Figure 3.9 compares the ROIC for Walmart and Target in 2012. From their annual reports for 2018, ending in January 0f 2019, update that comparison and explain why one is higher than the other. Show the work that goes into these numbers, as is demonstrated on p.101 in the text.

100 Part 2 The Nature of Compelitive Advantage Sources Income stateme Figure 3.9 Table 3.1 Definitions of Basic Accounting Terms Income staterme Costs associated with selling products and administering the company Definitions Terms Income stateme Cost of goods sold (COGS) Total costs of producing products Sales, general, and administrative expenses (SG&A) Balance sheet The amount of monev the company has to "work" with in the short term: Current assets- current liabilities Research and development (R&D) expenses Research and development expenditure Working capital that the company uses to manufacture and sell its products; also known as fixed capital The value of investments in the property, plant, and equipment Balance sheet Property, plant, and oquipment (PPE) Net profit expressed as a percentage of sales; measures how effectively the company converts revenues into profits Ratio Wa Return on sales (ROS) Ratio Revenues divided by invested capital; measures how effectively the company uses its capital to generate revenues Net profit divided by invested capital Capital turnover Ratio Return on invested capital (ROIC) Income statement Net profit Total revenues minus total costs before tax Balance sheet Invested capital Interest-bearing debt plus shareholders' equity increasing capital turnover. They do this by pursuing strategies that reduce the amous of working capital, such as the amount of capital invested in inventories, needed to generate a given level of sales (working capital/sales) and then pursuing strategies that reduce the amount of fixed capital that they have to invest in property, plant, and equipment (PPE) to generate a given level of sales (PPE/sales). That is, they pursue strategies that reduce the amount of capital that they need to generate every dollar of sales, and therefore reduce their cost of capital. Recall that cost of capital is part of the cost structure of a company (see Figure 3.2), so strategies designed to increase capital turnover also lower the cost structure. To see how these basic drivers of profitability help us understand what is going on in a company and identify its strengths and weaknesses, let us compare the financial performance of Wal-Mart against one of its more effective competitors, Target as it was in 2012. We have chosen this year because the performance differential between the two enterprises was particularly clear. fo th 3-6a Comparing Wal-Mart and Target For the financial year ending January 2012, Wal-Mart earned a ROIC of 13.61% and Target earned a respectable 10.01%. Wal-Mart's superior profitability can be un- derstood in terms of the impact of its strategies on the various ratios identified in Figure 3.8. These are summarized in Figure 3.9, Cope 3 ol Anl eouces ond Competve Advontoge 101 Figure 3.9 Comporing Wal-Mart and Torget, 2012 emens nmert COGS/Sales Wal-Mart 75 C% Terpet 69.1 % ment Ratum an Sales Wal-Mart 3.51% Target 4.19% SGSA/Sales Wal-Mart 19.1% Terget 23.24 % ROIC Wal-Mart 13.61 % Target 10.01% Working CapitalSales Wal-Mert-164 % Target 3.10% Capital Tumover Wal-Mart $3.87 PPE/Sales Wal-Mart 20.72 % Target 41.72 % Target $2.39 First, note that Wal-Mart has a fower return on sales than Target. The main reason for this is that Wal-Mart's cost of goods sold (COGS) as a percentage of sales is higher than Target's (75 % versus 69.1 % ) . For a retailer, the COGS reflects the price that Wal Mart pays to its suppliers for merchandise. The lower COGS/sales ratio implies that Wal-Mart does not mark up prices much as Target-its profit margin on cach item. sold is lower. Consistent with its long-time strategic goal, Wal-Mart passes on the low prices it gets from suppliers to customers Wal-Mart's higher COGS/sales ratio reflects its strategy of being the lowest-price retailer On the other hand, you will notice that Wal-Mart spends less on sales, general, and administrative (SG&A) expenses as a percentage of sales than Target (19.1 % versus 22.24 % ) . There are three reasons for this. First, Wal-Mart's carly strategy was to focus on small towns that could only support one discounter. In small towns, the company does not have to advertise heavily because it is not competing against other discount- ers. Second, Wal-Mart has become such a powerful brand that the company does not need to advertise as heavily as its competitors, even when its stores are located close to them in suburban areas Third, because Wal-Mart sticks to its low-price philoso- phy, and because the company manages its imventory so well, it does not usually have an overstocking problem. Thus, the company does not need to hold periodic sales- and nor bear the costs of promoting those sales (e g, sending out advertisements and coupons in local newspapers). Reducing spending on sales promotions reduces Wal- Mart's SG&A/sales ratio. at 100 Part 2 The Nature of Compelitive Advantage Sources Income stateme Figure 3.9 Table 3.1 Definitions of Basic Accounting Terms Income staterme Costs associated with selling products and administering the company Definitions Terms Income stateme Cost of goods sold (COGS) Total costs of producing products Sales, general, and administrative expenses (SG&A) Balance sheet The amount of monev the company has to "work" with in the short term: Current assets- current liabilities Research and development (R&D) expenses Research and development expenditure Working capital that the company uses to manufacture and sell its products; also known as fixed capital The value of investments in the property, plant, and equipment Balance sheet Property, plant, and oquipment (PPE) Net profit expressed as a percentage of sales; measures how effectively the company converts revenues into profits Ratio Wa Return on sales (ROS) Ratio Revenues divided by invested capital; measures how effectively the company uses its capital to generate revenues Net profit divided by invested capital Capital turnover Ratio Return on invested capital (ROIC) Income statement Net profit Total revenues minus total costs before tax Balance sheet Invested capital Interest-bearing debt plus shareholders' equity increasing capital turnover. They do this by pursuing strategies that reduce the amous of working capital, such as the amount of capital invested in inventories, needed to generate a given level of sales (working capital/sales) and then pursuing strategies that reduce the amount of fixed capital that they have to invest in property, plant, and equipment (PPE) to generate a given level of sales (PPE/sales). That is, they pursue strategies that reduce the amount of capital that they need to generate every dollar of sales, and therefore reduce their cost of capital. Recall that cost of capital is part of the cost structure of a company (see Figure 3.2), so strategies designed to increase capital turnover also lower the cost structure. To see how these basic drivers of profitability help us understand what is going on in a company and identify its strengths and weaknesses, let us compare the financial performance of Wal-Mart against one of its more effective competitors, Target as it was in 2012. We have chosen this year because the performance differential between the two enterprises was particularly clear. fo th 3-6a Comparing Wal-Mart and Target For the financial year ending January 2012, Wal-Mart earned a ROIC of 13.61% and Target earned a respectable 10.01%. Wal-Mart's superior profitability can be un- derstood in terms of the impact of its strategies on the various ratios identified in Figure 3.8. These are summarized in Figure 3.9, Cope 3 ol Anl eouces ond Competve Advontoge 101 Figure 3.9 Comporing Wal-Mart and Torget, 2012 emens nmert COGS/Sales Wal-Mart 75 C% Terpet 69.1 % ment Ratum an Sales Wal-Mart 3.51% Target 4.19% SGSA/Sales Wal-Mart 19.1% Terget 23.24 % ROIC Wal-Mart 13.61 % Target 10.01% Working CapitalSales Wal-Mert-164 % Target 3.10% Capital Tumover Wal-Mart $3.87 PPE/Sales Wal-Mart 20.72 % Target 41.72 % Target $2.39 First, note that Wal-Mart has a fower return on sales than Target. The main reason for this is that Wal-Mart's cost of goods sold (COGS) as a percentage of sales is higher than Target's (75 % versus 69.1 % ) . For a retailer, the COGS reflects the price that Wal Mart pays to its suppliers for merchandise. The lower COGS/sales ratio implies that Wal-Mart does not mark up prices much as Target-its profit margin on cach item. sold is lower. Consistent with its long-time strategic goal, Wal-Mart passes on the low prices it gets from suppliers to customers Wal-Mart's higher COGS/sales ratio reflects its strategy of being the lowest-price retailer On the other hand, you will notice that Wal-Mart spends less on sales, general, and administrative (SG&A) expenses as a percentage of sales than Target (19.1 % versus 22.24 % ) . There are three reasons for this. First, Wal-Mart's carly strategy was to focus on small towns that could only support one discounter. In small towns, the company does not have to advertise heavily because it is not competing against other discount- ers. Second, Wal-Mart has become such a powerful brand that the company does not need to advertise as heavily as its competitors, even when its stores are located close to them in suburban areas Third, because Wal-Mart sticks to its low-price philoso- phy, and because the company manages its imventory so well, it does not usually have an overstocking problem. Thus, the company does not need to hold periodic sales- and nor bear the costs of promoting those sales (e g, sending out advertisements and coupons in local newspapers). Reducing spending on sales promotions reduces Wal- Mart's SG&A/sales ratio. at