Financial Management MBA

FINANCIAL MANAGEMENT
Student name
Professor’s name
University
State
City
Date
Executive Summary
This paper will present a discussion of two competing companies with regards to historical and expected future performances. The first company identified is Wal-Mart, which is a giant retailer shop. COSTCO Wholesale Corporation (COST) is identified as its chief competitor. In this paper, the two companies are briefly introduced. Afterwards they are compared with regard to their financial statements for the years 2013 and 2014 where the ratios are analyzed and at the end of the paper a recommendation and a conclusion are given. This paper takes into account not only the quantitative aspects of the companies but the qualitative aspects as well.

Table of Contents
 TOC \o "1-3" \h \z \u  HYPERLINK \l "_Toc418592472"
Executive Summary  PAGEREF _Toc418592472 \h
2
 HYPERLINK \l "_Toc418592473"
Background  PAGEREF _Toc418592473 \h
4
 HYPERLINK \l "_Toc418592474"
Wal-mart  PAGEREF _Toc418592474 \h
4
 HYPERLINK \l "_Toc418592475"
COSTCO Wholesale Corporation (COST)  PAGEREF _Toc418592475 \h
4
 HYPERLINK \l "_Toc418592476"
Overview of The Impact of Global Factors  PAGEREF _Toc418592476 \h
4
 HYPERLINK \l "_Toc418592477"
Industry Trends And Ability To Cope With Them  PAGEREF _Toc418592477 \h
6
 HYPERLINK \l "_Toc418592478"
Financial Analysis  PAGEREF _Toc418592478 \h
7
 HYPERLINK \l "_Toc418592479"
Recommendation  PAGEREF _Toc418592479 \h
9
 HYPERLINK \l "_Toc418592480"
Conclusion  PAGEREF _Toc418592480 \h
10
 HYPERLINK \l "_Toc418592481"
References  PAGEREF _Toc418592481 \h
12

Background
Wal-mart
Wal-Mart Incorporation is the world’s largest retailer. Wal-Mart incorporated operates thousands of stores across United States of America, Mexico, Canada, Asia, Europe and Africa. It is a market leader in the retail business with more than 5000 stores across these different regions while employing more than two million people. Wal-Mart has experienced a steady financial growth in the recent past with a turnover of more than 470 billion dollars in the year 2014. Its consistent expansion and ability to attract more customers has seen it see growth year in year out.
COSTCO Wholesale Corporation (COST)
Costco is also a giant retailer business. This incorporation is a close competitor to Wal-Mart bearing in mind that the firm is currently operating more than 600 membership warehouse stores which span across several continents. COSTCO Wholesale Corporation is a major wholesale and retail business in the United States, Mexico, Australia, Canada, Japan, Taiwan, and in the United Kingdom as well. The company makes sales through bulk packaging at most times while dealing with close to four thousand products ranging from alcoholic drinks, fresh produce, pharmaceutical products and electrical appliances too. The organization currently serves more than seventy million customers and it has seen at tremendous financial growth in the recent years too. In fact in the year ended 2014, the company announced a record sales of more than 110 Billion dollars that translated to a net income of more than 2 billion dollars.
Overview of the Impact of Global Factors
Wal-Mart has experienced financial growth stagnations in the year 2014 due to changes in the global factors that affect the economy. The adverse weather experienced in the most parts of the US in the year 2014 greatly affected the organizations fresh produce supplies which contribute a significant part of its sales income. Additionally, the expiration of the US food stamp program and the payroll tax cut as well greatly impacted on the company’s earnings. This translated to stagnation in the earnings per share at 5.6 USD though the stock market remained optimistic of a better weather pattern that would see the fresh produce sector record better sales and increase the Earnings per Share (EPS). This additionally led to a plateau point in the gross profit and the operating profit margins that remained at 24.3 and 5.90 respectively. This is an indication of the total margin available to cover the operating expenses and generate positive returns as well. This as well shows the firm’s profitability has been consistent from earnings arising from current operations without including those that accrued from the capital structure (Bonakele, Beaty, Rasool & Kriek, 2014). Global economy recovery however contributed towards offsetting these losses arising from bad weather and expiration of benefits that translated directly to the company’s revenue. The opening of several branches has helped the organization benefit from a global economic recovery through increased sales. These increased sales therefore contributed to a direct increase in the sales revenues from 469 billion USD in 2013 to 476 Billion USD in the year 2014.
COSTCO Wholesale Corporation (COST) as well, greatly benefited from a global economic recovery which attracted investments across different regions in America. COSTCO in this regard took advantage of the recovering global economy and the increasing incomes of the people by opening more wholesale stores across America. This expresses their future prospect of the retail and wholesale sectoral growth prospects in the coming years. This move increased the investor confidence leading to a greater demand fro COSTCO shares. This retranslated to an increase in their stock value of 105 USD to an average of 145 USD in the year 2014 (Nasdaq, 2015). In fact according to the COSTCO annual report in the year 2013 and 2014 in particular, twelve warehouses were opened some in northern Dakota, their first ever warehouse unit in Washington D.C, five Warehouses in Japan, three warehouses in Canada, three others in the United Kingdom, one in Taiwan, the other in Mexico and the remaining units were established in the existing markets within the united states. All these new units were aimed at tapping the increased spending potential in these markets and the general global economy as well.
Industry Trends And Ability To Cope With Them
COSTCO’s net sales in the year 2013 were $102,870 million dollars and in the year 2014 they rose to $110,212 million dollars increasing by five percent and then seven percent respectively. These reflect the increase in the firm’s sale of the products that it dealt with. Apparently there was stability in prices of the major commodities such as alcoholic beverages, electrical appliances and other durable goods. Therefore, majority of this increase in sales revenues was generally as a result of increased customer spending from the wholesale units. This however did not make any improvement in the company’s gross profit margin which stood at 12.6 for the two years 2013 and 2014 (Nasdaq, 2015). Ideally, gross profit margin is an indication of the total margin available to cover operating expenses and generate profits. This showed that despite the increased sales turnover in the business, still no additional price increases that the business undertook. For a company investing in such a sector and amid the increasing global incomes, the business ought to make consistent profits. To achieve this, the business should either increase the gross profit margin in all or some of its products or rather increase the inventory that is sold. In this case however, the prices seem to have gone a bit lower while the inventory sold increased in a proportionate manner. As a result, the gross profit margin remained the same. This as well demonstrated the firm’s low pricing strategy that was aimed at increasing the inventory turnover thereby increasing the sales revenues. This would help attract more customers to the firm’s stores. More so, the firm’s operating profit margin stood stagnant at 5.56. This meant that despite reducing the products prices and increasing the number of sales, there was little reduction in the operating costs of the organization (Nasdaq, 2015).
For such an organization that seeks to expand and increase its customers while at the same time adopting forward and backward integration into other industries, there is a strong need to improve their production efficiency. This shows that the operations of the firm did not increase in their efficiency. This presents a future risk in the net profits of the organization if changes will not have been made to reduce the operating costs through increasing the efficiency in cost control, administrative efficiency and production efficiency too.
Financial Analysis
Wal-Mart Inc. gross profit margin for the year 2013 was 24.9% while for 2014 it was 24.8%. This shows that Wal-Mart was able to generate profits in relation to its sales and the cost of their goods. This expresses that besides increasing their inventory turnover, Wal-Mart was still able to negotiate for better prices from its suppliers. This therefore increased its gross profit margin between the two years. The operating profit margin for the firm in the year 2013 was 5.93%. However in the year 2014 the figure dropped to 5.64%. This expressed the increase in average operating profits of the company. There was a lag in the production efficiency of the firm. Administrative and other production costs such as the cost of keeping inventory, servicing the stores, insuring and maintaining the organization’s capital goods seems to have gone up. Therefore as compared to COSTCO it appears that COSTCO is exhibiting increasing production efficiency as depicted by the minimal change in the operating profit margins. This apparently creates better prospects to achieve a higher profitability level as compared to Wal-Mart in the future. This would translate to increased earnings per share owing to the increase in profits.
This in turn reflects in...