KMART CORPORATION

HISTORICAL ANALYSIS
FIN 6425
March 10, 2000
Debbie Hilderbrandt
Joyce Hinrichs
David Holton
Index
Note: ll dollar val!es !sed in this analysis in relation to the "inancial state#ents are in
#illions !nless other$ise noted%
Section Pages
Historical nalysis 1&'6
Appendix '(
)able 1 * Inco#e +tate#ent 1
)able 2 & ,alance +heet 2
)able ' * -ash Flo$ +tate#ent '
)able 4 * -o##on&si.e Inco#e +tate#ent 4
)able 5 * -o##on&si.e ,alance +heet 5
)able 6 * Financial /atios 6
)able ( * 0ther 1ey /atios (
/M Ind!stry Data
,iblio2ra3hy
2
Introduction
ttention 1#art sho33ers, all 140 #illion o" yo!5 1#art -or3oration is the
second lar2est disco!nt retailer in the nation and third lar2est 2eneral #erchandise
retailer% 1#art6s 3ri#ary lines o" b!siness are na#e brand and 3rivate label 2eneral
#erchandise $ith a33ro7i#ately 2,161 stores, incl!din2 100 +!3er 1#art -enters% 1#art
has a retail 3resence in all 50 states, 8!erto /ico, the 9%+% :ir2in Islands, and ;!a#%
1#art o$ns 110 stores and leases a33ro7i#ately 2,051 stores% 1#art6s 3ri#ary
co#3etitors "ro# the disco!nt retail sector incl!de <al&#art, )ar2et, +ho3=o and -ostco%
Fro# the de3art#ent store sector, J%- 8enny and +ears are the #ain co#3etitors% )he
3ri#ary "actors in #aintainin2 a co#3etitive advanta2e are 3rice, >!ality, service, 3rod!ct
#i7 and convenience%
1#art stores are 2enerally one&"loor, "reestandin2 !nits ran2in2 "ro# 40,000 to
140,000 s>!are "eet% 1#art6s diversi"ication into s3ecialty retailin2 bro!2ht it close to
ban=r!3tcy in 1??5% /estr!ct!rin2 e""orts have res!lted in the conversion o" #any older
stores into the ,i2 1#art "or#at "eat!rin2 2rocery sections, bri2hter d@cor and an
e73anded selection o" #erchandise% )hese stores "eat!re an e73anded selection o"
#erchandise incl!din2 3rivate labels s!ch as Martha +te$art, +esa#e +treet, Jaclyn
+#ith and 1athy Ireland% In addition, ne$ #ar=etin2 conce3ts "eat!rin2 the ):
celebrities /osie 06Donnell and 8enny Marshall are seen in al#ost every 1#art
co##ercial%
)he +!3er 1#art center is a ne$ store 3rototy3e "or the disco!nt retailer that
"eat!res a "!ll assort#ent o" 2roceries as $ell as a broad selection o" 2eneral #erchandise
and a33arel "o!nd at traditional 1#art stores% )he o""erin2s incl!de "resh and "ro.en
'
"ood, ba=ery and #eats% )here are also one&sto3 conveniences s!ch as video rental, hair
salons, "lorists, ban=in2, and one&ho!r 3hoto 3rocessin2% )he +!3er 1#art centers are
o3en 24 ho!rs a day and seven days a $ee=% )here $ere 102 +!3er 1#art centers as o"
1??4%
8rior to 1??6, 1#art had diversi"ied into s3ecialty retailin2 and international
o3erations in Me7ico, -anada and +in2a3ore, $hich nearly 3!t the# on the brin= o"
ban=r!3tcy% D!rin2 late 1??5 and into 1??6, they be2an a co#3any $ide restr!ct!rin2
that incl!ded the divestit!re o" these international o3erations% dditionally, in 1??(
1#art discontin!ed o3erations o" several s!bsidiaries incl!din2: ,!ildin2 +>!are, ,order
;ro!3, 0""iceMa7, +3ort6s !thority, )hri"ty 8ayless Holdin2s, Inc% -oles Myer, Atd%
and F!rr6sB,isho3s, Inc%
n additional 3art o" the restr!ct!rin2 e""ort involved the availability o" a 3rivate
label 1#art -redit -ard to credit $orthy c!sto#ers% )he credit card is o""ered tho!2h
,ene"icial National ,an= 9+ $ho no$ o$ns the acco!nts receivables and !nder the
ter#s o" the 3!rchase a2ree#ent, retains all o" the credit ris= associated $ith the credit
card%
1#art over the last "e$ years have been restr!ct!rin2 their or2ani.ation and as a
res!lt has beco#e the second lar2est disco!nt retailer in the nation% )his restr!ct!rin2 has
not been $itho!t "inancial cost in their 3er"or#ance% 1#art6s 3er"or#ance over the
1??6&1??4 3eriod $ill be e7a#ined in detail in the re#ainin2 sections o" the 3a3er%
Financial ratios are calc!lated "ro# inco#e state#ents and balance sheets to
eval!ate 1#art6s #ana2e#ent o" assets to 3rod!ce reven!e% )he ratios $ere co#3ared to
ind!stry avera2es cited "ro# the /obert Morris ssociates C/MD "or the year 1??4%
4
1#art, <al&Mart, and )ar2et have ca3t!red 40E o" the disco!nt retail #ar=et share%
-onse>!ently, the !33er >!artile sho!ld be !sed to analy.e 1#art6s "inancial 3osition%
Ho$ever, /M co##on si.e n!#bers 2enerate the #edian ratios% )here"ore, this
analysis !ses the #edian ratios to ens!e 3ro3er co#3arison to the ind!stry n!#bers%
<here /M data $as not available, #edian 3eer co#3arisons "ro# <al&Mart, )ar2et,
+ho3=o, #es and -ostco $ere !sed 3rovided by ,an= o" #erica /etail 8eer nalysis
"or 1??4% )he re#ainder o" the 3a3er $ill e7a#ine these "inancial ratios to 3rovide a
bench#ar= and trend analysis "or 1#art "or the "iscal years 1??6&1??4% CNote: +ee
33endi7 "or )ables 1&( "or "inancial state#ents and ratio calc!lationsD%
5
Ratio Analysis
Liquidity Ratios
Ai>!idity ratios #eas!re a "ir#6s ability to #eet its "inancial obli2ations% )he
overall health o" a "ir# has traditionally been #eas!red by these ratios% )he !se"!lness o"
li>!idity ratios is no$ chan2in2 as #ore co#3anies are holdin2 "e$er c!rrent assets to
2enerate reven!e% )hese ratios are still a 2ood #eas!re "or this ind!stry beca!se the
disco!nt retail ind!stry does rely on a lar2e a#o!nt o" c!rrent assets to 2enerate reven!e%
)he #eanin2 o" hi2h and lo$ ratios are F!d2ed based on the relevant ind!stry nor#s%
Current Ratio
Current Ratio = )otal -!rrent ssets
)otal -!rrent Aiabilities
Ite#s in this table re3resent 3ercenta2es o" total assets%
Account 1996 1997 1998 RA
-ash G H>!ivalents 2%44E '%6(E 5%01E 14%'E
Merchandise Inventories 45%11 46%?6 46%14 '6
0ther -!rrent ssets 6%?1 4%51 4%12 %4
Total Current Assets 54.9% 55.14% 55.27% 53.60%
-!rrent Mat!rities o" Aon2&ter# debt 1%0?E %54E %54E 2E
)rade cco!nts 8ayable 14%06 14%14 14%45 1(%'
ccr!ed 8ayroll G 0ther Aiabilities ?%0? (%45 ?%5? (%?
)a7es other than inco#e ta7es %?( 1%54 1%4( NB
Total Current Liabilities 25.21% 24.15% 26.06% 33.8%
Current Ratio 2.15 2.28 2.12 1.6
)he c!rrent ratio is a #eas!re o" total c!rrent assets to total c!rrent liabilities%
)his indicates a "ir#6s ability to #eet its c!rrent obli2ations $ith cash, inventories or
6
other li>!id c!rrent assets% hi2h ratio !s!ally indicates that a "ir# is better able to #eet
liability obli2ations%
!enc"#ar$%
1#art6s c!rrent ratio is 2(E above the ind!stry nor#% It a33ears that 1#art is in a
better 3osition to #eet its obli2ations than the ind!stry% )he co#3any6s co##on si.ed
state#ents relative to the ind!stry can e73lain this relation to the ind!stry% -!rrent assets
are 'E 2reater than the ind!stryI $hile the c!rrent liabilities are 2'E lo$er than the
ind!stry% )h!s, the c!rrent ratio is 2reater than the ind!stry%
closer loo= into the ele#ents o" the ratio indicates a heavy reliance on
inventory, $hich is 24E above the ind!stry nor#% )he co#3any also has in co#3arison
to the ind!stry lo$ cash balances C64E lessD% 1#art6s c!rrent assets are 'E 2reater than
the ind!stry% )he #ost si2ni"icant "eat!re o" c!rrent liabilities is trade acco!nts 3ayable
at 16E less than the ind!stry% In addition, c!rrent #at!rities o" lon2 ter# debt o" accr!ed
3ayroll are less then the ind!stry in relative co##on&si.e "i2!res% )h!s, the c!rrent
liabilities o" 1#art are 2'E lo$er than the ind!stry% ltho!2h 1#art is carryin2
si2ni"icantly less c!rrent liabilities it is also carry #!ch less cash and #!ch #ore
inventory than the ind!stry%
Ho$ever, 1#art6s cash #ana2e#ent a33ears to be ade>!ate even $ith the stated
lo$er cash balances% In revie$in2 the cash "lo$ state#ent, net cash a"ter o3erations $as
a 3ositive J2,011M "or "iscal year end 1??4% 1#art had ade>!ate cash "lo$ covera2e to
3ay their c!rrent #at!rities o" lon2 ter# debt, interest e73ense and inco#e ta7 e73ense%
1#art6s net ca3ital e73endit!res o" J1,11'M $ere also covered by cash "lo$% 1#art6s
re#ainin2 cash balance $as J(10M "or the year 1??4% Ho$ever, it is i#3ortant to note
(
that net cash "lo$ o3erations had been on a 52E decline "or the three year 3eriod 1??6&
1??4% In addition, 1#art has a revolvin2 credit a2ree#ent o" J2%5 billion that 3rovides
1#art the contin!ed "le7ibility in their cash #ana2e#ent 3ractices%
)a=in2 into consideration both co##on si.e and cash "lo$ state#ents it a33ears
that inventory #ana2e#ent #ay be the 3ri#ary 3roble#% s seen later in the inventory
ratios, 1#art holds above the avera2e nor# o" inventory res!ltin2 in their hi2her costs o"
2oods sold% In order to better eval!ate 1#art6s li>!idity, the >!ic= ratio $ill be revie$ed
belo$%
&rend%
)he c!rrent ratio over the last three years has re#ained stable d!e to the stability
o" the c!rrent assets and c!rrent liabilities as a 3ercenta2e o" total assets% -!rrent assets
2re$ 1E $hile c!rrent liabilities 2re$ 2E over the entire 3eriod and th!s, the 1??4 ratio
is so#e$hat less than the 1??6 ratio%
'uic$ Ratio
'uic$ Ratio = -ash and H>!ivalents & Inventory
)otal -!rrent Aiabilities
Account 1996 1997 1998 RA
-ash G H>!ivalents 2%44E '%6(E 5%01E 14%0'E
)rade cco!nts receivable 0 0 0 2%5
0ther -!rrent ssets 6%?1 4%51 4%12 %4
Total Current Assets less inventory 9.72% 8.18% 9.13% 17.6%
-!rrent Mat!rities o" Aon2&ter# debt 1%0?E %54E %54E 2%0E
)rade cco!nts 8ayable 14%06 14%14 14%45 1(%'
ccr!ed 8ayroll G 0ther Aiabilities ?%0? (%45 ?%5? (%?
)a7es other than inco#e ta7es %?( 1%54 1%4( NB
Total Current Liabilities 25.21% 24.15% 26.06% 33.8%
ui!" Ratio .38 .34 .35 .4
4
)he >!ic= ratio is considered a #ore acc!rate #eas!re o" a "ir#6s ability to #eet
its c!rrent liabilities% In calc!latin2 this ratio, inventory is s!btracted "ro# the total
c!rrent assets beca!se it is the #ost co##only in"lated and least li>!id c!rrent asset%
!enc"#ar$%
1#art6s >!ic= ratio o" %'5 relative to the ind!stry ratio o" %4 indicates that the
co#3any is reliant on inventory to #eet its obli2ations% 1#art6s c!rrent assets #in!s
inventory is ?%1'E o" total assets in co#3arison to the ind!stries 1(%6E% )his reliance
!3on inventory to #eet c!rrent obli2ation is !s!ally a bad sit!ation% 1#art6s lo$er >!ic=
ratio co#3ared to the ind!stry can be "!rther e73lained by the "act that 1#art6s inventory
re3resents 4'E o" its c!rrent assets, $hich is si2ni"icantly hi2her than the ind!stry
avera2e o" 6(E%
)he c!rrent liabilities are lo$er than the ind!stry and have been disc!ssed
3revio!sly in the c!rrent ratio% <hile, the c!rrent liabilities is only 2'E less than the
ind!stry, the c!rrent assets #in!s inventory is 44E is less than the ind!stry%
-onse>!ently, the >!ic= ratio is less than the ind!stry by 12%5E%
&rend%
)he >!ic= ratio over the last three years overall has re#ained stable d!e to the
stability o" the c!rrent assets and c!rrent liabilities as a 3ercenta2e o" total assets%
Ho$ever, $ith a 6E dro3 in c!rrent assets #in!s inventory and a 2E increase in c!rrent
liabilities, the ratio has sli2htly declined over the three year 3eriod% In addition to
li>!idity ratios, asset #ana2e#ent ratios $ill hi2hli2ht the co#3any6s stren2ths and
$ea=nesses%
?
anage#ent Ratios
Sales Recei(a)le Ratio
Sales * Recei(a)le = Net +ales
)rade /eceivables
)his ratio #eas!res the n!#ber o" ti#es receivables t!rn over in a year relative to
sales% )his deter#ines the ti#e bet$een a sale and act!al collection% )he credit ter#s
and >!ality o" receivables can be #eas!red !sin2 this ratio relative to the ind!stry%
nother $ay to vie$ this ratio is in the n!#ber o" days the receivable re#ains on the
co#3any6s boo=s% )his ratio $ill be disc!ssed $ith the Days in cco!nts /eceivable
ratio belo$%
+ays Recei(a)le Ratio
+ays Recei(a)les K '65
+alesB /eceivables /atio
Day6s /eceivables ratio tells ho$ #any days on avera2e it ta=es to collect on
sales% I" this n!#ber is hi2h, it indicates that there are so#e acco!nts that are a2in2 and
#ay never be collected% It #ay also indicate loose credit 3olicies and 3oor collection
3rocesses% In so#e e7tre#e cases, it can reveal 3oor internal controls and 3rocesses in
acco!ntin2 s!ch as cash collection and reconcile#ent o" acco!nts% 1#art does not carry
any acco!nt receivable d!e to the sale o" their credit card to ,ene"icial National ,an=
9+% ccordin2 to the ter#s o" the sale, ,ene"icial retains all credit ris= "or credit card
receivables% ,eca!se o" 1#art6s .ero trade receivables these ratios are not relevant to o!r
analysis other than to note that 1#art is aty3ical o" their 3eers%
10
In(entory ,ro-t"
Account 1996 1997 1998 RA
Inventory 3ercent to total assets 44%44E 46%?6E 46%14E '6%00E
Inventory J6,'54M J6,'6(M J6,5'6M NB
#nventory $ro%t& '(A .20% 2.65% '(A
Inventory has re#ained relatively stable "or the 3ast three years% Ho$ever, in
co#3arison to the ind!stry as seen in the above table, they are holdin2 e7cessive
inventory% Inventory days on hand Cinventory t!rnoverD is a33ro7i#ately '0 days
C4%067D 2reater than Cless thanD the ind!stry avera2e o" 61 days C5%0D as seen belo$%
Cost o. Sale In(entory Ratio
Cost o. sales * In(entory = -ost o" sales
Inventory
Account 1996 1997 1998 RA
-ost o" 2oods sold ((%54E (4%15E (4%16E 6(%60E
Inventory 44%44E 46%?6E 46%14E '6%00E
Cost o) *ales(#nventory Ratio 3.84 3.95 4.06 5.0
)his ratio #eas!res the n!#ber o" ti#es inventory is t!rned over d!rin2 the year
in ter#s o" dollars% Hi2h and lo$ t!rnover relative to the ind!stry co!ld #ean either
3oor inventory #ana2e#ent Chi2h t!rnoverD or 3oor !tili.ation o" related reso!rces Clo$
t!rnoverD%
+ays In(entory Ratio /I01+234
+ays In(entory K '65
-ost o" +alesBInventory
11
Account 1996 1997 1998 RA
)!rnover /atio '%44 '%?5 4%0' 6%0
/I01+234 95.09 92.40 90.64 73
Inventory days on hand #eas!res ho$ lon2 the co#3any holds inventory be"ore it
is sold% 1#art6s ?0%64 days is C14 days lon2er than the ind!stryD sho$s a very serio!s
3roble# that ri33les thro!2h the entire co#3any6 "inancial state#ents and o3erations%
)his ratio s!33orts 3revio!s evidence that the co#3any is e73eriencin2 inventory control
and #ana2e#ent 3roble#s%
!enc"#ar$%
)he cost o" sales is 15E hi2her than the ind!stry avera2eI a si2ni"icant di""erence
that co!ld be attrib!ted to a 3oor distrib!tion syste#, 3oor sales #ana2e#ent and
ine""ective 3!rchasin2 3ractices% Inventory is 24E above the ind!stry avera2e indicatin2
1#art #ay be e73eriencin2 inventory #ana2e#ent 3roble#s% +ince inventory e7ceeds
the ind!stry by a 2reater #a2nit!de than cost o" sales e7ceeds the ind!stry, the cost o"
salesBinventory ratio is less than the ind!stry and as a res!lt inventory days on hand is
2reater than the ind!stry avera2e%
&rend%
Inventory days on hand has been declinin2 d!e to a (%?E 2ro$th in cost o" sales
vers!s a 2%?E 2ro$th in inventory over the 1??6&1??4 3eriod%
Cost o. Sales Paya)les Ratio
Cost o. Sales * Paya)les = -ost o" sales
)rade 8ayables
Account 1996 1997 1998 RA
-ost o" +ales 77.58% 78.15% 78.16% 67.60%
cco!nts 8ayables * )rade 14.06% 14.18% 14.45% 17.30%
Cost o) *ales +ayable Turnover Ratio 12.14 13.08 12.86 10.9
12

)his #eas!re#ent o" li>!idity #eas!res the n!#ber o" ti#es acco!nt 3ayables
t!rnover in one year and can 3rovide n!#ero!s insi2hts into the o3erations o" a co#3any
incl!din2 ho$ $ell they are $or=in2 $ith vendors in its s!33ly chain% do$n$ard
trend or a lo$ ratio co#3ared to ind!stry standard #ay be indicative o" cash "lo$
3roble#s or t!r#oil bet$een the cor3oration and its s!33liers%
+ays Paya)le Ratio /AP+234
AP+23 K '65
-ost o" +alesB8ayables
Account 1996 1997 1998 RA
-ost o" +ales 77.58% 78.15% 78.16% 67.60%
8ayable )!rnover /atio 12.14 13.08 12.86 18.6
A+,-. 30.06 27.91 28.39 33.0
)he cost o" salesB3ayable ratio is !tili.ed to derive the n!#ber o" days 3ayable
$hich 3rovides a #eas!re#ent o" the len2th o" ti#e bet$een the 3!rchase on acco!nt and
the ti#e the acco!nt is settled% It is not !nco##on "or co#3anies to ta=e liberties $ith
the 3ay#ent o" acco!nts, stretchin2 the credit ter#s or ridin2 their trade%
!enc"#ar$%
-ost o" sales is trendin2 !3$ards to (4%16E in 1??4 $hich is 16E above ind!stry
avera2e% s seen in the acco!nts 3ayable co##on si.e 3ercenta2es, 1#art is holdin2
a33ro7i#ately 16%5E lo$er on avera2e than the ind!stry standard% +ince the cost o" sales
is 2reater than ind!stry avera2e and acco!nts 3ayables are less than the ind!stry avera2eI
1'
cost o" salesB3ayable ratio "or 1#art is 2reater than the ind!stry and acco!nts 3ayable
days on hand is less than the ind!stry%
&rend%
-ost o" sales has 2ro$n (%?E over 1??6&1??4 $hile acco!nts 3ayable increased
1%?E over the sa#e 3eriod% s a res!lt, the t!rnover 2ot lar2er and the days 2ot s#aller
over the three year 3eriod% 8er notes to the 1??4 "inancial state#ents, 1#art re3orted
hi2her 3ro#otional and occ!3ancy cost as a contrib!tin2 "actor "or the increase in cost o"
sales% ,eca!se 1#art is 3ayin2 their trade 3ayables 4%61 days >!ic=er than the ind!stry
1#art is !sin2 a33ro7i#ately J'1? #ore cash than they $o!ld i" they $ere #ore in&line
$ith the ind!stry avera2e o" '' days%
1#art6s acco!nts 3ayable days on hand are less than the ind!stry avera2e% )hey
are 3ayin2 an avera2e o" 14E "aster, $ith an avera2e o" 2? days relative to the ind!stries
'' days%
2perating Cycle
cco!nts /eceivable Days on Hand C/D0HD L Inventory Days on Hand CIN:D0HD
Cas" Con(ersion Cycle
cco!nts /eceivable Days on Hand C/D0HD L Inventory Days on Hand CIN:D0HD *
cco!nts 8ayable Days on Hand C8D0HD
5le#ents 1996 1997 1998 RA
/D0H 0 0 0 2
IN:D0H ?5%0? ?2%40 ?0%64 ('
8D0H '0%06 2(%?1 24%'? ''
-/eratin0 Cy!le 95.09 92.40 90.64 75
Cas& Conversion
Cy!le
65.02 64.49 62.25 42
14
2perating Cycle
)he o3eratin2 cycle is the ti#e to ac>!ire or to #an!"act!re inventory, sell the
3rod!ct and collect the cash% )he o3eratin2 cycle is !s!ally less than one year "or #ost
ind!stries% s seen in the 1#art6s o3eratin2 cycle o" ?0%64 days and the ind!stry
standard o" (5 days, the disco!nt retail ind!stry is an e7a#3le o" a shorter o3eratin2
cycle%
!enc"#ar$%
1#art6s o3eratin2 cycle is 20%45E lon2er than the /M ind!stry avera2e% )he
o3eratin2 cycle "or 1??4 is ?0%64 days in co#3arison to the ind!stry o" (5 days%
&rend%
Inventory days on hand has been declinin2 d!e to a (%?E 2ro$th in cost o" sales
vers!s a 2%?E 2ro$th in inventory over the 1??6&1??4 3eriod $hich has ca!sed the
o3eratin2 cycle days to i#3rove the 4%64E as indicated above% s 3revio!sly stated
1#art does not retain credit ris= on their credit card receivables there"ore /D0H is
.ero%
Cas" con(ersion cycle%
)he a#o!nt o" ti#e e73ressed in n!#ber o" days re>!ired to sell inventory and collect
acco!nts receivable less the n!#ber o" days credit is e7tended by s!33liers%
!enc"#ar$%
)he cash conversion cycle is 44%21E lon2er than the /M ind!stry avera2e% )he
cash conversion cycle "or 1??4 is 62%45 days in co#3arison to the ind!stry o" 42 days%
15
&rend%
<ith IN:D0H declinin2 at 5E and 8D0H also declinin2 at 6E "or the 3eriod,
the cash conversion cycle has decreased% )he o3eratin2 cycle is, as stated above is also
lon2er than the ind!stry havin2 a 20%45E i#3act on the cash conversion cycle% 1#art6s
acco!nts 3ayable days on hand are less than the ind!stry avera2e% )hey 3ayin2 an
avera2e o" 14E "aster to 3ay, $ith an avera2e o" 2? days relative to the ind!stries ''
days% 1#artMs cash conversion cycle has i#3roved by 4%45E over the three year 3eriod
1??6&1??4, ho$ever still re#ainin2 20%45 days lon2er than the ind!stry%
Sales * 0et 6or$ing Capital Ratio
Sales * 6or$ing Capital = Net sales
Net $or=in2 ca3ital
Account 1996 1997 1998 RA
Net +ales J'1,4'(M J'2,1?'M J'',6(4M
+ee note
)otal -!rrent ssets 54%1'E 55%14E 55%2(E 5'%60E
)otal -!rrent Aiabilities 25%21E 24%15E 26%06E ''%40E
Net <or=in2 -a3ital 24%?2E '0%??E 2?%21E 1?%40E
*ales('et 1or"in0 Ca/ital Ratio 7.61 7.66 8.14 12.7
Note: /M sales data $as not in3!t beca!se it $as not co#3arable to 1#art $hich is one o" the
to3 three retailers #a=in2 !3 40E o" the disco!nt retail #ar=et share%
)his ratio 3rovides a #eas!re#ent o" ho$ $ell $or=in2 ca3ital, the di""erence
bet$een c!rrent assets and c!rrent liabilities, is bein2 !tili.ed $ithin the or2ani.ation% In
essence this ratio tells !s "or every dollar o" ne$ $or=in2 ca3ital invested in 1??4 J4%12
o" sales $ere 2enerates reven!es co#3ared to the ind!stry J12%40 in sales% )he lon2&
ter# s!rvival o" an or2ani.ation is 3artially de3endent on ho$ $ell it #ana2es c!rrent
16
o3erations% )he "ir# #!st strate2ically 3lan "or a tar2eted ran2e o" c!rrent assets and
3lan "or their "inancin2%
!enc"#ar$%
)he salesBnet $or=in2 ca3ital ratio has trac=ed belo$ the ind!stry avera2e "or the
3ast three years% )he ratio has increased "ro# (%617 in 1??6 to 4%147 in 1??4 in
co#3arison to 12%(7 to the ind!stry% +alesBnet $or=in2 ca3ital ratio is '5%?1E lo$er than
the ind!stry%
-!rrent assets are sli2htly hi2her than the ind!stry $hile c!rrent liabilities $ere
2?E lo$er than the ind!stry standard% s a res!lt, 1#art6s sales to net $or=in2 ca3ital
ratio is less than the ind!stry% )his dis3arity in c!rrent assets and c!rrent liabilities
relative to the ind!stry co!ld indicate that "inancin2 o" c!rrent assets #ay be ta=in2 3lace
$ith lon2& ter# liabilities% s a res!lt o" 1#art6s net $or=in2 ca3ital is 44E 2reater than
the ind!stry% )his lar2e net $or=in2 ca3ital is drivin2 the ratio do$n relative to the /M
ind!stry avera2e%
)he $or=in2 ca3ital o" the disco!nt store ind!stry can "l!ct!ate d!e to seasonal
levels net o" trade acco!nts 3ayable, 3ro"itability, and the level o" store o3enin2s and
closin2s% 1#art ended 1??4 $ith an increase in its n!#ber o" stores "or the "irst ti#e in
"ive years% 1#art6s 3ri#ary so!rces o" $or=in2 ca3ital are cash "lo$s "ro# o3erations
and borro$in2s !nder its credit "acilities%
&rend%
+ales increased by (E, $hile net $or=in2 ca3ital only increased by%2E "or the
1??6&1??4 3eriod, res!ltin2 in an increase in the salesBnet $or=in2 ca3ital ratio%
1(
Sales * 0et 7ixed Assets
Account 1996 1997 1998 RA
Net +ales J'1,4'(M J'2,14'M J'',6(4M
+ee note
Net Fi7ed ssets '4%4EB J5,(40M 40%2EB J5,4(2M 40%4EB J5,?14M '(%5E
'et *ales('et 2i3e4
Assets Ratio
5.48 5.88 5.69 8.5
Note: /M sales data $as not in3!t beca!se it $as not co#3arable to 1#art $hich is one o" the
to3 three retailers #a=in2 !3 40E o" the disco!nt retail #ar=et share%
)his ratio sho$s the e""ectiveness o" the !se o" "i7ed assets in a b!siness to
3rod!ce sales% )here is not a serio!s distortion in the yearly ratios "ro# year to year,
$hich re3resents "i7ed assets not bein2 lar2ely de3reciated or "i7ed assets are bein2
re3lacedBadded at the sa#e rate as de3reciation% +!r3risin2ly, the intense !se o" labor in
this "or# o" b!siness has not a""ected or distorted the ratios "ro# year to year% <hen
co#3ared to the ind!stry the ratio is considerably lo$% )his #ay be the res!lt o" an over
invest#ent o" its "i7ed assets or a lar2e a#o!nt o" leasehold i#3rove#ents% +ince
leasehold i#3rove#ents can only be de3reciated on a strai2ht&line basis and not at an
accelerated basis% I" 1#art held a lar2e 3ercenta2e o" leasehold i#3rove#ents vers!s the
3ercenta2e o" b!ildin2s, the net "i7ed assets $o!ld be lar2er than their 3eers attrib!tin2 to
the discre3ancy in the ratio%
-are #!st be ta=en $hen !sin2 this ratio to co#3are other "ir#s% In"lation #ay
have ca!sed the val!es o" so#e o" the older assets to be serio!sly !nderstated% 0lder
assets #ay have also been de3reciated by a 2reater a#o!nt% )he res!lt o" s!ch a
co#3arison is that an older "ir# $ho ac>!ired its assets years a2o at lo$er 3rices #ay
14
have a hi2her t!rnover ratio o" "i7ed assets% In addition, "ir#s !sin2 an accelerated
de3reciation vers!s a strai2ht&line #ethod $o!ld have a hi2her t!rnover ratio%
!enc"#ar$%
Net "i7ed assets are 40%4E to total assets $hile the ind!stry is only '(%5E%
,eca!se o" 1#art6s reliance on net "i7ed assets relative to the ind!stry, the net salesBnet
"i7ed assets ratio is ''%06E lo$er than the ind!stry%
1#art leases ?5E o" all their "acilities $hile the 3eers in the ind!stry o$n the
#aFority o" their "acilities% It a33ears that d!e to this o$nershi3 di""erence, the 3eers in
the ind!stry are able to de3reciate their "i7ed assets on an accelerated de3reciation
#ethod vers!s the strai2ht&line a#orti.ation on leasehold i#3rove#ents !sed by 1#art%
s a res!lt, 1#art6s net "i7ed assets are hi2her than the ind!stry as 3revio!sly stated
above% /e"er to above Net Fi7ed ssetsB)an2ible Net <orth ratio "or "!rther details
re2ardin2 Net "i7ed ssets%
&rend%
+ales increased by (E $hile net "i7ed assets increased by '%?E over the three
year 3eriod% s a res!lt, salesBtotal net "i7ed assets has increased over the three year
3eriod% +ales increased "aster than 1#art6s net "i7ed assets is a2ain indicative o" 1#art6s
leasin2 rather than o$nin2 stores%
0et Sales * &otal Assets
Account 1996 1997 1998 RA
Net +ales $31,437M $32,183M $33,674M
See noe
)otal ssets $14,286M $13,558M $14,166M
See Noe
'et *ales(Total Assets Ratio 2.20 2.37 2.38 2.6
1?
Note: /M sales and assets data $as not in3!t beca!se it $as not co#3arable to 1#art $hich is
one o" the to3 three retailers #a=in2 !3 40E o" the disco!nt retail #ar=et share%
2ain, this ratio is a #eas!re o" #ana2e#entMs ability to !tili.e its assets, in this
case all o" its assets% It a33ears that 1#art is only able to 2enerate J2%'4 vers!s their
ind!stry 3eers 2eneratin2 J2%60 in sales "or every J1 o" assets% )h!s, it a33ears that
1#art is so#e$hat less e""icient% )his ratio is sli2htly lo$er than the ind!stry avera2e
d!e to the hi2her inventory and lo$ cash balances% s stated above an e""ort sho!ld be
#ade ho$ever to increase sales vol!#e to i#3rove the ratio% nother o3tion "or
i#3rove#ent $o!ld be to i#3rove its c!rrent asset t!rnover by i#3rovin2 inventory
#ana2e#ent, $hich $ill i#3rove its total asset t!rnover, th!s i#3rovin2 the net sales&
total asset ratio%
!enc"#ar$%
)he net salesBtotal assets ratio is 4%46E less than the ind!stry avera2e%
&rend:
+ales increased by (E $hile net total assets decreased by 1E over the three year
3eriod% s a res!lt, salesBtotal net "i7ed assets has increased over the three year 3eriod by
4%14E% <ith the ne$ ,i2&1 "or#at, sales have increased $ith the introd!ction o" ne$
lines% In addition, total assets have decreased sli2htly d!e to the other assets listed on the
"inancial state#ents% )he notes to the "inancial state#ents did not incl!de an e73lanation
as to $hat is co#3rised in the other asset acco!nts, both short&ter# and lon2&ter#%
Co(erage Ratios
-overa2e ratios #eas!re the ability to service debt "ro# o3erations%
20
5!I& * Interest
5!I&*Interest = H,I)NNNN
Interest
Account*Ite# 1996 1997 1998 RA
Harnin2s ,e"ore Interest and )a7es 2.4!% 2.43% 3.24% 5.5%
Interest 1.44% 1.13% .87% .5%
56#T(#nterest Ratio 1.73 2.15 3.72 12.2
)his ratio sho$s ho$ $ell a "ir# is able to #eet interest 3ay#ents% In 1??4,
1#art6s o3eratin2 inco#e $o!ld cover their interest cost '%(2 ti#es relative to the
ind!stry nor# o" 12%2 ti#es%
!enc"#ar$%
)he H,I)BInterest ratio is '%(27 in co#3arison to the ind!stry avera2e o" 12%27%
Harnin2s be"ore interest and ta7es has trac=ed belo$ the /M avera2e "or the three&year
3eriod% In 1??4, 1#art6s H,I) $as at '%24E vers!s the ind!stry avera2e o" 5%5E% In
addition, interest has decreased by '?%6E over the 3ast three years% Ho$ever, interest
e73ense o" %4(E "or 1??4 re#ains above the ind!stry standard o" %5E% <ith H,I)
si2ni"icantly belo$ the ind!stry nor# o" interest near the nor#, the covera2e ratio is
si2ni"icantly belo$ the /M avera2e o" 12%2%
&rend%
H,I) increased '0E $hile interest decreased '?%6E over the 1??6&1??4 3eriod%
)here"ore, )IH increased by 115E% )his is "!rther validated by total debt dro33in2 "ro#
5(%5E to 50%5E o" total assets%
&otal +e)t * 5!I&
21
Account 1996 1997 1998 edian Peer
Co#parison
)otal Aiabilities 5(%50E 52%64E 50%45E NB
H,I) 2%4?E 2%4'E '%24E NB
&otal +e)t*5!I& Ratio 189:9 991; 696 :9<
)otal debt to earnin2 be"ore interest and ta7es indicates the a#o!nt o" debt the
co#3any has it relates to the H,I) Co3eratin2 inco#eD% For e7a#3le, in 1??6, 1#art had
J10%4? o" debt to every one dollar o" H,I), J?%15 and J6%60 "or 1??( and 1??4
res3ectively% In essence in 1??4, it too= J6%60 o" debt to 2enerate J1 o" o3eratin2
inco#e% )his ratio re#ains hi2h in co#3arison to the #edian 3eer co#3arison%
1#art6s i#3rove#ent by contin!ed red!ction o" total liabilities $as d!e to the !se
o" cash "ro# o3erations to 3ay do$n their ter# debt, #ort2a2e notes and #edi!# ter#
notes% )his red!ction o" liabilities $as o""set by the iss!ance o" -o##ercial Mort2a2e
8ass )hro!2h -erti"icates C-M,+D #ort2a2e loans, $hich are s!bFect to interest and
3rinci3al 3ay#ents $ith a #at!rity date o" Febr!ary 2002% )otal debt also incl!des a J2%5
billion revolvin2 credit a2ree#entI ho$ever, no o!tstandin2s $ere re3orted "or 1??6&
1??4% Ho$ever, the revolvin2 credit a2ree#ent allo$s 1#art to carry #!ch lo$er cash
balances than their 3eers%
+e)t Ser(ice Co(erage Ratio
Account 1996 1997 1998
0et Inco#e =/1894 =>98 =;68
De3reciation 654 660 6(1
#orti.ation 0 0 0
Interest H73ense 45' '6' 2?'
Total Cas& Available )or ,ebt *ervi!e 79138 7193218 7195328
-MA)D J156 J(4 J((
Interest H73ense 45' '6' 2?'
T-TAL ,56T *ervi!e 76098 74418 73708
Cas& A)ter ,ebt *ervi!e 73048 78808 7199028
22
,ebt *ervi!e Covera0e Ratio 1.49 2.99 4.14
&raditional +e)t Ser(ice% 03eratin2 Inco#e L De3rec %L #ort %L Interest H73ense
-!rrent Mat!rity Aon2 )er# Debt L Interest
H73ense
)raditional debt service covera2e is the #eas!re#ent o" a co#3any6s ability to
service its c!rrent #at!rities o" lon2&ter# debt and interest o$ed on that debt% 1#art
debt service covera2e o" 1%4?,2%?? and 4%14 "or "iscal years endin2 ?6&?4 res3ectively has
i#3roved "or the last three years% )his increase in the ratio is attrib!ted to the lar2e
2ro$th in net inco#e o" 21'%04E and 104%0'E co!3led $ith the decrease in total debt
service o" 16E%
1#art leases 2,051 o" their "acilities% )he ter#s o" the leases are 25 years $ith
#!lti3le "ive year rene$al o3tions the allo$s the co#3any to e7tend the li"e o" the lease
!3 to 50 years beyond the initial ter#% )he "ollo$in2 ratios ill!strates the co#3anies
ability to re3ay their debt ta=in2 rental e73ense or lease e73ense into consideration rather
than the traditional debt service covera2e ratio above%
5!I&+AR * Interest 5xpense ? Rental 5xpense
Account 1996 1997 1998
H,I) J(4'M J(41M J1,0?1M
De3reciation 654 660 6(1
#orti.ation 0 0 0
/entBAease H73ense 442 4(4 524
56#T,AR 7198798 7199198 7292868
Interest H73ense 45' '6' 2?'
/entalBAease H73ense 442 4(4 524
T-TAL 78958 78418 78178
56#T,AR(:#nterest ;Rent 53/ense< 2.103 2.283 2.803
2'
)his ratio re3resents the a#o!nt o" covera2e the co#3any has in order to 3ay their
interest e73ense and lease e73ense% )his ratio is addin2 bac= non&cash e73ense o"
de3reciation and a#orti.ation besides the cash e73ense o" rent to calc!late total
H,I)D/% )he contin!in2 trend is a 3ositive trend d!e to increased H,I), H,I)D/
and the decreased in total interest e73ense% )he lo$er interest e73ense is d!e to the
3aydo$n o" lon2 ter# debt, is #ore than o""settin2 the increasin2 lease e73ense%
5!I&R * Interest 5xpense ? Rental 5xpense
Account 1996 1997 1998 edian
.or
Peers
Net Inco#e J(4'M J(41M J1,0?1M NB
/entBAease H73ense 442 4(4 524 NB
56#TR 7192258 7192598 7196158 NB
Interest H73ense 45' '6' 2?' NB
/entalBAease H73ense 442 4(4 524 NB
T-TAL 78958 78418 78178 NB
56#TR(#nterest ;Rent 53/ense 1.37 1.50 1.98 3.4
)his ratio re3resents the a#o!nt o" covera2e the co#3any has in order to 3ay their
interest e73ense and lease e73ense% )his ratio does not add bac= non&cash e73enses as
seen above% )his ratio is also a standard ind!stry ratio "or disco!nt retail stores%
ltho!2h, 1#art6s ratio is trendin2 to$ards a 3ositive direction, in co#3arison to the
#edian "or the 3eers in the ind!stry that incl!deI <al&#art, Dayton H!dson, -ostco,
+ho3=o and #es, they are si2ni"icantly lo$er% )he #edian 3eer H,I) #ar2in is
a33ro7i#ately '%?E vers!s 1#art6s '%24E #ar2in% )he lo$er ratio in co#3arison to
their 3eers is attrib!ted to the lo$er H,I) #ar2in% )he 3eer analysis o" the e73ense side
o" the ratio $as not available "or co#3arative 3!r3oses "or this analysis%
24
Le(erage Ratios
Aevera2e ratios #eas!re the e7tent o" the or2ani.ation6s "inancin2 $ith debt% It is
a #eas!re#ent o" the ca3acity and ability to #eet lon2&ter# obli2ations% )he levera2e
ratios co#3are the "!nds s!33lied by b!siness o$ners $ith "inancin2 s!33lied by
creditors% )his debt "inancin2 involves ris= associated $ith the 3ay#ent o" 3rinci3al and
interest% Ho$ever, the "ir# #ay earn #ore on these invest#ents than it 3ays in interest
that res!lts in the ret!rn o" the o$ner6s ca3ital bein2 "avorably levera2ed% Debt "inancin2
also has the advanta2e o" not dil!tin2 stoc=holder o$nershi3%
7ixed * 6ort"
7ixed * 6ort" = Net "i7ed assets
)an2ible net $orth
Account 1996 1997 1998 RA
'et 2i3e4 Assets :8918@ :89<6@ :197;@ <79;8@
Net $orth 42%50E 4(%'2E 4?%15E 44%0E
Aess Intan2ible ssets 0 0 0 0
T"n#$%&e Ne 'o() 42%50E 4(%'2E 4?%15E 44E
2i3e4 Assets( T'1 0.95 0.85 0.85 0.80
)his sho$s to $hat e7tent the co#3any has invested its ca3ital into the "i7ed
assets o" 3lant and e>!i3#ent% s#aller ratio sho$s a relatively s#all invest#ent into
these "i7ed assets, 3rovidin2 #ore li>!idity "or creditors% hi2her n!#ber $o!ld
indicate a 2reater ris= to these creditors%
1#art6s Fi7edB<orth ratio is only sli2htly lar2er than the ind!stry standard and
#ay be attrib!ted to the n!#ber o" stores in the chain co#3ared to the ind!stry% 8er notes
25
to the "inancial state#ents 1#art6s "i7ed assets are co#3rised o" 40E ca3ital leases and
leasehold i#3rove#ents, and 44E is invested in "!rnit!re and "i7t!res% )he
concentration o" "i7ed assets in "!rnit!re and "i7t!res is attrib!ted to the invest#ent in the
,i2 1#art stores, $hich re>!ire additional re"ri2eration e>!i3#ent "or the 2rocery
section C)he 8antryD% s stated 3revio!sly, 1#art leases ?5E o" their "acilities also
attrib!ted to the hi2her "i7ed assets co#3ared to the ind!stry beca!se the a#orti.ation
#ethod !sed "or "inancial state#ent 3!r3oses is strai2ht&line #ethod over the esti#ated
!se"!l li"e o" the assets%
!enc"#ar$%
Net "i7ed assets are 11%'E 2reater than the /M and tan2ible net $orth is 2%4E
2reater than the /M% +ince net "i7ed assets e7ceed the ind!stry avera2e the "i7ed
assetsBtotal net $orth is 2reater C%45D than the ind!stry avera2e C%40D%
&rend%
)he tan2ible net $orth has sho$n an !3$ard trend "or the 3ast "e$ years $ith an
increase o" 15%65 E "ro# 1??6 to 1??4% )he net "i7ed assets d!rin2 the sa#e 3eriod has
only increased by '%?E% +ince the total net $orth increased "aster than net "i7ed assets
over the 3eriod, this ratio has declined%
+e)t * 6ort"
+e)t * 6ort" = )otal Aiabilities
)an2ible Net <orth
Account 1996 1997 1998 RA
)otal Aiabilities 5(%5E 52%64E 50%45E 52%00E
26
)an2ible Net <orth 42%5E 4(%'2E 4?%15E 44%0E
Total ,ebt(T'1 Ratio 1.35 1.11 1.03 1.08
)his ratio sho$s the ca3ital contrib!tion relationshi3 bet$een creditors and
o$ners and is so#eti#es re"erred to as the de2ree o" advanta2e% hi2hly levera2ed "ir#
$ill not have as #!ch "le7ibility to borro$ in the "!t!re as one $ith a hi2her debtB$orth
ratio% hi2her ratio indicates that the cor3oration is !tili.in2 a lar2e a#o!nt o" debt to
"inance its b!siness o3erations on a daily basis% It $o!ld a33ear that 1#art is #ar2inally
belo$ their 3eers in the !sa2e o" debt%
!enc"#ar$%
)otal liabilities are 2%2E lo$er than the /M ind!stry avera2e and tan2ible net
$orth is 2%4E hi2her than the /M avera2e% s a res!lt, 1#art6s debtB$orth ratio o"
1%0'7 si#ilar to the 1%047 /M avera2e%
&rend%
s a res!lt o" total liabilities decreasin2 by 12E $hile net $orth has increased by
16E over this 3eriod% 1#art6s debtB$orth ratio has i#3roved by 2'%(E d!rin2 the three
year 3eriod 1??6&1??4%
)he co#3any has 3aid do$n their lon2&ter# notes $ith cash, b!t also iss!in2
convertible 3re"erred sec!rities% )hese sec!rities are convertible to '%'' shares o" 1#art
stoc=% 1#art also has a J2%5 billion dollar /evolvin2 -redit 2ree#ent that $as
a#ended in 1??( $ith #at!rity e7tensions and red!ced interest rate s3reads% In 1??4, the
co#3any believed that its c!rrent "inancin2 arran2e#ents $o!ld be s!""icient to #eet
their li>!idity needs "or o3erations and ca3ital%
2(
Pro.ita)ility Ratios
8ro"itability ratios are a !se"!l tool in the eval!ation o" #ana2e#ent 3er"or#ance%
0et Inco#e ,ro-t" Rate
Account 1996 1997 1998
Net Inco#e JC220DM J24?M J514M
'et #n!o=e $ro%t& Rate 61% 213.18% 108.03%
Net inco#e 2ro$th rate as seen in the table above i#3roved si2ni"icantly "or
years ?6, ?( and ?4% )he loss in 1??6 is attrib!ted to a decrease o" %?E in sales "ro# the
3revio!s year $hich can be attrib!ted to the sale o" the Me7ican and -anadian
international o3erations% 1#art also closed 44 stores in 1??6, $hich $as o""set 3artially
by the o3enin2 o" 21 ne$ stores% In addition, FOH 1??6 had one less $ee= d!rin2 "iscal
year 1??6 decreased sales% In addition 1#art at FOH 1??6 re3orted a net loss o" J451
"ro# discontin!ed o3erations "ro# the sales o" the ,!ilders +>!are s!bsidiary and also
the sale o" a 3ortion o" an invest#ent in )hri"ty 8ayless Holdin2s%
Net inco#e "or 1??( increased at a rate o" 21'%14EI 3ri#arily d!e to the o3enin2
o" the ,i2 1#art stores, the introd!ction o" the Martha +te$art lines, +esa#e +treet =ids
line and increased 3ro#otional activities% )he net inco#e increase $as d!e to not only
the sales increase b!t to e73ense control% Ho$ever, #ost o" the lar2e 3ercenta2e increase
in net inco#e $as d!e to an 4'E decrease in vol!ntary early retire#ent 3ro2ra#s and a
?1E decrease in interest e73ense% +ales increased by 2%'(E "or the FOH?(% In addition,
+;G e73enses decreased by %4?E d!e to the sale o" the international o3erations and
#ana2e#ent control o" e73enses by "oc!sin2 on the core b!siness lines%
Net inco#e "or 1??4 increased a second year in a ro$ $ith the 2ro$th o"
104%0'E over 1??(% )his increase in attrib!ted to a 4%6'E 2ro$th in sales "or FOH?4
24
"ro# the ne$ ,i2 1#art store conce3t, the Martha +te$art lines, +esa#e +treet =ids line
and 3rivate label 1athy Ireland line% In addition, +;G e73enses decreased by %52E "or
the year, a2ain "or the reasons stated in the 3recedin2 3ara2ra3h%
ltho!2h 1#art is re3ortin2 not only 3ositive net inco#e levels, b!t 3ositive trends "or
the 3ast t$o years, their 2ross #ar2ins are si2ni"icantly lo$er than ind!stry as stated
above%
argins
,ross argin and 2perating argin
Account 1996 1997 1998 RA
Net +ales $31,437M $32,183M $33,67M See Noe
Aess -0;+ 77.! 77.6 78.2 67.6
$ross 8ar0in 22.42% 21.85% 21.84% 32.40%
Aess 03eratin2 H73enses 23.3% 20.0% 1!.4% 26.!%
-/eratin0 8ar0in 2.46% 2.78% 3.30% 5.50%
Note: /M sales data $as not in3!t beca!se it $as not co#3arable to 1#art $hich is one o" the
to3 three retailers #a=in2 !3 40E o" the disco!nt retail #ar=et share%
)he ;ross Mar2in and the 03eratin2 Mar2in both re3resent a co#3anyMs ability
to translate sales dollars into 3ro"it% )hese #ar2ins are calc!lated at di""erent sta2es o"
#eas!re#ent%
)he 2ross #ar2in is the relationshi3 bet$een sales and the cost o" 3rod!ct sold%
It is an acc!rate #eas!re#ent in ter#s o" the co#3anyMs ability to control costs o" 2oods
sold% -onsideration is 2iven to the co#3anyMs ability to 3ass !navoidable 3rice increases
to the c!sto#ers% In #ost recent years, 1#art has re#ained consistent in its 2ross
#ar2in, b!t it is s!bstantially lo$er than the ind!stry standard as seen above% )he lo$er
2?
2ross #ar2in can be attrib!ted to 1#artMs costs o" 2oods sold bein2 si2ni"icantly hi2her
than ind!stry standards%
)he o3eratin2 3ro"it #ar2in #eas!res overall o3eratin2 e""iciency% It incor3orates
all e73enses associated $ith the o3erations o" the b!siness% 1#art has been s!ccess"!l at
i#3rovin2 its o3eratin2 #ar2in d!e to controllin2 o3eratin2 e73enses% 03eratin2
e73enses $ere 1?%4E in co#3arison to 26%?E ind!stry avera2e% ltho!2h, the o3eratin2
e73enses $ere lo$er than ind!stry, 1#art6s o3eratin2 #ar2in o" '%'07 re#ains belo$
ind!stry avera2e o" 5%507% )his a2ain can be attrib!ted to costs o" 2oods sold e7ceedin2
ind!stry by 10%6E%
5!I&+A * Re(enue
Account 1996 1997 1998 edian Peer
Co#parison
H,I) J(4'M J(41M J1,0?1M NB
De3reciation 654 660 6(1 NB
5!I&+A =1A:<7 =1A::1 =1A76> 0*A
/even!e J'1,4'( J'2,14' J'',6(4 NB
5!I&+A * Re(enue 4.57 4.48 5.23 6.0
)he H,I)D or Harnin2s ,e"ore Interest, )a7es, De3reciation and #orti.ation
to /even!e ratio has beco#e a val!able baro#eter to a co#3anyMs s!ccess% H,I)D is a
#eas!re o" cash "lo$ "ro# the co#3any6s o3eration% )he ass!#3tion is that as H,I)D
steadily i#3roves, debt $ill be re3aid and a co#3anyMs balance sheet is acce3table and
3ortrays a s!ccess"!lly r!n b!siness% )his ratio sho$s the ra$ earnin2 3o$er o" the
b!siness%
'0
1#art has contin!ed to i#3rove this ratio and is %(( "ro# #eetin2 the P#edian
3eer co#3arisonP% )his co#3arison is #ade !3 o" the to3 si7 retailers in the ind!stry%
-ontrib!tions to 1#artMs s!ccess in this ratio incl!de better #erchandisin2 and i#3roved
inventory #ana2e#ent% -ons!#ers are attracted to this "or# o" the retail ind!stry,
beca!se o" their val!e o" brand na#es at disco!nt 3rices%
@ Pro.it !e.ore &axes * &angi)le 0et 6ort"
Ite# 1996 1997 1998 RA
Harnin2s ,e"ore )a7es 1.05% 1.30% 2.37% 5.00%
)an2ible Net <orth 42.5% 47.32% 4!.15% 48%
% 56T(T'1 Ratio 5.43% 6.52% 11.46% 31.9%
H,I) divided by tan2ible net $orth re"lects the rate o" ret!rn on tan2ible assets
$ithin an or2ani.ation% <hen co#bined $ith other ratios, it can be a !se"!l #ana2e#ent
tool b!t is #ore e""ective $hen co#3ared to other ratios that 3rovide a #ore detailed
analysis% hi2h n!#ber is !s!ally indicative o" s!ccess"!l #ana2e#ent b!t #ay be a
"alse ass!#3tion i" de2ree o" ca3itali.ation and other "actors are not considered%
!enc"#ar$%
1#art6s H,) is a33ro7i#ately 52%6E belo$ ind!stry avera2e d!e to the hi2her
-0;+, $hich also res!lted in lo$er 2ross and o3eratin2 #ar2ins% )he tan2ible net $orth
is 2%4E hi2her than the ind!stry avera2e% -onse>!ently, 1#art6s EH,)B)N< is
considerably lo$er than the ind!stry avera2e%
&rend%
1#art6s H,)B)N< has i#3roved by 111E "or the three year 3eriod endin2 1??6&
1??4% )his lar2e 2ro$th has been d!e to H,) 2ro$in2115E over the three year 3eriod
1??6&1??4 $hile )N< has only 2ro$n by 16E% Ho$ever, as stated above 1#art is still
'1
$ell belo$ the ind!stry nor#% )he !3$ard trend o" this ratio #ay be 3artially d!e to the
cor3orate 2oal to 2et the#selves in the 3osition o" bein2 able to direct lar2e a#o!nts o"
ca3ital into ne$ o33ort!nities $itho!t add debt%
Pro.it !e.ore &axes * &otal Assets
Ite# 1996 1997 1998 RA
Harnin2s ,e"ore )a7es 1.05%
$330M
1.30%
$418M
2.37%
$7!8M
5.00%
)otal ssets $14,286M $13,558M $14,166M N*A
% 56T(Total Assets Ratio 2.31% 3.08% 5.63% 12.3%
Note: /M asset data $as not in3!t beca!se it $as not co#3arable to 1#art $hich is one o" the
to3 three retailers #a=in2 !3 40E o" the disco!nt retail #ar=et share%
)his ratio is a re3resentation o" #ana2e#entMs ability to !tili.e the reso!rces
available% It e73resses the ratio o" 3re&ta7 ret!rns on total assets%
!enc"#ar$%
Harnin2 be"ore ta7es o" 2%'E is considerable lo$er than the ind!stry avera2e%
)he lo$ H,) is the #aFor "actor behind the H,)B)otal ssets ratio bein2 less than the
ind!stry% H,) is a33ro7i#ately 52%6E belo$ ind!stry avera2e d!e to the hi2her -0;+,
$hich also res!lted in lo$er 2ross and o3eratin2 #ar2ins%
&rend%
1#art6s H,)B)otal ssets ratio is trendin2 !3$ard since 1??6I earnin2s be"ore
ta7es have increased over the 1??6&1??4 3eriod by 142E $hile total assets decreased o"
1E% s a res!lt, H,)B)otal ssets has been above the ind!stry d!rin2 this 3eriod%

'2
Supple#ental Bey Industry Ratios
Sa#e Store Sales
1997 1998
1&Mart 4.8+ 4.8+
<al&Mart 6.0 !.0
Dayton&H!dson C)ar2etD 5.0 6.1
edian Peer Co#parison 4.8 6.5
+!ccess $ith c!sto#ers is #eas!red by yearly sales 2ains% )he +a#e +tore +ales
>!antitative indicator is one o" the #ost closely $atched indicators% It is de"ined as the
increase or decrease "ro# the 3recedin2 year in sales at stores that have been o3en at least
one year% Ne$ stores are e7cl!ded since "irst year o3enin2s are o"ten s3i=es in the
statistics "or co#3any6s sales history% )he sa#e store sales is an e7cellent baro#eter o"
basic de#and% )rends in this "actor 2ive a better indication o" the state o" the b!siness
rather than a sin2le #onthMs n!#ber $o!ld% 1#art has had the sa#e increase in sales "or
the last t$o years% 1#art6s sa#e store sales has re#ained sta2nant even tho!2h they
have been o3enin2 ne$ stores% )his stable ratio has been beca!se 1#art, altho!2h
o3enin2 ne$ stores, has also been closin2 stores at the sa#e ti#e in their e""ort to
restr!ct!re the co#3any%
D!e to the lac= o" an !3$ard trend in the rate o" sales 2ro$th, #ana2e#ent #ay
need to reeval!ate ne$ store 3ositions and locations, $hich can i#3act this data% )he
belo$ #edian 3eer co#3arison also re"lects sta2nation in the 2ro$th o" the co#3any as
$ell as slo$ 3ro"it $hen co#3ared to the other #aFor 3layers in the retail ind!stry%
Sales * Square 7oot /#illions4
1997 1998
1&Mart $211M $222,S-M
''
<al&Mart 347 371,.-
Dayton&H!dson C)ar2etD 230 244,S-
edian Peer Co#parison 72168 72218
,S- Desi2nates s>% "oota2e vs% ,.- 2ross
)he +ales to +>!are Foot ratio is a #eas!re#ent o" ho$ e""icient the retailer is
!sin2 its assets% It 2ives credit to the desi2nersBarchitects $ho desi2n the b!ildin2s that
ho!se the retailers as $ell as to the #ana2e#ent and #ar=etin2 sta"" $ho control its
3rod!ct 3resentation% It indicates ho$ e""ective s3ace, in this case s>!are "oota2e "or
sellin2, is !tili.ed% I" the sales 3er s>!are "oot is lo$ relative to other retailers in the sa#e
sector a 3roble# #ay e7ist% +o#e o" the "actors contrib!tin2 to this 3roble# are the sales
associateMs 3er"or#ance, the c!sto#er base or the 3hysical location o" the b!siness%
1#artMs n!#bers in this ratio are i#3ressive in that they have de#onstrated
i#3rove#ents and are 3resently sli2htly above the #edian 3eer co#3arison% It a33ears
they are !tili.in2 their assets e""ectivelyI ho$ever, their lac= o" 2ro$th overall in the
#ar=et #ay be contrib!ted to their lac= o" 3ro"itability "ro# their 3rod!ct #i7% 8lease
note: the s re"erred to in the table above denotes sellin2 s3ace 3er s>!are "oot $hile the
Q;R re3resent 2ross s>!are "oota2e% For e7a#3le: 1#art is re3ortin2 their sellin2 3er
s>!are "oota2e, Conly the s3ace !sed to sellD vers!s <al&#art is re3ortin2 their
sellin2Bs>!are "oot "ro# their 2ross store s>!are "oota2e% )he 2ross n!#ber is incl!din2
non&sellin2 s3ace, $hich in"lates <al&#art n!#bers in the 3eer co#3arison%
'4
Conclusion
)he "ollo$in2 table identi"ies =ey stren2ths and $ea=nesses identi"ied thro!2h the
historical analysis o" 1#art%
Strengt"s 6ea$nesses
Cas"% 1#art is #aintainin2 3ositive net cash a"ter
o3erations to service their debt% Ho$ever, net cash
a"ter o3erations has declined 52E over the three year
3eriod 1??6&1??4% )he cash 3osition co!ld be vie$s
as a stren2th or $ea=ness%
1#art has a J2%5 billion revolvin2 credit a2ree#ent%
Cas"% -ash balances are 64E less than the
ind!stry% In addition, net cash a"ter o3erations
has declined 52E over the three year 3eriod
1??6&1??4%
Accounts Paya)le% 8D0H is 4%61 shorter than the
ind!stry avera2e res!ltin2 in 1#art 3ayin2 14E
"aster than the ind!stry res!ltin2 in the !se o" cash o"
a33ro7i#ately J'1?%
In(entory% 1#art is carryin2 24E above the
inventory nor#% IN:D0H is 1(%64 days lon2er
than the ind!stry res!ltin2 in a lon2er o3eratin2
and cash conversion cycles res!ltin2 in the !se o"
cash o" a33ro7i#ately J1,222%
5!I&*Interest% H,I) increased '0E $hile interest
decreased '?%6E over the 1??6&1??4 3eriod res!ltin2
)IH increasin2 by 115E%
Cost o. ,oods Sold% -ost o" 2oods sold is 16E
above the ind!stry avera2e res!ltin2 in a lo$er
2ross #ar2in o" 21%44E in co#3arison to '2%40E
ind!stry avera2e% In addition, the o3eratin2
#ar2in is a""ected by cost o" 2oods sold at '%'0E
vers!s the 5%50E ind!stry avera2e%
Sales ,ro-t"% +ales 2ro$th has i#3roved (%12E
over the three year 3eriod 1??6&1??(%
Sales*net -or$ing capital ratio% +alesBnet
$or=in2 ca3ital ratio is '5%?1E 2reater than the
ind!stry% It a33ears that 1#art is "inancin2
c!rrent assets $ith lon2&ter# debt%
@5!&*&otal Assets: Harnin2s be"ore ta7es o" 2%'E
is considerable lo$er than the ind!stry avera2e% )he
EH,)B)otal ssets ratio is less than the ind!stry%
H,) is a33ro7i#ately 52%6E belo$ ind!stry avera2e
d!e to the hi2her -0;+ $hich res!ltin2 in lo$er
2ross #ar2ins and o3eratin2 #ar2ins% Harnin2s
be"ore ta7es have increased over the 1??6&1??4
3eriod by 142E%
Sa#e store sales: +a#e store sales re#ained
constant "or 1??( and 1??4 and $as lo$er C4%47D
than the ind!stry 6%57 "or 1??4%
5!I&R* Interest 5xpense?Rent 5xpense: )he
#edian 3eer H,I) #ar2in is a33ro7i#ately '%?E
vers!s 1#art6s '%24E #ar2in% )he lo$er ratio in
co#3arison to their 3eers is attrib!ted to the lo$er
H,I) #ar2in%
Sales*net .ixed assets% +ales increased by (E
$hile net "i7ed assets increased by '%?E over the
three year 3eriod% s a res!lt, salesBtotal net
"i7ed assets has increased over the three year
3eriod%
Inco#e gro-t"% Inco#e 2re$ 201E over the three
year 3eriod% Ho$ever, d!e to e73enses associated
$ith divestin2 s!bsidiaries, 1#art re3orted losses "or
"iscal year ended 1??6% In addition, 1#art boo=ed
e73enses "or early retire#ent 3ro2ra#s%
Leases (s9 2-n% 1#art leases 2,051 and o$ns
110 o" their "acilities%
+e)t Ser(ice Co(erage% Debt service covera2e is
4%147 "or 1??4 vers!s 2%??7% )his increase in the
ratio is attrib!ted to the lar2e 2ro$th in net inco#e o"
21'%04E and 104%0'E co!3led $ith the decrease in
total debt service o" 16E%
1#art6s inco#e 2re$ 201E over the 3ast three years d!e to i#3roved
#erchandise assort#ents and roll o!t o" the ,i2&1 "or#at% dditionally, the absence o" a
J114M e73ense "or vol!ntary early retire#ent $as a contrib!tin2 "actor to the inco#e
2ro$th% ltho!2h cash balances are si2ni"icantly lo$er than the ind!stry, 1#art a33ears
to #ana2e their cash 3osition $ith re3orted 3ositive net cash a"ter o3erations "or the 3ast
three years%
1#art6s 3er"or#ance is trendin2 !3$ard "or the 3ast three years in co#3arison to
1??5 $hen they $ere on the ver2e o" ban=r!3tcy% +ales have contin!ed to increase an
avera2e (%12E "or the 3ast three years% In addition, 1#art has red!ced interest e73ense
thro!2h debt restr!ct!rin2 and 3ay do$ns o" lon2&ter# debt% ltho!2h 1#art is
i#3rovin2 their debt str!ct!re, asset #ana2e#ent 3ractices co!ld be i#3roved%
1#art6s 3ri#ary $ea=ness is their inventory #ana2e#ent 3ractices% s seen in
the analysis and above table, inventory has sli2htly declined in the 3ast year, ho$ever
they are still above the ind!stry avera2e by 24E% In addition, cost o" 2ood sold is 16E
hi2her than the ind!stry% )his has res!lted in a hi2her IN:D0H by 1(%64 days 2reater
than the ind!stry res!ltin2 in an e""ect o" J1,222M% 1#art6s #ana2e#ent needs to "oc!s
on e7a#inin2 the 3roble# in inventory #ana2e#ent control% Inventory #ana2e#ent is a
critical as3ect in the disco!nt retail ind!stry beca!se it is their 3ri#ary so!rce o" reven!e
2eneration% In addition, 1#art is 3ayin2 their trade 3ayables "aster than the ind!stry by
4%61 days res!ltin2 in a J'1? !se o" cash%
1#art leases ?5E o" their "acilities% )he re#ainin2 co#3etitors in the ind!stry
o$n the #aFority o" their "acilities% ,eca!se o" di""erences in de3reciation #ethods o"
strai2ht&line a#orti.ation CleasesD and accelerated Co$nin2 the b!ildin2D, 1#art6s net
'6
"i7ed assets are hi2her than the ind!stry% 1#art has si2ned 25 year leases $ith 5 year
rene$able o3tions% It a33ears the ne$ store o3enin2 are bein2 bo!2ht, rather than leased,
and are incl!ded in the 110 stores o$ned%
1#art6s sa#e store sales are also lo$er than the ind!stry ca!sed by recent store
closin2s and o3enin2s% 1#art has closed #any stores, $hile o3enin2 others !tili.in2 the
+!3er 1 centers% s a res!lt, 1#art6s ratio has been biased do$n since the ne$ stores are
not incl!ded in the ratio% )his disco!nt retail ind!stry ratio s!btracts o!t the c!rrent year
sales o" the ne$ stores to deter#ine sa#e store sales% )his ratio ens!res that ne$ store
o3enin2 do not in"late store sales "i2!res each year% )here"ore, this ratio is a critical 3art
o" historical analysis "or the disco!nt retail ind!stry%
)his historical analysis 3rovides a "inancial overvie$ o" the co#3anies
3er"or#ance over the 3ast three years 1??6&1??4% )he #ain stren2ths and $ea=nesses o"
1#art are identi"ied in the above table, $hich $ere validated in the ratio analysis
thro!2ho!t the 3a3er% )he "o!rth sta2e o" this ind!stry analysis 3roFect $ill 3rovide
3roFections "or the ne7t three year 3eriod%
<e e73ect 1#art to 2ro$ at a33ro7i#ately 6%5E increasin2 at a rate o" 2E each
year% )his increase is e73ected d!e to the o3enin2 o" the ,i2 1 "or#at stores d!rin2 the
ne7t three years% -ost o" 2oods sold $ill contin!e to increase at the rate o" sales also
contrib!ted "ro# the o3enin2 o" ne$ stores "or the ne7t three years% 0verall net inco#e
$ill increase d!e to the increase in sales, controlled +;G e73enses and the absence o"
loss o" discontin!ed o3erations% )he sale o" all 1#art6s discontin!ed o3erations sho!ld
be co#3leted by the end o" 2000%
'(
D!e to the sales increase and cost o" 2oods sold and ne$ store o3enin2sI
inventory on the balance $ill increase at the rate o" sales% )he contin!ed chan2e o"
1#art6s "or#at into the ,i2&1 layo!t $ill res!lt in an increase in "i7ed assets contrib!ted
to the re"ri2eration e>!i3#ent and e73ansion o" "acilities% 1#art has also entered into a
ne$ revolvin2 credit a2ree#ent o" J40%6MM "or $or=in2 ca3ital $ill res!lt in contin!ed
decreasin2 cash balances% 0verall, 1#art is e73ected to contin!e to re3ort 3ositive
res!lts "or the ne7t three years% )he #ain reso!rces !sed in this 3a3er $ere the 1??6&
1??4 a!dited "inancial state#ents, /M ind!stry data and ,an= o" #erica /etail 8eer
nalysis%
'4
APP50+IC
7inancial State#ents and Ratios
'?
!i)liograp"y
Aaney, Janice% ,an= o" #erica /etail 8eer nalysis, 1??4% 82s% 62&(0%
1#art -or3oration% !dited Financial +tate#ents, 1??6&1??4%
/obert Morris and ssociates Ind!stry Data%, 1??4% 82s% 654&655%
40