Kmart Market Analysis - Essay Example

K-MART: Introduction The Company: Kmart is the third largest discount retailer in America. It is engaged in the mass merchandising business having 1,479 Kmart and Kmart Super Center retail stores in America. The Kmart business consists of Big Kmart, Kmart Super Centers and traditional Kmart stores where the company provides retail and merchandising services to millions of American customers. Kresge initially launched Kmart store in the year 1966 along with its other stores but due to the overwhelming success of the latter, Kresge kept on expanding the number of Kmart stores in the country and finally renamed the company as Kmart Corporation in 1977. Product Line: Kmart deals in a wide range of retail products. The company principally provides the grocery items on its retail stores along with other consumer products such as women's and kids apparels, fashion clothing, gifts, toys, baby and kids beddings, furniture, nursery products, jewelry, electronics, home appliances, fragrances, personal care items and sports, leisure and fitness goods etc ("Kmart Home", n.d.) Industry: Kmart's business operations fall under discount retailing industry. It confronts with overwhelming competition in the industry from the significant retail giants such as Wal-Mart, Target stores, Kohl's and J.C. Penney etc. Future Goals: Kmart has shown a comeback in the industry after the bankruptcy with a vision to deliver value to its customers and shareholders in an identical manner. It aims for constant expansion with a view to advance in terms of sale and profitability records, to enhance the efficacy and alleviate the costs, to strengthen and elevate the utilization of assets towards increasing profits etc ("Corporate History", n.d.) FINANCIAL RATIO ANALYSIS The following chart depicts a snapshot of K-mart's financial ratios ("Kmart Corporation", n.d.) compared to the discount retailing industry average ("Retail (Department & Discount) Industry", n.d.) along with two of its competitors i.e., Wal-Mart ("Ratios for Wal-Mart", n.d.) and Target ("Ratios for Target", n.d.), so as to provide a better insight into the company's financial position and performance with respect to that of its industry and competitors: Kmart Industry Wal-Mart Target Quick Ratio 2.0 0.26 0.13 0.89 Current Ratio 3.6 1.17 0.89 1.50 Debt to Equity 0.93 0.55 0.54 0.70 Gross Margin 25.9% 27.50% 23.17% 32.15% Net Profit Margin 5.6% 3.80% 3.49% 4.58% Return On Assets 10.1% 7.43% 8.32% 7.30% Cash Conversion Cycle 67 days 39 days 14 days 39 days An examination of the above chart straightens out a fine line between Kmart, its major competitors and the whole discount retail industry. The further in-depth interpretation and analysis of the above presented ratios is provided below to compare Kmart's financial position and performance with its competitors and other companies in the same industry: Current Ratio: The current ratio reflects the liquidity position of a company in terms of a comparison of its current assets and current liabilities. Kmart's current ratio is 3.6:1, which means that the company keeps $3.6 worth of liquid assets against every $1 worth of current liabilities. The current ratio of Kmart is much higher than that of the discount retail industry as well as Wal-Mart and Target Corporation individually. Apart from showing a sound liquidity position of the company, it emphasizes the fact that much of the company's current assets are lying idle without being invested further. Quick Ratio: An investigation of the above ratio comparison reveals that the Kmart Corporation's quick ratio is much higher than that of its industry and competitors. Kmart's quick ratio is 2.0, which shows that Kmart is much capable to pay off its short-term debts and liabilities after keeping aside the inventory than all the other companies in the industry. The difference between the current and quick ratios explicit the quantity of stock held by company, which is about 55% of the total current assets for Kmart. Debt to Equity: Kmart's debt-to-equity ratio is 0.93, which indicates much highly leveraged position of the company as compared to all the other companies in the same industry. It further reflects that while all the other companies in the industry including its major competitors keep a mixed capital structure i.e., equal proportions of debt and equity, Kmart mostly relies on the debts and borrowings to finance its business operations. Gross Margin: The gross margin of Kmart Corporation is 25.9%, which reveals the profits obtained on the total sales after accounting for the costs borne by the company in the course of production and distribution of goods. Target Corporation obtains the highest gross margin i.e., 32.15%, while Wal-Mart gains only 23.17% as profit out of its total sales and most of the companies in the industry are procuring 27.50% of sales as profits. Therefore, the gross profit obtained by Kmart Corporation is lower than the industrial average but higher than one of its competitors. Net Profit Margin: This ratio explicates the net profit procured by the company after accounting for all the production, distribution, selling, general and administrative expenses. Here, Kmart Corporation tops the list with the highest net profit margin i.e., 5.6%. Also, the difference between gross and net profit margin reveals the extent of earnings lost in the pursuit of selling and administrative activities. This further illuminates the fact that Kmart is more efficacious in managing its expenses than the other companies in the industry. Cash Conversion Cycle: Kmart's cash conversion cycle depicts that the company's cash remains tied up for around 67 days in the business activities before it could be turned into working capital. Here, the industrial average for cash conversion cycle remains to be 39 days while Wal-Mart tops the list with a cash conversion cycle of about 14 days. It therefore reflects that Kmart has not been successful in managing its cash cycle efficiently whereas other companies in the industry, most importantly its major competitors are much ahead in cash conversion than Kmart. CONCLUSION The above analysis illustrates the financial position and performance of the company in comparison with the other companies in the industry including its two giants i.e., Wal-Mart and Target Incorporation. The ratios and their interpretation reflect that Kmart is a sound competitor of both the giants. The greatest strengths and weaknesses of the company have been figured out to be: Strength: The elevated profit margins due to the efficacious and better management of the costs and expenses borne by the company. Weaknesses: The most illustrious weakness of Kmart in managing its business operations is its high cash conversion cycle, which reflects an unhealthy situation for the company's working capital management. The company's position in terms of solvency is also unsound. Kmart tends to rely more on debts and borrowings than the equity funds to finance its business activities. Future Trends: The company's financial performance although in terms of net and gross profit margins present bright prospects for the company's upcoming future, yet the accumulation of long term debts and increasing reliance of the company of debts and borrowings highlight the sign of dangers a slight move of the company towards bankruptcy. The high cash conversion cycle also explicates the ill management of cash flow in the company. If the situation persists, the company might lose its liquidity and smooth flow of working capital might be interrupted making the company unable to pay its short-term debts, borrowings and expenses. References Corporate History, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.kmartcorp.com/corp/story/general/corporate_history.stm Kmart Home, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.kmart.com/home.jsp Kmart Corporation, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.hoovers.com/kmart/--ID__10830,ticker__--/free-co-fin-factsheet.xhtml Ratios for Wal-Mart, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.investor.reuters.com/MG.aspxticker=WMT.N&target=/stocks/financialinfo/ratios/valuation Ratios for Target, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.investor.reuters.com/MG.aspxticker=TGT.N&target=%2fstocks%2ffinancialinfo%2fratios%2fvaluation Retail (Department & Discount) Industry, (n.d.), retrieved February 17, 2006 from the World Wide Web: http://www.investor.reuters.com/IndustryCenter.aspxindustry=RTDEPT&target=%2findustries%2findhighlights%2findustrycenter Read More