W15392

ANALYZING THE SUCCESS OF “RETAILERS”

Professors Neil Bendle and Xin (Shane) Wang wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.

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Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-09-10

ANALYZING THE SUCCESS OF “RETAILERS”

It was July 27, 2015, and Kelsey1 had been at her new job for only a few hours. Even before being told
where the coffee machine was located, she was instructed to get ready to present to her new manager by
the end of the day. Kelsey had to compare six well-known firms and assess each firm’s performance.

KELSEY’S NEW JOB

Kelsey’s company specialized in providing investment advice to wealthy clients but with a distinct
philosophy: The firm never hired anyone with banking experience. This practice was largely out of
concern that traditional finance experience like banking led to conventional thinking, and the firm wanted
to be different. Its policy was to hire only those individuals who possessed deep industry experience,
which, rightly or wrongly, was thought to trump traditional financial skills.

Kelsey had been recruited directly from her MBA program at a major Canadian business school. Prior to
taking her MBA, she had been on the management fast track at a major electronics retailer. Her
assignments as part of a rotational program included managing a store, and while her retail experience
had taught her about serving consumers, organizing inventory and managing people, it had focused less
on number-crunching than on the background of a typical analyst of publically available secondary data.2
Kelsey wasn’t totally out of her element in her new job, given the technical skills she had learned during
her MBA, but applying those skills in the workplace was something entirely new to her and it seemed a
little daunting.

1
While the companies and data used in this case are real, Kelsey and her firm are fictional.
2
Secondary data is data that was not created for the specific analysis being undertaken. For example, the answers to
questions in a survey are primary data, but the data contained in an annual report is secondary data.
Page 2 9B15A045

AMAZON: A BIGGER RETAILER THAN WAL-MART?

The office was buzzing due to the fact that Amazon.com had announced its quarterly results just a few
days before. The positive news had led to a surge in Amazon’s market value,3 which had jumped to more
than $246 billion.4 By this metric, Amazon was now worth more than Wal-Mart5 (see Exhibit 1). Even
more impressive, this good news went beyond Amazon’s online retailing arm. “Amazon said its Amazon
Web Services cloud-computing business saw revenues jump 81 per cent, 16 points higher than Wall
Street expected, to $1.8 billion.”6

The presentation Kelsey was expected to make was related to Amazon’s rise. Indeed, Kelsey thought the
task was designed to be a test of her abilities. She suspected that her performance would influence the
way her manager would treat her for some time to come, so it was important to do well.

KELSEY’S MANAGERS’ QUESTIONS

A hand-written note provided Kelsey with an address for a file (see Exhibit 2). This file contained
highlights from two years’ worth of annual reports for six major companies, termed “retailers.” Kelsey’s
manager had scribbled four questions onto the note below the file address, and Kelsey realized that she
was expected to provide answers to these questions when she met with her manager in the late afternoon.
The questions were these:

• Do the accounts give an accurate view of the company’s performance?

• What can we say about the business plans of these “retailers”?
• Which has been/is the most successful of these companies?
• Which of them would you recommend investing in, going forward?

AN INCOMPLETE LIST OF PERFORMANCE METRICS

Kelsey used her smartphone to retrieve a list of performance metrics she had made during her MBA
studies. The class in which Kelsey had produced this list had been quite dull, and she wasn’t sure she had
been concentrating enough to create the perfect list of metrics. Still, she knew this list would provide her
with a useful starting point for her analysis, which would initially consist of six categories for assessment:

• Return on Assets (ROA): Aims to compare net income (profit) with the assets used to generate it.
Sometimes sales are compared to assets, but Kelsey’s professor had said, “Comparing sales to assets
is not financial return!”
• Staff Productivity: A measure of the sales dollars generated per employee.
• Inventory Turns: The number of times the inventory (stock) “turned over” in a period; typically
assessed as total sales divided by an estimate of the average level of inventory held.

3
“Amazon shares surge on surprise quarterly profit,” July 24, 2015, BBC News, www.bbc.com/news/business-33646762,
accessed July 27, 2015.
4
All currency in U.S. dollars unless specified otherwise.
5
Akin Oyedele, “Amazon is now bigger than Wal-Mart,” Business Insider, July 23, 2015, www.businessinsider.com/amazon-
bigger-than-walmart-2015-7, accessed July 27, 2015.
6
Robert Hoff, “Amazon’s Surprise Q2 Profit: It’s All About the Cloud,” Forbes, July 23, 2015, www.forbes.com/sites/
roberthof/2015/07/23/amazons-surprise-q2-profit-its-all-about-the-cloud/, accessed July 27, 2015.
Page 3 9B15A045

• Market to Book Ratio: The value of the firm as assessed by the stock market, divided by the value
owned by the stockholders as recorded in the financial accounts.
• Change in sales over a period.
• Change in profits over a period.

GETTING READY FOR THE PRESENTATION

While Kelsey knew that she should certainly consider all six of these performance metrics, she felt that,
on their own, they did not constitute a thorough analysis. From her retail experience, Kelsey knew she
should report some sort of margin. She wondered what other analysis she could produce with just these
numbers to go on.

Kelsey knew that simply crunching a few numbers would not be enough to get her relationship with her
boss off to the right start. What were the strengths and weaknesses of the metrics? What else should she
consider? How could she compare the business models of these companies? Indeed, should her manager
really call them all “retailers,” given their business models? Kelsey’s manager would surely be interested
in observing her new employee’s skills, and Kelsey wanted to impress.
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EXHIBIT 1: THE SELECTED “RETAILERS”

“Retailer” Primarily Brief Explanation of Their Business

Known As
Target Corp. Department “From our department store roots to the debut of our small-
Store format stores, our history reveals our passion for innovation
and creating great shopping experiences.”7

Kroger Co. Grocer “The Kroger Co. spans many states with store formats that
include grocery and multi-department stores, convenience
stores and jewelry stores.”8

Walmart Stores Department “Price, access, assortment and experience drive a customer’s
Inc. Store choice of retailer. Historically, Walmart led on price and
assortment. Retail environments are more competitive today,
especially with e-commerce.”9

Costco Wholesale Warehouse “We are a membership warehouse club, dedicated to bringing
Corp. our members the best possible prices on quality brand-name
merchandise.”10

Amazon.com Inc. Online “We seek to be Earth’s most customer-centric company for four
Retailer primary customer sets: consumers, sellers, enterprises, and
content creators.”11

eBay Inc. Marketplace “We give sellers the platform, solutions, and support they need
to grow their businesses and thrive. We measure our success
by our customers’ success.”12

7
“Target Company History,” Target, https://corporate.target.com/about/history, accessed July 27, 2015.
8
“About Kroger,” Kroger, www.thekrogerco.com/, accessed July 27, 2015.
9
“WalMart Business and Strategy,” Walmart, http://stock.walmart.com/investors/our-strategy/default.aspx, accessed July 27,
2015.
10
“Why Become a Member, Costco,” Costco, www.costco.com/membership-information.html, accessed July 27, 2015.
11
“Amazon Investor Relations,” Amazon, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-irhome, accessed July
27, 2015.
12
“Who Are We, eBay Inc.,” eBay, www.ebayinc.com/our-company/who-we-are/ <--, accessed July 27, 2015.
Page 5 9B15A045

EXHIBIT 2: SELECTED DATA FOR SIX MAJOR “RETAILERS”

US $ Millions Thousands
Total Total Stockholders’ Net Market
2013 Assets Liabilities Equity Inventories Sales Income Value Employees
Target $44,553 $28,322 $16,231 $8,766 $72,596 $1,971 $35,849 366
Kroger $29,281 $23,886 $5,384 $5,651 $98,375 $1,519 $18,339 375
Walmart $204,751 $121,921 $76,255 $44,858 $474,259 $16,022 $241,440 2,200
Costco $30,283 $19,271 $10,833 $7,894 $105,156 $2,039 $48,869 184
Amazon $40,159 $30,413 $9,746 $7,411 $74,452 $274 $183,045 117
eBay $41,488 $17,841 $23,647 $0 $16,047 $2,856 $70,995 34

Total Total Stockholders’ Net Market

2014 Assets Liabilities Equity Inventories Sales Income Value Employees
Target $41,404 $27,407 $13,997 $8,790 $72,618 -$1,636 $47,126 347
Kroger $30,556 $25,114 $5,412 $5,688 $108,465 $1,728 $33,627 400
Walmart $203,706 $117,769 $81,394 $45,141 $483,521 $16,363 $274,315 2,200
Costco $33,024 $20,509 $12,303 $8,456 $112,640 $2,058 $52,995 195
Amazon $54,505 $43,764 $10,741 $8,299 $88,988 -$241 $144,313 154
eBay $45,132 $25,226 $19,906 $0 $17,902 $46 $68,691 37

Source: Company annual reports as collated by Compustat, accessed July 27, 2015 using Wharton Research Data Services.