Sears and Wal-Mart

1. The purpose of Don Edwards' comparison of Sears and Wal-Mart is to find out which company is the real powerhouse in the industry. Edwards found that although Sears has some problems in its operation, the ROE of Sears outperform that of Wal-Mart. Since the research may affect decisions of buying or selling stocks of these two companies, Don Edwards want to make the comparison.

2. For Sears, the target consumers were middle-class female shoppers. Sears offered credit cards which could only be used in its own stores to increase payment flexibility, so as to pull up revenue.

The strategy of Wal-Mart was to offer the lowest price to customers. They didn't have target group of people; they attracted consumers by low prices. Wal-Mart also offered credit card to their customer, though the risk of receivables were transferred to a third party, Chase Manhattan Bank.

3. To compare these two companies with DuPont Model, we calculate the following ratios.

Sears Wal-Mart

Net Profit Margin 0.033 0.030

Assets Turnover 0.972 2.914

Financial Leverage 6.928 2.272

ROE 0.220 0.198

We find that although the ROE of Sears is higher than that of Wal-Mart, there are significant difference between the two companies in the asset turnover and financial leverage ratio.

The net profit margin ratios of the two companies are close. The assets turnover ratio shows that Wal-Mart had an annual turnover that covered 2.914 times of its average assets, while the Sears' annual turnover is only 0.972 of its average assets. Sears didn't seem to have a high net income.

As for the financial leverage ratio, the amount of Sears' debt is around 5.928 times of shareholders' equity. Wal-Mart, however, had debt only 1.272 times of equity. This means the Sears was mainly financed by debts, which enabled the shareholders get larger return on relative low equity.

4. We calculated the following ratios to apply ROE disaggregation.

Sears Wal-Mart

Return on Assets(ROA) 0.053 0.092

Net Profit Margin (PM) 0.033 0.030

- Gross Profit Margin(GPM) 0.264 0.208

- Expense to Sales(ETS) 0.229 0.164

Assets Turnover(AT) 0.972 2.914

- Average Receivable Turnover(ART) 1.860 129.583

- Inventory Turnover(INVT) 5.530 5.769

- PPE Turnover(PPET) 5.920 5.929

Return on Financial Leverage(ROFL) 0.167 0.106

From