Kroger operates retail food and drug stores, multidepartment stores, jewelry stores, and convenience stores throughout the United States. These stores are operated under banners such as Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Dillon's, and City Market. The company operated 2,468 supermarkets and multidepartment stores, 779 convenience stores, and 412 jew- elry stores at the end of 2006. Safeway and its subsidiaries operate as food and drug retailers in the United States and Canada. At the end of 2006, the company operated 1,761 stores. Financial ratios for each company follow. EBI denotes after-tax earnings before interest expense and excluding nonoperating gains or losses.

Required:
1. Which company was the more profitable in 2006? (Hint: Compare ROE and ROA performance for the two grocery retailers.)
2. What was the likely source of that company’s superior profit performance in 2006? (Hint:
Decompose ROE and ROA into their individual component parts.)
3. Which company was the more profitable in 2004?
4. Both companies have EBI/Sales margins that hover around 2%. What aspect of the retail grocery industry contributes to such low margins?
5. Which company better manages its receivables, inventories, and payables?

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Selected Financial Ratios Kroger 2003 2004 2005 2006 2003 2004 Safeway 2005 2006 Annual growth rate Sales 3.9% 4.9% 7.3% 9.2% 9.7% 0.8% 7.2% 4.6% Operating earnings (before taxes) Assets (12.1) (20.2) 7.3 9.9 (32.8) 3.8 (21.7) 25.6 3.3 (1.3) 0.0 3.6 (5.9) 1.9 2.5 3.3 Return on common equity (ROCE) EBI/Sales margin 0.027 0.020 0.020 0.020 0.026 0.027 0.020 0.024 Asset turnover 2.633 2.736 2.956 3.171 2.283 2.351 2.468 2.509 Return on assets (ROA) 0.070 0.055 0.060 0.064 0.060 0.064 0.049 0.060 Common earnings leverage 0.219 (0.088) 0.785 0.831 (0.181) 0.574 0.734 0.907 Financial structure leverage 5.216 5.482 5.167 4.477 4.283 3.833 3.374 3.026 ROE 0.080 (0.027) 0.242 0.239 (0.047) 0.141 0.122 0.164 Selected expense items (% sales) Cost of goods sold 73.4% 74.4% 75.2% 75.8% 67.7% 67.9% 68.6% 68.7% Selling, general, and administrative 20.0 20.0 19.3 18.9 25.4 25.0 25.6 24.8 Interest expense 1.1 1.0 0.8 0.7 1.3 1.2 1.1 1.0 Selected asset utilization ratios Days receivables are outstanding 4.808 5.071 4.563 4.041 4.088 3.679 3.276 3.687 Days inventory held 38.590 37.036 35.415 33.121 38.912 40.372 38.110 35.746 Days payables outstanding 31.977 32.358 29.435 26.846 24.590 24.617 27.092 30.372