Financial Statement Analysis - Wolverine World Wide Inc and The Timberland Company - Essay Example

In order to compare the financial status of two public companies a financial analyst can perform ratio analysis and trend analysis to analyze the financial statements of two or more different companies. The three basic financial statements utilized to perform ration analysis are the income statement, the balance sheet and the statement of cash flow. Financial statements are prepared in a manner that all the information inside the statements is identical as far as format as the financial statements of different company in a different industry. This report analyzes the financial condition of two companies in the apperal industry. The apperal industry is a generated $276 billion in sales in the year 2005 (Plunkett Research). Competition in this industry is fierce and the production of low end products is being cannibilized by the Asian markets which includes India, The People’s Republic of China and Pakistan among other nations. In order to apperal companies to suceed in develop nation they must use a branding strategy to differentiate their products. The two apperal companies analyzed in this report are Wolverine World Wide Inc. and The Timberland Company. Wolverine World Wide Inc (WWW) is company with a rich history dating back to the year 1883 when it was founded by G.A Krause. The company is dedicated to producing and selling branded footwear, apperal and accessories products. Some of the licenced brands the company owns include Bates, Cat Footwear, Harley-Davidson Footwear, Hush Puppies, Merrell, Pantagonia Footwear, Sebago, and Wolverine; a portfolio of product which help generate 47 million pairs of shoe sales in 2006 (Annual Report: Wolverine 2006). The company is a global player with a physical precense in over 180 countries worldwide. The company’s target market is North America which represents the majority of the company sales (43%). Emerging markets such as Europe were growth drivers in 2006, the European region had a 10% sales growth during that fiscal year. The company has expanded its product offerign to move beyond being a shoe manufacturer. The firm offerrs many apperal and accessories products, a strategy that takes advantage of the branded image recognition of lines such as Sebago which are known for their quality, great designs and durability. In 2006 Wolverine generated $1141.9 in revenues. Appendix A shows the 2006 Income Statement of Wolverine. The year’s total sales was a significant improvement over the results of the last few years. The 2006 sales total represent an 8% sales increase in comparison with 2005 and a 15% increase in comparison with 2004. The diluted earnings per share of the company were $1.47, a metric that grew by 16% in comparisoin with fiscal year 2005. The company increase its efficiency in 2006. The return of equity (ROE) metric of the firm was 16.2%. This total is higher than the 2005 and 2004 result of 16.2% and 15.1%. ROE show well a company is using its equity acquired to generate revenues for the company. The higher the metric the more productive the company. Another efficiecy ratio is the return of assets metric. Wolverine World Wide Inc. had a returrn on asset in 2006 of 12.5%, an improvement of 0.9% over the 2005 results. The company made good use of its human capital in 2006. During this year the enterprise generated $252,000 per employee, which is a 23% in this metric in comparison with 2004. The company’s level of debt is low. Appendix C shows a variety of financial ratios for Wolverine World Wide Inc. The debt to equity ratio in 2006 was a low 0.28. During the last two years the debt to equity ratio has gone down every year. Having a low totat debt position is a desirable trait because it provide a corporation with a the opportunity to use its credit in the future for future expansion plans. The Timberland Company was founded in 1953 by Nathan Swartz, but it was not until 1973 that the company’s cash cow product its branded Timberland boot was not introduced (Timberland). The first became a global player in the 1980’s when it launched its products in the Europena market. Today Timberland Company is giant in the apperal industry dedicated to selling boots, shoes, clothers and other gear to customers worldwide. The company’s licenced branded product lines include Timberland, Timberland Pro, Mion, GoLite, Howies, iPath and Startwool (Timberland). The company believes in protecting the environment and in the company obligation towards the community, a strategy that is implemented through its corporate social responsibility strategy. (another accomplishment) Timberland generated $1.57 billion in sales in 2006 a figure which represents a slight increase of 0.12% over 2005. The company’s gross profit went down 2% in 2006 and its net margin went down 5% in comparison with 2005. Both these metrics are negative signs for the company. The operating income results of the income show a similar downwards pattern as well as its operating cash flow per share. The operating cash flow per share went down from 2.75in 2005 to 1.79 in 2006, a decrease of 54%. This a worrisome sign since a decrease in cash flows hinders a company’s liquity position and its ability to pay its short term debt. The company in 2006 had year which ended with a positive net income of $105,205,000 so the foundation of financial success for the company is still there, but in past the firm had been more profitabible. Adjustmest must be made to reach the higher levels of financial glory the company achieved in the past. Comparative Financial Analysis: Wolverine vs. Timberland These two companies are a part of the apperal industry. Both firms have a long history in the marketplace and the revenues of these comapanies are in the billions of dollars in 2006. Appendix C shows a ration analysis of these two companies. In 2006 Timberland had sales of $1.57 billion dollars, while Wolverine had a lower total of $1.14 billion in sales. The total revenues of Wolverine reflect an upwards spiral during the last few years, while Timberland has an opposite sales total tendency reflecting a downward spiral. Timberland Company is more efficient at moving its merchendise which is reflected by the 2006 inventory turnover ratio of 4.65, which is 0.60 higher than Wolverine. The debt levels of both these companies is below the apperral industry standard. Appendix D illustrated the industry ratio standards for the apperral industry based on Dun & Bradstreet research results. The industry median for debt to equity ratio in the apperal industry in 2006 was 0.705. In 2006 Wolverine had a debt to equity of 0.28, while Timberland’s ratio was 0.50. Wolverine enjoys a competitive advantage with a lower debt postion than Timberland, but both firm’s are doing well in regards to this financial metric. The industry standard for the current ratio in the apperal industry is 2.50. The current ration is a metric that measures the ability of a company to pay its short term debt. A high current ratio is desirable. Wolverine has a current ratio of 4.01, which means the firm has a current ratio 60% higher than the industry average. Timberland on the other hand has a current ratio of 2.27, a postion that places the company with a current ratio metric 10% below the industry average. The company’s solvecy problems were already identifying in this report. This metric shows strong proof of the situation. The company has to take inmediate measure to remedy the problem. Ways in whch a firm can improve its current ratio are lower production cost, increasing sales, lowering overhead costs, lowering debt levels among other strategies. The profitability of these companies are moving in different directions. The retail industry is going through some though times. In 2006 the net profit margin of the industry was -0.2%. Wolverine and Timberland both that high positive net margins totals of 7.3% and 6.5% respectively. The reason of the different direction observation is that Wolverine’s net margin has risen each of the last two years, while Timberland had a drastic increase of 5 percentage points in 2006. In reality Timberland had been enjoying prior to 2006 some incredible net margin final year totals. The company is currently enjoying a nice 6.5% net margin which represents a 6.7 percentage points over the pathetic industry median of -0.2 percentage points. Wolverine enjoyed a better cash flow position in 2006 than Timberland, a situation which was opposite in 2005 when Timberland had a much better cash position than Wolverine. The gross margin of Timberland is much higher than Wolverine. Timberland had a 47.5% gross margin in comparison with Wolverine’s 38.67% gross margin in 2006. In the past Timberland took advantage of the gross margin spread advantage and obtain much higher net margin as a consequence of its outstanding gross margin, but recently they lost a huge chunck of their profitability. In 2005 the gross margin of Timberland of 49.5% translated in a net margin of 11.5%, but in 2006 the 47.5% gross margin translated in only a 6.5% net margin. Timberlands operating cost rose significally in a year’s time span. The second quarter of 2007 financial results for Wolverine World Wide Inc. showed more positive signs. The 2nd quarter sales were $250,039 thousands an increase of 5% in comparison with the 2nd quarter of 2006. The current ratio of the the company at the end of the 2nd quarter of 2007 was 3.65, while it quick ratio ended at a 1.99. The Timberland Company lackluster results continued in the third quarter of 2007 with sales down 13.9% in comparison with the third quarter of 2006. The current ratio as of the end of the 3rd quarter of 2007 of Timberland Company was 2.38 and its quick ratio at the end of the third quarter of 2007 was 1.17. Conclusion The financial analysis of the financial statements results of Wolverine World Wide Inc. and The Timberland Company illustrate the position of these two companies in the apperal industry and the recent financial trends of each company. Timberland in the bigger of the two firms, but it is clear that Wolverine currently is enjoying better overall financial results. If I was to pick one of these two common stocks to invest a $10,000 in the stock market I would place my money on WWW based on the financial analysis perform in this report. Wolverine has the increasing sales trend, a much lower debt levels, higher net profitability, increasing asset, greater efficiency in return of assets and a much higher price to earnings ratio. Both companies are good investment because they have great unique branded products, a global distribution network in place, multiple decades of experience in the apperal industry, and a vision and understanding on how the world economy changed with the start of the convertion age at the turn of the century. Both companies have cybernetic platforms in place to achieve further growth through ecommerce during the 5-10 years. Timberland must make adjustmetn in its operations to locate the sources of inefficiecy that are hurting the profitability of the company and are hurtign the liquidity position of the company, a key financial metric since a lack of liquit assets place a firm a company at risk of total shutdown if current liabilities cannot be met. There is lot of work ahead for both these companies and continued success is a high possibility if the companies adapt to the changes in the marketplace and make the changes necessary to optimize their financial engines. References “Annual Report: Timberland 2006”. 3 December 2007. . “Annual Report: Wolverine 2006”. 3 December 2007. Duns & Bradstreet. 2007. Apperal Industry Business Ratios. 4 December 2007. Plunkett Research. 2007. “Apperal Industry Statistics.” 4 December 2007. Timberland.com. 2007. 3 December 2007. Yahoo.com. 10 October 2007. “Historical Prices:TBL”. 4 December 2007. Yahoo.com. 10 October 2007. “Historical Prices WWW”. 4 December 2007. Appendix A: Income Statement Wolverine World Wide (Annual Report: Wolverine 2006). Appendix B: Income Statement Timberland Company (Annual Report: Timberland 2006). Appendix C: Ratio Analyses Comparison: Wolverine vs. Timberland (Yahoo) ; (Annual Report: Timberland 2006) ; (Annual Report: Wolverine 2006). Appendix D: Apperal Industry Financial Ratios (Dun & Bradstreet). Read More