The questions here are unstructured so that instructors can tailor the case to their preferences. The case then walks dents through analyses of profitability, asset efficiency, leverage, and cash flow. A common mistake is to calculate ratios without using the average balance sheet numbers. To facilitate this analysis, we added a third year to both companies’ balance sheets. The numbers for Dullard’s for 2005 have been modified to reflect the 2007 restatement. See note 2 to Dullard’s 10-K.
The case includes all of footnote 1 Significant accounting policies) for both companies. That way, instructors can encourage or require students to contrast and compare accounting policies between the two companies. We also included the long-term debt footnotes and the footnote detailing leases and other commitments. For Dullard’s we include footnote 2 that details the restatement in the financial. This footnote informs our restatement of the 2005 balance sheet. Instructors can students go to www. Sec. Gob for the companies’ entire annual reports.
About tax rates: Both companies’ effective tax rates and statutory rates are essentially the same. Students can calculate the effective tax rates from the income statement and instructors can discuss the difference between statutory rates and effective rates. No questions explicitly require students to use tax rates. About Operating Leases: Both companies have operating leases primarily related to store space. The case does not explicitly require the leases be capitalized but the solution shows that the liquidity and solvency ratios are slightly changed by doing so.
En make the following assumptions: or discount the future lease payments, we use the interest rate implicit in each company’s capitalized leases. As you would expect, the rate is higher for Dullard’s because of higher leverage and weaker credit ratings. These rates are: Kohl’s 7. 93% and Dullard’s 9. 37%. Instructors may choose to give these rates to the students in advance. En assume that the payments due each year from year 6 and beyond are approximately the same amount as in year 5. Thus, for Dullard’s the last payment will occur in 2013: $33,143 / $34,118 = 1.
For Kohl’s, there will be 18. 92 payments, which En rounded up to 20 for the case instructions. Kohl’s Corporation & Dullard’s Inc. ?Financial Statement Analysis O Copyright 2012 by Cambridge Business Publishers, LLC. All rights reserved. No part of this publication may be reproduced in any form for any purpose without the Mitten permission of the publisher. . Industry Analysis There are several recent macroeconomic factors that have affected the retail department store industry. First, rising energy costs have created a cash crunch on the lower and middle class.
In addition, increased interest rates and a slowdown in the housing market have added to consumers’ woes. The retail department store industry is divided into four main segments: discount, moderate, better, and luxury. Rhea industry is mature and highly competitive. Consequently, retailers find it difficult to raise their prices. Instead, retailers focus on strategies to keep costs low, generate paving through improved economies of scale, reduce staffing levels, and expand stores in highly profitable and promising areas (Standard & Poor).
Both companies experienced a stock-price run up n 2006 and current prices Kohl’s Corporation & Dullard’s Inc. ?Financial Statement Analysis 1 are at their 2005 levels. Dullard’s book value is greater than its market cap – not a good sign. Rhea companies face essentially the same competitors: Macy’s, Target, TX Max, J Penny, Sears, and regional department stores. One commonality is that both of these companies have tried to monotone their assets in an effort to reduce debt and to repurchase outstanding common shares of stock. Both companies have captive credit cards and special purpose entities to securities their receivables.
In 2005, Kohl’s removed all accounts receivable from its balance sheet. ) Rhea companies have different strategies. Kohl’s competitive strategy is to provide top name brands and its private-label brands at reduced costs, as a result of its cost- saving strategies. Kohl’s first positions itself in lifestyle centers which are located in strip malls and have a lower rent than traditional malls. These locations are also close to its target market, and are highly visible due to scarce competition in nearby strip malls. Kohl’s is the preferred retailer of married moms between the ages of 25 o 54.
The positioning of Kohl’s stores in lifestyle centers is an advantage since they are usually located near upper-class residential neighborhoods. It has recently tried to expand its contemporary brands and increase its lifestyle brand focus in an effort to bring in young new customers for the long-term and to create a brand loyalty. It is also trying to raise the profile of the Kohl’s brand in order to increase its appeal to more affluent customers. Kohl’s has also designed centrally located cash registers inside the stores to expedite checkouts and reduced staffing costs.
The size of the retail chain has resulted in economies of scale and volume discounts that allow Kohl’s to compete with other discount department stores. Further, Kohl’s unique merchandising relationships allow them to carry top brands such as NIKKEI, Levi Strauss, and Ralph Lauren. This combination of low price and quality goods allows them to compete with “discount,” “moderate,” and “better” department stores. Additionally, Kohl’s strong distribution network enables the company to renew offerings at its stores at regular intervals and reduce transportation costs (Data Monitor).
In April 2006, Kohl’s sold its private-label credit card accounts and future payments tied to the profitability of the portfolio to Comparing Chase & Co. For about $1. 5 billion; however, Kohl’s continues to handle all customer and marketing services for Comparing Chase as they relate to credit card customers (Hoovers). Dullard’s is a leader in the department store segment Witt stores that target the middle to upper-middle income markets. Dullard’s stores are located primarily in the South and Southwest United States.
The company currently has 326 stores in 29 states. Most Dullard’s stores are located in suburban shopping malls. The company’s main positioning strategy is the dual-anchor concept; Dullard’s has about 60 dual- anchor stores, where it purchases an additional location to house women’s, children’s and home furnishings in one location and men’s and Junior’s departments in the other location (Hoovers). Dullard’s differs from Kohl’s in that it operates two non- merchandising subsidiaries: Dullard’s Travel and Dullard’s in-store spa centers.
Because of consumers’ recent preferences for value shopping, Dullard’s has utilized its private-label merchandise to compete with other lower-cost stores. The company, Inch traditionally does not mark down items, has been forced by mounting competition to place merchandise on sale and sell it at deeply discounted prices. Dullard’s broad range of traditional department store services has solidified its brand and customer loyalty, and may provide it with an edge over competition. Kohl’s however, is a “value” retailer. Kohl’s Corporation & Dullard’s Inc. ?Financial Statement Analysis 2 Although Dullard’s constantly opens new stores, it has been closing underperforming stores at a greater rate (Hoovers). Dullard’s also sold its private-label credit card absurdity to GE Consumer Finance in November 2004 for approximately $1. 1 billion Ninth the intent to reduce debt, repurchase stock, and to achieve general corporate purposes with the proceeds (Hoovers). B. Kohl’s income statement does not have any obvious nonrecurring items. The company has increasing store opening expenses but given the company’s plans for continued expansion, these are expected to persist.