336 PART 4 FURTHER CASE STUDIES CASE 6 VALUATION RATIOS IN THE RETAIL INDUSTRY 2016 TO 2018 This case relates to Chapters 5, 7 and 8. 585 stores. The management commentary includes the Jessica Waters, a 25-year-old student was recently following comments: quoted as saying, 'I don't buy more than I used to, but ... solid sales growth in all divisions ... Underlying costs buy differently and in those simple words she eloquently of business increasing due to investment in multichannel summed up the quandary facing Australia's retailers' capability, investment in store service level and increase in occupancy costs. Dividend increase to 38 cpr. Introduction Company B Over the decade leading up to the GFC (mid-2007), Company B operates in two segments: investments and Australia's retailers enjoyed year after year of growth retail. The investments segment is managed and operated without the need for real innovation. In the current climate, through the company. The retail segment operates through complacent retailers find themselves in a constricting a number of retail fashion chains within Australia and market, unprepared for the changes demanded by a New Zealand and via a joint venture entity in South Africa, tough new world, Australian consumers are spending The company offers casual wear, women's wear and non- less with retailers. Much of the commentary by big retail apparel products. It owns various brands and offers its has focused on the impact of online shopping and the products through the internet. As of 28 July 2017, it had threat to local industry from overseas e-tailers. Several seven brands trading from more than 1000 stores. The major retailers have moved into omni-channel businesses management commentary includes the following remarks: However, retail sales indices show that online sales 1. setting aside one-off accounting redassification gains, represented just 8% of Australia's $267.4 billion retailing company Bachieved an increase in sales and profit despite industry, with less than half of these sales from overseas the challenging operating environment...the Board has Hence, there is no single 'silver bullet' solution facing retail decided to increase dividends to 38 cents per share.... Australia With this background, the following text summarises Company C the strategies of four unidentified retail firms. Figure C6.1 Company C operates in two divisions: the Rental division presents financial ratios for the same firms over the period and the Credit management division. The Rental division 2016 to 2018 offers a range of audio-visual products, kitchen and laundry appliances, computers, furniture and fitness equipment. The firms The Credit management division includes receivables management, debt recovery, credit information services, debt purchasing, equipment finance and personal loans Company A The company operates 90 outlets. The management Company A operates in three segments: Auto & Cycle commentary includes the following comments: Retailing, Leisure Retailing and Sports Retailing. The Auto & ... the backdrop to this year's report is that many Cycle Retailing segment is engaged in retail and distribution customers ... have encountered tough economic of motor vehicle spare parts and bicycle accessories, conditions, with consumer and business confidence tools and equipment. The Leisure Retailing segment is at low levels. Company C is not immune from these engaged in retail and distribution of boating, camping, conditions but another record year from our core fishing, outdoor equipment and apparel. The sports retailing consumer rental division coupled with a strong base of segment is engaged in the retail and distribution of sporting recurring revenue streams and significant cash flows equipment and apparel. In 2016 and 2017 it acquired underscores our resilience and strength... additional retail interests. It operates approximately Michael Bradbury prepared this case. This case is intended solely as a basis for class discussion and is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective management. 2018 2017 2016 5.6% 3.4% 6.7% 5.1% 3.3% 6.2% 9.0 10.6 0.0 6.9 7.7 128 ompany D ompany D operates through two segments. The tail segment comprises businesses that retail locally anufactured and imported household furniture. The retail gment also includes the manufacturing operations. The operty segment purchases and develops sites for use by e company and leases surplus requirements to external nants. As of 30 June 2018, it operated 136 retail stores he management commentary includes the following omments: ... the gross margin for the Group varies by brand and has been affected by product discounting and the clearance of excessive inventory. Trading conditions are expected to remain challenging in financial year 2019 due to increasing competition in key markets, lower exchange rates, continued economic weakness and continued subdued consumer confidence." 0.6 0.6 Company B Profit ratios Return on equity Return on assets Leverage Total debt / total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio Inventory turnover Receivable turnover Payable turnover Growth rates Sales 11.8% 14.0% 7.5% 11.03 123% 8.2% 4.6% 9.1% 54 43 17 14 44 3.5 9.9 10.4 10.4 84.0 39.7 75.3 40.4 85.9 370 (4.4%) 68.4% (0.3%) (49.1%) 3.3% (3.8%) Net income Figure deliberately missing - see Question 1 2018 2017 2016 19.0% 23.7% 24.9% GURE C6.1 Financial comparison of four retail firms over the eriod 2011 to 2013 Company A 2018 2017 2016 rofit ratios Ceturn on equity 14.5% 16.8% 19.4% Eeturn on assets 8.5% 10.2% 11.8% everage otal debt / total assets 325 36.0 24.6 BIT / interest expense 6.6 6.4 8.2 fficiency ratios otal asset turnover 1.2 1.9 margin ratios Eross margin 43.6% 45.2% BIT margin 8.6% 8.6% 8.1% Het margin 5.1% 5.0% 5.1% Working capital management Current ratio 1.7 22 23 uick ratio 0.2 0.3 0.3 ventory tumover 25 25 eceivable turnover 68.6 80.2 68.6 Payable turnover 6.5 8.4 7.5 Growth rates Fales 22.1% 51.4% 16.5% et income 23.0% 50.2% 46.1% 14.73 17.0% 15.8% 15.7 275 9.1 26.3 23.6 53.5 Company C Profit ratios Return on equity Return on assets Leverage Total debt/total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio 10 1.0 30.7% 27.4% 21.0% 22.2% 20.99 140 13.8% 14.8% 1.8 1.7 1.3 1.6 17 12 igure deliberately missing - see Question 1 below. 338 PART 4 FURTHER CASE STUDIES 41 44 Inventory turnover Receivable turnover Payable turnover Growth rates Sales 6.9 6.0 1 Match these ratios with each firm. What is the reasoning for your selection? Firm Total asset turnover 2018 Gross margin 2018 25 28.2% 1.4 44.5% 8.0% 8.6% 19.2% 26.4% Net income 0.6% 13.0% 0.9 29.6% Figure deliberately missing - see Question 1 0.6 12 59 2018 2017 2016 12.4% 8.2% 20.0% 13.0% 20.3% 125 2 Match the following price earnings multiple with each firm. What is the reasoning for your selection? Firm Price earnings 2018 10.8 11.1 19.0 15.4 15.2 23.2 150 172 28.2 229 . 26 27 Company D Profit ratios Return on equity Return on assets Leverage Total debt / total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio Inventory turnover Receivable turnover Payable turnover Growth rates Sales Net income 3 Match the following price to book multiple with each firm What is the reasoning for your selection? Firm Price-to-book 2018 0.6 . 4.2% 3.0% 30.3% 70% 4.7% 29.6% 6.5% 4.5% 1.9 20 20 20 17 04 32 0.5 0.4 42 39 3.7 Endnotes 540 262 49.0 20.3 42.5 189 1 See P Singine and D. Ansett, Walking with retail dinosaurs'. The Melbourne Review (May 2012) 2 Australian Bureau of Statistics (ABS). Retail Turnover excluding cafes, restaurants and takeaway food services for 2017 calendar year and Australia Post, Inside Australian Online Shopping Paper based on delivery data from January 2016 and December 2017 4.2% (0.1%) (35.6%) 2.1% 7.8% 5.1% -Figure deliberately missing - see Question 1 QUESTIONS One way to think about the differences between various retail activities is to consider two ratios: asset turnover and gross margin 250 / 336 PART 4 FURTHER CASE STUDIES CASE 6 VALUATION RATIOS IN THE RETAIL INDUSTRY 2016 TO 2018 This case relates to Chapters 5, 7 and 8. 585 stores. The management commentary includes the Jessica Waters, a 25-year-old student was recently following comments: quoted as saying, 'I don't buy more than I used to, but ... solid sales growth in all divisions ... Underlying costs buy differently and in those simple words she eloquently of business increasing due to investment in multichannel summed up the quandary facing Australia's retailers' capability, investment in store service level and increase in occupancy costs. Dividend increase to 38 cpr. Introduction Company B Over the decade leading up to the GFC (mid-2007), Company B operates in two segments: investments and Australia's retailers enjoyed year after year of growth retail. The investments segment is managed and operated without the need for real innovation. In the current climate, through the company. The retail segment operates through complacent retailers find themselves in a constricting a number of retail fashion chains within Australia and market, unprepared for the changes demanded by a New Zealand and via a joint venture entity in South Africa, tough new world, Australian consumers are spending The company offers casual wear, women's wear and non- less with retailers. Much of the commentary by big retail apparel products. It owns various brands and offers its has focused on the impact of online shopping and the products through the internet. As of 28 July 2017, it had threat to local industry from overseas e-tailers. Several seven brands trading from more than 1000 stores. The major retailers have moved into omni-channel businesses management commentary includes the following remarks: However, retail sales indices show that online sales 1. setting aside one-off accounting redassification gains, represented just 8% of Australia's $267.4 billion retailing company Bachieved an increase in sales and profit despite industry, with less than half of these sales from overseas the challenging operating environment...the Board has Hence, there is no single 'silver bullet' solution facing retail decided to increase dividends to 38 cents per share.... Australia With this background, the following text summarises Company C the strategies of four unidentified retail firms. Figure C6.1 Company C operates in two divisions: the Rental division presents financial ratios for the same firms over the period and the Credit management division. The Rental division 2016 to 2018 offers a range of audio-visual products, kitchen and laundry appliances, computers, furniture and fitness equipment. The firms The Credit management division includes receivables management, debt recovery, credit information services, debt purchasing, equipment finance and personal loans Company A The company operates 90 outlets. The management Company A operates in three segments: Auto & Cycle commentary includes the following comments: Retailing, Leisure Retailing and Sports Retailing. The Auto & ... the backdrop to this year's report is that many Cycle Retailing segment is engaged in retail and distribution customers ... have encountered tough economic of motor vehicle spare parts and bicycle accessories, conditions, with consumer and business confidence tools and equipment. The Leisure Retailing segment is at low levels. Company C is not immune from these engaged in retail and distribution of boating, camping, conditions but another record year from our core fishing, outdoor equipment and apparel. The sports retailing consumer rental division coupled with a strong base of segment is engaged in the retail and distribution of sporting recurring revenue streams and significant cash flows equipment and apparel. In 2016 and 2017 it acquired underscores our resilience and strength... additional retail interests. It operates approximately Michael Bradbury prepared this case. This case is intended solely as a basis for class discussion and is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective management. 2018 2017 2016 5.6% 3.4% 6.7% 5.1% 3.3% 6.2% 9.0 10.6 0.0 6.9 7.7 128 ompany D ompany D operates through two segments. The tail segment comprises businesses that retail locally anufactured and imported household furniture. The retail gment also includes the manufacturing operations. The operty segment purchases and develops sites for use by e company and leases surplus requirements to external nants. As of 30 June 2018, it operated 136 retail stores he management commentary includes the following omments: ... the gross margin for the Group varies by brand and has been affected by product discounting and the clearance of excessive inventory. Trading conditions are expected to remain challenging in financial year 2019 due to increasing competition in key markets, lower exchange rates, continued economic weakness and continued subdued consumer confidence." 0.6 0.6 Company B Profit ratios Return on equity Return on assets Leverage Total debt / total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio Inventory turnover Receivable turnover Payable turnover Growth rates Sales 11.8% 14.0% 7.5% 11.03 123% 8.2% 4.6% 9.1% 54 43 17 14 44 3.5 9.9 10.4 10.4 84.0 39.7 75.3 40.4 85.9 370 (4.4%) 68.4% (0.3%) (49.1%) 3.3% (3.8%) Net income Figure deliberately missing - see Question 1 2018 2017 2016 19.0% 23.7% 24.9% GURE C6.1 Financial comparison of four retail firms over the eriod 2011 to 2013 Company A 2018 2017 2016 rofit ratios Ceturn on equity 14.5% 16.8% 19.4% Eeturn on assets 8.5% 10.2% 11.8% everage otal debt / total assets 325 36.0 24.6 BIT / interest expense 6.6 6.4 8.2 fficiency ratios otal asset turnover 1.2 1.9 margin ratios Eross margin 43.6% 45.2% BIT margin 8.6% 8.6% 8.1% Het margin 5.1% 5.0% 5.1% Working capital management Current ratio 1.7 22 23 uick ratio 0.2 0.3 0.3 ventory tumover 25 25 eceivable turnover 68.6 80.2 68.6 Payable turnover 6.5 8.4 7.5 Growth rates Fales 22.1% 51.4% 16.5% et income 23.0% 50.2% 46.1% 14.73 17.0% 15.8% 15.7 275 9.1 26.3 23.6 53.5 Company C Profit ratios Return on equity Return on assets Leverage Total debt/total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio 10 1.0 30.7% 27.4% 21.0% 22.2% 20.99 140 13.8% 14.8% 1.8 1.7 1.3 1.6 17 12 igure deliberately missing - see Question 1 below. 338 PART 4 FURTHER CASE STUDIES 41 44 Inventory turnover Receivable turnover Payable turnover Growth rates Sales 6.9 6.0 1 Match these ratios with each firm. What is the reasoning for your selection? Firm Total asset turnover 2018 Gross margin 2018 25 28.2% 1.4 44.5% 8.0% 8.6% 19.2% 26.4% Net income 0.6% 13.0% 0.9 29.6% Figure deliberately missing - see Question 1 0.6 12 59 2018 2017 2016 12.4% 8.2% 20.0% 13.0% 20.3% 125 2 Match the following price earnings multiple with each firm. What is the reasoning for your selection? Firm Price earnings 2018 10.8 11.1 19.0 15.4 15.2 23.2 150 172 28.2 229 . 26 27 Company D Profit ratios Return on equity Return on assets Leverage Total debt / total assets EBIT / interest expense Efficiency ratios Total asset turnover Margin ratios Gross margin EBIT margin Net margin Working capital management Current ratio Quick ratio Inventory turnover Receivable turnover Payable turnover Growth rates Sales Net income 3 Match the following price to book multiple with each firm What is the reasoning for your selection? Firm Price-to-book 2018 0.6 . 4.2% 3.0% 30.3% 70% 4.7% 29.6% 6.5% 4.5% 1.9 20 20 20 17 04 32 0.5 0.4 42 39 3.7 Endnotes 540 262 49.0 20.3 42.5 189 1 See P Singine and D. Ansett, Walking with retail dinosaurs'. The Melbourne Review (May 2012) 2 Australian Bureau of Statistics (ABS). Retail Turnover excluding cafes, restaurants and takeaway food services for 2017 calendar year and Australia Post, Inside Australian Online Shopping Paper based on delivery data from January 2016 and December 2017 4.2% (0.1%) (35.6%) 2.1% 7.8% 5.1% -Figure deliberately missing - see Question 1 QUESTIONS One way to think about the differences between various retail activities is to consider two ratios: asset turnover and gross margin 250 /