C3. Business Application Two of the largest chains of clothing stores in the

United States are The Gap, Inc. and Abercrombie & Fitch Co. In fiscal 2011, Gap had

net income of $833 million, and Abercrombie & Fitch had net income of $128 million.

It is difficult to judge from these figures alone which company is more profitable because

they do not take into account the relative sales, sizes, and investments of the companies.

Data (in millions) needed for a complete financial analysis of the two companies follow:

Gap

Abercrombie

& Fitch*

Net sales $14,549 $4,158

Beginning total assets 7,065 2,941

Ending total assets 7,422 3,048

Beginning total liabilities 2,985 1,051

Ending total liabilities 4,667 1,186

Beginning stockholders' equity 4,080 1,891

Ending stockholders' equity 2,755 1,862

*Abercrombie & Fitch's data is rounded to the nearest dollar.

1. Determine which company was more profitable by computing profit margin, asset

turnover, the debt to equity ratio, return on assets, and return on equity for the two

companies. Comment on the relative profitability of the two companies. (Round to

one decimal place or the nearest tenth of a percent.)

2. What do the ratios tell you about the factors that go into achieving an adequate

return on assets in the clothing retail industry? For industry data, refer to the graphs

in the ratio boxes throughout the chapter.

3. How would you characterize the use of debt financing in the clothing retail industry

and the use of debt by these two companies?