Problems and Cases #4.15

Analyzing operating profitability. Exhibit 4.22 presents selected operating data for three retailers for a recent year. Macys operates several department stores chains selling consumer products such as brand name clothing, china, cosmetics, and bedding and has a large presence in the bridal and formal wear markets (under store names Macys and Bloomingdales). Home Depot sells a wide range of building materials and home improvements products, which includes lumber and tools, riding lawn mowers, lighting fixtures, and kitchen cabinets and appliances. Supervalu operates grocery stores under numerous brands (including Albertsons, Cub foods, Jewel-Osco Shaws and star market).

Exhibit 4.22

Selected Data for three Retailers (amount in millions)

Macys Home Depot Supervalu

Sales $24,892 $71,288 $44,564

Cost of goods sold 15,009 47,298 34,451

Interest expense 588 624 633

Net income (4,803) 2,260 (2,855)

Average inventory 4,915 11,202 2,734

Average fixed assets 10,717 26,855 7,531

Average total assets 24,967 42,744 19,333

a) Compute the rate of ROA for each firm. Disaggregate the rate of ROA into profit margin for ROA and assets turn over components. Assume that the income tax rate is 35% for all companies.

b) Based on your knowledge of the three-retail store and their respective industry concentration, Describe the likely reasons for the differences in the profit margins for ROA and assets turn over.