Financial statements of Abercrombie & Fitch and Gap Inc.
Introduction
Abercrombie & Fitch is an American lifestyle retailer that focuses on casual wear. It has its headquarters located in New Albany, Ohio. The company operates 1,049 stores, and two offshoot brands, Hollister, Co, and Abercrombie kids. The company deals with products such as; apparel, accessories, personal care, and foot wear, and has a total of 22,500 employees. It was founded in 1892 by David T. Abercrombie. And Ezra Fitch. The total net income of the company as at 2017 was US$ 7.09 million, operating income that same year was US$ 72.05 million, total equity was US$ 1.242 billion, revenue was US$ 3.493 billion, and its total assets that same year were worth US$ 2.326 billion. The net worth of the company as at 2019 is $ 1.84 billion. Gap Inc and American Eagle Outfitters are among its top competitors. Gap Inc is another American accessories retailer that operates worldwide, Gap Inc was founded in 1969 by Donald Fisher and Doris F. Fisher, and its headquarters are located in San Francisco, California. The company is responsible for operation six primary divisions, namely; Banana Republic, Old Navy, Intermix, Hill City, and Athleta. Gap happens to be the largest specialty retailer in the United States, as at September 2008 the company had 135, 000 employees and operated 3, 727 stores worldwide. Its main products include; apparel, accessories and personal care products. As at 2017 the company had a total revenue of US$ 15.855 million, operating income of US$ 1.479 billion, net income of US$ 848million, total equity of US$ 3.144 billion, and that year it had assets valued at US 7.989 billion.
Share Market Price
These two companies deal with the same line of products, the work below will contain the share market price in the stock exchange for the two companies, and the rate of exchange from year to year for ten years. A comparison of the trend of the share market prices between the two companies along with their relevant stock market index for ten consecutive years. Revenues and rate of exchange, return on equity, liquidity ratio, debt ratio, interest coverage ratio, price earnings ratio, dividend per share and dividend yield for three consecutive years (Riikkinen, Saarijärvi, Starlin & Lähteenmäki, 2018).
Abercrombie & Fitch and Gap Inc. are restorative gadget industry and not an individual’s business any longer, as it is observed from innovative point of view (Lee & Smith, 2018). This endeavor has a sorted-out structure, clear objectives and goals that drive organization towards constant development. In view of assessment of center plan of action and serious issues that Stryker Corp. has today, there are yet numerous business openings that can be embraced, and suggestions gave will contribute later progress. The firms are thoroughly based all round the world and is isolated into different decentralized operational units, each executing as a detached substance: making a whole deal responsibility in fit manner to patients, suppliers and buyers, systems, corporate organization and accomplices. Its things, zones and organization responsibilities are different; thus, there are different sorts of developments inside.
Financial Analysis
The firms have dependably had a noteworthy development rate, even in 2007 and 2008. In 2009, notwithstanding, it changed. The firms just dealt with a development rate of 0.1% in deals and 4% in profit per share. Income and profit development the investors have generally anticipated from the companies. The companies went head to head with an unstable worldwide economy, moved with some commercial center punches, moved rapidly and struggled back. “Each of the business has a net offer of $1.4 billion and $5.0 billion expanded 5.9% and 6.4% in the quarter and entire year and 7.0% and 5.9% in consistent cash.
Natural net deals expanded 7.0% and 5.9% in the quarter and entire year including 8.9% and 8.1% from expanded unit volume mostly counterbalanced by 1.9% and 2.2% from lower costs. MedSurg net offers of $1.7 billion and $6.0 billion expanded 9.9% and 10.1% in the quarter and entire year and 11.1% and 10.0% in consistent cash. Natural net deals expanded 10.1% and 8.6% in the quarter and entire year including 11.3% and 9.3% from expanded unit volume mostly counterbalanced by 1.2% and 0.7% from lower costs.
The businesses main lines operation offer of $0.7 billion and $2.6 billion expanded 20.1% and 18.6% in the quarter and entire year and 21.4% and 18.0% in consistent cash. Natural net deals expanded 8.4% and 10.6% in the quarter and entire year including 10.2% and 12.2% from expanded unit volume mostly counterbalanced by 1.8% and 1.6% from lower costs” (Striker, 2019).
Trend Analysis for the Firms
Fitch and Gap Inc major strength is the product offerings in diverse therapy areas revenue performance Strong performance of all segments , but firms keep up an outdated stock and abundance saves because of the failure to sell its items at costs in abundance of current conveying costs. This is basically because of the presentation of new items and surgeries all the time in the business sectors in which the organization works. This may prompt the out of date quality of a portion of the organization's items. The organization assesses the future recoverability of the expenses of these items and records an arrangement for abundance and out of date inventories dependent on lapse of sanitization dates and anticipated future patterns. Contrasts in the real item life cycles, item request or acknowledgment of new item presentations and during the ones anticipated could prompt extra stock compose downs and influence the future working benefits of the organization all to maintain the excess inventory which in most cases is treated as reserve in the stores hence not giving out room for profit generation as they lie fallow and as such a risk procedure to the business at hand.
Industry Analysis
The firm ventures in one of the most competitive businesses across the world. It is not an easy venture it faces competition from the services offered by the national government in all the nations that the business operates. Operating parallel to the government programs that are offered cheaply makes the business face one of its major setback. The returns are subject to unpredictable increase and decrease, the two stocks in as much as they are experiencing price downfall, and they may increase on price any time depending on the stock market changes.
The total value of the investments have yielded less than it is expected and so the initial outlay is more than the realized money plus it. Investment in stocks is a risky venture and is only a good fit for the risk takers. It is not certain that upon buying stocks, there is expected profit or say yield on the same stock. The analysis above indicates that the firm requires increasing the cash ratio by increasing the amount of cash via increasing on the sales volume of the goods and services. The assets are low in value and there is need to make an improvement on the same. The need to increase on the quantity and value of assets in the business would guarantee it an improvement on many sectors of its finances to up on its productivity. The inventory levels require a boost in terms of management and stock.
Companies Pooled Financial Projections
The NPV of the project can be calculated as follows:
NPV= -$1,000,000 + $150,000 / 0.1
= $500,000
The NPV of the project is $500,000.
An indication that the business would make substantive progress in the long run and as such the investment would go on.
Payback Period = Initial Investment / Annual Cash Inflow
= $1,000,000 / $140,000
= 7.142 years
The payback is longer than the cut off period for five years, the project need to be re-evaluated before commencement. The business suppose it had a cash flow of $100,000 at hand today, requires to put into place more strategies to attain the maximum possible output so as to attain the required revenue in the next five fiscal years.
Looking at the currency mix of the debt of the two firms, we can see that the majority of the debt is denominated in either US dollars or Euros. This exposes the firms to exchange rate risk, such that if the Australian dollar depreciates towards either the US dollar or the Euro, the money owed increases. At the same time, the subordinated bonds with variable rates are denominated in EUR, GBP and USD, why this creates a risk as well.
The firms have also developed necessary skills to make advanced data decryption in the future. The firm does decryption calls for a structured algorithm and proper calculation that accompanies the decryption method. For the case of the group, would recommend that we get to do a finer research for future tasks so that we get acquainted in case of a more complex task. The group performance would however have improved if all the knowledge about code decryption was exploited in time to make a better quality of the solution at hand.
The objectives are the improvement of the quality of the environment through which the business is ongoing as well as the ensuring that customers for the business in question stands a chance to get satisfied. Any form of misjudgment or over-emphasis of the two primary objectives results to green marketing myopia.
This means that regardless of the result and the Free Cash flow to equity, the company will payout at least 50 cent of the profits. This is a lower bound and can thus be higher if there is a high FCFE and a few good investment opportunities. The dividend yield is the dividends per share relative to the share price; it measures the return an investor can make from dividends alone.
The majority of the shareholders are institutional investors (91.52 pct.) with individuals only owning 0.15 pct. of the company. With the marginal investor being an active, institutional investor they would normally prefer dividends, as this is a way of monitoring the management’s process and eliminating agency costs. Contrary to the above showed that institutional investors have a slight preference for share buybacks compared to dividends, though it depends on the taxation level in the specific country. With dividends being a signal to the investors and with 16 analysts. It is not considered necessary for the firm to have a dividend policy as the analysts are expected to find all relevant information about the firm and feed it to the financial markets.
The current investment in stock and securities services in my opinion of the CAPM assumptions is unpredictable on whether one would realize a yield on the portfolio. The firm has a higher dividend payout ratio compared to its main competitors in the industry, with a dividend yield slightly below average and a low earnings per share. The average dividend payout ratio of the peer group is below 50 pct. meaning that less than half of their earnings are paid out to investors through dividends. The company has a much lower return of equity than its peers, which can explain why the dividend-payout ratio is significantly higher than the competitors, as cash needs to be returned to the equity holders when there are fewer attractive investment opportunities.
There is change in the overall investment in as far as value goes since an experience in the decline in the available two stocks has been recorded with a consequent increase in the price of only one stock. In the case of Alphabet price increase, there is an offset shown by the very decline in the prices of the earlier stocks. In conclusion therefore, there is nothing in particular that have been earned in the event of trading and as such there is no any form of return on the investment but instead a negative return of 0.002 % that in a critical point of view is insignificant. It this thus hoped that the prices of the remaining two stocks would increase in the future so as to impact positively on the portfolio (Das & Kumar, 2018). The employment of different facets in relation to marketing mix also offers an optimal solution to the challenges of consumption of environmental unfriendly commodities.
The stock prices seems to take the direction that the economic parameters of the nations in focus take. The annual return mean on closer examination offers a mean of 0.36 on all stocks invested by the major stakeholders. The business has put up a fight in the event of survival in the industry for a long time. Other firms offering similar products to the global market have shown up stiff competition but because of the business brand and strategic marketing, TMR has remained in business and maintained the customer relationship up to today.
Sensitivity Analysis
The businesses should in all ways:
- a) Raise the debt rating from A3 to A1 in order to lower the cost of debt. Then increase the debt ratio in order to lever up the firm.
- b) Current investments are of a bad quality. Retain cash or pay to equity owners until the ROIC and RoE increases above the WACC and CoE.
c). Increase the debt, as this becomes a more attractive option when the firm is mature, with less of a need for flexibility.
d).Use the excess free cash flow to equity to pay out more dividends or buy back stock as current investments are bad and the active, institutional investors need a signal about future cash flows and responsible cash management (Demirer, Diebold, Liu & Yilmaz, 2018). This is also relative to their peers, which are having higher RoE and EPS.
The solution to the inventory is to work on increasing the demand of goods or services offered by the business in their stock, this would reduce on stocked good. The debtors to the company need to be reduced by clearing their debts early enough before a company falls in shortage of funds to clear them. It would be a burden to shoulder in the future. The firm may find it difficult to meet its financial obligations.
Conclusion
Abercrombie & Fitch and Gap Inc.in as far as they majors in similar businesses, there is need to seek more information in regard to overtrading as it may affect the business in the future. The main focus at the heart of the problem failure of the firm to specialize in the most pertinent and well-paying services in the industry. The concern however is to ensure that the firms does not fall out of operation and as such control of the resources would make an incredible deal. The assets of the two companies may be taken for auctioning to enable it meet its financial obligations in the long run (Rabin, 2000). Remedies to the situation can be made early enough by laying in place sound and practicable strategies to curb future problems in the cash inflows and outflows for the two businesses.
References
Rabin, M., 2000. The diminishing marginal utility of wealth cannot explain risk aversion.
Demirer, M., Diebold, F. X., Liu, L., & Yilmaz, K. (2018). Estimating global bank network connectedness. Journal of Applied Econometrics, 33(1), 1-15.
Das, D., & Kumar, S. B. (2018). International economic policy uncertainty and stock prices revisited: Multiple and Partial wavelet approach. Economics Letters, 164, 100-108.
Debroux, P. (2017). Human Resource Management in Japan: Changes and Uncertainties-A New Human Resource Management System Fitting to the Global Economy: Changes and Uncertainties-A New Human Resource Management System Fitting to the Global Economy. Routledge.
Lee, G. L., & Smith, C. (2018). Engineers and management: International comparisons. Routledge.
Odekon, M. (2015). Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis. Routledge.
Tiller, J., & O'Hanley, R. (2013). Information Security Management Handbook, Sixth Edition, Volume 7. CRC Press.
McCabe, J. D. (2010). Network Analysis, Architecture, and Design. Morgan Kaufmann.
Zachary, W. W. (2017). An information flow model for conflict and fission in small groups. Journal of anthropological research, 33(4), 452-473.
Hassani, H., Huang, X., & Silva, E. (2018). Digitalisation and big data mining in banking. Big Data and Cognitive Computing, 2(3), 18.
Krishna, G. J., & Ravi, V. (2019, January). Feature Subset Selection using Adaptive Differential Evolution: An Application to Banking. In Proceedings of the ACM India Joint International Conference on Data Science and Management of Data (pp. 157-163). ACM.
Riikkinen, M., Saarijärvi, H., Starlin, P., & Lähteenmäki, I. (2018). Using artificial intelligence to create value in insurance. International Journal of Bank Marketing, 36(6), 1145-1168.
Appendix
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TABLE |
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|
In thousands except per share (USD) |
ABERCROMBIE & FITCH |
GAP INC |
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|
|
2018 |
2017 |
2016 |
2018 |
2017 |
2016 |
|
Sales Revenue |
3,590,109 |
3,492,690 |
3,326,740 |
16,580,000 |
15,855,000 |
15,516,000 |
|
Rate of change |
27.9% |
5% |
- |
4.6% |
2.2% |
- |
|
Net Income |
78,808 |
10,525 |
7,718 |
1,003,000 |
848,000 |
676,000 |
|
Operating profit |
127,366 |
72,050 |
15,188 |
1,362,000 |
1,479,000 |
1,191,000 |
|
Rate of change |
649% |
36% |
- |
18.3% |
25.4% |
- |
|
Current Assets |
1,335,950 |
1,264,538 |
1,139,300 |
4,251,000 |
4,568,000 |
4,315,000 |
|
Current Liabilities |
558,917 |
507,546 |
486,000 |
2,174,000 |
2,461,000 |
2,453,000 |
|
Assets |
2,385,593 |
2,325,692 |
2,295,757 |
8,049,000 |
7,989,000 |
7,610,000 |
|
Liabilities |
1,166,972 |
1,073,221 |
1,043,718 |
4,496,000 |
4,845,000 |
4,706,000 |
|
Shareholders’ Equity |
1,218,621 |
1,252,471 |
1,252,039 |
3,553,000 |
3,144,000 |
2,904,000 |
|
Cash From Operations |
352,933 |
287,658 |
185,169 |
1,381,000 |
1,380,000 |
1,719,000 |
|
Interest expense |
10,999 |
16,889 |
18,666 |
73,000 |
74,000 |
75,000 |
|
Dividends for the year |
53,714 |
54,392 |
54,066 |
373,000 |
361,000 |
367,000 |
|
Shares outstanding (basic) |
67,350 |
68,391 |
67,878 |
378,000 |
389,000 |
399,000 |
|
Dividend per share |
$0.80 |
$0.80 |
$0.80 |
$0.97 |
$0.92 |
$0.92 |
|
Earnings per share (basic) |
$1.08 |
$0.1 |
$0.06 |
$2.61 |
$2.16 |
$1.69 |
|
Market price per share (*) |
$20.05 |
$17.43 |
$12.00 |
$25.76 |
$34.06 |
$22.44 |
|
ΔΕΙΚΤΕΣ – RATIOS |
|
|
|
|
|
|
|
Return on Sales (operating profit / revenue) |
3.55% |
2.06% |
0.46% |
8.2% |
9.3% |
7.7% |
|
Current ratio (current assets/ current liabilities) |
2.39 times |
2.49 times |
2.34 times |
1.96 times |
1.86 times |
1.76 times |
|
Debt ratio (total liabilities/ total assets) |
48.9% |
46.1% |
45.5% |
55.9% |
60.6% |
61.8% |
|
Equity ratio (shareholders equity / total assets) |
51.1% |
53.9% |
54.5% |
44.1% |
39.4% |
38.2% |
|
Interest expense coverage (operating profit / interest expense) |
11.6 times |
4.27 times |
0.81 times |
18.66 times |
19.99 times |
15.88 times |
|
Return on equity (net income / shareholders equity) |
6.5% |
0.8% |
0.6% |
28.2% |
27% |
23.3% |
|
Capital yield (change in market price per share) |
15.03% |
45.25% |
-55.06% |
-24.4% |
51.8% |
-9.1% |
|
Dividend yield (dividend per share / market price per share) |
4% |
4.6% |
6.7% |
3.8% |
2.7% |
4.1% |
|
Total return (capital yield + dividend yield) |
19.03% |
49.85% |
-48.9% |
-20.6% |
54.5% |
-5% |
|
Price earnings ratio (market price per share / earnings per share) |
18.6 times |
174.3 times |
200 times |
9.9 times |
15.8 times |
13.3 times |
|
(*) Market price per share – closing price from NYSE at 31 December 2016, 31 December 2017, 31 December 2018
All financial information was taken from the annual reports of the 2 companies. |
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