Question

E2-33. Comparing Income Statements and Balance Sheets of Competitors Following are selected income statement and balance sheet data from two retailers, Abercrombie & Fitch (clothing retailer in the high-end market) and TJX Companies (clothing retailer in the value- priced market), for the fiscal year ended January 30, 2016. ANF TJX Income Statement ($ thousands) Sales. Cost of goods sold .... Gross profit........... Total expenses........ Net income...... $3,518,680 1,361,137 2,157,543 2,121,967 $ 35,576 $30,944,938 22,034,523 8,910,415 6,632,757 $ 2,277,658 Balance Sheet ($ thousands) ANF TJX ..... Current assets Long-term assets.. Total assets............ $1,178,980 1,254,059 $2,433,039 $ 6,772,560 4,726,922 $11,499,482 Current liabilities....... Long-term liabilities....... Total liabilities. Stockholders' equity ......... Total liabilities and equity.... ........ $ 534,703 602,614 1,137,317 1,295,722 $2,433,039 $ 4,402,230 2,790,177 7,192,407 4,307,075 $11,499,482 a. Express each income statement amount as a percentage of sales. Comment on any differences observed between these two companies, especially as they relate to their respective business models. b. Express each balance sheet amount as a percentage of total assets. Comment on any differences observed between these two companies, especially as they relate to their respective business models. c. Which company has a lower proportion of debt? What do the ratios tell us about the relative riskiness of the two companies?

Answer 1

Part A
ANF & TJX
Condensed Income statement
Year ended Jan 30,2016
Vertical Analysis(amount is '000)
	ANF		TJX
Sales	$35,18,680	100.00%	$3,09,44,938	100.00%
Cost of goods sold	$13,61,137	38.68%	$2,20,34,523	71.21%
Gross Profit	$21,57,543	61.32%	$89,10,415	28.79%
Total expenses	$21,21,967	60.31%	$66,32,757	21.43%
Net Income	$35,576	1.01%	$22,77,658	7.36%
ANF is operating at a high-end market which means that its sales are less and its expenses are higher in proportion to its sales
which will result into lower Net Income. However TJX is operating in a value-proced market which goes to show that it is selling
cheap products at very high volumes which results into higher sales and also its expenses are less as to compared to ANF
which in turn result into higher profit margin
Part B
ANF & TJX
Balance Sheet
Year ended Jan 30,2016
Vertical Analysis(amount is '000)
	ANF		TJX
Current Assets	$11,78,980	48.46%	$67,72,560	58.89%
Long-term Assets	$12,54,059	51.54%	$47,26,922	41.11%
Total Assets	$24,33,039	100.00%	$1,14,99,482	100.00%
Current Liabilities	$5,34,703	21.98%	$44,02,230	38.28%
Long-Term Liabilities	$6,02,614	24.77%	$27,90,177	24.26%
Total Liabilities	$11,37,317	46.74%	$71,92,407	62.55%
Total Stockholder's Equity	$12,95,722	53.26%	$43,07,075	37.45%
Total Liabilities and Stockholders equity	$24,33,039	100.00%	$1,14,99,482	100.00%
ANF is operating in a high-end market which means that it must have lower proprtion of Accounts Receivable
and Inventory in Current Assets and lower proportion of Accounts payable in current liabilities which can be shown
in the percentage of Current Assets and Current Liabilities to Total Assets. On the other hand the sistuation of
TJX is reversed as it is operating a low-end market it has to keep high level of inventory and cash reserves due
to this reason its current assets and current liability proportion is higher as compared to that of ANF.
Part C
For deciding that which company is having lower proprtion of Debt we have to compare the Long-term liabilities
to Total Assets ratio. For ANF it is 24.77% and for TJX it is 24.26%, so for the companies it is virtually same.
Now it may happen that the current liability might contain some short-term borrowings. Now as TJX is operating
at high volume it needs a much larger amount of short-term borrowings as compared to ANF.
So in coclusion ANF has a lower proportion of Debt.