dupont analysis examples
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Dupont AnalysisAdapted by P. V. Viswanath with permission
from http://marriottschool.net/teacher/swinyard/Retailing/
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P.V.
Viswanath
2
The Du Pont Identity
ROA = NI/ TA
ROA = (NI/ Sales)*(Sales / TA)
ROA = (Net Profit Margin)*(Asset Turnover)
ROE = NI / TE
ROE = (NI/Sales)*(Sales/TA)*(TA/TE)
= Net Profit Margin*Asset Turnover*Equity Multiplier
Net Profit margin is a measure of the firms operating efficiency how well it controls costs
Total asset turnover is a measure of the firms asset useefficiency how well it manages its assets
Equity multiplier is a measure of the firms financial leverage.
Lets first look at the ROA identity a firm could have a highvolume/low margin strategy, which would be reflected in highasset turnover but low profit margins or the reverse.
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Low
Margin
High
Margin
Low Turnover
High Turnover
Failure
ROA: Turnover vs Margin
Unattainable
Two of the four segments might be unattainable or undesirable. But how
should a manager improve the firms positioning in the other two
segments?
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Illustrations of the Dupont
Identity
The Dupont identity is fairly well known as an accounting
identity. Accountants use it as a model for managerial control
and as a basis for firm valuation.
However, it can also be the basis for alternative marketingstrategies.
Let us see how this works, as reflected in the practices of
some US corporations.
We first look at Provo Bakery and Zales Jewelry, two firms in
two different industries.
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Return on Assets
Both firms have the same ROA, but different combinations of profitmargin and asset turnover. Perhaps the different approaches simply
reflects the difference in industries? Lets now look at two firms in the same industry: Tiffany, a jewelry
retail firm and Walmart, which is another jewelry retail firm and,according to its website, the worlds largest but quite different.(http://walmartstores.com/sustainability/9137.aspx)
Net Profit X Asset = Return onMargin Turnover Assets
Provo Bakery 10% X 9 times = 90%
Zales Jewelry 90% X 1 time = 90%
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* Effective tax rates often differ among corporations due to different tax breaks and advantages.
Source: Levy & Weitz
Income Statements: Wal-Mart vs Tiffany(2000, in millions)
Which has the higher net margin?
Wal-Mart Tiffany
Net sales $ 139,208 $ 1,173
Less: Cost of goods sold $ 108,725 $ 515
Gross margin $ 30,483 $ 658
Less: Operating expense $ 22,363 $ 493
Less: Interest expense $ 950 $ 9Total expense $ 23,313 $ 502
Net profit, pretax $ 7,170 $ 156
Less: Taxes* $ 2,740 $ 66
Tax rate 38.21% 42.31%
Net profit after tax $ 4,430 $ 90
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Net Sales
$139,208
$1,173
Cost of
goods sold
$108,725$515
Operating
expenses
$22,363
$493
Interest
expenses
$950
$9
Gross
margin
$30,493 (21.9%)
$658 (56.1%)
Total
expenses
$23,313$502
Net profitbefore tax
$7,170
$156
Taxes
$2,740
$66
Net profit
after taxes
$4,430
$90
Net sales
$139,208
$1,173
Net profit
margin
3.18%
7.68%
--
-
+
Top Number = Wal-Mart
Bottom Number = Tiffany
Profit Margin Model: Wal-Mart vs Tiffany(2000, in millions)
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Profit Margins
Clearly, Tiffany has the larger profit margin (gross margins
56.1% vs 21.9%; net margins 7.68% vs 3.18%)%.
The model in the previous slide also shows exactly where the
profit margin comes from.
The focus in this approach is on the numerator of the profitmargin ratio, viz. on Net Profit After Taxes (NPAT).
It behooves the savvy manager to look at the components of
NPAT as a fraction of sales.
Is it possible to improve cost of goods sold and operatingexpenses as a fraction of sales but without affecting sales?
How are these being used to improve sales?
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Accounts
receivable$1,118
$108
Merchandiseinventory
$17,076
$481
Cash
$1,878
$189
Other currentassets
$1,059
$37
Total current
assets$21,123
$816
Fixed assets$28,864
$241
Net sales
$139,208
$1,173
Total assets
$49,996
$1,057
Assetturnover
2.78
1.11
+
+
+
+
Asset Turnover Model: Wal-Mart vs Tiffany(2000, in millions)
Top Number = Wal-Mart
Bottom Number = Tiffany
From income
statement
From balance sheet
The sales $ generated
by each $ of assets
What does this
represent?
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Asset Turnover
Clearly, Walmart has the larger asset turnover.
The model in the previous slide also shows exactly what is the
source of the higher asset turnover.
The focus in this approach is on the denominator of the asset
turnover ratio, viz. on Total Assets.
It behooves the savvy manager to look at the components of
total assets in terms of how they contribute to sales.
Is it possible to reduce accounts receivable and merchandise
turnover and other assets but without affecting sales? How are these assets being used to improve sales?
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2000 data Net ProfitMargin
Net Income/Net
Sales
Asset TurnoverNet Sales/TA
ROA
Walmart 3.18 2.78 8.84
Tiffanys 7.68 1.11 8.525
Dupont Analysis: Wal-Mart vs Tiffany(2000, in millions)
Although Walmart and Tiffany clearly have different
marketing/merchandising strategies, they end up with approximately thesame ROA!
In principle, this approach could be extended to look at ROE and include
leverage choices as part of the mix. The next slide shows how different
firms have made different choices in terms of net profit margin, asset
turnover and leverage.
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Financial Objectives:The Strategic Profit Model (SPM)
Return on
Investment
Leverage
Ratio
Return on
Assets= x
Net Profit
Net Worth
Net Profit
Total Assets
Total Assets
Net Worth
Return on
Assets=
Net Profit
Total Assets
and so ...
Net Profit
Margin
Asset
Turnoverx
Net Sales
Total Assets
Net Profit
Net Sales
The $ sales
generated
by each $ of assets
The net profit
generated
by each $ of sales
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Big Lots:24.6% 13.1 1.5 1.2
Albertsons:18.9% 2.1 4.2 2.1
The Dress Barn:32.4% 7.4 2.9 1.5
Lands End:40.2% 6.8 3.1 1.9
The Limited:
32.3% 6.7 2.2 2.2
The Gap:25.5% 6.6 2.4 1.6
SPM ExamplesReturn on
Investment= x
Asset
TurnoverLeverage
Ratio
Net Profit
Margin %x
1998 data
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ROI Model, Including
The Strategic Profit Model
Net Sales
Cost of
goods sold
Variable
expenses
Fixed
expenses
Gross
margin
Total
expenses
Net profit
Net Sales
Net profit
margin
Assetturnover
Return on
assets
-
-
+
Inventory
Accounts
receivable
Other current
assets
Total current
assets
Fixed
assets
Net sales
Total
assets
+
+ +
x
FinancialLeverage
xReturn on
Net Worth=
Net Sales
Cost of
goods sold
Variable
expenses
Fixed
expenses
Gross
margin
Total
expenses
Net profit
Net Sales
Net profit
margin
Assetturnover
Return on
assetsInventory
Accounts
receivable
Other current
assets
Total current
assets
Fixed
assets
Net sales
Total
assets
Income Statement
Balance Sheet
Strategic Profit Model
FinancialLeverage
Return on
Net Worth
Which is the income statement? Balance sheet? SPM?
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Retail Stratgies
Look at some of these firms and figure out their strategy
http://marriottschool.net/teacher/swinyard/Retailing/retail_links.htm
As the previous slide points out, the two arms of the Dupont ROA
identity could be thought of as reflecting alternatives focusing on the
income statement (profit margin) versus on the balance sheet
(volume).However, both approaches really reflect different uses of a
companys assets/capabilities.
The next slide shows how Walmart has worked on one aspect of its
balance sheet, while the remaining slides look at how Tiffanys
marketing focus on profit margin is reflected in its asset choices.
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Walmarts focus on efficient asset useThe use of information technology has been an essential part of Wal-Mart's
growth. A decade ago Wal-Mart trailed K-Mart, which could negotiate lower
wholesale prices due to its size. Part of Wal-Mart's strategy for catching up was a
point-of-sale system, a computerized system that identifies each item sold, finds its
price in a computerized database, creates an accurate sales receipt for the
customer, and stores this item-by-item sales information for use in analyzing sales
and reordering inventory. Aside from handling information efficiently, effective use
of this information helps Wal-Mart avoid overstocking by learning what
merchandise is selling slowly. Wal-Mart's inventory and distribution system is a
world leader. Over one 5 year period, Wal-Mart invested over $600 million in
information systems.
Wal-Mart use telecommunications to link directly from its stores to its central
computer system and from that system to its supplier's computers. This allows
automatic reordering and better coordination. Knowing exactly what is selling welland coordinating closely with suppliers permits Wal-Mart to tie up less money in
inventory than many of their competitors. At its computerized warehouses, many
goods arrive and leave without ever sitting on a shelf. Only 10% of the floor space
in Wal-Mart stores is used as an inventory area, compared to the 25% average for
the industry.
http://www.prenhall.com/divisions/bp/app/alter/student/useful/ch1walmart.html
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Financial InformationTiffany 2004 2003 2002 2001 2000
Net Sales/Cash from Sales 0.993 0.995 1.003 1.006 0.991
Net Sales/Net A/R 15.153 15.095 16.306 15.591 12.33Net Sales/Inventory 2.296 2.331 2.627 2.559 2.915
Asset Turnover 0.836 0.887 0.985 1.064 1.095
Net Income/Sales 9.90% 11.43% 10.81% 11.13% 10.78%
ROA 9.01% 9.87% 10.64% 9.87% 9.01%
ROE 11.84% 12.25% 9.75% 15.72% 14.68%
Whitehall 2004 2003 2002 2001 2000
Net Sales/Cash from Sales 1.003 1.001 0.999 0.995 1
Net Sales/Net A/R 99.84 252.54 285.04 210.39 135.48
Net Sales/Inventory 2.14 1.99 1.95 1.73 1.67
Asset Turnover 1.454 1.404 1.343 1.252 1.201
Zales 2004 2003 2002 2001 2000Net Sales/Cash from Sales 1 1 1 1 1
Net Sales/Net A/R N/A N/A N/A N/A N/A
Net Sales/Inventory 2.91 2.88 2.8 2.77 1.57
Asset Turnover 1.338 1.496 1.472 1.709 1.007
Do you see a difference in the strategies of the three firms?
Tiffany, in particular, has a low asset turnover compared to Whitehall and Zales
particularly in the later years. Lets see why..
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The Tiffany Approach
In the following videos, consider Tiffanys and asset
use and think of our previous discussion.
http://www.youtube.com/watch?v=tbG0btCu1S4&f
eature=related
http://www.trendhunter.com/trends/tiffany-co-to-
launch-70-new-stores
Lets now look at how Tiffanys management
considers the issue in its 10K report.
http://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.trendhunter.com/trends/tiffany-co-to-launch-70-new-storeshttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=related -
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Tiffany Brand StrategyTiffany focuses on the profit margin. To do this, it needs to
spend more on certain assets than Walmart.
The TIFFANY & CO. brand is the single most important asset of
Tiffany. The strength of the Brand goes beyond trademark rights
and is derived from consumer perceptions of the Brand.
Management monitors the strength of the Brand through focus
groups and survey research.Management believes that consumers associate the Brand
with high-quality gemstone jewelry, particularly diamond
jewelry; excellent customer service; an elegant store and online
environment; upscale store locations; classic productpositioning; distinctive and high-quality packaging materials
(most significantly, the TIFFANY & CO. blue box); and
sophisticated style and romance.
Intangible Assets consist primarily of Product Rights and
Trademarks (about $10m. in 2010)
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Tiffany Brand Strategy
Tiffanys business plan includes many expenses and strategiesto maintain the strength of the Brand. Stores must be staffed
with knowledgeable professionals to provide excellent service.
Elegant store and online environments increase capital and
maintenance costs.Display practices require sufficient store footprints and lease
budgets to enable Tiffany to showcase fine jewelry in a retail
setting consistent with the Brands positioning.
Stores in the best high street and luxury mall locations are
more expensive and difficult to secure, but reinforce theBrands luxury connotations through association with other
luxury brands.
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Tiffany Brand StrategyThe classic positioning of Tiffanys product line supports the
Brand, but limits the display space that can be afforded to
fashion jewelry. Tiffanys packaging practices support
consumer expectations with respect to the Brand and are
more expensive.
Some advertising is done primarily to reinforce the Brandsassociation with luxury, sophistication, style and romance,
while other advertising is primarily intended to increase
demand for particular products.
Maintaining its position within the high-end of the jewelrymarket requires Tiffany to invest significantly in diamond and
gemstone inventory and accept reduced overall gross
margins; it also causes some consumers to view Tiffany as
beyond their price range.
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The Walmart Stores
In the following videos, look at Walmarts asset use
and think of our previous discussion. How does it
differ from Tiffany?
Walmart Stores
http://www.youtube.com/watch?v=RJphoRD1w0I
http://vimeo.com/11111204
http://projects.flowingdata.com/walmart/
http://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://vimeo.com/11111204http://vimeo.com/11111204http://vimeo.com/11111204http://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=RJphoRD1w0Ihttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=relatedhttp://www.youtube.com/watch?v=tbG0btCu1S4&feature=related -
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Crafting strategy post Dupont
Once we look at the firms Dupont and other ratios (such asSales/GSA Expense ratio), we might want to suggest that the firmmove in the direction of increasing profit margin or in the directionof increasing volume.
This decision has to be taken, keeping in mind the capabilities andresources that the firm possesses. It is also necessary to look at the
competitive environment. If there are many competing brands, thenit might not be a valuable strategy to create a new brand, ab initio,in the same space. All the other Porter framework forces have to beconsidered.
If the decision is to move in the direction of higher profit margin,then the firm has to think of a better brand. It might want to look at
the ratio of Sales to advertising expenses. It might want to increase trade promotion efforts, as well.
If it pursues the goal of higher volume, then a lower price and allthat it entails is indicated. However, this may be achieved throughdifferent strategies, e.g. coupons or other off-price methods. Bettercredit terms may also be an option.
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