Case Study about SIGNET

  

Description

Please answer the following questions:

What are the key similarities and differences in the business models of Signet, Tiffany and Blue Nile? How are these factors reflected in their financial ratios? An Excel copy of the ratios is enclosed on Canvas in the spreadsheet “Signet Exhibits and Ratios.”
Which of the three companies is performing better? Why?
How do you assess the performance of Signet’s in-house financing program? 
Do you think Signet should continue to offer an in-house financing program? What are the risks involved?
Do you agree with Cohode’s critique of Signet’s bad debt expense policy?

the files are:

Case: Signet Jewelers: Assessing Customer Financing Risk 
signet exhibit and ratios excel 
Reading: Analyzing Financial StatementsFor the exclusive use of N. Wilson, 2022.
Financial Accounting
V.G. Narayanan and Dennis Campbell, Co-Series Editors
+ INTERACTIVE ILLUSTRATIONS
Analyzing
Financial
Statements
V.G. NARAYANAN
HARVARD BUSINESS SCHOOL
SURAJ SRINIVASAN
HARVARD BUSINESS SCHOOL
5056 | Published: April 11, 2017
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Table of Contents
1 Introduction ………………………………………………………………………………………………………………………………………………. 3
2 The Financial Analysis Framework …………………………………………………………………………………………….. 4
2.1 Understanding Return on Equity ………………………………………………………………………………………… 6
2.2 Profitability ……………………………………………………………………………………………………………………………………….. 8
2.3 Operating Efficiency ………………………………………………………………………………………………………………… 11
2.3.1 Return on Assets ……………………………………………………………………………………………………………. 12
2.3.2 Digging Deeper into Asset Turnover ……………………………………………………………….. 13
2.3.3 Inventory Turnover ………………………………………………………………………………………………………. 14
2.3.4 Accounts Receivable Turnover ……………………………………………………………………………. 16
2.3.5 Accounts Payable Turnover …………………………………………………………………………………… 18
2.3.6 Cash Conversion Cycle ……………………………………………………………………………………………… 20
2.3.7 Working Capital Turnover ………………………………………………………………………………………. 22
2.4 Financial Leverage…………………………………………………………………………………………………………………….. 23
2.4.1 Interest Coverage Ratio ……………………………………………………………………………………………. 27
2.4.2 Liquidity Ratios ………………………………………………………………………………………………………………. 28
3 Summary …………………………………………………………………………………………………………………………………………………… 30
4 Supplemental Reading …………………………………………………………………………………………………………………….. 32
4.1 Key Ratios ……………………………………………………………………………………………………………………………………….. 32
5 Key Terms ………………………………………………………………………………………………………………………………………………… 34
6 Endnotes …………………………………………………………………………………………………………………………………………………… 36
7 Index ……………………………………………………………………………………………………………………………………………………………. 37
This reading contains links to online interactive illustrations, denoted by the icon
above. To access these exercises, you will need a broadband Internet connection.
Verify that your browser meets the minimum technical requirements by visiting
http://hbsp.harvard.edu/tech-specs.
V.G. Narayanan, Thomas D. Casserly, Jr. Professor of Business Administration,
Harvard Business School, and Suraj Srinivasan, Philip J. Stomberg Professor of
Business Administration, Harvard Business School, developed this Core Reading
with the assistance of writer M. Penelope K. Rossano.
Copyright © 2017 Harvard Business School Publishing Corporation. All rights reserved.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
1 INTRODUCTION
T
he ability to analyze financial statements is essential for anyone trying to
understand a business and assess its performance. Managers can use
insights derived from financial analysis to inform their strategic decisions, and
outside stakeholders, such as debt and equity investors, can use the information
to evaluate a company’s performance. For example, managers might want to
assess an acquisition’s performance implications, a bank or supplier would need
to assess a client’s creditworthiness before granting a loan or extending credit,
and customers would like to understand a potential supplier’s long-term viability
before entering into a contract. In this reading, we will introduce financial
analysis tools that can be used to gain insights about a company’s business
model and financial performance. We will primarily use a ratio analysis method
called the DuPont framework. In this framework, one ratio tells us how efficiently
a company is utilizing its assets, while another ratio compares the company’s
cash to its upcoming liabilities to see if it will likely be able to pay its creditors.
Taken together, these ratios can be used to understand and assess the
company’s financial and operational performance.
Ratio analysis is useful in making comparisons across companies or in evaluating
a company’s performance over time. In the former case, financial analysis can be used
to assess the performance of managers across similar companies. In the latter case,
time-series analysis allows us to assess how well managers are executing the desired
strategy over time.
Throughout this reading, we will use the publicly available financial statements of
several retail companies to provide examples of various types of ratio analyses and
comparisons. They are Industria de Diseño Textil, S.A (Inditex Group), a Spanish
fast-fashion retailer; Prada S.p.A. (Prada), a luxury retail brand with Italian roots and
headquarters in Hong Kong; and three US-headquartered brands: The Gap, Inc.;
Nordstrom, Inc.; and Urban Outfitters, Inc.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
In 2015, Inditex was operating worldwide with over 6,600 stores1 of fast-fashion
brand chains such as Zara, Pull & Bear, Stradivarius, and Massimo Dutti. It was
known in the retail world for being innovative in managing its supply chain and for
going very quickly from design to garment in about six weeks.
Founded in 1913 in Milan, by 2015 Prada was a luxury brand that produced and
sold high-quality leather goods, clothing, footwear, and accessories including eyewear
and fragrance for both men and women. It was operating internationally in more
than 70 countries at more than 600 directly operated stores at prestigious locations.2
Prada executives carefully monitored both the creative and production processes to
guarantee excellent quality and exclusivity in its products. The company’s business
strategy combined its in-house design skill and industrial know-how to create
inventive, high-quality, trend-setting products.3
The Gap, Inc., was a global retailer offering apparel, accessories, and personal
products for men, women, and children under Gap, Banana Republic, Old Navy,
Athleta, and Intermix brands. In 2015, the company operated more than 3,700
company-owned and franchise locations. Its brand appeal was targeted at younger
customers.
In 2015, Urban Outfitters, Inc., operated under the Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN brands.4 The company targeted a broad
range of culturally sophisticated customers: young adults aged 18–28 at Urban
Outfitter stores, women aged 28–45 at Anthropologie, and young, contemporary
women aged 25–30 at private label Free People.5
Nordstrom, Inc., founded in 1901 as a shoe store in Seattle, was committed to
providing superior customer service and delivering the best possible shopping
experience. In 2015, it was a leading fashion specialty retailer with an established
e-commerce business. The company strived to maintain its reputation for its high
level of integrity, excellent customer service, and quality merchandise by offering an
extensive selection of high-quality, brand-name, private-label merchandise.6
2 THE FINANCIAL ANALYSIS
FRAMEWORK
Financial statement information comes from the three key statements: the income
statement, the balance sheet, and the statement of cash flows. The income statement
documents the company’s financial activity over a given accounting period, say, a
year. The balance sheet, on the other hand, reflects the company’s financial position,
assets, liabilities, and shareholder equity as of a particular date, say, the end of the
financial year. Like the income statement, the statement of cash flows also presents
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
the firm’s cash flows over a given period, such as a year. In calculating ratios, it is
common to average the beginning and ending balance sheet amounts to measure the
average level of assets used during the period. We use this convention because income
statement items (e.g., revenues) are measured over the course of the year, so we
assume that the average balance sheet values have been used throughout the year to
generate a given level of revenues. However, some financial statement users may use
beginning-of-the-year amounts if appropriate, such as when the ratios will be used for
forecasting. Throughout this reading, we will use the average balance sheet amounts
when comparing income statement and balance sheets in any ratio. Certain ratios
may also be computed for shorter periods, such as quarters or months. For example,
to plan inventory levels, it is important to understand seasonal cycles, so inventory
ratios are often computed on a quarterly or monthly basis.
When conducting financial analysis, key questions an analyst typically asks relate
to the company’s performance. For example, how well has the company executed its
strategy? How well has it performed against its competitors? Does the performance
arise from superior operating capability or because of its financing mix? We will
begin our financial analysis of the company using two key metrics of performance:
return on equity (ROE) and return on assets (ROA). Both of these metrics allow an
analyst to assess how well a company has generated profits from the resources
deployed.
ROE measures overall business performance, specifically management’s ability to
generate profits for its shareholders. It is calculated by dividing net income by total
shareholders’ equity (SE).
ROA, also referred to as “return on investment,” is an indicator of the company’s
profitability relative to its assets or total capital employed in the firm (recall that assets
= liabilities + equity); it indicates how efficiently management uses the company’s
assets to generate earnings. ROA is calculated by dividing a company’s earnings by its
total assets.
As we will see later, breaking down each of these ratios into its underlying
components allows us to assess different aspects of a company’s performance relative
to comparable companies as well as to the firm’s past results.
The DuPont framework, commonly used for financial analysis, originated at the
DuPont Corporation in the 1920s. It decomposes ROE into subcomponents to
provide a deeper look at how the profit (or loss) was generated. Systematic analysis of
the ratios that make up the DuPont framework provide additional information about
how a company manages its business. Similar to peeling an onion, conducting
financial statement analysis that examines the most general ratios, then drills down to
its more granular components facilitates the analyst’s understanding of the
determinants of performance. For example, an analyst may ask whether a company’s
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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For the exclusive use of N. Wilson, 2022.
performance is primarily driven by profit margins (how much profit the company
generates for its shareholders), asset turnover (how efficiently the company uses its
assets to generate return), or financial leverage (the level of debt the company
carries).
2.1 Understanding Return on Equity
Let’s start with the return on equity, which can be broken into three components:
• Profitability
• Operating efficiency
• Financial leverage
These values are derived by decomposing ROE into three parts:
ROE = net profit margin × asset turnover × financial leverage
That is,
ROE =
net income
sales
total assets
×
×
sales
total assets
equity
Which simplifies to,
ROE =
net income
sales
total assets
×
×
sales
total assets
equity
=
net income
equity
Interactive Illustration 1 demonstrates in a graphical format how the three
components of ROE link together. Change the numerical values of net income, sales,
assets, and equity, and observe their effects on the ROE “block,” as well as on the
simplified income statement and balance sheet.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
INTERACTIVE ILLUSTRATION 1 DuPont Framework
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2pHtruh
Managers can use the financial analysis framework to evaluate the sources of
favorable or unfavorable performance in each of these three areas, which helps them
take actions to increase the company’s overall ROE. In this reading, to demonstrate
how each of the underlying factors contributes to a company’s ROE, we will calculate
each ratio for Prada and then provide the ratios for the other companies described in
the introduction. Prada’s financial statement numbers are given in Exhibit 1. All
financial numbers are in millions of euros.
Note that we average the beginning and ending balances of shareholders’ equity for
the period in which net income is earned for our analysis. To illustrate, we will plug in
the values from Exhibit 1, as follows:
Prada’s average shareholders’ equity (SE) in 2015
=
=
( beginning SE + ending SE )
2
( €2,688 + €3,001)
= €2,845
2
ROE for Prada in 2015 =
€451
= 15.8%
€2,845
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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For the exclusive use of N. Wilson, 2022.
Similarly, we calculate ROE for the other retailers for fiscal year 2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
ROE
41.8%
25.4%
31.9%
15.8%
15.4%
Note that the ROEs for Prada and Urban Outfitters differ by less than half a
percentage point. Gap is highly profitable, with ROE of 41.8%. Further analysis of the
drivers of ROE will inform us about how these companies manage their business.
2.2 Profitability
The first component of the ROE decomposition is profitability, the profit margin that
the company achieves from each dollar of sales after all expenses have been accounted
for:
Net profit margin =
net income
sales
Using the values from Exhibit 1, we find:
Net profit margin for Prada in 2015 =
€451
= 12.7%
€3, 552
Similarly, we calculate the net profit margin for the other retailers for fiscal year 2015
as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Net Profit Margin
7.7%
13.8%
5.3%
12.7%
7.0%
The net profit margin for Urban Outfitters, 7%, and Prada, almost 13%, indicates
that Prada would earn about twice Urban Outfitters’ profit for every dollar of sales
after accounting for all costs. This margin structure fits their business models. Prada
is a luxury brand that sells high-end specialty products, while Urban Outfitters’
products appeal to more cost-conscious customers. Gap, whose net profit margin of
7.7% is similar to that of Urban Outfitters, also has a similar customer profile. Urban
Outfitters and Gap are both low-cost providers, whereas Prada’s more differentiated
model operates at the higher end of the customer spectrum. Companies with a low-
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
cost model tend to sell larger quantities at lower margins, while companies with a
differentiated strategy tend to have higher profit margins but sell lower volumes.
Recall that the ROE for both Urban Outfitters and Prada is approximately 15%. We
will discuss later what may account for this similarity in ROE despite the big
difference in the two companies’ net profit margin.
A big advantage of the DuPont decomposition framework is that it lets us dig
deeper into the components of ROE (“peeling the onion” analogy again), in this case,
net income margin. For example, some investors may be interested in the gross profit
margin, which represents the amount of profit that is left to cover other expenses
after only the cost of goods sold is subtracted from revenues. This means that gross
profit margin measures profit before operating expenses as a percent of sales. It is
calculated by dividing the net revenue minus cost of goods sold, by sales.
Gross profit margin =
gross profit
sales
Using the data from Exhibit 1, we get the following:
Gross profit margin for Prada in 2015 =
€2,551
= 71.8%
€3, 552
Similarly, we calculate gross profit margin for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Gross Profit Margin
38.3%
58.3%
36.9%
71.8%
35.4%
As discussed earlier, Prada is a luxury brand; a gross margin at 72% is consistent
with the higher price of its products. Urban Outfitters, on the other hand, is targeting
a customer group of younger adults, so the lower gross margin of 35% will facilitate a
more affordable price to their customers.
Examining a company’s expense structure can also help you better understand its
performance. One common performance metric for a retail company is how efficient
its selling, general, and administrative expenses (SG&A) are. SG&A margin is defined
as the amount of SG&A expenses incurred by a company for every dollar of revenues
earned. SG&A expenses are one component of operating expenses.
SG&A margin =
selling, general, and administrative (SG&A) expenses
sales
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For the exclusive use of N. Wilson, 2022.
which, using the data in Exhibit 1, gives us the following:
Prada’s SG&A margin in 2015 =
€1,716
= 48.3%
€3,552
Similarly, we calculate SG&A margin for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
SG&A Margin
25.7%
35.6%
27.2%
48.3%
24.4%
Since SG&A includes expense items such as advertising and selling expenses, it is
appropriate for Prada to have a higher expense level than Urban Outfitters and Gap
given Prada’s higher-end advertising and likely greater selling expenses for its luxury
brand compared to the fast-fashion retailers.
Review how these common profitability measurements are derived from the
income statement in Interactive Illustration 2. Select one of the four metrics at the
top of the graphic, and explore how those metrics would be affected by different
performance scenarios (e.g., more annual revenue, reduced costs, etc).
INTERACTIVE ILLUSTRATION 2 Profitability Ratiosa
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2pHtruh
a
For simplicity, this representation limits the range of possible values. For example, COGS, and
operating expenses could both be larger than revenue, leading to a net loss.
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
2.3 Operating Efficiency
In addition to questions about profitability, analysts also often ask how efficiently a
company is using its assets. The next component of the ROE decomposition, asset
turnover, helps answer this question. Asset turnover tells us the extent of sales
generated by a dollar (or euro in our example) of assets. The amount of sales
generated by a unit of assets depends on the strategy the company uses to generate
sales or deliver a service. This efficiency measure also depends on the technology the
company is using. For instance, a retailer with greater percentage of online sales—
ones where fixed assets are not needed to deliver revenues—will have a greater asset
turnover than a purely brick-and-mortar retailer.
Asset turnover =
sales
average total assets
Applying this to our Prada example gives us the following:
Prada’s average total assets in 2015
=
( beginning total assets + ending total assets )
( €3,888 + €4,739 )
=
= €4, 314
2
2
Prada’s asset turnover in 2015 =
€3,552
= 0.8
€4, 314
Similarly, we calculate asset turnover for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Asset Turnover
2.1
1.2
1.5
0.8
1.6
It is worthwhile to repeat why we have used average total assets rather than the
beginning or ending value of assets in the denominator. A company records its sales
at every point throughout the year using assets in place. Assets in place may change
during the year depending on the company’s investments. Averaging the start- and
end-of-year assets provides a basis for comparison when looking at assets that
support the level of sales achieved over the year.
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For the exclusive use of N. Wilson, 2022.
Urban Outfitters’ asset turnover is twice that of Prada’s, meaning the fast-fashion
retailer sells twice as much per unit of assets as the more luxury-oriented brand. This
is likely because Prada has to make larger investments for a given level of sales. Prada
stores need to be located in more upscale areas and have more fashionable interiors
than Urban Outfitters does. The value of inventory in a Prada store is also likely to be
greater than that in an Urban Outfitters store. The difference in business models is
apparent in the ratios: Prada, with its higher-end luxury brands, generates greater
profit per unit of revenue than Urban Outfitters, but sells lower volume for the assets
in place. Recall that the net profit margin for Prada was about twice that of Urban
Outfitters, meaning that Urban Outfitters makes lower profit per unit of revenue but
sells twice as much as Prada does per unit of assets that it uses. These two factors net
each other out when we compare the two companies’ profitability per unit of asset
utilized. This brings us to our next concept, return on assets.
2.3.1 Return on Assets
Return on assets (ROA) measures profits as a proportion of total resources used or
financed by the firm. It is calculated by dividing net income by average total assets.
ROA is the product of the first two terms of the DuPont decomposition:
net profit margin × asset turnover.
ROA =
net income
average total assets
Using our example, we find the following:
Prada’s ROA in 2015 =
€451
= 10.4%
€4,314
Similarly, we calculate ROA for the other retailers for fiscal year 2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
ROA
16.2%
17.2%
8.1%
10.4%
11.3%
As discussed earlier, while Prada and Urban Outfitters have distinctly different net
profit margins and asset turnover ratios consistent with their differing market
positions and business strategies, when we consider ROA, the two effects almost
cancel each other out. Note here that Nordstrom’s ROA is 8.1%, which is somewhat
lower than Prada’s 10.4%. Despite the lower ROA, Nordstrom’s ROE in the ROE
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table in Section 2.1 is much higher, 31.9%, compared to Prada’s 15.8%. We will return
to this apparent puzzle later when we discuss leverage.
A firm’s total assets are financed by a mixture of debt and equity. Net income (the
numerator in the ROA formula) includes interest expense, which is the financing cost
of debt. If the analyst wishes to ignore the firm’s financing mix, he or she would
eliminate the financing impact on net income, which would determine a pure return
on investment before financing costs. ROA is often calculated by dividing after-tax
net income before interest expense by average total assets.
2.3.2 Digging Deeper into Asset Turnover
Companies need a mix of assets to drive their business performance. For example,
retail companies need stores (long-term assets) as well as shorter-term assets such as
inventories. By examining whether asset turnover efficiency is driven by short-term
or long-term assets, an analyst can learn about how well managers are undertaking
long-term investments versus how well they are handling the business’s day-to-day
operational activities.
Long-term asset turnover =
sales
average long-term assets
Here are the long-term asset turnover numbers for our retail examples:
Prada’s average long-term (LT) assets in 2015
=
=
( beginning LT assets + ending LT assets )
( €2, 427 + €2, 839 )
= €2,633
2
2
Prada’s LT asset turnover in 2015 =
€3,552
= 1.3
€2,633
Similarly, we calculate LT asset turnover for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
LT Asset Turnover
4.8
2.4
3.7
1.3
2.9
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
As with the total asset turnover ratios, Urban Outfitters uses its LT assets more
efficiently than Prada does. Gap appears to be the most efficient in utilizing its longterm assets to produce sales revenues.
Let’s turn to short-term operations. A company needs working capital to manage
its day-to-day operations. Working capital is composed of receivables plus inventory
less the amount the company owes to its vendors, such as accounts payable.
Companies need smaller amounts of working capital if they can collect more quickly
from their customers (lower receivables), hold lower levels of inventory for a given
level of sales (faster inventory turnover), and receive greater financing from their
vendors (greater accounts payable). Let’s examine each of these in turn.
2.3.3 Inventory Turnover
Inventory turnover, calculated as cost of goods sold divided by the average inventory
for the period, measures how often the inventory is sold during a given time period. It
is useful in understanding how efficiently a business manages its inventory levels. Just
as holding more assets for a given level of sales does, holding more inventory for a
given level of sales decreases efficiency. Although businesses may prefer to hold lower
inventory levels, the trade-off is to avoid running out of products available for
customers. Inventory levels also depend on product characteristics (e.g., perishable
products versus packaged goods), stocking efficiency, variation in product demand,
and so forth. As when we calculate asset turnover, we use the average inventory
balance rather than the ending balance. This is especially relevant for a firm that is
growing quickly, as the level of inventory may have increased significantly during the
year.
Inventory turnover =
cost of goods sold (COGS)
average inventory
Interactive Illustration 3 is a demonstration of inventory turnover in action. Start
the animation of items moving through a warehouse facility over the course of two
years of business operations. Reset the illustration and replay it with different
assumptions about the firm’s average inventory and annual COGS. The effect of
these parameters are reflected in the “Days Inventory” and “Inventory Turnover”
outputs at the bottom.
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
INTERACTIVE ILLUSTRATION 3 Inventory Turnover and Days in Inventory
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2I9pGVd
Applying the data from Exhibit 1 gives us the following:
Prada’s average inventory in 2015
=
( beginning inventory + ending inventory )
( €450 + €655 )
=
= €552
2
2
Prada’s inventory turnover in 2015 =
€1,001
= 1.8
€552
Similarly, we calculate inventory turnover for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Inventory Turnover
5.3
4.3
5.1
1.8
6.4
As a fast fashion business, it is no surprise that Urban Outfitters turns over its
inventory faster (6.4 times a year) than Prada’s luxury products (1.8 times). Urban
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For the exclusive use of N. Wilson, 2022.
Outfitters is also somewhat more efficient in handling its inventory when compared
to the other fast fashion business, Gap, whose inventory turnover is 5.3.
Another metric for measuring inventory use is the days inventory held, the average
number of days the inventory is held before it is sold, as opposed to the inventory
turnover, which measures how many times the inventory turned over during the
period. It is calculated dividing the COGS by 365 days, then dividing the average
inventory by this number.
Days inventory held =
average inventory
cost of goods sold 365 days
or:
Days inventory held =
365
inventory turnover
Applying the data for our Prada example yields the following:
Prada’s days inventory held in 2015 =
365
= 201
€1,001 €552
Similarly, we calculate days inventory held for the other retailers for fiscal year 2015
as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Days Inventory Held
69
86
72
201
57
Again it makes sense that Urban Outfitters turns its inventory faster than Prada
because the average number of days that Urban Outfitters holds its inventory is
substantially shorter—57 days versus Prada’s 201 days.
2.3.4 Accounts Receivable Turnover
Accounts receivable (AR) turnover measures a company’s efficiency in collecting
receivables from its customers. Companies often provide credit to their customers as
a way to increase sales. However, this practice comes at the risk of having some
customers be unable to pay when the bill comes due. The accounts receivable
turnover is calculated by dividing sales revenues by the average accounts receivable
(AR) balance. While AR turnover depends on the company’s credit practices, a
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
declining AR turnover indicates a weaker ability to collect cash from customers,
which could indicate a business weakness. For example, it could mean that the
company’s customers are having trouble paying what they owe.
Accounts receivable turnover =
sales
average accounts receivable
Prada’s average accounts receivable (AR) in 2015
=
( beginning AR + ending AR )
2
( €308 + €346 )
=
= €3 27
2
Prada’s accounts receivable turnover in 2015 =
€3,552
= 10.9
€327
Similarly, we calculate the AR turnover for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Accounts
Receivable Turnover
44.6
54.3
6.0
10.9
52.9
A related metric is days sales outstanding (DSO), also referred to as the average
collection period or days sales in receivables. It measures the average number of days
it takes for a business to collect payment from a customer. Say the firm’s credit policy
is to allow payment within 30 days. If, for example, the DSO is 40 days, it may
indicate that there is a payment problem. The DSO is calculated by dividing the
average accounts receivable by the sales per day, that is, sales divided by 365.
Days sales outstanding =
average accounts receivable
sales 365 days
Days sales outstanding =
365 days
accounts receivable turnover
or
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Using the data from Exhibit 1, we find the following:
Prada’s days sales outstanding in 2015 =
365
= 34
€3,552 €327
Similarly, we calculate DSO for the other retailers for fiscal year 2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Days Sales
Outstanding
8
7
61
34
7
Retailers such as the ones in our examples typically do not offer credit to their
customers, therefore they do not incur high levels of receivables. Gap, Inditex, and
Urban Outfitters’ low level of DSO generally results from the companies’ vendors of
miscellaneous goods (e.g., furniture and fixtures) and sundry services. Therefore,
Nordstrom’s DSO of about two months and Prada’s of about one month deserve
some attention. It turns out that Nordstrom has a credit card operation that offers
Nordstrom-branded cards to its customers, which retains the receivables on its
balance sheet. This accounts for Nordstrom’s lower receivable turnover ratio and
higher DSO. Prada, on the other hand, sells not only through its own stores but also
through franchises. Therefore, the franchises owe Prada for the products it sells to
them for sale to the end customer, as well as possible royalty fees.
2.3.5 Accounts Payable Turnover
The accounts payable (AP) turnover measures how long it takes a company to pay its
vendors, including suppliers of inventory, services, or other noninventory items.
Recall that payables are the flip side of receivables, that is, payables occur when the
vendor allows the company credit in paying for goods or services rendered. Accounts
payable turnover is calculated as total purchases divided by the average accounts
payable. (An alternate definition substitutes cost of goods sold for purchases).
Accounts payable turnover =
purchases
average accounts payable
Applying this ratio to our Prada example gives us the following:
Prada’s purchases in 2015 = COGS + ending inventory − beginning inventory
=€1,001 + €655 − €450 = €1,206
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For the exclusive use of N. Wilson, 2022.
Prada’s average accounts payable (AP) in 2015
=
( beginning AP + ending AP )
2
( €349 + €437 )
=
= € 39 3
2
Prada’s accounts payable turnover in 2015 =
€1,206
= 3.1
€393
Similarly, we calculate accounts payable turnover for the other retailers for fiscal year
2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Accounts Payable
Turnover
8.4
3.2
6.6
3.1
15.0
As with inventory and receivables, it is useful to think of accounts payable turnover
in terms of the number of days it takes the company to pay its accounts payable, or
days payable outstanding (DPO). This ratio is calculated by dividing the average
accounts payable by the average daily purchases (that is, total purchases divided by
365).
Days payable outstanding =
average accounts payable
purchases 365 days
Days payable outstanding =
365 days
accounts payable turnover
Alternatively,
Applying the data from Exhibit 1 gives us the following:
Prada’s days payable outstanding in 2015 =
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
365
= 119
€1, 206 €393
19
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Similarly, we calculate DPO for the other retailers for fiscal year 2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Days Payable
Outstanding
44
115
56
119
24
The difference between Urban Outfitters’ days payable outstanding of 24 days
versus Prada’s 119 days indicates that Urban Outfitters pays its vendors much faster
than Prada does. To evaluate the efficiency implication of these different days payable
outstanding ratios, we would need to compare the historical numbers as well as the
credit terms. Credit from suppliers serves as a form of short-term financing that can
be beneficial if it is cheaper than bank credit or other sources of financing. However,
an increasing trend in days payable outstanding can suggest that the company has
liquidity problems, making it unable to pay its suppliers on time.
2.3.6 Cash Conversion Cycle
The length of time between when a company must pay its suppliers for inventory
until it collects cash from its customers is called the cash conversion cycle. It is the
sum of days inventory held plus days sales outstanding less days payable outstanding.
A negative cash conversion cycle typically indicates that the business purchased goods
from a supplier on credit and can sell the inventory and collect cash from the
customer even before the supplier requires payment to be made.
Cash conversion cycle = days inventory + days sales outstanding − days payable outstanding
The pertinent events that affect the cash conversion cycle—payment (for an item)
to a supplier, the item (or a product that includes that item) is sold, and the
customer’s payment for that sale is received—are displayed on a timeline in
Interactive Illustration 4. Use the sliders to change the timing of these events, to
push the cash conversion cycle to be long, short, or negative.
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
INTERACTIVE ILLUSTRATION 4 Cash Conversion Cycle
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2ujeHXe
Using the data for Prada in Exhibit 1, we find the following:
Prada’s cash conversion cycle in 2015 = 201 + 34 − 119 = 116
Similarly, we calculate the cash conversion cycle for the other retailers for fiscal year
2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Cash Conversion
Cycle
33
(22)
77
116
39
Urban Outfitters’ cash conversion cycle of 39 days means the company must
finance 39 days’ worth of sales, compared to Prada’s 116 days. Inditex, on the other
hand, has a negative cash conversion cycle of 22 days; the company can sell its goods
before paying its suppliers, which means it does not need to invest in financing its
inventory. This is because Inditex takes longer to pay its suppliers (days payable
outstanding = 115 days), not because of its receivables days outstanding (days sales
outstanding = 7) or the number of days it holds inventory (days inventory held = 86).
Prada, in comparison, holds its inventory longer and, as a result, has more cash tied
up in its business operations.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
2.3.7 Working Capital Turnover
Closely related to cash conversion is the concept of working capital, defined as
current assets less current liabilities. Working capital turnover is calculated by
dividing net sales by the result of average current assets minus average current
liabilities.
Working capital turnover =
sales
average working capital
where
Working capital = current assets − current liabilities
For Prada, this result is as follows:
Prada’s average current assets in 2015
=
( beginning current assets + ending current assets )
( €1, 461 + €1,900 )
=
= €1,681
2
2
Prada’s average current liabilities in 2015
=
=
( beginning current liabilities + ending current liabilities )
2
( €707 + €1,115)
= €911
2
Prada’s working capital turnover in 2015 =
€3,552
= 4.6
( €1,681 − €911)
Similarly, we calculate the working capital turnover for the other retailers for fiscal
year 2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Working Capital
Turnover
8.1
5.4
5.3
4.6
5.9
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Working capital turnover measures the efficiency with which a company manages
its working capital to generate sales. Gap with a working capital turnover of 8.1 is the
most effective of the retailers listed.
Calculations for common efficiency measures are visualized in Interactive
Illustration 5. Select a metric from the top row to see what items are drawn from the
income statement and balance sheet to calculate that ratio.
INTERACTIVE ILLUSTRATION 5 Efficiency Ratios
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2uo8MQH
2.4 Financial Leverage
Having examined the drivers of profitability and operating efficiency, we next assess
how capital structure affects a company’s performance. This leads to the last
component of the DuPont decomposition framework, financial leverage. In the
DuPont decomposition formula, the last term is also referred to as the equity
multiplier and is calculated by dividing average total assets by average shareholder’s
equity.
Managers can successfully use financial leverage to improve a company’s
performance if the return on borrowed funds is greater than the interest cost of those
borrowed funds on an after-tax basis because interest cost is tax-deductible. The
benefit of borrowing is that managers can operate from a larger asset base than the
amount that would be financed only from shareholders’ equity. For example, if a firm
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
receives a $100 equity investment and has no debt, it can use that $100 to buy assets
that generate revenues. If the firm borrows an additional $100 as debt, it can use the
extra capital to purchase more revenue-generating assets. This would result in greater
profits for shareholders as long as the business generates a higher return on its assets
than what it must pay to service the debt. Interactive Illustration 6 shows how
leverage affects companies’ EPS and ROE.
INTERACTIVE ILLUSTRATION 6 Leverage Ratios
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2GiuO8Y
The flip side of leverage is that the company becomes committed to meeting
interest payments, whereas dividend payment to equity holders is discretionary.
Borrowing can thus create a risk of financial distress when the firm’s performance is
depressed. If the business were to suffer a loss, the debt amplifies the loss’s effect on
equity holders. Therefore, companies should avoid very high levels of debt financing.
Analysts use the extent of financial leverage to assess the leverage’s benefit as well as
to measure distress risk.
Using the ROE decomposition formula provided earlier, we can measure the
impact of all non-equity financing—or any kind of debt—on the firm’s ROE. If all the
assets are financed by equity, the multiplier is 1. As debt increases, the equity
multiplier also increases.
Equity multiplier =
average total assets
average equity
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Using the data in Exhibit 1, we calculate the following:
Prada’s average total assets in 2015
=
=
( beginning total assets + ending total assets )
( €3,888 + €4,739 )
= €4,314
2
2
Prada’s average shareholders’ equity (SE) in 2015
=
( beginning SE + ending SE )
2
( €2,688 + €3, 001)
=
= €2,845
2
Prada’s equity multiplier in 2015 =
€4,314
= 1.5
€2,845
Similarly, we calculate the equity multiplier for the other retailers for fiscal year 2015
as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Equity Multiplier
2.6
1.5
3.9
1.5
1.4
Urban Outfitters and Prada’s equity multipliers are quite similar—1.4 and 1.5,
respectively—indicating that the two companies have similar capital structure
strategies. However, Nordstrom has a high equity multiplier of 3.9. Recall that
Nordstrom’s ROE was 31.9%, significantly higher than Prada’s 15.8%, despite
Nordstrom’s lower ROA (8.1%) compared to Prada’s (10.4%). The answer lies in the
significantly higher level of leverage as indicated by Nordstrom’s equity multiplier,
which is more than double Prada’s. Can Prada improve its returns to shareholder
equity (ROE) by taking on more debt? Prada’s managers must grapple with this
question. The answer would depend on the extent of financial risk they wish to take
on. Alternately, should Nordstrom’s shareholders be concerned that the company has
very high debt levels? They would need to consider whether Nordstrom’s business
operations can support these high debt levels without causing the firm to slip into
financial distress.
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Another commonly used measure of leverage is the debt-to-equity ratio, which is
calculated as the ratio of average total liability divided by average shareholder’s
equity.
Leverage ratio =
average total liabilities
average shareholders’ equity
Using the data in Exhibit 1, we find the following:
Prada’s average total liabilties in 2015
=
( beginning total liabilities + ending total liabilities )
( €1,187 + €1,721)
=
= €1, 454
2
2
Prada’s average shareholders’ equity (SE) in 2015
=
=
( beginning SE + ending SE )
2
( €2,688 + €3, 001)
= €2,845
2
Prada’s leverage ratio in 2015 =
€1, 454
= 0.5
€2,845
Similarly, we calculate the leverage ratio for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Leverage Ratio
1.6
0.5
2.9
0.5
0.4
Not surprisingly, Nordstrom’s leverage ratio, at 2.9, is significantly higher than
Prada’s at 0.5. We can peel the onion further and compare the different retailers in
terms of long-term debt versus short-term liabilities.
Long-term leverage ratio =
average long-term liabilities
average equity
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Prada’s average long-term (LT) liabilties in 2015
=
( beginning LT liabilities + ending LT liabilities )
( €480 + €606 )
=
2
= €543
2
Prada’s average shareholders’ equity (SE) in 2015
=
( beginning SE + ending SE )
2
( €2,688 + €3, 001)
=
= €2,845
2
Prada’s long-term leverage ratio in 2015 =
€543
= 0.2
€2,845
Similarly, we calculate the LT leverage ratio for the other retailers for fiscal year 2015
as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Long-Term
Leverage Ratio
0.8
0.1
1.8
0.2
0.1
These ratios indicate that Nordstrom has significantly greater long-term debt
compared to its equity than the other retailers in our sample do.
2.4.1 Interest Coverage Ratio
As discussed earlier, one possible result of higher leverage is the risk that the company
may not be able to meet its debt payment obligations. Many debt providers, such as
banks, protect themselves from their creditors’ default by requiring the companies to
follow certain restrictions (or covenants) defined by the ratios that measure the extent
of financing risk. The interest coverage ratio is used to gauge whether a business can
make the interest payments on its outstanding debt. The ratio is measured as earnings
before interest and taxes (EBIT) divided by interest expense.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Interest coverage ratio =
EBIT
interest expense
which for Prada would be as follows:
Prada’s interest coverage ratio in 2015 =
€702
= 54
€13
Similarly, we calculate the interest coverage ratio for the other retailers for fiscal year
2015 as follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Interest Coverage
Ratio
28
N/A
11
54
N/A
Interest coverage ratio is useful for assessing the firm’s long-term solvency by
examining its ability to cover interest expense on debt, typically long-term debt.
Nordstrom, with an interest coverage ratio of 11, has the lowest ability to meet its
debt obligations within this sample of retailers. Although it is difficult to assess the
extent of distress risk from this ratio alone, it is clear that Prada, with a ratio of 54,
and Gap at 28, have a greater amount of earnings to cover interest expense. Because
Urban Outfitters and Inditex did not incur much interest expense in 2015, their
interest coverage ratios are less meaningful.
2.4.2 Liquidity Ratios
Analysts, especially those concerned with assessing a company’s short-term liquidity
(for example, a credit analyst in a bank), use measures such as the current ratio to
determine if funds provided by current assets would be sufficient to meet demand
from current liabilities.
The current ratio is calculated as current assets divided by current liabilities.
Current assets include cash as well as assets such as inventory and accounts receivable
that are likely to convert to cash in the short term. Current liabilities include accounts
payable, wages payable, and other items that will require cash payout in the short
term. The higher the current ratio, the easier it is for the business to meet its
approaching liabilities. However, if the current ratio is too high, it might indicate that
the business is not managing its working capital efficiently.
Current ratio =
current assets
current liabilities
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
For Prada, the current ratio is as follows:
Prada’s current ratio in 2015 =
€1,900
= 1.7
€1,115
Similarly, we calculate current ratio for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Current Ratio
1.9
1.9
1.9
1.7
2.3
Overall, all the retailers’ current ratios hover around similar levels. Banks and other
short-term lenders often impose requirements for the current ratio level and that of
other, similar liquidity ratios in a given industry. It is also helpful to compare current
with historical levels of the ratio to determine whether there are any reasons for
concern or whether this metric should be differentiated across similar companies.
The quick ratio, or acid test ratio, is similar to the current ratio except only highly
liquid current assets are considered available for paying current liabilities. This ratio
measures a firm’s ability to meet current obligations even if its inventory cannot be
sold immediately. It is calculated by considering cash, marketable securities, and
accounts receivable, but not inventory, which is relatively less liquid; businesses in
distress may have trouble turning their inventory into cash.
Quick ratio =
( cash and marketable securities + accounts receivable )
current liabilities
Applying the data from Exhibit 1, we get the following:
Prada’s quick ratio in 2015 =
€715 + €346
= 1.0
€1,115
Similarly, we calculate the quick ratio for the other retailers for fiscal year 2015 as
follows:
FY 2015
Gap
Inditex
Nordstrom
Prada
Urban Outfitters
Quick Ratio
0.8
1.3
1.1
1.0
0.9
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
The retailers in our sample generally appear to be quite comfortable in meeting
their current liabilities from highly liquid current assets though Gap and Urban
Outfitters are a little less so than the other companies.
3 SUMMARY
The financial analysis framework provides a methodology for assessing and digging
deeper into the drivers of a company’s performance. Analysts and others can use
financial ratios to compare the company’s performance to its peers or to its own
historical performance. Managers can then use the insights to improve the way the
business operates, by improving either its profit margins, its asset utilization, or its
capital structure. In this reading, we have used the DuPont decomposition framework
to provide a basic structure for ratio analysis. There are many additional ratios not
covered here, and you may find somewhat different definitions from what we have
used here.
In order to conduct insightful financial analysis, you must develop a deep
understanding of the business economics of a company and its industry to select the
appropriate ratios to measure and then to interpret them correctly. As seen in our
retail examples, it is also important to probe deeper to understand the causes of
differences in the ratios’ measures. A good analyst typically uses a portfolio of ratios
to understand the overall picture of a company and the drivers of its performance.
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For the exclusive use of N. Wilson, 2022.
EXHIBIT 1 Prada Group’s Balance Sheet and Income Statement
Prada Group: Consolidated statement of financial position
(amounts in millions of Euros)
January 31, 2015
January 31, 2014
715
346
655
184
1,900
582
308
450
121
1,461
1,474
943
422
2,839
4,739
1,230
901
296
2,427
3,888
267
437
411
1,115
67
349
291
707
255
42
309
606
1,721
208
42
230
480
1,187
256
2,163
131
451
3,001
256
1,853
(49)
628
2,688
17
4,739
13
3,888
Assets
Current assets
Cash and marketable securities
Trade receivables, net
Inventory, net
Other current assets
Total current assets
Non-current assets
Property, plant, and equipment
Intangible assets
Other non-current assets
Total non-current assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Bank overdrafts and short-term loans
Trade payable
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term financial payables
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Share capital
Share capital
Other reserves
Translation reserves
Net income for the year
Total shareholders’ equity
Non-controlling interests
Total liabilities and shareholders’ equity
Consolidated income statement
(amounts in millions of Euros)
Net revenue
Cost of goods sold
Gross margin
Selling, general and administrative costs
Product design and development costs
Operating expenses
Earnings before interest and taxes
Net interest expenses
Other income/(expenses)
Income before taxes
Taxation
Net income for the year
Net income—non-controlling interests
Net income—shareholders
Basic and diluted earnings per share in euros per share
For the twelve months ended
January 31, 2015
3,552
(1,001)
2,551
1,716
133
1,849
702
(13)
(21)
668
(209)
459
8
451
0.176
January 31, 2014
3,587
(939)
2,648
1,580
129
1,709
939
(9)
(8)
922
(285)
637
10
627
0.245
Source: Extracted from Prada Annual Report for the year ended January 31, 2015.
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
4 SUPPLEMENTAL READING
4.1 Key Ratios
Accounts payable turnover =
purchases
average accounts payable
Accounts receivable turnover =
Asset turnover =
sales
average accounts receivable
sales
average total assets
Cash conversion cycle = days inventory + days sales outstanding − days payable outstanding
Cost of goods sold = beginning inventory + purchases − ending inventory
Credit purchases = cost of goods sold + ending inventory − beginning inventory
Current ratio =
current assets
current liabilities
Days inventory held =
average inventory
cost of goods sold 365 days
Days inventory held =
365
inventory turnover
Days payable outstanding =
average accounts payable
purchases 365 days
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Days payable outstanding =
365 days
accounts payable turnover
Days sales outstanding =
average accounts receivable
sales 365 days
Days sales outstanding =
365 days
accounts receivable turnover
Equity multiplier =
average total assets
average equity
Gross profit margin =
gross profit
sales
Interest coverage ratio =
Inventory turnover =
Leverage ratio =
EBIT
interest expense
cost of goods sold (COGS)
average inventory
average total liabilities
average shareholders’ equity
Long-term asset turnover =
sales
average long-term assets
Long-term leverage ratio =
average long-term liabilities
average equity
Net profit margin =
net income
sales
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Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Quick ratio =
( cash and marketable securities + accounts receivable )
current liabilities
ROA =
net income
average total assets
ROE =
net income
sales
total assets net income
×
×
=
sales
total assets
equity
equity
SG&A margin =
selling, general, and administrative (SG&A) expenses
sales
Working capital = current assets − current liabilities
Working capital turnover =
sales
average working capital
5 KEY TERMS
accounts payable (AP) turnover Measures how long it takes a company to pay
its vendors, including suppliers of inventory, services, or other noninventory items.
accounts receivable (AR) turnover Measures a company’s efficiency in
collecting receivables from its customers.
asset turnover Measures how efficiently the company uses its assets to generate
return.
average collection period Measures the average number of days it takes for a
business to collect payment from a customer. Also called days sales outstanding
(DSO).
balance sheet A financial statement that provides a snapshot of the company’s
resources and the claims on those resources at a specific point in time.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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This document is authorized for use only by Nathan Wilson in TGM 517 Global Accounting & Financial Management (MGM FA22) – M/W 82846 taught by Euvin Naidoo, Thunderbird School of
Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
cash conversion cycle The length of time between when a company must pay its
suppliers for inventory until it collects cash from its customers.
current ratio Measures the sufficiency of a firm’s funds, provided by current assets,
to meet demand from current liabilities.
days inventory held The average number of days the inventory is held before it is
sold.
days payable outstanding (DPO) The number of days it takes the company to
pay its accounts payable.
DuPont framework A ratio analysis method, originated by the DuPont
Corporation in the 1920s, which decomposes ROE into subcomponents to provide a
deeper look at how profit (or loss) was generated.
equity multiplier The measure of the impact of debt on a firm’s ROE.
financial leverage The degree to which a company uses fixed-cost financing such
as bank loans, bonds, and preferred stock. The more debt and preferred stock
financing a company uses, the higher its financial leverage.
gross profit margin The amount of profit that is left to cover other expenses after
only the cost of goods sold is subtracted from revenues.
income statement A financial statement that shows an entity’s operating
performance over a given period of time.
interest coverage ratio Gauges whether a business can make the interest
payments on its outstanding debt.
inventory turnover Measures how often the inventory is sold during a given time
period.
profitability In the DuPont framework, the profit margin that the company
achieves from each dollar of sales after all expenses have been accounted for.
quick ratio Measures a firm’s ability to meet current obligations even if its
inventory cannot be sold immediately.
ratio analysis The use of simple calculations as financial analysis tools, which can
be used to gain insights about a company’s business model and financial
performance.
return on assets (ROA) An indicator of the company’s profitability relative to its
assets or total capital employed in the firm.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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This document is authorized for use only by Nathan Wilson in TGM 517 Global Accounting & Financial Management (MGM FA22) – M/W 82846 taught by Euvin Naidoo, Thunderbird School of
Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
return on equity (ROE) A measure of a business’s profitability in relation to its
shareholder equity. It is found by dividing net income by the book value of the equity.
selling, general, and administrative (SG&A) margin The amount of SG&A
expenses incurred by a company for every dollar of revenues earned.
shareholders’ equity A measure of a business’s profitability that is found by
subtracting liabilities from the company’s assets. It consists of contributed capital
(stock) and retained earnings.
statement of cash flows A financial statement showing cash sources and uses by a
company over an accounting cycle.
working capital The liquid capital used in day-to-day business operations.
working capital turnover Measures the efficiency with which a company manages
its working capital to generate sales.
6 ENDNOTES
1 Inditex, Annual Report 2014 (A Coruña, Spain: Inditex, 2015) p. 193.
2 Prada Group, Annual Report 2014 (Milan, Italy, 2015), p. 5.
3 Prada Group, Annual Report 2014 (Milan, Italy, 2015), p. 17.
4 Urban Outfitters, Inc. SEC Form 10-K, January 31, 2015 (Philadelphia, PA), p. 1.
5 Urban Outfitters, Inc. SEC Form 10-K, January 31, 2015 (Philadelphia, PA), pp. 2–3.
6 Nordstrom, Inc., SEC Form 10-K, January 31, 2015 (Seattle, WA), p. 4.
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
36
This document is authorized for use only by Nathan Wilson in TGM 517 Global Accounting & Financial Management (MGM FA22) – M/W 82846 taught by Euvin Naidoo, Thunderbird School of
Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
7 INDEX
accounts payable (AP) turnover, 18, 19,
32, 34
accounts receivable (AR) turnover, 16,
17, 32, 34
asset turnover, 11, 12, 32, 34
assets, in return on equity calculation, 6,
7
average collection period, 17, 34
balance sheet, 4, 34
cash conversion cycle, 20, 21, 32, 35
cost of goods sold, 32
credit purchase, 32
current ratio, 28, 29, 32, 35
days inventory held, 16, 32, 35
days payable outstanding (DPO), 19, 20,
21, 32, 33, 35
days sales outstanding (DSO), 17, 18, 20,
21, 32, 33, 35
DuPont framework, 3, 5, 7, 35
efficiency ratios, 23
equity multiplier, 23, 24, 25, 33, 35
equity, in return on equity calculation,
6, 7
financial analysis, 3, 5, 7
financial leverage, 6, 35
Gap, 3, 4, 8, 9, 10, 11, 12, 13, 14, 15, 16,
17, 18, 19, 20, 21, 22, 23, 25, 26, 27, 28,
29, 30
gross profit margin, 9, 33, 35
income statement, 4, 35
Inditex, 3, 4, 8, 9, 10, 11, 12, 13, 15, 16,
17, 18, 19, 20, 21, 22, 25, 26, 27, 28, 29
interest coverage ratio, 27, 28, 33, 35
interest expense, 13
inventory turnover, 14, 15, 33, 35
leverage, 35
leverage ratio, 26, 33
liquidity ratios, 28
long-term asset turnover, 13, 33
long-term leverage ratio, 26, 27, 33
net income, 6, 7, 12, 13
net profit margin, 8, 33
Nordstrom, 3, 4, 8, 9, 10, 11, 12, 13, 15,
16, 17, 18, 19, 20, 21, 22, 25, 26, 27, 28,
29
operating efficiency, 6, 11
performance, analysis of, 3, 5, 7, 9, 10
performance, financial leverage and, 23,
24, 30
performance, mix of assets driving, 13
Prada, 3, 4, 7, 8, 9, 10, 11, 12, 13, 14, 15,
16, 17, 18, 19, 20, 21, 22, 25, 26, 27, 28,
29, 31
profit margins, 6
profitability, 6, 8, 35
profitability ratios, 10
quick ratio, 29, 34, 35
ratio analysis, 3, 35
ratios, periods used in calculating, 5
return on assets (ROA), 5, 12, 13, 34, 36
return on equity (ROE), 5, 6, 7, 8, 34, 36
sales, in return on equity calculation, 6,
7
selling, general, and administrative
(SG&A) margin, 9, 10, 34, 36
shareholders’ equity (SE), 5, 7, 23, 25,
26, 27, 31, 33, 36
statement of cash flows, 4, 36
Urban Outfitters, 3, 4, 8, 9, 10, 11, 12,
13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 25,
26, 27, 28, 29, 30
working capital, 14, 22, 34, 36
working capital turnover, 22, 34, 36
5056 | Core Reading: ANALYZING FINANCIAL STATEMENTS
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Global Management from Aug 2022 to Dec 2022.
SIGNET
x
=
x
=
BLUE NILE
TIFFANY
2013
2014
2015
2016
2013
2014
2015
2014
2015
2016
Dupont Decomposition
Net Income Margin
Asset Turnover
ROA
Leverage
ROE
8,7%
1,09x
9,5%
1,58x
15,0%
6,6%
1,12x
7,4%
1,91x
14,2%
7,1%
1,03x
7,4%
2,16x
15,9%
8,5%
0,98x
8,3%
2,12x
17,6%
2,4%
2,79x
6,8%
5,90x
39,9%
2,0%
2,83x
5,8%
6,15x
35,7%
2,2%
3,05x
6,7%
9,77x
65,2%
11,4%
0,86x
9,3%
1,78x
17,3%
11,3%
0,80x
9,1%
1,78x
16,1%
11,1%
0,78x
8,8%
1,72x
15,0%
Gross Profit / Revenues
Operating Profit / Revenues
Gross Margin
Operating Margin
EBT / Revenues
37,5%
13,6%
13,5%
36,2%
10,1%
9,4%
37,3%
10,7%
10,0%
36,8%
11,9%
11,1%
18,6%
3,2%
3,2%
18,3%
3,0%
3,1%
19,2%
3,4%
3,4%
59,7%
21,0%
19,6%
60,7%
18,5%
17,3%
62,2%
18,0%
17,5%
365 / (Revenues / avg. AR)
365 / (COGS / avg. Inventory)
365 / ((COGS+ Ch. Inventory)/ avg. AP)
Avg. Days Sales Out.
Avg. Days Inventory Out.
Avg. Days Payable Out.
Avg. Cash Conversion Cycle
120
200
21
299
100
196
17
279
99
217
24
292
111
221
24
308
2
34
118
-83
1
36
116
-79
2
41
117
-73
13
500
24
488
14
519
30
503
16
529
30
515
Growth over prior year
Revenues
Gross Profit
Operating Profit
EBT Excl. Unusual Items
Net Income
5,7%
2,8%
1,8%
1,7%
2,3%
36,3%
31,2%
1,1%
-4,6%
3,6%
14,2%
17,7%
22,0%
21,7%
22,7%
-2,2%
-3,3%
8,5%
8,5%
16,1%
12,5%
11,6%
16,3%
12,3%
29,8%
5,2%
3,5%
-0,7%
0,0%
-11,0%
1,4%
6,6%
13,4%
10,3%
8,2%
5,4%
8,4%
13,6%
13,1%
166,9%
-3,4%
-1,8%
-14,7%
-14,6%
-4,2%
-2,5%
0,0%
-5,1%
-1,1%
-3,8%
Net Income / Revenues
Revenues / avg. Assets
ROA (Net Income / avg. Assets )
Assets / avg. Equity
Net Income / avg. Equity
Exhibit 2Signet Merchandise and Segment Mix
Fiscal Year Ending 1/28/2017
Sterling Jewelers division
Zale division
Diamonds and diamond jewelry
77%
60%
Gold and silver jewelry, including charm bracelets
9%
28%
Other jewelry, including gift category
8%
9%
Watches
6%
3%
100%
100%
3.930,40
1.812,80
61,30%
28,30%
Sales ($ Millions)
Source: Compiled from financial information in Signet’s 2017 Annual Report.
UK Jewelry division
Other Total Signet
35%
68%
17%
15%
16%
9%
32%
8%
100%
100%
647,1
18,1
6.408,40
10,10%
0,30%
100,00%
Exhibit 3aSignet Jewelers Income Statements, 2013-2017 ($ Millions)
2012
2013
2014
2015
2016
Revenue
Fiscal Year
3.983,40
4.209,20
5.736,30
6.550,20
6.408,40
Cost Of Goods Sold
-2.446,00
-2.628,70
-3.662,10
-4.109,80
-4.047,60
Gross Profit
Selling General & Admin Exp.
Interest Income In-house Finance
Other Operating Income (Expense)
Operating Income
Interest Expense
EBT
Income Tax Expense
Net Income
1.537,40
1.580,50
2.074,20
2.440,40
2.360,80
-1.138,30
-1.196,70
-1.712,90
-1.987,60
-1.880,20
159,7
186,4
217,9
252,6
282,5
1,7
0,3
-2,6
-1,7
0,1
560,5
570,5
576,6
703,70
763,2
-3,6
-4
-36
-45,9
-49,4
556,9
566,5
540,6
657,8
713,8
-197
-198,5
-159,3
-189,9
-170,6
359,9
368
381,3
467,9
543,2
Correct
Source: Signet’s Annual Reports.
Note:
Signet’s fiscal year ended on the fourth Saturday of the following year. Fiscal year ending
dates for the five years listed are as follows: 2/2/2013, 2/1/2014, 1/31/2015, 1/30/2016, and
1/28/2017.
Exhibit 3bSignet Jewelers Balance Sheet, 2013-2017 ($ Millions)
Fiscal Year
2012
2013
2014
2015
2016
301
247,6
193,6
137,7
98,7
1.293,00
1.471,80
1.680,70
1.886,40
1.996,70
-87,7
-97,8
-113,1
-130
-138,7
1.205,30
1.374,00
1.567,60
1.756,40
1.858,00
ASSETS
Cash And Equivalents
Accounts Receivable, Gross
Bad Debt Allowance
Accounts Receivable, Net
Other Receivables
Inventory
Other Current Assets
Total Current Assets
42,1
51,5
63,3
84
95,9
1.397,00
1.488,00
2.439,00
2.453,90
2.449,30
90,7
96,5
139,3
156,1
140,7
3.036,10
3.257,60
4.402,80
4.588,10
4.642,60
Gross Property, Plant & Equipment
1.154,50
1.275,70
1.518,00
1.676,80
1.872,30
Accumulated Depreciation
-724,1
-788,1
-852,1
-949,2
-1.049,40
430,4
487,6
665,9
727,6
822,9
24,6
26,8
519,2
515,5
517,6
Intangible Assets, net
–
–
447,1
427,8
417
Deferred Tax Assets, LT
104,1
113,7
2,3
–
0,7
Retirement benefit asset
48,5
56,3
37
51,3
31,9
Other Long-Term Assets
75,3
87,2
140
154,6
165,1
3.719,00
4.029,20
6.214,30
6.464,90
6.597,80
Accounts Payable
155,9
162,9
277,7
269,1
255,7
Accrued Expenses and Other
326,4
328,5
482,4
498,3
478,2
–
19,3
97,5
57,7
91,1
Curr. Income Taxes Payable
100,3
103,9
86,9
65,7
101,8
Unearned Revenue, Current
159,7
173
248
260,3
276,9
Def. Tax Liability, Curr.
129,6
113,1
–
–
–
871,9
900,7
1.192,50
1.151,10
1.203,70
Net Property, Plant & Equipment
Goodwill
Total Assets
LIABILITIES
Loans and overdrafts
Total Current Liabilities
Long-Term Debt
Unearned Revenue, Non-Current
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities
Pref. Stock, Convertible
Total Pref. Equity
–
–
1.363,80
1.321,00
1.317,90
405,9
443,7
563,9
629,1
659
–
–
53,5
72,5
101,4
111,3
121,7
230,2
230,5
213,7
1.389,10
1.466,10
3.403,90
3.404,20
3.495,70
–
–
–
–
611,9
–
–
–
–
611,9
Common Stock
15,7
15,7
15,7
15,7
15,7
Additional Paid In Capital
246,3
258,8
265,2
279,9
280,7
Retained Earnings
2.268,40
2.812,90
3.135,70
3.534,60
3.995,90
Treasury Stock
-260
-346,2
-370
-495,8
-1.494,80
Comprehensive Inc. and Other
59,5
-178,1
-236,6
-273,7
-307,3
Total Common Equity
2.329,90
2.563,10
2.810,40
3.060,70
2.490,20
Total Equity
2.329,90
2.563,10
2.810,40
3.060,70
3.102,10
Total Liabilities And Equity
3.719,00
4.029,20
6.214,30
6.464,90
6.597,80
Source: Compiled from Signet’s Annual Reports.
Note:
Signet’s fiscal year ended on the fourth Saturday of the following year. Fiscal year ending
dates for the five years listed are as follows: 2/2/2013, 2/1/2014, 1/31/2015, 1/30/2016, and
Note:
Signet’s fiscal year ended on the fourth Saturday of the following year. Fiscal year ending
dates for the five years listed are as follows: 2/2/2013, 2/1/2014, 1/31/2015, 1/30/2016, and
1/28/2017.
Exhibit 3cSignet Cash Flow, 2013-2017 ($ Millions)
Fiscal Year
Net Income
Depreciation & Amort.
2012
2013
2014
2015
2016
359,9
368
381,3
467,9
543,2
99,4
110,2
139,3
160,7
173,7
Amort. of Goodwill and Intangibles
–
–
-14,1
-14,8
-5,9
Depreciation & Amort., Total
99,4
110,2
125,2
145,9
167,8
Other Amortization
0,4
0,4
7,4
3,6
2,8
Asset Writedown & Restructuring Costs
–
–
0,8
0,7
1,3
Stock-Based Compensation
15,7
14,4
12,1
16,4
8
Tax Benefit from Stock Options
-7,4
-6,5
-11,8
-6,9
-2,4
Other Operating Activities
-7,6
-29,1
-51,5
26,1
23,2
Change in Short-Term Receivables
-117,1 -168,7
-193,6
-188,8
-101,6
Change In Inventories
-65,7
-121,6
-46
-9,7
Change in Acc. Payable
-39,6
3,2
23,7
-6,4
-7
Change in Unearned Rev.
40,6
50,8
102,3
76,3
43,6
Change in Inc. Taxes
27,2
7,9
-1,6
-25,7
38,9
6,9
-16,7
10,3
-19,8
-29,8
312,7
235,5
283
443,3
678,3
Capital Expenditure
-134,2 -152,7
-220,2
-226,5
-278
Cash Acquisitions
-56,7
-7,7
-1.429,20
–
–
–
–
-3,2
-2,2
-0,4
-228,7
-278,4
Change in Other Net Operating Assets
Cash from Ops.
Invest. in Marketable & Equity Secur.
Cash from Investing
-98,4
-190,9 -160,4 -1.652,60
Short Term Debt Issued
–
76,3
39,4
–
–
Long-Term Debt Issued
–
–
3.000,30
2.619,90
3.674,10
Total Debt Issued
–
76,3

3.039,70
2.619,90
3.674,10
Short Term Debt Repaid
–
-57
–
-47,1
-10,2
Long-Term Debt Repaid
–
–
-1.612,70
-2.645,90
-3.634,70
Total Debt Repaid
–
-57
-1.612,70
-2.693,00
-3.644,90
Issuance of Common Stock
21,6
9,3
Repurchase of Common Stock
-287,2 -104,7
6,1
5
2,1
-29,8
-130
-1.000,00
Issuance of Pref. Stock
–
–
–
–
611,3
Common Dividends Paid
-38,4
-46
-55,3
-67,1
-75,6
Total Dividends Paid
-38,4
-46
-55,3
-67,1
-75,6
Other Financing Activities
-4,1
-2,7
-27,1
-1,4
-5,2
1.320,90
-266,6
-438,2
Cash from Financing
-308,1 -124,8
Foreign Exchange Rate Adj.
0,5
-3,7
-5,3
-3,9
-0,7
Net Change in Cash
-185,8
-53,4
-54
-55,9
-39
Source: Compiled from Signet’s Annual Reports.
Note:
Signet’s fiscal year ended on the fourth Saturday of the following year. Fiscal year ending
dates for the five years listed are as follows: 2/2/2013, 2/1/2014, 1/31/2015, 1/30/2016, and
1/28/2017.
Exhibit 4aSterling Jewelers – Customer Financing Statistics
2012
2013
2014
Total sales (millions)
Fiscal Year
3.273,90
3.517,60
3.765,00
Credit sales (millions)
1.862,90
2.028,00
2.277,10
Credit sales as % of total Sterling Jewelers sales (1)
56,90%
57,70%
60,50%
Net bad debt expense (millions)
122,4
138,3
160
Net bad debt as a % of Sterling Jewelers credit sales
6,60%
6,80%
7,00%
Number of active credit accounts at year end (2)
1.173.053
1.256.003
1.352.298
Average outstanding account balance at year end
1.110,00
1.175,00
1.245,00
Average monthly collection rate
Ending bad debt allowance as a % of ending gross
accounts receivable
12,40%
12,10%
11,90%
6,80%
6,70%
6,80%
Net write-offs as a % of average gross accounts receivable
9,22%
9,40%
9,30%
Net bad debt expense (millions)
-122,4
-138,3
-160
Late charge income (millions)
27,5
29,4
31,3
Interest income from in-house customer finance programs
(millions)
159,7
186,4
217,9
64,8
77,5
89,2
Credit portfolio impact
Source:
Notes:
Compiled from Signet’s Annual Reports.
(1) Including any deposits taken at the time of sale.
(2) The number of active accounts is based on credit cycle end date closest to the fiscal year end date.
2015
2016
3.988,70
3.930,40
2.451,20
2.438,30
61,50%
62,00%
190,5
212,1
7,80%
8,70%
1.423.619
1.401.456
1.319,00
1.405,00
11,50%
11,00%
7,00%
7,10%
9,90%
10,70%
-190,5
-212,1
33,9
36
252,5
277,6
95,9
101,5
Exhibit 4b Sterling Jewelers In-House Finance Receivables ($ Millions)
Fiscal Year
2012
2013
2014
2015
2016
Sterling Jewelers in-house receivables and
bad debt allowance
Bad Debt Allowance
Beginning balance:
-78,1
-87,7
-97,8
-113,1
-130
Write-offs, net
112,8
128,2
144,7
173,6
203,4
Net bad debt expense
-122,4
-138,3
-160
-190,5
-212,1
Ending balance
-87,7
-97,8
-113,1
-130
-138,7
1.280,60
1.453,80
1.666,00
1.855,90
1.952,00
-87,7
-97,8
-113,1
-130
-138,7
1.192,90
1.356,00
1.552,90
1.725,90
1.813,30
Ending balance Accounts Receivable, gross
Bad Debt Allowance
Ending balance Accounts Receivable, net
Source:
Compiled from Signet’s Annual Reports.
Note: During the third quarter of Fiscal 2016, Signet implemented a program to provide in-house credit to customers
in the Zale division’s US locations. The resulting accounts receivable balance and allowance for doubtful accounts
was immaterial as of January 28, 2017 and January 30, 2016.
edit to customers
btful accounts
Exhibit 4cSterling Jewelers Aging of Signet’s In-House Receivables
2012
Fiscal Year
Credit Quality Indicator and Age Analysis:
Gross
2013
Bad Debt Allowance
Gross
Performing ($ million):
Current, aged 0 – 30 days
Past due, aged 31 – 90 days (2012)
1.030,30
-33,8
203,9
-7,5
1.170,40
Past due, aged 31 – 60 days
195,7
Past due, aged 61 – 90 days
34,2
Non Performing ($ million):
Past due, aged more than 90 days
46,4
-46,4
53,5
1.280,60
-87,7
1.453,80
Current, aged 0 – 30 days
80,50%
3,30%
80,50%
Past due, aged 31 – 90 days (2012)
15,90%
3,70%
Total
Performing (as a % of the ending receivable balance):
Past due, aged 31 – 60 days
13,50%
Past due, aged 61 – 90 days
2,30%
Non Performing:
Past due, aged more than 90 days
3,60%
100,00%
3,70%
Total
100%
6,80%
100%
Source:
Compiled from Signet’s Annual Reports.
2013
2014
Bad Debt Allowance
Gross
2015
Bad Debt Allowance
Gross
2016
Bad Debt Allowance
Gross
-36,3
1.332,20
-41,1
1.473,00
-45,4
1.538,20
-6,4
230,2
-7,5
259,6
-8,3
282
-1,6
40,9
-1,8
49,2
-2,2
51,6
-53,5
62,7
-62,7
74,1
-74,1
80,2
-97,8
1.666,00
-113,1
1.855,90
-130
1.952,00
3,10%
80,00%
3,10%
79,40%
3,10%
78,80%
3,30%
13,80%
3,30%
14,00%
3,20%
14,40%
4,70%
2,50%
4,40%
2,70%
4,50%
2,60%
100,00%
3,80%
100,00%
4,00%
100,00%
4,10%
6,70%
100%
6,80%
100%
7,00%
100%
2016
Bad Debt Allowance
-47,2
-9
-2,3
-80,2
-138,7
3,10%
3,20%
4,50%
100,00%
7,10%
Exhibit 7aIncome Statements for Blue Nile and Tiffany ($ Millions)
Fiscal Year
2012
2013
2014
2015
2013
2014
Blue Nile
2016
Total Revenue
400
480,1
4.031,10
4.249,90
4.104,90
4.001,80
Cost Of Goods Sold
-325 -366,4 -386,9 -387,7
-1.690,70
-1.712,70
-1.613,60
-1.511,50
Gross Profit
450
2015
Tiffany
473,5
75
83,7
86,6
92,3
2.340,40
2.537,20
2.491,30
2.490,30
-62,8
-69,3
-72,4
-76,3
-1.555,90
-1.645,80
-1.731,20
-1.769,10
12,3
14,3
14,2
16,1
784,5
891,4
760,1
721,2
Interest Income (Expense)
0,1
0,1
0,1
0,1
-62,6
-62,9
-49
-46
Other Income (Expense), net
0,5
0,2
0,3
0
13,2
2,8
-1,2
1,4
EBT Excl. Unusual Items
13
14,6
14,6
16,1
735,1
831,3
709,9
702
Legal Settlements
–
–
–
–
-480,2
–
–
–
Other Unusual Items
–
–
–
–
–
-93,8
–
–
13
14,6
14,6
16,1
254,9
737,5
709,9
676,6
-4,6
-3,7
-4,9
-5,6
-73,5
-253,3
-246
-230,5
8,4
10,9
9,7
10,5
181,4
484,2
463,9
446,1
Selling General & Admin Exp.
Operating Income
EBT Incl. Unusual Items
Income Tax Expense
Net Income
Source:
S&P Capital IQ, accessed April 2017.
Note:
Tiffany settled a lawsuit with Swiss watch company Swatch for $480.2 million in March 2014 related to a
joint venture that Tiffany was accused of blocking and delaying. Maggie McGrath, “Half-Billion Swatch Settlement Drags
Tiffany Fourth Quarter Earnings To A Loss.” Forbes, March 2014
https://www.forbes.com/sites/maggiemcgrath/2014/03/21/half-billion-swatch-settlement-drags-tiffany-fourth-quarterearnings-to-a-loss/#3f2890e17862. Tiffany’s fiscal year ended on January 31 of the following year (i.e. fiscal year 2012 officially
ended on January 31, 2013). Blue Nile’s fiscal year ended on the Sunday nearest December 31. Blue Nile was taken private in
2016.
14 related to a
ar 2012 officially
ken private in
Exhibit 7bBalance Sheets for Blue Nile
and Tiffany
Fiscal Year
2012
2013
2014
2015
2013
2014
Blue Nile
2015
2016
Tiffany
ASSETS
Cash And Equivalents
87
115,9
91,2
86,5
345,8
730
843,6
928
Short Term Investments
–
–
–
–
21,3
1,5
43
57,8
Total Cash & ST Investments
Accounts Receivable, Gross
Bad Debt Allowance
Accounts Receivable, Net
87
115,9
91,2
86,5
367
731,5
886,6
985,8
2,6
3
2,1
3,3
199,1
205,8
217,9
238,3
0
0
0
0
-10,3
-10,6
-11,5
-11,5
2,6
3
2,1
3,3
188,8
195,2
206,4
226,8
Other Receivables
0,9
0,5
1,6
1,3
–
–
–
–
Inventory
33,3
34,5
41,7
46,4
2.326,60
2.362,10
2.225,00
2.157,60
Prepaid Expenses and Other Curr.
1,2
1,3
1,5
1,6
244,9
220
190,4
203,4
Deferred Tax Assets, Curr.
0,9
1
–
–
101
–
–
–
–
0,2
–
–
–
–
–
–
Other Current Assets
125,9
156,6
138,1
139,1
3.228,40
3.508,80
3.508,40
3.573,60
Gross Property, Plant & Equipment
Total Current Assets
24,6
29,5
32,8
35,6
2.098,60
2.267,20
2.354,40
2.455,70
Accumulated Depreciation
-16,7
-19,3
-22,4
-25,1
-1.243,50
-1.367,70
-1.418,60
-1.523,90
7,9
10,2
10,4
10,5
855,1
899,5
935,8
931,8
Deferred Tax Assets, LT
Net Property, Plant & Equipment
7,8
5,5
4,2
5,1
278,4
426,1
382,8
301,8
Other Long-Term Assets
4,3
4,6
4,7
2,7
390,5
346,2
294,6
290,4
145,9
176,9
157,3
157,4
4.752,40
5.180,60
5.121,60
5.097,60
Accounts Payable
116,2
122,3
128,7
121,9
116,6
118
127,8
108,6
Accrued Exp.
Total Assets
LIABILITIES
12,4
9,4
9,7
9,3
110,5
105,7
99,8
123
Short-term Borrowings
–
–
–
–
252,4
234
221,6
228,7
Curr. Port of LT Debt
–
–
–
–
–
–
84,2
–
Curr. Income Taxes Payable
–
–
1,3
1,7
32
39,9
27,1
22,1
Unearned Revenue, Current
–
–
–
–
70,3
66,1
67,9
69,2
0,3
1,8
1,3
1,6
115
94,3
101,5
81,2
Other Current Liabilities
129
133,4
141
134,6
696,7
658
729,9
632,8
Long-Term Debt
Total Current Liabilities
–
–
–
–
751,2
882,5
790
878,4
Unearned Revenue, Non-Current
–
–
–
2
81,9
64,5
55,1
45,9
Pension & Other Post-Retire. Benefits
–
–
–
–
268,1
524,2
428,1
318,6
2,8
2,9
2,7
2,4
220,5
200,7
189
193,5
131,8
136,3
143,6
139
2.018,40
2.329,90
2.192,10
2.069,20
0,2
0
0
0
1,3
1,3
1,3
1,2
197,3
223,3
227,1
232,1
1.095,30
1.173,60
1.175,70
1.190,20
Retained Earnings
82,9
93,8
103,5
114
1.682,40
1.950,70
2.012,50
2.078,30
Treasury Stock
-266 -276,4 -316,7 -327,5
–
–
–
–
Other Non-Current Liabilities
Total Liabilities
Common Stock
Additional Paid In Capital
Comprehensive Inc. and Other
Total Common Equity
–
–
-0,2
-0,2
-58,5
-290,5
-278,1
-256,2
14,1
40,6
13,7
18,5
2.720,40
2.835,10
2.911,40
3.013,50
Minority Interest
–
–
–
–
13,5
15,6
18,1
14,9
Total Equity
14,1
40,6
13,7
18,5
2.734,00
2.850,70
2.929,50
3.028,40
Total Liabilities And Equity
145,9
176,9
157,3
157,4
4.752,40
Source:
S&P Capital IQ, accessed April 2017, Note: Tiffany’s fiscal year ended on
January 31 of the following year (i.e. fiscal year 2012 officially ended on January 31, 2013). Blue
Nile’s fiscal year ended on the Sunday nearest December 31. Blue Nile was taken private in 2016.
5.180,60
5.121,60
5.097,60
Exhibit 7cCash Flows for Blue Nile and Tiffany
Fiscal Year:
2012
2013
2014
2015
2013
2014
Blue Nile
Net Income
Depreciation & Amort.
2015
2016
Tiffany
8,4
10,9
9,7
10,5
181,4
484,2
463,9
446,1
3,4
3,1
3,6
3,9
176,4
186,4
198,8
205,1
Amort. of Goodwill and Intangibles
–
–
–
–
4,2
7,8
3,7
3,4
Depreciation & Amort., Total
3,4
3,1
3,6
3,9
180,6
194,2
202,5
208,5
(Gain) Loss From Sale Of Assets
0
0
–
–
-9,5
-9,2
-8,3
-8,5
Asset Write-down & Restr. Costs
–
–
–
–
–
–
–
25,4
Bad Debt Expense
–
–
–
–
–
–
37,9
12,6
Stock-Based Compensation
5,1
5
4,4
5,1
32,2
26,5
24,5
24,3
Tax Benefit from Stock Options
-2,6
-0,9
-2,9
-0,8
-14,9
-14,1
-2,2
-0,7
Other Operating Activities
-0,2
2,2
2,3
-0,9
52,8
110,5
89,3
110,7
Change in Acc. Receivable
-0,3
0
-0,2
-0,3
-23,2
-17,6
-16,7
-19,2
-4
-1,3
-7,1
-4,7 -168,3 -167,6
63,7
54,8
Change in Acc. Payable & Accr. Liab.
20,4
6,4
6,3
-6,7
-15,3
-24,6
Change in Unearned Rev.
3,1
–
–
2
4,7
-2,7
3
1,5
1
-0,2
0,2
–
-70,1
81,9
3,1
-39,3
0,2
-1,7
0,8
0
-56,4
-65,1
-31,8
-89,5
34,4
23,4
17,2
8
154,7
615,1
813,6
702,1
-2,5
-5,5
-3,8
Sale of Property, Plant, and Equipment
–
–
–
Invest. Marketable & Equity Securities
-4
-0,3
Other Investing Activities
–
–
Cash from Investing
-6,5
-5,8
-3,8
Short Term Debt Issued
–
–
–
–
139,7
19,8
24,8
91
Long-Term Debt Issued
–
–
–
–
–
548
–
98,1
Total Debt Issued
–
–
–
–
139,7
567,8
24,8
189,1
Change In Inventories
Change in Inc. Taxes
Change in Other Net Operating Assets
Cash from Operations
Capital Expenditure
45,4
-5,9
-3,8 -221,4 -247,4 -252,7 -222,8
–
–
–
0,9
–
–
–
-23,5
15,2
-26,4
-15,7
–
1,4
-1,9
15,2
–
1,7
-2,4 -246,8
-217 -278,2 -236,8
Short Term Debt Repaid
–
–
–
–
-69,7
-15,9
-27,3
-83,1
Long-Term Debt Repaid
-0,1
-0,1
-0,1
0
–
-400
–
-97,1
Total Debt Repaid
-0,1
-0,1
-0,1
0
8,6
21,4
2,4
1,1
27,9
-38,9 -10,4 -40,3 -10,8
–
Issuance of Common Stock
Repurchase of Common Stock
-69,7 -415,9
42,9
-27,3 -180,2
2
15,3
-27 -220,4 -183,6
Common Dividends Paid
–
–
–
– -170,2 -191,2 -203,4 -218,8
Total Dividends Paid
–
–
–
– -170,2 -191,2 -203,4 -218,8
0,4
-0,1
Other Financing Activities
–
Cash from Financing
-30,3
Foreign Exchange Rate Adj.
Net Change in Cash
-2,4
-0,5
6,9
11,2 -38,1 -10,2
-65,4
0,1
0
2
-4,6
-23,4 -422,3 -382,8
-0,1
-0,1
-1,5
9,5
0,5
1,9
28,9 -24,8
-4,6
-159
384,2
113,6
84,4
Source:
S&P Capital IQ, accessed April 2017.
Note:
Tiffany’s fiscal year ended on January 31 of the following year (i.e. fiscal year 2012
officially ended on January 31, 2013). Blue Nile’s fiscal year ended on the Sunday nearest December 31. Blue
Nile was taken private in 2016.
For the exclusive use of N. Wilson, 2022.
9 -1 1 7 -0 3 8
REV: JANUARY 22, 2019
GERARDO PÉREZ CAVAZOS
SURAJ SRINIVASAN
MONICA BARALDI
Signet Jewelers: Assessing Customer Financing
Risk
“I think they’re heading for a cliff,” said Marc Cohodes referring to his latest short-sell target, Signet
Jewelers (Signet). 1 Cohodes had made a long career as a canny short seller, with successful shorts on
companies from pinball manufacturers to speech-recognition software companies to subprime
lenders. 2 In early 2016, he had set his sights on Signet, the parent company of jewelry brands such as
Kay, Zales, and Jared. Cohodes believed that Signet had become addicted to boosting sales through a
risky customer credit program and had a product portfolio consisting of low-quality jewelry—
”trinkets,” as he called them. 3 According to Cohodes, Signet was also masking the quality of its credit
program through a practice called recency accounting, which allowed them to downplay the number
of customers who were delinquent on repayment.
Signet pushed back, with CEO Mark Light decrying the “targeted attack” of Cohodes and other
short sellers and affirming that its in-house customer financing program, which the company
considered a major competitive advantage, followed “strict risk tolerance standards.” 4, 5 The company
also announced strategic moves, including the potential sale of its credit portfolio and an investment
by a private equity firm. Investors and analysts appeared to buy Signet’s argument: its stock price had
stabilized by February 2017, buoyed by bullish arguments for Signet’s growth prospects and
competitive advantages in a fragmented jewelry industry. 6,7
Cohodes was undeterred. He said, “Their credit book, to me, is beyond toxic. So you have a toxic
business, a toxic combination, and I don’t know their way out. I do not know their way out.” 8
Signet Jewelers
Company History
Signet, initially known as Ratner Group, was founded in the U.K. in 1949 and rapidly expanded
through a series of acquisitions in the 1980s and early 1990s. 9 The company rebranded as Signet in 1993
and grew throughout the 2000s both organically and through acquisitions. In 2008, the company
Professors Gerardo Pérez Cavazos and Suraj Srinivasan and Case Researcher Monica Baraldi (Case Research & Writing Group) prepared this case
with the assistance of Teaching Fellow Iris Leung and Research Associate Quinn Pitcher. It was reviewed and approved before publication by Marc
Cohodes. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed
solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2017, 2018, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by Nathan Wilson in TGM 517 Global Accounting & Financial Management (MGM FA22) – M/W 82846 taught by Euvin Naidoo, Thunderbird School of
Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
117-038
Signet Jewelers: Assessing Customer Financing Risk
redomiciled in Bermuda, keeping its headquarters in Akron, Ohio. In May 2014, Signet acquired Zale
Corporation, a large competitor that owned Zales jewelry stores, for $1.4 billion. 10 By 2016, Signet was
the world’s largest retail jeweler, focusing on the mid-market segment of the sector. The company had
a 13-14% share of the $41 billion U.S. mid-market jewelry segment. No other competitor had more than
a 1% share of the segment. 11 (See Exhibit 1 for Signet’s stock price data.)
Brand Strategy
In 2016, Signet employed around 30,000 people and operated in 3,625 in-mall and off-mall stores
and kiosks in the US, Canada, and the UK. Signet’s goal was to be the leader in the mid-market jewelry
segment wherever it operated. Mid-market jewelry purchases generally ranged from $100-$10,000.
Bridal jewelry was crucial to Signet, owing to the large and stable market for jewelry pieces such as
engagement rings (see Exhibit 2 on Signet’s merchandise and segment mix and Exhibit 3 for Signet’s
financial statements). For Signet’s three main American brands, Kay, Jared, and Zales, engagement
rings between $1,000-5,000 comprised 65%, 78%, and 45% of their total stock of engagement rings,
respectively. 12,13,14 Signet leveraged its large size to buy many of its goods directly from international
vendors, a cost advantage not available to the myriad of small players in the jewelry sector. 15
Signet used a multi-brand strategy to capture a greater share of the mid-market jewelry sector. The
company operated its Kay and Jared stores under the umbrella of Sterling Jewelers. Kay was the largest
specialty retail jewelry store brand in the U.S. based on sales. Jared operated stores at free-standing
sites across the U.S. Zales operated predominantly in shopping malls, emphasizing diamond jewelry
to shoppers who sought jewelry from recognizable designers and brands. Amongst its international
brands, Signet owned market leaders H. Samuel and Ernest Jones in the U.K. and Peoples in Canada.
Accordingly, Signet’s operations were organized into five business segments: Sterling Jewelers, U.K.
Jewelry, Zale Jewelry, Piercing Pagoda, and Others. 16
Customer Finance
Customers at Kay and Jared had the opportunity to access a financing program provided directly
by Signet. 17 Zales stores did not offer the finance program, although they did offer third-party
financing through a Zales-branded credit card and planned to adopt the credit program over time.
Signet maintained that its financing program was integral to maintaining its competitive advantage
and that no other competitor had the scale and systems necessary to manage an in-house financing
program. 18 Financing programs required infrastructure to approve loans, service existing loans, and
collect in instances where full repayment was not received. Such infrastructure was not cheap: based
on the scale of Signet operations, equity research analysts estimated that the SG&A expenses associated
with retail financing businesses could total up to 30% of interest income. 19
The financing program allowed Signet to reach middle income customers that didn’t have the
financial ability to purchase a piece of jewelry outright. This was a boon to bridal jewelry sales, as 75%
of these sales in the Sterling division utilized financing. 20 In its 2016 annual report, Signet stated,
Our in-house consumer financing program provides Signet with a competitive
advantage through the enabling of incremental profitable sales that would not occur
without a consumer financing program. Several factors inherent in the U.S. jewelry
business support the circumstances through which Signet is uniquely positioned to
generate profitable incremental business through its consumer financing program. These
factors include a high average transaction value; a significant population of customers
2
This document is authorized for use only by Nathan Wilson in TGM 517 Global Accounting & Financial Management (MGM FA22) – M/W 82846 taught by Euvin Naidoo, Thunderbird School of
Global Management from Aug 2022 to Dec 2022.
For the exclusive use of N. Wilson, 2022.
Signet Jewelers: Assessing Customer Financing Risk
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seeking to finance merchandise primarily in the bridal category; and the minimum scale
necessary to administer credit pro…
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