dupont analysis examples

7/29/2019 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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