Exhibit P2 displays a selected set of financial ratios for the years 2015–2017 of three fashion retailers: USbased Gap, UK-based Next, and Japan-based Uniqlo (Fast Retailing). Using this set of ratios, analyze the retailers’ financial performance.

1 The return on equity (ROE) decomposition shows that the underlying drivers of ROE performance vary across retailers. Which economic or strategic factors may explain these differences in the components of ROE?

2 How did performance trends (during the period 2015 to 2017) differ among the three retailers?

Which factors contributed most to these differences?

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EXHIBIT P2 Ratio analysis of Gap, Next, and Uniqlo Gap Next Uniqlo ROE decomposition 2017 (%) 2016 (%) 2015 (%) 2017 (%) 2016 (%) 2015 (%) 2017 (%) 2016 (%) 2015 (%) Net operating profit margin (including other expense/income) 6.3 Net operating profit margin (excluding other expense/Income) 6.47 x Operating asset turnover 1.63. = Return on Net Operating Assets 10.5 Spread Financial leverage = Financial leverage gain 7.4 2.60 19.2 g g 66 6.6 16.3 17.2 17.4 6.9 3.2 7.1 6.9 16.4 17.3 17.6 6.7 5.9 6.9 1.55 1.31 1.35 1.47 2.94. 2.82 2.77 10.7 21.4 23.2 25.9 19.8 16.6 19.3 Return on Net Operating Assets 10.5 10.7 21.4 23.2 25.9 19.8 16.6 19.3 x (Net Operating Assets/Invested Capital) 0.89 0.92 0.97 0.98 0.97 0.50 0.57 0.64 + Return on Non-Operating Investments 1.1 0.5 2.1 1.7 1.5 0.7 0.4 0.3 x (Non-Operating Investments/Invested Capital) 0.11 0.08 0.03 0.02 0.03 0.50 0.43 0.36 = Return on Invested Capital 9.5 9.9 20.9 22.8 25.2 10.2 9.7 12.3 8.3 18.3 20.2 22.9 9.4 8.6 11.2 2.98 5.43 6.55 8.22 0.87 0.61 0.35 24.7 99.2 132.0 187.9 8.2 5.2 4.0 ROE = Return on Invested Capital + Financial leverage gain 28.7 29.1 346 34.6 120.0 154.9 213.1 18.4 14.9 16.3