Homework Set #7: Financial Ratios At the end of the homework you will find financial statements for COSTCO WHOLESALE CORP and KROGER CO (the parent company of Fred Meyer) use the most recent annual numbers from both statements to complete the following questions: (show your work for partial credit) 1. Calculate the gross margin, operating margin, and profit margin ratio for each company. 2. Describe any insights these three ratios give you into how the profit models of the two companies are different. 3. Calculate the current ratio and the quick ratio for both companies. 4. Are both of the companies financially liquid according to the current ratio? In a worst case scenario where all of the current liabilities came due at the same time would both companies still be financially liquid? 5. Is either company too liquid? Explain your reasoning. 6. Calculate the debt to equity and debt to assets ratio for both companies. 7. According to the leverage ratios which company is the riskier investment? How many dollars of assets can each company purchase for one dollar of new equity investment? 8. How many times did each of the two companies generate enough revenue to (theoretically) replace all of their assets? 9. Compute the days of inventory of both companies (Use FIFO). 10. Which company is the most efficient at turning cash into more cash? How much longer does it take the other company? 3 Months Ended 4 Months Ended 12 Months Ended Feb. 01, 2014 Nov. 09, 2013 Aug. 17, 2013 Feb. 02, 2013 Nov. 03, 2012 Aug. 11, 2012 May 25, 2013 May 19, 2012 Feb. 01, 2014 Feb. 02, 2013 Jan. 28, 2012 $ 23,222 $ 22.470 $ 22.686 $ 24,120 $ 21.776 $ 21,697 $ 29,997 $ 29,026 $ 98,375 $ 96,619 $ 90.269 18,397 17.866 18,059 19.069 17,352 17,249 23,817 23,056 78,138 76.726 71,389 15.345 14,849 628 1,652 3.558 147 402 718 107 611 184 619 3,537 138 395 534 108 426 125 3.506 139 387 595 99 496 3,689 157 386 819 112 707 239 3,305 141 382 596 103 493 175 3,391 139 383 535 106 429 4.593 4,464 189 191 519 501 879814 129 141 750 673 266 232 15,196 613 1.703 2.725 443 2.282 751 Homework Set #7: Financial Ratios 2.764 462 2.302 794 1,638 1.278 435 843 247 176 CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Millions, except Per Share data, unless otherwise specified CONSOLIDATED STATEMENTS OF OPERATIONS Sales Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below Operating, general and administrative Rent Depreciation Operating Profit Interest expense Earnings before income tax expense Income tax expense Net earnings including noncontrolling interests Net earnings (loss) attributable to noncontrolling interests Net earnings attributable to The Kroger Co. Net earnings attributable to The Kroger Co. per basic common share in dollars per share) Average number of common shares used in basic calculation in shares) Net earnings attributable to The Kroger Co. per diluted common share in dollars per share) Average number of common shares used in diluted calculation in shares) Dividends declared per common share in dollars per share) 148 427 301 320 468 318 281 484 441 1,531 1.508 596 5 2 3 6 1 2. 3 2 12 11 (6) $ 422 $ 299 $ 317 $ 462 $ 317 $ 279 $ 481 $ 439 $ 1,519 $ 1,497 $ 602 $ 0.82 $ 0.58 $ 0.61 $ 0.89 $ 0.61 $ 0.52 $ 0.93 $ 0.78 $ 293 $ 2.78 $ 1.01 511 515 515 514 518 538 514 556 514 533 590 $ 0.81 $ 0.57 $ 0.60 $ 0.88 $ 0.60 $ 0.51 $0.92 $ 0.78 $ 2.90 $2.77 $ 1.01 517 521 521 518 522 541 520 559 520 537 593 $ 0.165 $ 0.165 $ 0.150 $ 0.150 $ 0.150 $ 0.115 $ 0.150 $ 0.115 $ 0.63 $ 0.53 $ 0.44 Kroger's Income Statement Kroger's Balance Sheet 702 CONSOLIDATED BALANCE SHEETS (USDS) Feb. 01, 2014 Feb. 02, 2013 In Millions, unless otherwise specified Current assets Cash and temporary cash investments $ 401 $ 238 Store deposits in-transit 958 955 Receivables 1.116 1.051 FIFO inventory 6,801 6.244 LIFO reserve (1.150) (1,098) Prepaid and other current assets 704 569 Total current assets 8,830 7,959 Property, plant and equipment, net 16,893 14.848 Intangibles, net 130 Goodwill 2.135 1,234 Other assets 721 463 Total Assets 29.281 24,634 Current liabilities Current portion of long-term debt including obligations under capital leases and 1,657 2.734 financing obligations Trade accounts payable 4.881 4.484 Accrued salaries and wages 1,150 1,017 Deferred income taxes 248 288 Other current liabilities 2.769 2.538 Total current liabilities 10.705 11,061 Long-term debt including obligations under capital leases and financing obligations Face-value of long-term debt including obligations under capital leases and 9,654 6.141 financing obligations Adjustment to reflect fair-value interest (1) 4 rate hedges Long-term debt including obligations under capital leases and financing 9,653 6,145 obligations Deferred income taxes 1.381 796 Pension and postretirement benefit 901 1.291 obligations Other long-term liabilities 1.246 1,127 Total Liabilities 23.886 20,420 Commitments and contingencies (see Note 13) SHAREOWNERS' EQUITY Preferred shares, $100 par per share, 5 shares authorized and unissued Common shares, S1 par per share, 1,000 shares authorized; 959 shares issued in 959 959 2013 and 2012 Additional paid-in capital 3,549 3,451 Accumulated other comprehensive loss (464) (753) Accumulated earnings 10.981 9,787 Common stock in treasury, at cost, 451 shares in 2013 and 445 shares in 2012 (9,641) (9,237) Total Shareowners' Equity - The Kroger 5,384 4.207 Co. Noncontrolling interests 11 7 Total Equity 5.395 4.214 Total Liabilities and Equity $ 29,281 $ 24,634 105, 156 Consolidated Statements Of Income 3 Months Ended 4 Months Ended 12 Months Ended (USD $) In Millions, except Share data in Thousands, unless otherwise specified May 12, 2013 Feb. 17, 2013 Nov. 25, 2012 May 06, 2012 Feb. 12, 2012 Nov. 20, 2011 Sep. 01, 2013 Sep. 02, 2012 Sep. 01, 2013 Sep. 02, 2012 Aug. 28, 2011 REVENUE Net sales $ 23,552 $ 24,343 S 23,204 $ 21,849 $ 22,508 $ 21,181 $ 31,771 $ 31,524 $ 102,870 $ 97,062 $ 87,048 Membership fees 531 528 511 475 459 447 716 694 2.286 2,075 1,867 Total revenue 24,083 24,871 23,715 22.324 22.967 21,628 32,487 32.218 99. 137 88,915 OPERATING EXPENSES Merchandise costs 21,038 21,766 20.726 19,543 20,139 18,931 28,418 28 210 91,948 86,823 77,739 Selling, general and administrative 2.313 2361 2.332 2,152 2.178 2.144 [1] 3,098 3.044 10,104 9.518 8,691 Preopening expenses 10 6 18 6 6 10 17 15 51 37 46 Operating income 722 738 639 623 644 543 954 949 3.053 2.759 2,439 OTHER INCOME (EXPENSE) Interest expense (25) (25) (13) (19) (27) (27) (36) (22) (99) (95) (116) Interest income and other, net 15 26 20 18 10 37 36 38 97 103 60 INCOME BEFORE INCOME TAXES 712 739 646 622 627 553 954 965 3,051 2.767 2.383 Provision for income taxes 248 185 [2] 225 217 215 225 [3] 332 343 990 1.000 841 Net income including noncontrolling 464 554 421 405 412 328 622 622 2,061 1,767 1,542 interests Net income attributable to noncontrolling (5) (7) (5) (19) interests (18) (8) (5) (13) (22) (58) (80) NET INCOME ATTRIBUTABLE TO $ 459 $ 547 $ 416 $ 386 $ 394 $ 320 $ 617 $ 609 COSTCO $ 2,039 $ 1,709 $ 1,462 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic (in dollars per share) $ 1.05 $ 1.26 $0.96 $ 0.89 $0.91 $ 0.74 $ 1.41 $ 1.41 $ 4.68 $ 3.94 $ 3.35 Diluted in dollars per share) $ 1.04 $ 1.24 $0.95 $ 0.88 S 0.90 S 0.73 $ 1.40 $ 1.39 $ 4.63 $ 3.89 $ 3.30 Shares used in calculation (000's) Basic (shares) 436,488 435,975 433,423 433.791 434,535 434,222 436,752 432,437 435.741 433,620 436.119 Diluted (shares) 440 780 439,812 438,643 439,166 439.468 440,615 441,907 438,344 440.512 439,373 443,094 CASH DIVIDENDS DECLARED PER COMMON SHARE S 0.31 $ 7.275 14 $ 0.275 SO 151 S 0.24 $ 0.24 $ 0.31 $ 0.55 16) $ 8.17 $ 1.03 $ 0.89 Homework Set #7: Financial Ratios [1] Includes a $17 charge to selling, general and administrative for contributions to an initiative reforming alcohol beverage laws in Washington State. [2] Includes a $62 tax benefit recorded in the second quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan. [3] Includes a $24 charge relating to the settlement of an income tax audit in Mexico. [4] Includes the special cash dividend of $7.00 per share paid in December 2012 [5] On May 9, 2012, subsequent to the end of the third quarter of 2012, the Board of Directors declared a quarterly cash dividend of $0.275 per share. [6] The quarterly dividend rate was 50 275 per share. Costco's Income Statement Costco's Balance Sheet Consolidated Balance Sheets (USD $) Sep. 01, 2013 Sep. 02, 2012 In Millions, unless otherwise specified CURRENT ASSETS Cash and cash equivalents $ 4.644 $ 3,528 Short-term investments 1,480 1.326 Receivables, net 1,201 1,026 Merchandise inventories 7,894 7,096 Deferred income taxes and other current 621 550 assets Total current assets 15.840 13.526 PROPERTY AND EQUIPMENT Land 4,409 4,032 Buildings and improvements 11,556 10.879 Equipment and fixtures 4.472 4.261 Construction in progress 585 374 Gross property and equipment 21.022 19,546 Less accumulated depreciation and amortization (7,141) (6,585) Net property and equipment 13,881 12.961 OTHER ASSETS 562 653 TOTAL ASSETS 30,283 27.140 CURRENT LIABILITIES Accounts payable 7,872 7,303 Accrued salaries and benefits 2037 1,832 Accrued member rewards 710 661 Accrued sales and other taxes 382 397 Deferred membership fees 1,167 1,101 Other current liabilities 1,089 966 Total current liabilities 13.257 12,260 LONG-TERM DEBT, excluding current 4.998 1.381 portion DEFERRED INCOME TAXES AND 1,016 981 OTHER LIABILITIES Total liabilities 19.271 14.622 COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $.005 par value; 100,000,000 shares authorized; no shares 0 0 issued and outstanding Common stock 5.005 par value; 900,000,000 shares authorized; 2 2 436,839,000 and 432,350,000 shares issued and outstanding Additional paid-in capital 4,670 4.369 Accumulated other comprehensive (loss) (122) 156 income Retained earnings 6,283 7.834 Total Costco stockholders' equity 10,833 12,361 Noncontrolling interests 179 157 Total equity 11,012 12.518 TOTAL LIABILITIES AND EQUITY $ 30,283 $ 27.140