is each company spending their cash with respect to reinvestments in the business, changes in debt, and returning money to shareholders?
4. Liquidity
    How do the companies compare in terms of the current ratio, and what are their respective 3-year trends?
    Do their current ratios indicate that either of these companies could go bankrupt soon?

Sample Solution