International Business Entity of Gap Inc - Assignment Example

International Business Entity of Gap Inc. Introduction Gap Inc is an international business entity that has outlets in various parts of the world. The outlets of Gap Inc deal in personal care products, clothes and other accessories for women, men and even children. The major brands of Gap Inc in the business include Old Navy, banana republic, and piperlime among other top brands in the world. In the United States of America, the retail industry is one of the largest industries in the economy, recording an average of US $ 3.8 trillion annually. Almost 12.4 % of all business establishments in US are involved in the retail industry and the gross margin of the industry is between 31% and 33%. There is stiff competition in the retail industry and this has seen the sales of Gap Inc drop significantly. Apart from the drop in sales, the company has also been experiencing a decrease in the number of customers. This prompted the company to explore strategies of improving on their sales. The company adopted some measures such as markdowns, aggressive promotion and product campaigns among others. This has caused a recent improvement in the sales of the company though slight. A financial analysis of Gap Inc is critical at this time to determine the financial soundness of the company. Financial analysis is the process of selecting, evaluating and interpreting information from the financial statements of a company in order to obtain information for decision-making. Financial statements have to be interpreted in order to make sense to decision makers in the firm. Financial analysis makes sense out of the financial statements and this enables decision-making. Financial statement analysis is therefore a very important tool for the success and growth of an organization. It provides information for decision making either outside or inside the organization. The main tool used to carry out financial analysis is the ratio analysis. The various ratios of the organization will be compared against subsequent years and against the industry in order to determine the growth of the firm in relation to the industry and competitors in the industry. The data used to carry out financial analysis comes from the financial statements of Gap Inc. Other sources of data include the press releases about the economy or industry performance and economic data such as the gross domestic product (Block & Geoffrey, 2009). It is important for the financial analyst to make a careful selection of relevant data for analysis. All data must be obtained before beginning the process. There are numerous financial ratios. A ratio is an expression of quantitative relationship between elements (Helfert, 2001). Financial ratios are classified into various categories such as liquidity ratios, profitability ratios and activity ratios among others. These ratios are classified based on the information they provide for decision makers of the company. Gap Inc. Mission The mission statement of Gap Inc. is that the firm never stops moving. The firm takes many talented, passionate and dedicated workers across the world to deliver the products of the firm and enable customers have their expected and wonderful shopping experience. Financial Ratio Analysis 1. Ratios measuring the Liquidity of Gap Inc. The ratios are vital for the operations of the firm since they help in determination of the ability of the corporation from meeting its daily operations. Gap Inc. is expected to have high liquidity in order to assure its stakeholders of continued operations. Therefore, high liquidity ratios are favorable for the corporation. These assets are also known as liquid assets and they include cash, bank deposits, stock, and notes receivable among others (Vance, 2002). a) Current ratio Current ratio is the ratio of current assets to current liabilities and it is an indicator of the ability of a company to meet current liabilities using current assets. Current ratio = current assets / current liabilities The current ratios for Gap Inc for the years 2011, 2010 and 2009 are 1.87, 2.19, and 1.86 respectively. The ratio fluctuated for the three-year period as indicated. However, the high ratios indicated the ability of the corporation for meeting its liabilities in the short period from the company’s easily convertible assets. b) Quick/acid test ratio The ability of an organization to operate depends on the ability of the firm to finance the daily activities. The activities can be funded from the assets of the firm that can be converted to cash fast. This ratios measures the speed at which the Gap Inc. is able to converts its assets to liquid cash for effectiveness in daily operations. Inventory is factored out of the liquid assets because it takes time to convert to cash. Quick ratio = (Current assets – Inventory) / Current liabilities The quick ratios for Gap Inc for the years 2011, 2010 and 2009 are 1.1, 1.5, and 1.16 respectively. The ratio provides a similar indication as the current ratio, the ability to meet short-term obligations. In addition, the ratio fluctuated over the three years. c) Net Working capital to sales ratio It is the ratio between working capital (Current assets less current liabilities) in relation to sales. It is an indicator of the ability of a company to meet liquidity needs (sales) using the amount of current assets which remain after taking care of current liabilities. Net working capital = (Current assets – current liabilities) / sales The net working capital to assets ratios for Gap Inc for the years 2011,2010 and 2009 are0.13, 0.18 , and 0.13 respectively. The ratio was low and remained constant over the three years. 2. Ratios of Profitability These ratios give an understanding of the components of the income of a company in relation to unit sales (Block & Geoffrey, 2009). a) Gross profit margin The ratio is utilized in the determination of the income earned on unit sales of the inventory of the firm without inclusion of the earnings of the company forms other sources. Gross profit margin = Gross income / sales The Gross profit margins for Gap Inc for the years 2011, 2010 and 2009 are 40%, 40%, and 38% respectively. The gross profit was constant for the two years before dropping to 38% in 2011. b) Operating profit margin It is the ratio of net income to sales and it show the remains in dollar terms of sales after taking care of cost of sales. Operating Profit margin = operating income / sales The operating profit margins for Gap Inc for the years 2011, 2010 and 2009 are 13%, 13%, and 11% respectively. The ratios indicate that the operating profit of the firm indicated a declining trend. c) Net profit margin Net profit margin is the ratio of net income to sales and it point towards the amount of sales in dollar value that remain after taking care of expenses and cost of sales. Net profit margin = Net income / sales The net profit margins for Gap Inc for the years 2011, 2010 and 2009 are 8%, 8%, and 7% respectively. This indicates a declining trend for the net profit hence measures should be taken to change to trend to an upward trend. 3. Activity Ratios The ratios point to the ability of an organization to handle its assets efficiently. They show the benefits that a company derives from various types of assets. They are also used to measure the profitability of a company against all the assets involved (Helfert, 2001). a) Turnover of Inventory The ratio points to the ability of the stock of the corporation to create income for the company. Inventory turnover = cost of goods sold / inventory The inventory turnover ratios for Gap Inc for the years 2011, 2010 and 2009 are 5.42, 5.74, and 6.03 respectively. The figures fluctuated, increased first before decreasing. b) Turnover on Total asset Total asset turnover ratio = sales / total assets The total assets turnover ratios for Gap Inc for the years 2011, 2010 and 2009 are 2.08, 1.78, and 1.92 respectively. The figures begun on a high of 2.08, dropped to 1.78 before showing an upsurge of 1.92. 4. Financial leverage ratios These show the company’s long-term financial obligations and its ability to meet the obligations as they fall due. Financial leverage indicates the structure of the sources of finance to Gap Inc. Companies use a mixture of equity and debt to finance their investments. More use of debt leads to high profitability but high financial risk hence it is important for a firm to analyze financial leverage carefully. Financial leverage ratios of gap Inc. indicate the financial risk taken by the company through use of debt (Vance, 2002). The ratios are of two types, which are component percentages and coverage ratios. Component percentages show the comparison of debt with either total capital or equity capital. Coverage ratios show the ability of the company to meet obligations arising out of debt such as interest. a) Total debt to assets ratio It is an indicator of the proportion of assets, which are financed using either long term or short-term debt. Total debt assets ratio = total debt / total assets The total debt to assets ratios for Gap Inc for the years 2011, 2010 and 2009 are 0.42, 0.63, and 0.42 respectively. The ratio increased to 0.63 before dropping to 0.42. b) Long term debt to assets ratio This ratio shows the percentage of assets financed using long-term debt only. Long term debt to assets ratio = Long term debt /total assets The long-term debt to assets ratio for Gap Inc in 2009 was 1.45. There was no long-term debt in the company in 2010 and 2011. c) Debt to equity ratio It is an indicator of relative use of debt and equity as sources of capital for the company. Debt-equity ratio = total debt / total shareholders’ equity The debt to equity ratios for Gap Inc for the years 2011, 2010 and 2009 are 0.73, 0.63, and 0.72 respectively. Given that a high debt to equity ratio is not encouraging, the ratios are not high hence acceptable (Yahoo Finance, 2011). d) Times interest coverage ratio This is a comparison of the earnings available and the interest expense. Times interest coverage ratio = Earnings before interest and taxes / interest The times interest coverage ratios for Gap Inc for the years 2010 and 2009 are 0.3 and 1.59 respectively. There was no interest expense in 2011. 5. Shareholder ratios These are relevant to shareholders and they indicate the profitability of the company in terms of the shareholder investments (Vance, 2002). a) Earnings per share This is the amount of net operating income per share held in the company. Earnings per share = Net income available to shareholders / Number of shares outstanding The earnings per share for Gap Inc for the years 2011, 2010 and 2009 are 2.07, 1.89, and 1.66 respectively. b) Price earnings ratio This is the ratio of market price per share to the earnings per share of common shares. Price-earnings ratio = Market price per share / Earnings per share 6. Return on investment ratios These ratios show the profitability of a company in relation to the amount of assets invested. This is the ratio of the net operating income to total assets of a company (Helfert, 2001). Return on investment = Net operating income / Total assets The return on investments for Gap Inc for the years 2011, 2010 and 2009 are 0.17, 0.14, and 0.13 respectively Gap Inc. SWOT Analysis Strengths Gap is a multinational corporation that is recognized globally as an organization providing American culture. The company is also across the world as it has its stores located in many countries across the world. Another strength is that of the ease with the firm franchises and expands across the world. Operating with multiple brands, Gap Inc is able to extend the brands with five strong trading brands such as Gap, old navy, Banana Republic, Athleta and Piperlime among others. Due to the strong brand, Gap Inc has a strong customer base (Block & Geoffrey, 2009). Weaknesses Gap has a weakness as nearly all of its merchandise depend on third party vendors located outside the U.S. the issue with such vendors is that they could easily lead to shortage in company brands. Another weakness is that of keeping up with fashion. It offers less attractive trendy clothing to its clients and it experiences uncontrollable production processes. Opportunities Gap Inc has the opportunity of venturing and expanding its operations into new potential markets such as the EU and China. It also has the option of utilizing e-commerce to conduct its international business activities including sales and purchases online. Threats Various issues could affect the existence of the firm. First is the business cycles that are characterized by booms and recessions. The second threat is the high competition of the global apparel industry that could force the firm to exit some markets. Due to free entry and exit, there has been an emergence of new fashion retailers across the world threatening its existence. Porters Generic Strategy: market Segmentation According to Campbell et al (2002, p. 180), a focus strategy focuses on a given market segment in which it applies cost leadership or differentiation strategy. Use of focus strategy helps in gaining customers’ loyalty. Gap Inc. is a well known company operating of in a competitive industry. Market segmentation strategy is a good generic strategy for this company, as it will enable the company to divide its market using various factors such as age factor, business group, and domestic group among other groups in the market. After establishing the market, the company uses differentiation strategy to provide unique products in the market. Most companies that use differentiation-focused strategy are able to provide a broad range of commodities in a given market. Focus strategy may however suffer changes in targeted segments and imitation. This strategy indicates the ethical behavior of firms in a competitive market as it enables it to increase its competitiveness in the market. Employee Motivation and Compensation According to Armstrong (2006), employees are the most valuable resources of an organization given their skills and experience to increase the productivity of the organization. As noted by Mumford and Gold (2004, p. 62), motivation is one of the factors that increase the effectiveness of employees. Motivation should be by role modeling, establishment of professional credibility and creation of reciprocal trust. Motivation is a determinate factor of the performance of employees and should not be ignored by the company. Both intrinsic and extrinsic types of motivation are used to motivate the employees of Gap Inc. with basis being the hierarchy of employee needs as specified by Maslow. A good recruitment plan should contain seven factors that are physical make up, attainments, intelligence, special aptitudes, interests, disposition and circumstance. Armstrong (2006) argues that the success of recruitment exercise will include the recruiters doing the groundwork, thorough preparation, and availability of good ideas among many others. Education and training Learning should not stop at the formal education and training that employees had. An organization should strive at establishing a good education program that helps employees to advance their careers. Education and training will not only motivate employees but it will also lead to their increased performance. Expertise in Gap Inc. could lead to innovation that could turn out to be a competitive advantage for the organization. Therefore, education should not be ignored. Reward and Compensation This is another form of motivation to employees. Employees use their skills and expertise in doing useful work for an organization. The employees should be compensated for the work that they do for the organization. The compensation could be in many forms mainly financial aspect. Let employees receive compensation for an equivalent effort used in productivity. In addition to compensation, exemplary work performed by employees should be rewarded. Rewards motivate employees in an organization while increasing their productivity. Just like compensation, rewards could also be in financial terms. However, other forms of rewards such as promotions, trips, scholarships for further education and training could be used to motivate employees. Conclusion In conclusion, Gap Inc is doing well financially since it is able to meet its obligations as they fall due. The assets of the company are also managed effectively and the company does not have high financial risk. There is improvement in the financial position over the three years. However, the firm needs to improve on its financial performance to avoid fluctuations. References Armstrong, M. (2006). A hand book of human resource management practice. 10th edn. London: Kogan Page. Block, S. & Geoffrey, H. (2009). Foundations of Financial Management. New York: McGraw-Hill Irwin Campbell, B., Stonehouse, G. & Houston, B. (2002). Business strategy: An introduction. Oxford: Butterworth-Heinemann. Helfert, E.A. (2001). Financial analysis: tools and techniques: a guide for managers. New York: McGraw-Hill Professional. Herring, R. & Litan, R. (1995). Financial regulation in the global economy. Washington, DC: Brookings Institution. Mumford, A. & Gold, J. (2004). Management Development: Strategies for action, New York: CIPD Publishing. Vance, D.E. (2002). Financial analysis and decision-making: tools and techniques to solve financial problems and make effective business decisions. New York: McGraw-Hill Professional. Yahoo Finance, (2011). Gap Inc. Retrieved on 10 Dec. 2011 from: http://finance.yahoo.com/q?s=GPS Appendix TYPE OF RATIO RATIO FORMULA 2011 2010 2009 Liquidity ratios Current ratio Current assets/current liabilities 3,926 / 2,095 = 1.87 4,664/2,131 = 2.19 4,005/2,158 = 1.86 Quick ratio (Current assets –inventory) /current liabilities (3926-1,620)/2,095 =1.10 (4,664-1,477)/2,131 =1.50 (4,005-1,506)/2,158 =1.16 Net working capital to assets (current assets – current liabilities) / sales (3,926-2,095)/14,664 =0.13 (4,664-2,131)/14,197 =0.18 (4,005-2,158)/14,526 =0.13 Profitability ratios Gross profit margin Gross profit / sales 5,889/14,664 =0.40 5,724/14,197 =0.40 5,447/14,526 =0.38 Operating profit margin Operating profit /sales 1,968/14,664 =0.13 1,815/14,197 =0.13 1,548/14,526 =0.11 Net profit margin Net income /sales 1,204/14,664 =0.08 1,102/14,197 =0.08 967/14,526 =0.07 Activity ratios Inventory turnover ratio Cost of sales / inventory 8,775/1,620 =5.42 8,473/1,477 =5.74 9,079/1,506 =6.03 Total assets turnover ratio Sales / total assets 14,664/7,065 =2.08 14,197/7,985 =1.78 14,526/7,564 =1.92 Financial leverage ratios Total debt to assets ratio Total debt / total assets 2,985/7,065 =0.42 3,094/4,891 =0.63 3,177/7,564 =0.42 Long term debt to assets ratio Long term debt / total assets - - 11,000/7,564 =1.45 Debt to equity ratio Total debt / total equity 2,985/4,080 =0.73 3,094/4,891 =0.63 3,177/4,387 =0.72 Times interest coverage ratio EBIT / interest - 1,822/6,000 =0.30 1,585/1,000 =1.59 Shareholding ratios Earnings per share Net income available to shareholders / shares outstanding 1,204/583 =2.07 1,102/583 =1.89 967/583 =1.66 Return on investment Return on investment Net operating income / Total assets 1,204/7,065 =0.17 1,102/7,985 =0.14 967/7,564 =0.13 Read More