Topics opics co cover vered ed
Financing growth growth by COSTCO hat is common size income statement & W hat preparing common size statements ear on year performance of Costco & Y ear competitors based on its common size income statement Costco¶s performance vis-à-vis its competitors Suggestions to Margarita Torres based on the analysis
FINANCING GROWTH STRATEGIES
FINANCING GROWTH STRATEGIES
Value to customers Not marking up products more than 14% over distributors price Optimal container size Delivering lowest per unit price Target markets
Value to customers Not marking up products more than 14% over distributors price Optimal container size Delivering lowest per unit price Target markets Middle class customers Small businesses Kirkland Signature store brand Brand name quality at discount prices
Value to manufacturers
Broad distribution distribution channel
Few SKU¶s
Value to manufacturers
Broad distribution distribution channel
Few SKU¶s
Run continuous production lines
Powerful purchaser
Ancillary services
Numerous products shoppers can add to basket baske t
Increased sales per store
Ancillary services
Numerous products shoppers can add to basket baske t
Increased sales per store
Operating efficiency
Cost conscious approach Low gross margin on products High return on assets High inventory turnover Lower operating expenses
Operating efficiency
Cost conscious approach Low gross margin on products High return on assets High inventory turnover Lower operating expenses than competitors Possible increase in tax efficiency
Minimizing capital expenditure
No frills warehousing
Cross-docking
Reduce transportation transportation
Minimizing capital expenditure
No frills warehousing
Cross-docking
Reduce transportation transportation
Full capacity utilization
Growth drivers No dividend Increase in current liabilities Decrease in liquidity
Capital structure Debt/equity ratio of approximately 1
Growth drivers No dividend Increase in current liabilities Decrease in liquidity
Capital structure Debt/equity ratio of approximately 1 Moderate financial leverage High return on equity Reinvestment of earnings
Common Size financial statement A financial statement, which expresses the different values in form of percentage, is called a Common size financial statement
Common Size financial statement A financial statement, which expresses the different values in form of percentage, is called a Common size financial statement
Horizontal common size statement (trend analysis) Vertical common size statement
Common Size Statement Financial statements reveal the financial credibility of a company.
elps in
CS components
Balance sheet
Income statement
Common Size Statement Financial statements reveal the financial credibility of a company.
comparing two companies, which differ in size.
CS components
Balance sheet
Income statement
Net assets are taken as 100 %
Net sales are taken as 100 %
Helps in
Horizontal analysis Horizontal
analysis analysis ( or trend analysis ) shows the changes between years in the financial data in percentage and dollar form.
Highlights changes that are
unusual.
Horizontal analysis Horizontal
analysis analysis ( or trend analysis ) shows the changes between years in the financial data in percentage and dollar form.
Highlights changes that are
unusual.
Formulas
Dollar Dollar change change = Current Current year fig. ± Base yr. fig.
Formulas
Dollar Dollar change change = Current Current year fig. ± Base yr. fig.
Percentage change = Dollar change X 100 Base year fig.
E.g.
E.g.
CLOVER CORPORATION Comparative Comparative Income Income Statem State me nts For the Years Ended December 31
2008 2007 Ne t sale s $ 520,000 $ 480,000 Cost of goods sold 360,000 315,000 Gross marSales gin ,0008.3%, 165,000 increase1d60by increased yet O ti 128 600 126,000
Increase (Decrease) Amount % $ 40,000 8.3 45,000 14.3 (5,000) (3.0) 2,600 2.1
CLOVER CORPORATION Comparative Comparative Income Income Statem State me nts For the Years Ended December 31 Increase (Decrease) 2008 2007 Amount % Ne t sale s $ 520,000 $ 480,000 $ 40,000 8.3 Cost of goods sold 360,000 315,000 45,000 14.3 Gross marSales gin ,0008.3%, 165,000 (5,000) (3.0) increase1d60by increased yet Ope rating e xpe nse s 128,600 2,600 2.1 net income decreased by126,000 21.9%. Ne t ope rating income 31,400 39,000 (7,600) (19.5) Inte re st e xpe nse 6,400 7,000 (600) (8.6) Net income bef befo ore ta taxes 25,000 32,000 (7,000) (21.9) Less ess income taxes (30%) 7,500 9,600 (2,100) (21.9) Ne t income $ 17,500 $ 22,400 $ (4,900) (21.9)
CLOVER CORPORATION There were inysis both cost of goods ntincreases alComparative nal Horizo A Comparative Income Income Statem State me nts
sold (14.3%) and operating expenses (2.1%). For the Years Ended December 31 These increased costs more than offset theIncrease increase in sales, sales , yielding yielding an overall (Decrease) decrease in net 200income. 8 2007 Amount % Ne t sale s Cost of goods sold Gross margin O ti
$ 520,000 $ 480,000 $ 40,000 360,000 315,000 45,000 160,000 165,000 (5,000) 128 600 126,000 2,600
8.3 14.3 (3.0) 2.1
CLOVER CORPORATION There were inysis both cost of goods ntincreases alComparative nal Horizo A Comparative Income Income Statem State me nts
sold (14.3%) and operating expenses (2.1%). For the Years Ended December 31 These increased costs more than offset theIncrease increase in sales, sales , yielding yielding an overall (Decrease) decrease in net 200income. 8 2007 Amount % Ne t sale s $ 520,000 $ 480,000 $ 40,000 Cost of goods sold 360,000 315,000 45,000 Gross margin 160,000 165,000 (5,000) Ope rating e xpe nse s 128,600 126,000 2,600 Ne t ope rating income 31,400 39,000 (7,600) Inte re st e xpe nse 6,400 7,000 (600) Net income bef befo ore ta taxes 25,000 32,000 (7,000) Less ess income taxes (30%) 7,500 9,600 (2,100) Ne t income $ 17,500 $ 22,400 $ (4,900)
8.3 14.3 (3.0) 2.1 (19.5) (8.6) (21.9) (21.9) (21.9)
Trend percentages
Trend percentages state several years financial data in terms of a base year which equals 100%.
Horizontal
analysis analysis can be even eve n more useful
Trend percentages
Trend percentages state several years financial data in terms of a base year which equals 100%.
Horizontal
analysis analysis can be even eve n more useful when data from a number of years are used to compute trend percentages.
Trend analysis
Trend % = Current yr. amount Base yr. amount
X 100
Trend analysis
Trend % = Current yr. amount Base yr. amount
X 100
Trend analysis (e. g.)
Berry products products financial financial info. (2001 ± ¶05)
The base year is 2001 and its amounts = 100%
Trend analysis (e. g.)
Berry products products financial financial info. (2001 ± ¶05)
The base year is 2001 and its amounts = 100%
Analysis Analysis
- cost of of goods sold sold is is increasing increasing faster faster than sales, which is slowing the increase in gross margin.
Trend analysis ( graph )
Trend analysis ( graph )
Vertical analysis Vertical analysis focuses
relationships relationships among financial statement items at a given point of time
In a common size financial statement each item is expressed as a percentage
Vertical analysis Vertical analysis focuses
relationships relationships among financial statement items at a given point of time
In a common size financial statement each item is expressed as a percentage
Vertical analysis
In income statements, all items are expressed as a percentage of sales
In balance sheets, all items are usually expressed as a
Vertical analysis
In income statements, all items are expressed as a percentage of sales
In balance sheets, all items are usually expressed as a percentage of total assets
e. g. CLOVER CORPORATION Comparative Comparative Incom Income Statem State me nts For the Years Ye ars Ended Decem De cember ber 31 Common-Size Percentages 2008 2007 2008 2007 Ne t sale s $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Net sales is Ope rating e xpe nse s 128,600 126,000
the base
e. g. CLOVER CORPORATION Comparative Comparative Incom Income Statem State me nts For the Years Ye ars Ended Decem De cember ber 31 Common-Size Percentages 2008 2007 2008 2007 Ne t sale s $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Net sales is Ope rating e xpe nse s 128,600 126,000 the base Ne t ope rating income 31,400 39,000 and is Inte re st e xpe nse 6,400 7,000 expressed Net income bef befo ore ta taxes 25,000 32,000 as 100%. Le ss income ta taxe s (30%) 7,500 9,600 Ne t income $ 17,500 $ 22,400
CLOVER CORPORATI CORPORAT ION Comparati Comparati I om ome e tatement ement or t or t e ears Ended ecember
Net Ne t sal sale s Cost Cost of goods sold f goods sol ross margi margin Operati Operating ng e xpe nse s 008 Cost ÷
2008 $ 520,000 000 360,000 000 160,000 000 128,600 600 8 Sale Sale
2007 $ 80, 80,000 000 315 315,000 000 165 165,000 000 126 126,000 000 0%
CommonCommon- i e Percent Percentages 2008 2007 00. 00.0 00. 00.0 69..2 69 65..6 65
CLOVER CORPORATI CORPORAT ION Comparati Comparati I om ome e tatement ement or t or t e ears Ended ecember CommonCommon- i e Percent Percentages 2008 2007 00. 00.0 00. 00.0 69..2 69 65..6 65
2008 2007 Net Ne t sal sale s $ 520,000 000 $ 80, 80,000 000 Cost Cost of goods sold 360,000 000 315 315,000 000 f goods sol ross margi margin 160,000 000 165 165,000 000 Operati Operating ng e xpe nse s 128,600 600 126 126,000 000 ÷e200 008 8 Sale Sa × 10 100% 0% 2008 Net Ne t operati opera ting ng Cost incom 31les , s00 39, 39,000 000 ,0 0,00 000 100% 0% Interest erest (e$ x3 p6 e0 ns e00 ÷ $520, 6, 0 00) × 10 7,000 00=0 69.2% Net Ne t income income bef be f ore ore taxe s 25,000 000 32, 32,000 000 2007 007 Sales es 9×,600 100% 10 Less income taxes (30% 30Cost %) ÷ 2700 ,500 5070 Sal 60 00% ( $3 $315 15,0 ,000 00 $480 80,0 ,000 × 10 100% 0% = 65 65.6 .6% Net Ne t in income $ ÷ 17,$4 500 500 $ 00 22, 22,) 00
CLOVER CLOVER CORPORA COR PORAT T ION Comparative Comparative Income Income Statem State me nts For the Years Ye ars Ende Ende d Decem De cember ber 31 Common-Size W Percentages 2008 2007 2008 2007 Ne t sale s $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6 Gross margin 160,000 165,000 30.8 34.4 Ope rating e xpe nse s 128,600 126,000 24.8 26.2
hat can we conclude? hat
CLOVER CLOVER CORPORA COR PORAT T ION Comparative Comparative Income Income Statem State me nts For the Years Ye ars Ende Ende d Decem De cember ber 31 Common-Size W Percentages 2008 2007 2008 2007 Ne t sale s $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6 Gross margin 160,000 165,000 30.8 34.4 Ope rating e xpe nse s 128,600 126,000 24.8 26.2 Ne t ope rating income 31,400 39,000 6.0 6.0 8.2 8.2 Inte re st e xpe nse 6,400 7,000 1.2 1.2 1.5 1.5 Net income befo efore taxes 25,000 32,000 4.8 4.8 6.7 6.7 Le ss income ta taxe s (30%) 7,500 9,600 1.4 1.4 2.0 2.0 Ne t income $ 17,500 $ 22,400 3.4 4.7 4.7
hat can we conclude? hat
Common size statement for comparison
Useful when comparing data from diff. companies
In 2002, W endy¶s endy¶s net income is $219Mn and McDonald¶s net income is $893Mn. Comparison Comparison is misleading due to diff. sizes of the companies.
Common size statement for comparison
Useful when comparing data from diff. companies
In 2002, W endy¶s endy¶s net income is $219Mn and McDonald¶s net income is $893Mn. Comparison Comparison is misleading due to diff. sizes of the companies.
endy¶s W endy¶s
net income as 8% of the sales and McDonald¶s net income is 5.80% of sales. In this light, W endy¶s endy¶s performance is better than that of McDonald¶s.
Advantages
The size of the companies being compared is not relevant. The companies being compared may be small or big. Hence, it is termed as common size. Removes any any kind of bias Changes in different values pertaining to company's performance can also be ascertained during a particular period. Eg: Eg: to know how the cost of goods sold over a span of
Advantages
The size of the companies being compared is not relevant. The companies being compared may be small or big. Hence, it is termed as common size. Removes any any kind of bias
Changes in different values pertaining to company's performance can also be ascertained during a particular period. Eg: Eg: to know how the cost of goods sold over a span of time has changed, the common size financial statement can be helpful.
Predicts future trends and analyzes prevailing trends in the industry.
Limitations As with financial statements in general, the interpretation of common size statements is subject to many limitation, in the accounting data used to construct them.
Different accounting policies may be used by different firms or by the same firm at different points of time. Adjustments must be made
Limitations As with financial statements in general, the interpretation of common size statements is subject to many limitation, in the accounting data used to construct them.
Different accounting policies may be used by different firms or by the same firm at different points of time. Adjustments must be made Different firms may use different accounting calendars, so accounting periods may not be directly comparable.
COSTCO·S & COMPETIT COSTCO·S COMPETITORS· ORS· COMMON SIZE FINANCIAL STA ST ATEM EMEN ENTS TS & ANALYS YSIS IS
COSTCO·S & COMPETIT COSTCO·S COMPETITORS· ORS· COMMON SIZE FINANCIAL STA ST ATEM EMEN ENTS TS & ANALYS YSIS IS
Year on Year Vertical Common Size Income Statements
Year on Year Vertical Common Size Income Statements
C O S T C
C O S T C O
S E A R
S E A R S
W
A L
M A
W
A L
M A R T
B J c o r
B J c o r p
Costco vis-à-vis competitors ² vertical common size income statements.
Costco vis-à-vis competitors ² vertical common size income statements.
1997
1998
1997
1998
1999
2000
1999
2000
2001
2001
Vertical Common ² Size Income Statement Analysis
Vertical Common ² Size Income Statement Analysis
COSTCO High
operational efficiency
SEARS
BJ Wholesale corp Lower
net income in 2001 due to lease obligation
WAL-MART High
gross margin
COSTCO High
operational efficiency
SEARS
BJ Wholesale corp Lower
net income in 2001 due to lease obligation
WAL-MART High
High
operating expenses
gross margin Higher operational efficiency Lower operating expenses
Year ² on ² Year Horizontal Common - Size Income Statements
Year ² on ² Year Horizontal Common - Size Income Statements
COSTCO
COSTCO
SEARS, ROEBUCK
SEARS, ROEBUCK
WAL-MART
WAL-MART
BJ WHOLESALE CORP.
BJ WHOLESALE CORP.
Year ² on ² Year Horizontal Common - Size Income Statements Analysis
Year ² on ² Year Horizontal Common - Size Income Statements Analysis
The graph of net sales has been above the operating expenses hence showing that the firm is growing without increase in oper.exp. oper.exp. gross margin over time. Consistent gross
Costco
Sears
W al-mart al-mart
Sharp decline decline in the gross income around 2001 along with rising operating expenses expenses as compared to the net sales
Consistent increase increase in net n et sales and gross income in come Stable growth
The graph of net sales has been above the operating expenses hence showing that the firm is growing without increase in oper.exp. oper.exp. gross margin over time. Consistent gross
Costco
Sears
W al-mart al-mart
BJ wholesale Corporation
Sharp decline decline in the gross income around 2001 along with rising operating expenses expenses as compared to the net sales
Consistent increase increase in net n et sales and gross income in come Stable growth
between 2000-01 A sharp decline in the gross income between expenses do not contribute to sales Rising operating expenses
Threat! he major threat for COSTCO is the increasing market share of its major m ajor competitor Wal-Mart, which it needs to tackle
Threat! he major threat for COSTCO is the increasing market share of its major m ajor competitor Wal-Mart, which it needs to tackle
Suggestions to COSTCO
COSTCO Value added ad ded services Portfolio expansion
COSTCO Value added ad ded services Portfolio expansion
Suggestions to Margarita Torres
Suggestions to Margarita Torres
As per the analysis,
Costco & W al-mart al-mart are market leaders.
Monitor the performance of Costco and keep the existing shares of Costco
W al-mart al-mart
is a good option from an investment perspective
As per the analysis,
Costco & W al-mart al-mart are market leaders.
Monitor the performance of Costco and keep the existing shares of Costco
W al-mart al-mart
is a good option from an investment perspective
Margarita should purchase Wal-mart shares as well ; retaining retain ing the present shares of Costco
