Comparing Companies within an Industry and Over Time
Refer to the financial statements of American Eagle Outfitters in Appendix B, Urban Outfitters in Appendix C, and the Industry Ratio Report in Appendix D at the end of this book.
Required:
1. What was Advertising Expense for each company for the most recent year? Where did you find the information?
2. Compute the percentage of Advertising Expense to Net Sales for the most recent year for both companies. Which company incurred the higher percentage? Show computations. Are you able to perform the same comparison for the previous two years? If so, show the computations. If not, explain why not.
3. Compare the Advertising Expense to Net Sales ratio for the most recent year computed in requirement (2) to the industry average found in the Industry Ratio Report (Appendix D). Were these two companies spending more or less than their average competitor on advertising (on a relative basis)? What does this ratio tell you about the general effectiveness of each company’s advertising strategy?
4. Both companies include a note to the financial statements explaining the accounting policy for advertising. How do the policies differ, if at all?
5. Compute each company’s net profit margin for the three years reported. What do your results suggest to you about each company over time and in comparison to each other?
6. Compare each company’s net profit margin for the most recent year to the industry average net profit margin in the Industry Ratio Report. Were these two companies performing better or worse than the average company in the industry?