Comparing Ratios for Luxury and Budget Retailers

Following are selected financial statement data from Capri Holdings (a retailer that owns upscale brands Michael Kors, Jimmy Choo, and Versace) and Five Below (a value-priced toy and novelty retailer).

Capri Holdings ($ millions) Five Below ($ thousands)

2018 2017 2018 2017

Sales. . . . . . . . . . . . . $4,718.6 $4,493.7 $1,559,563 $1,278,208

Cost of sales. . . . . . . .1,859.3 1,832.3 994,478 814,795

Net income . . . . . . . . . . 592.1 551.5 149,645 102,451

Average equity . . . . . .1,805 1,794 536,826 394,982

Required

a. Calculate the gross profit for each company for both years. Gross profit is equal to sales minus the cost of sales.

b. Calculate gross profit as a percentage of sales for each company for both years.

c. Compute the return on equity for each company for both years.

d. Which of the following best explains why the ratios for Five Below and Capri Holdings differ.

1. Capri Holdings is much larger than Five Below and so its ratios are naturally larger.

2. Five Below is a younger company and so its ratios are naturally lower.

3. Capri Holdings' brand recognition creates a competitive advantage, which allows the company to add a bigger markup to the products it sells.

4. Five Below imports its products from Southeast Asia, which allows the company to keep product costs down