Financial Analysis on Retail Industry Essay

This analysis studied financial information of third multinational corporations in the sell manufacture, Ralph Lauren, American bird of Jove, and tornado. This examination is predominantly and analysis of Ralph Lauren and American eagle, and it compares its financials and performance to that of Gap. In order to reach a decision on which unanimous my lodge should invest in we recreated and cleaned twain companys financial statements followed by an analysis using key financial ratios and metrics. My company is searching for the firm that would be such(prenominal)(prenominal) economic in the following fiscal years.After completing an in-depth analysis of these companies, we concluded that Gap would be the best investment for future developing in the industry of retail. Gaps gross r sluiceue growth may not be relatively high compared to former(a) industry leaders but it is on the rise. Also the sales accrue can be related to the closing of stores and restructuring of intern ational operations. This overly relates to net in diminish growth showing signs of regression in the then(prenominal) fiscal years. Gaps EBIT Margin and EBITDA Margin suggest that the company is healthy and also properly managed. These ratios show us that the sales growth and net income growth decreases are collectible to former(a) factors in the business. Gap will show to be the right choice for our company to invest in as well as other industry research that we have done to help make this investment persuasive.Gap Inc.200920102011Sales Growth-7.8%-2.3%3.3%Net Income Growth 16.1%14.0%9.3%EBIT Margin10.7%12.8%13.4%EBITDA Margin15.1%17.5%17.9%Case Write Up and compendAll terzetto of these multinational corporations generate their revenues in the apparel retail brand industry. Gap is headquartered in San Francisco, California and the year-end date is January 30. American eagle is headquartered in Pittsburgh, Pennsylvania and their year-end date is January 30. Ralph Lauren is hea dquartered in New York, New York and there year-edndate is April 3. To perform this case analysis to determine which company which is much juicy using key financial ratios and metrics accompanied with industry research and trends of the apparel retail sector. We have recreated and cleaned financial statements for Ralph Lauren and American Eagle, comparing both to Gap. Using these recreated financial statements, we have performed a case analysis of these three companies in order to find out which company was most profitable.Gap is the largest of the three with a mart capitalization of nearly 16 billion while Ralph Lauren comes in second with roughly 15 billion market capitalization. Although Gap leads with market capitalization, American Eagle generates the most revenue that leads to highest net income as well, compared to both Gap and Ralph Lauren. Ralph Lauren does not lead these companies with its revenues and income but rather with its margins. They are consistently to a highe r place the industry average and are also much higher relative to the other companies we analyzed. Ralph Lauren also shows the best percentage of sales growth in the past fiscal years. Sales Growth3 Yr TrendPolo14.3%21.8%American Eagle0.9%6.5%Gap-2.3%3.3%For apparel retailers, advanced fashion trends and steady flow of promotions will help a low wiz digits increase in sales in 2012. This is what you see with Gap and American Eagle they do not show major increases in sales growth but on steadily rising at roughly 5% in the three year trend. Ralph Lauren shows a jump of 7% which could be overdue to the luxury brand section of retail section because of the opportunities in emerging markets such as Asia and Latin America fit in to industry reports. American Eagle plans on accelerating growth through internet sales. This generates higher margins for the company, last year it accounted for 12% of company revenues. This trend is also apparent in the other 2 companies because most reta ilers want to offer the convenience of on cable shopping to customers. The online channel provides a cost effective way for retailers to widen their reachacross existing and new markets. Gap intensified its international strategy as well, opening stores in Europe and China, and outlets accompanied by an e-commerce platform in Canada, Europe, and China.The company has 22% of sales from regions outside the US, up 7.6% from the year-ago period. This industry shows a thrust of penetration in the international markets looking to increase in the next few years. Teenagers also embolden an important role in the industry trends. With 7.1% of US population they have been a powerful force in retail with the leading beneficiaries being Gap, Abercrombie, American Eagle, and Urban Outfitters. This ties sales growth for both Gap and American Eagle due to a majority of the teen population shopping at these cardinal companies. Helping increase sales growth and produce for revenues for the firm. Th e biggest window for opportunity in the retail sector seems to be the overseas markets but especially China, according to the S&P industry reports. Gaps profitability has grown over the past three years showing larger EBIT and EBITDA margins which shows strong worry and healthy earnings. Ralph Lauren is also growing profitably as well as their margins have increased with time. American Eagle has been on teetering between being profitable and running efficiently to stay in the game.Net Income Growth3 Yr TrendPolo18.4%20.0%American Eagle-16.8%7.9%Gap14.0%9.3%On the margin side of things Polo seems to be the best company, this is because they are a luxury brand which tends to have higher margins. This makes up for their lack of revenues because batch buy less quantity of the luxury brands and tend to buy more of the timewornized products that are affordable and still have above average quality, such as Gap Inc. and American Eagle. The industry research showed that the recent drop i n cotton prices will help retail companies enormously in profit margins. This will help companies such as Gap and American Eagle more than luxury brands like Ralph Lauren. This is shown in Gaps trends in the past years for EBIT Margins in 2009 they had 10.7% which increased to 12.8% in 2010 this is a 2.1% increase.This increased another .6% to 13.4% in 2011, this can beprojected to grow even more in 2012 with more drops in the cotton prices. Gap reported that two-thirds of their increases were in the drop in cotton prices. Polo has also seen increases in EBIT margins but not in such a drastic change. From 2010 to 2011 they had a .7% increase on EBIT margin and then slowed mound to a .2% growth from 2011 to 2012. This is because they were less affected by the change in cotton prices. American Eagle showed a decrease in EBIT margins in 2012 with a change of -3.4%. This loss should not be as great as reported because in 2012 they had a loss on impairment of assets which is not a recur ring expense. EBIT Margin3 Yr TrendPolo14.7%15.4%15.6%American Eagle10.6%10.7%7.3%Gap10.7%12.8%13.4%EBITDA margin adds back the expenses taken out from depreciation and amortization, two non-cash expenses. Adding back those two expenses increases both companies EBIT margins by 4-5% for the three years analyzed. Ralph Laurens EBITDA margins seem to be declining in the three year trend which could raise questions about their assets and property plant and equipment expenses being raised. On the other hand you can see Gap showing strong 1-2% increases in both EBIT and EBITDA. Another key metric of financial profitability of a firm is earnings per share. Ralph Laurens earning per share is $7.09, as they are a more profitable firm within the industry and do not have a lot of debt on their balance sheet, with light leverage, is the reason there earnings per share are consistent and usually higher than the other two firms.Gaps earning per share comes in at $2.05, they do not carry a lot of debt on their statements which means they dont carry much leverage as well, giving them a decent earnings per share. They also repurchased tireds from the public which is another reason the earnings per share are moderately low. American Eagle had a earning per share of $0.96, this is due to the fact that they have more shares outstanding than their net income at the end of each year. They also carry no debt on their balance sheet so do not need to leverage themselves. EBITDA Margin3 Yr TrendPolo19.4%19.0%18.3%American Eagle15.2%15.4%11.8%Gap15.1%17.5%17.9%Return on Equity shows how the company is profitable compared to their righteousness. Ralph Lauren and Gap have shown substantial growth on this in the past three years. This is due to their growth in sales due to expanding sales into emerging markets such as Asia and Latin America, while maintaining level equity in their companies. Gap was also able to buy back some stock which made them able to increase their return on equity . American Eagle has stayed constant the past three years, this happened because they increased equity confusable to their increase in net sales. Return on assets shows how the company is profitable compared to their assets.Gap increased their return on assets because they closed numerous shops around the world that were not execute to their standards and also leasing all of their stores. This decreased their assets while maintaining high sales which gave them a better return on assets. Polo was able to increase return on assets by 1% each year, they were able to do this by having sufficient sales growth. The return on assets is also improved because many retail companies entered the fall mollify with inventory levels in line with sales trends. This means that companies are not over producing product so they are able to remove their product at a maximum price, this maximizes their sales in which maximizes their return on assets. This has the same effect on return on equity. ROE3 Yr TrendPolo15.4%17.2%18.6%American Eagle10.7%10.4%10.7%Gap22.0%22.5%29.5%ROA 3 Yr TrendPolo10.3%11.4%12.6%American Eagle7.9%7.5%7.8%Gap12.8%13.8%17.0%While analyzing financial leverage Polo has the most debt to equity on its balance sheets ranging in 8-9%. Compared to American Eagle and Gap which has little to no debt ranging from 0-1%. Gap has most likely paid of its debts from previous years and now rent their property and stores eliminating the cost of long term debt. American Eagle is very similar with actually 0% debt in the three year trend. Polo is a moderately leveraged company which brings on the additional risk of carrying debt, although can move on earnings per share for profitability.Maximizing sales by keeping inventory levels in line with sales trends helped maximize these companies leverage. Companies that over produce products have to sell at discounts to get rid of inventories this is not good because they lose out on profits and do not maximize their leverage. A lso companies that do not produce enough products lose out on sales this also does not maximize leverage. All three of these companies were able to keep their inventories in line with sales trends. Gap was able to decrease their debt to equity by buying back stock and maintaining a normal level of debt. Polo was able to decrease their debt to equity by buying back some stock and maintaining a level amount of debt.Debt to Equity 3 Yr TrendPolo9.0%9.0%8.0%American Eagle0.0%0.0%0.0%Gap1.0%0.0%0.0%All of these companies had similar ideas with their cash activities regarding buying back shares in 2011. American Eagle has the best position on cash, this is due to that they have no debt to pay back so all of their cash back into the company or into dividends. American Eagle bought back shares in 2011 to possibly help raise earnings per share. Gap also has a good cash flow they also did the same thing and bought back shares in 2011. Polo was the worst out of the three but is still in good s tanding they followed suit and also bought back shares in 2011. It is important for Polo to have a good cash flow because they still have long debts to pay back. Ending Cash Balance201020112012Polo $ 95.7 $ (123.3) $ 228.0 AmericanEagle $ 2,317.9 $ (63.2) $ 511.5 Gap $ 620.0 $ (812.0) $ 307.0We expect Gap to be the most profitable because they have high revenues, little to no debt, in good standing with creditors, and have good margins. This is better than Ralph Lauren because industry research shows that luxury brands will slow in growth while standard brands will continue to grow. Although Gap does not have the highest sales growth their market capitalization will help them succeed in emerging markets such as Asia and Latin America. Also with the decrease in cotton prices Gap is now able to have larger profit margins while keeping a lower priced product with the same quality. This increase in profit margins Gap will be able to generate the most amount of cash flow. With the trend s keep with their margins combined with the growth of new markets their cash flow will increase substantially.Ralph Lauren has been noted so have some corporate social responsibility problems in Indonesia where they have broken up unions that have tried to improve working conditions. This issue as well as others should be considered because more and more people now a day are taking into consideration the companies CSR before buying their product. Gap Inc. sets a high standard for their manufactures to up hold health and safety standards. They admit that some places still do not follow these regulations but Gap puts in a lot of resources into fixing them or even terminating the business with them. This is good because they are socially obligated and are willing to terminate business to stay responsible. Most companies try to stay socially responsible by implementing certain regulations for working conditions in third world countries so they do not bad mouth their own firm. The Inte rnational Labor governing and United Nations try to keep them in check in order to protect people and the environment.The information that we would like to request from senior management at each firm would be the growth forecasts and document containing information about international expansion. It seems apparent that international markets arenext big opportunity for the retail sector to increase revenues and income for most firms in this sector. This would help us invest in the company that will grow larger in the years to come as well as forecast numbers for potential growth which would help with our decision making process.