Annual Report Analysis.

Overview

A critical financial accounting skill is the ability to read, analyze, and make actionable decisions from any financial statement. Business leaders gain valuable information from the annual reports of direct competitors, companies that operate in similar fields, and companies in which they are considering an investment or partnership.

Instructions

You are the CFO of a family owned, regional mass merchandise retailer. You operate in a very competitive market against a host of large national retailers. Your CEO is a big believer in learning from players of all sizes, and is requesting your analysis and guidance. While there are dozens of potential companies worth exploring, you want to begin by taking a close look at two major players: Walmart (NYSE: WMT) and JC Penney (NYSE: JCP). You have decided to organize your work into TWO components: Part A: Financial Analysis Snapshot of key data from the annual reports Part B: Executive Memo

Part A: Financial Analysis Snapshot Submission Requirements  NOTE: All work is to be completed and submitted in the Excel template in the assignment module in Blackboard.  Go to the Investor Relations section of each company’s website and download their annual reports. You may need to download more than one report to get all required historical data.  Use the Annual Reports/10K to populate the Excel template. o Some entries simply require finding the respective line item amounts, while others will require calculations (these are indicated in in template). o Note that some historical data and ratios have already been provided in the template.

Executive Memo Part B:

Present a synopsis of your analysis in an executive memo you would feel comfortable turning in to your CEO or to Jack. You may organize the memo as you see fit, but it must follow the principles of good business communication. To support your executive memo, record a brief video presentation highlighting the key points of your findings. The requirements for each component are outlined below.

  1. Profitability/Net Income Margins  What are the after-tax net income margins (i.e., net profit margins) for both companies?  How do they compare?  Who achieves the higher net income margin? Why?

Tip: Analyze the major cost structure line items in the income statement (COGS, SG&A, interest, other, and taxes) as percentages of net sales, so you can identify reasons for better net income margins. Identify and comment on the differences. You may not know why a particular cost item like COGS is higher or lower, and that’s okay. Your CEO only wants to know which cost-structure items are higher or lower for each company.

  1. Inventory Management  Who does a better job managing their inventory (Inventory Days on Hand ratio)?  What are their respective 3-year trends for Inventory DOH?  What options could the company consider to improve inventory management?
  2. Cash Is King  How much net cash from operations did each company generate last year?  Which company has done a better job generating cash from operations?  In layman’s terms, how is each company spending their cash with respect to reinvestments in the business, changes in debt, and returning money to shareholders?
  3. Liquidity  How do the companies compare in terms of the current ratio, and what are their respective 3- year trends?  Do their current ratios indicate that either of these companies could go bankrupt soon? Explain.

Slide Deck: 1. Create a PowerPoint deck in support of your financial presentation  Highlight your key findings from your Executive Memo and Financial Analysis Snapshot. Focus on the most important insights that would be helpful for the leadership team.  Your PowerPoint should be complementary to your Executive Memo and your Financial Analysis Snapshot. i. Assume your CEO will have access to the documents, so just hit the high points. ii. Keep your slides legible. Avoid small fonts, too much text, or distracting graphics. iii. Keep it brief, using a maximum of 5 slides.

Submission Requirements  Your executive memo should be no more than 2 pages, single-spaced, using 10- or 12-point font. You may also include an appendix with additional references, graphs, charts, and tables for additional support if needed.  Your PowerPoint deck must not exceed 5 slides (not including cover page or references, if desired).

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