Problem 1: Business Models and Financial Footprints With its iconic logo and brand name recognized nearly

everywhere, The Coca-Cola Company is the world’s largest nonalcoholic beverage company. In addition to Coke, Diet
Coke, Fanta, and Sprite, the company manufactures and markets Minute Maid orange juice and Dasani water.
Coca-Cola products are carried on the shelves of Costco Wholesale Corporation, a discount retailer with over
750 membership warehouses in North America, Europe, and Asia. Costco offers its members low prices on both branded
and private label products and focuses on high volume products.
Coca-Cola products are also carried at the counters of Domino's Pizza, Inc. Domino’s Pizza, Inc.operates as a
pizza company in the United States and internationally. The company offers pizzas and other fast-food items under the
Domino's brand name through company-owned and, primarily, though franchised stores, with 18,800 total stores in 90
markets. Note that Domino’s charges fees and sells products on credit to its franchisee customers.

Company A Company B Company C

Return on assets 30.54% 8.45% 10.40%
Operating margin 17.91% 3.69% 26.70%
Days sales outstanding 21 3 31
Days inventory outstanding 8 30 79

Required:
Using the ratios above, identify each company, and provide at least one reason for your choice. Note that these ratios are
for 2021.

Problem 2: Cash Conversion Cycle – Wayfair Founded by engineers in 1995, Wayfair Inc. has become a popular e-
commerce furniture and home goods retailer. The company’s most recent annual report (Form 10-K, Item 1) includes this
description of its strategy:

Wayfair is one of the world's largest online destinations for the home. Through our e-commerce platform, we offer
customers visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over 40
million products from over 20 thousand suppliers. We are focused on bringing our customers an experience that is at the
forefront of shopping for the home online. Wayfair customers span a wide range of demographics, with annual household
income ranging from $25,000 to over $250,000, and also include business professionals. We have built one of the largest
online selections of furniture, décor, housewares and home improvement products in order to appeal to our customers’
different tastes, styles, purchasing goals and budgets when shopping for their home. We are able to offer this vast selection
of products because we hold minimal inventory. We specialize in the home category, and this has enabled us to build a
shopping experience and logistics infrastructure that is tailored to the unique characteristics of our market.

Required:

Using the most recent financial statements provided below, answer the following questions.

a. Calculate cash conversion cycle and its components for Wayfair in 2022. Explain briefly what the metrics tell you
about the financial consequences of Wayfair’s strategic choices.
1. Days receivables (sales) outstanding
2. Days inventory outstanding
3. Days payables outstanding
4. Cash conversion cycle

b. In all three years shown, Wayfair’s operating cash flow exceeds its reported net income (loss). Identify and explain
briefly the causes for that difference between net income (loss) and net cash flows from operations. Be prepared to
discuss whether Wayfair’s negative operating cash flow in 2022 would cause concern.
 WAYFAIR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,

2022 2021 2020

(in millions, except per share data)

$ $
Net revenue 12,218 13,708 $ 14,145

Cost of goods sold 8,802 9,813 10,033

Gross profit 3,416 3,895 4,112

Operating expenses:

Customer service and merchant fees 632 584 510

Advertising 1,473 1,378 1,412

Selling, operations, technology, general and administrative 2,625 2,015 1,826

Impairment and other related net charges 39 12 —

Restructuring charges 31 — 4

Total operating expenses 4,800 3,989 3,752

(Loss) income from operations ( 1,384 ) ( 94 ) 360

Interest expense, net ( 27 ) ( 32 ) ( 146 )

Other expense, net (4) (4) (9)

Gain on debt extinguishment 96 — —

(Loss) income before income taxes ( 1,319 ) ( 130 ) 205

Provision for income taxes, net 12 1 20

$ $
Net (loss) income ( 1,331 ) ( 131 ) $ 185

WAYFAIR INC.
CONSOLIDATED BALANCE SHEETS
December 31,

2022 2021

(in millions, except share and

per share data)

Assets:

Current assets
 $
Cash and cash equivalents 1,050 $ 1,706

Short-term investments 228 693

Accounts receivable, net 272 226

Inventories 90 69

Prepaid expenses and other current assets 293 318

Total current assets 1,933 3,012

Operating lease right-of-use assets 839 849

Property and equipment, net 774 674

Other non-current assets 34 35

$
Total assets 3,580 $ 4,570

Liabilities and Stockholders' Deficit:

Current liabilities
$
Accounts payable 1,204 $ 1,166

Other current liabilities 868 1,051

Total current liabilities 2,072 2,217

Long-term debt 3,137 3,052

Operating lease liabilities, net of current 893 892

Other non-current liabilities 28 28

Total liabilities 6,130 6,189

Commitments and contingencies (Note 7)

Stockholders’ deficit:
Class A common stock, par value $ 0.001 per share, 500,000,000 shares
authorized, 82,903,862 and 79,150,937 shares issued and outstanding at
December 31, 2022 and 2021 — —
Class B common stock, par value $ 0.001 per share, 164,000,000 shares
authorized, 25,691,397 and 25,691,761 shares issued and outstanding at
December 31, 2022 and 2021 — —

Additional paid-in capital 737 337

Accumulated deficit ( 3,280 ) ( 1,949 )

Accumulated other comprehensive loss (7) (7)

Total stockholders' deficit ( 2,550 ) ( 1,619 )

$
Total liabilities and stockholders' deficit 3,580 $ 4,570

WAYFAIR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,

2022 2021 2020

(in millions)

Cash flows (for) from operating activities:

$
Net (loss) income $ ( 1,331 ) ( 131 ) $ 185

Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities

Depreciation and amortization 371 322 286

Equity-based compensation expense 513 344 276

Amortization of discount and issuance costs on convertible notes 8 7 134

Impairment and other related net charges 39 12 —

Gain on debt extinguishment ( 96 ) — —

Other non-cash adjustments 41 6 13

Changes in operating assets and liabilities:

Accounts receivable, net ( 48 ) ( 118 ) ( 15 )

Inventories ( 21 ) ( 17 ) 10

Prepaid expenses and other current assets 26 ( 28 ) ( 61 )

Other assets 1 — (1)

Accounts payable and other current liabilities ( 177 ) 9 532

Other liabilities — 4 58

Net cash (used in) provided by operating activities ( 674 ) 410 1,417

Cash flows from (for) investing activities:

Purchase of short- and long-term investments ( 430 ) ( 989 ) ( 481 )

Sale and maturities of short- and long-term investments 889 749 580
 Purchase of property and equipment ( 186 ) ( 101 ) ( 186 )

Site and software development costs ( 272 ) ( 179 ) ( 149 )

Other investing activities, net — 5 —

Net cash provided by (used in) investing activities 1 ( 515 ) ( 236 )

Cash flows from (for) financing activities:

Repurchase of common stock ( 75 ) ( 300 ) ( 380 )

Proceeds from issuance of convertible notes, net of issuance costs 678 — 2,028

Premiums paid for capped call confirmations ( 80 ) — ( 255 )

Payment of principal upon maturity of convertible debt (3) — —

Proceeds from borrowings — — 200

Repayment of borrowings — — ( 200 )

Payments to extinguish convertible debt ( 504 ) — ( 1,040 )

Other financing activities, net — (3) —

Net cash provided by (used in) financing activities 16 ( 303 ) 353

Effect of exchange rate changes on cash and cash equivalents 1 ( 16 ) 13

Net (decrease) increase in cash and cash equivalents ( 656 ) ( 424 ) 1,547

Problem 3: Cash Conversion Cycle – Home Depot and Lowe’s

Home Depot and Lowe’s are the top two home improvement companies in the world. They sell a variety of home
improvement and gardening products out of free-standing stores that are typically over 125,000 square feet in size and
carry over 30,000 items of inventory. Home Depot has 2,322 stores and Lowe’s 1,738 as of their fiscal 2022 year-end. The
two companies are very comparable in the style of stores. Neither company extends credit to its customers, but both
companies accept credit cards. An interesting difference is that Lowe’s sells all of its accounts receivable to a bank for
cash on a daily basis (thus reporting no accounts receivable), while Home Depot manages its own credit card receivables.

The “Ratio Analysis Problem Set 2 HomeDepot Lowes 2022 Data” spreadsheet contains selected income statement and
balance sheet accounts for both companies for fiscal years 2019-2022. In this exercise, we focus on their cash conversion
cycles.

Required:
a. Using the data in the spreadsheet, compute the components of the cash conversion cycle.
1. Days receivables outstanding
2. Days inventory on hand
3. Days payables outstanding
4. Cash conversion cycle
b. The cash conversion cycles for these two companies were exactly the same in 2019, but since then, they have
diverged. Which company is more liquid in 2022? Is that company necessarily performing more effectively?
c. Home Depot reports a much shorter Days Inventory Outstanding. Inventory management has been a strategic
 focus for Home Depot as explained in its most recent 10-K (Annual Report, Item 1): Read the except below to
help answer the questions that follow.

OUR SUPPLY CHAIN

We continue to focus on building best-in-class competitive advantages in our supply chain to be
responsive to our customers’ expectations for how, when and where they choose to receive our products
and services. As part of enhancing the interconnected shopping experience, we continue to invest in
expanding our supply chain network, with the goal of achieving the fastest, most efficient and most
reliable delivery capabilities in home improvement. ….
We centrally forecast and replenish the vast majority of our store products through sophisticated inventory
management systems and utilize our network of distribution centers to serve both our stores’ and
customers’ needs. Our supply chain includes multiple distribution center platforms in the U.S.., Canada,
and Mexico tailored to meet the needs of our stores and customers based on types of products, location,
transportation, and delivery requirements. These platforms include rapid deployment centers, stocking
distribution centers, bulk distribution centers, and direct fulfillment centers, among others. As part of the
expansion of our supply chain, we have invested to further automate and mechanize our rapid
deployment center network to drive efficiency and faster movement of product.
We are also continuing to expand our fulfillment network, investing in a significant number of new
fulfillment facilities to drive speed and reliability of delivery for our customers and to help us ultimately
meet our goal of reaching 90% of the U.S. population with same or next day delivery for extended home
improvement product offerings, including big and bulky products. These facilities include omni-channel
fulfillment centers, which deliver product directly to customers, and market delivery operations, which
function as local hubs to consolidate freight for dispatch to customers for the final mile of delivery, with a
focus on appliances. In fiscal 2022, we realized our goal to control more of our appliance delivery end-to-
end and began managing all of our appliance delivery volume through our market delivery operations.
….Our network is designed to create a competitive advantage with unique, industry-leading capabilities
for home improvement needs for both Pros and consumers.

1. How has Home Depot achieved its shorter days inventory on hand?
2. Compute the gross profit margins for both companies. Has Home Depot’s advantage in lower days to
sell inventory been driven by operating at a lower gross profit margin?