Walmart Vs Sears Merger Essay

Intro
In 1997, Sears’ return on equity was 22.0% while Walmart’s was 19.7%. This memo provides a comparison of Sears and Walmart’s strategies while analyzing their return on equity (ROE).
Although Sears had a higher ROE, Walmart should be seen as the stronger company due to their different retailing and operating strategies, and cash management.

Retailing Strategies
Walmart, the powerhouse of American retailers, had $43.9 billion in sales in 1991, increasing to $100 billion in annual sales just 5 years later. They opened supercenters and Sam’s Club which increased their brand recognition. In 1996, customers were able to purchase credit cards, owned by Chase Manhattan bank, with Walmart’s logo on it but not a proprietary card.

Sears cut

Sears had an ROE of 22.0% for fiscal year 1997 while Walmart’s was 19.7%. Sears’ main component for ROE is the financial leverage multiplier of 6.93 while Walmart utilizes their asset turnover of 2.47.

With an asset turnover of 2.47 compared to Sears of 1.10, Walmart generates more revenue per dollar of assets. Walmart had more property, plant, and equipment ($18,333 million) in 1997 compared to Sears ($6,414 million) which explains the higher asset turnover. In 1997, Walmart had approximately 2,740 stores with a higher average sale per square foot of 337.35 while Sears had 3,530 stores and an average sale per square foot of 318. Walmart generates more sales revenue with less physical assets.

Walmart’s SG&A was only 15.9% of total revenue compared to 20.2% of Sears. This contributes to the fact that Walmart manages their assets differently, and focuses more on asset management, than Sears. Walmart keeps SG&A expenses low while creating more revenue per square foot. Walmart focuses on being cost effective and in return has a higher asset

Sears focuses on their debt because 90% of their receivables are tied up in credit card sales and they estimate that $1,113 million, or 25%, will be uncollected. It is advantageous for Walmart to have a low leverage ratio because the company doesn’t have to use their debt to finance their operations. This is a main indicator for why Sears ROE is more inflated than Walmart’s.

Cash Management
Walmart controls their inflow of cash better than Sears from a cash management perspective. With an accounts receivable turnover of 129.48, compared to Sears of 2.01, Walmart collects their receivables more frequently than Sears. From a days’ receivable perspective, Walmart collects their receivables every 2.82 days and Sears collects them every 181.5 days. Walmart manages their cash in a more effective way because they collect receivable more frequently.

Sears also had a high ROE in 1997 due to their 30% equity sale in Advantis. This sale created an after-tax gain of $91 million. This one time sale inflated the company’s net income, making it seem higher than normal.