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Financial Analysis Assignment Evaluating Business Performance Of Kroger & Walmart

Question

Task:
This project on financial analysis assignment deals with the analysis of two companies of the same sector, which are in competition with one another), listed in an American stock exchange, Nasdaq, NYSE or American Stock Exchange. The analysis will examine sales, profits, the market share, and some other statistics of the two companies, over a period of five years.

Please answer the following questions:

  1. Examine the sales of the two companies over a period of five years. Comment and justify the fluctuations in sales over that period based on information from the financial statements of the two companies, news reports and analysis.
  2. Examine the income from operations for the two companies over a period of five years. Comment and justify the fluctuations in income from operations over that period based on information from various sources, annual reports news reports and analysis. Make comments!
  3. Examine the cash flows from operations for the two companies over a period of five years. Comment and justify the fluctuations in cash flows from operations over that period based on information from the financial statements of the two companies. Make comments!
  4. Discuss the relationship between “sales and income from operations” for the two companies over the past five years. Do they move together? Explain!
  5. Discuss the relationship between “sales and cash flows”, for the two companies for the past five years. Do they move together? Explain!
  6. Discuss the relationship between “income from operations and cash from operations”, over the five year period. Do they move together? Should they move together? Explain!

Answer

Introduction
One of the companies selected herein financial analysis assignment is Walmart which is a USA based retail company operating a series of Hypermarkets, discount department stores and retail grocery stores worldwide. Kroger is the company which operates in the USA supermarket industry and also the market leader in that industry in term of revenue (The Kroger Co, 2021). This report evaluates different aspects of Kroger and Walmart's financial performance in the last five financial years. Some of the aspects of the financial performance which will be evaluated are income from operations, sales, cash flow from operations and relationship between these aspects in these two companies. In the end, the main point of the report will be stated in conclusion.

1. Examination of the sales of Walmart and Kroger over a period of five years

Sales of the two companies for the last five financial years

 

Walmart

Kroger

Years

2020

2019

2018

2017

2016

2020

2019

2018

2017

2016

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Sales

 $         523,964

 $        514,405

 $        500,343

 $        485,873

 $        482,130

$122,286

 $        121,852

 $        123,280

$115,337

 $        109,830


Table 1: Sales of the two companies for the last five financial years
(Source: Extracted from Annualreports.com, 2021 and Walmart.com, 2021 and S2.q4cdn.com, 2021)

Sales of Walmart in finan 1

Figure 1: Sales of Walmart and Kroger in the last five financial years
(Source: Created by the learner)

The above table and figure show that Walmart's sales have been relatively more stable and higher than Kroger. This is being stated as it can be seen that there is positive growth in Walmart's sales in each financial year from the previous financial years over these five financial years. However, on the other hand, Kroger has not been able to register positive growth in its sales in all last four financial years compared to its previous years. This is being stated as the company has registered negative growth in the financial year ending 2019 compared to financial year ending 2018. Although, in all other financial years, the company has registered positive growth in its sales (Investing.com, 2021).

Also, it can be seen that Walmart's sales are significantly higher than Kroger in all the financial years. Walmart's possible reason for generating higher sales than Kroger is that Walmart operates in the retail industry in 27 countries and is involved in e-commerce activities in 10 countries. On the other hand, Kroger operates in only the USA market. Therefore, as Walmart operates in a larger market than Kroger, this gives Walmart a higher sales opportunity to generate a higher revenue than Kroger. One of the reasons for Kroger registering the negative growth in sales in the financial year ending 2019 is due to the company struggling to compete with not only with Walmart but also Amazon for USA retail industry (Garcia, 2021). Therefore, this failure for Kroger to compete with Amazon and Walmart is one reason for the company registering negative sales growth. However, the company has been able to bounce back in 2020 due to some of the competitive advantages which it has compared to other companies in the market. One of such competitive advantages which it has is the strong market of its own-brand products. Another competitive advantage is that the company is constantly innovating to better its digital sales of Kroger, leading to high growth in its digital operation (Swan, 2021).

On the other hand, the reason for Walmart's constant positive growth over the last five financial years is that this company operates in many countries that diversify or reduce the impact of any negative growth in any particular market due to any specific reason in that country. The company has also seen high growth in its e-commerce activities due to its efficient supply chain and high-value pricing strategy. All these have contributed to the company generating positive and constant growth in its sales in Walmart.

2. Examination of the income from operations for Walmart and Kroger over a period of five years

Income from operation  of the two companies for the last five financial years

 

Walmart

Kroger

 

2020

2019

2018

2017

2016

2020

2019

2018

2017

2016

 

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Income from operation

20,568

21,957

20,437

22,764

24,105

2,251

2,614

2,612

3,436

3,576


Table 2: Income from the operation of the two companies for the last five financial years
(Source: Extracted from Annualreports.com, 2021 and Walmart.com, 2021 and S2.q4cdn.com, 2021)

Sales of Walmart in finan 2

Figure 2: Income of operations of Walmart and Kroger in the last five financial years
(Source: Created by the learner)

It can be seen from the above table 2 and figure 2 that income from the operation of both Walmart and Kroger in the last five financial years has been fluctuating significantly. The income from the operation of Walmart has declined in both financial year ending 2018 and 2017 compared to its previous financial year, which is financial year ending 2017 and 2016, respectively. However, it can be seen that in 2019, the company again generate positive growth in its operating profit. It generated negative growth in income from operation in the financial year ending 2020 compared to financial year ending 2019.

One of the reasons Walmart has generated negative growth in its income from operation in most of the period in the last five financial years is its increased operating cost. Also, another reason for the company generating negative growth in its income from the operation is that Walmart is keeping low-profit margin in most of its product to ensure that the company is not only able to hold on to its current market share but also able to take away some of its competitive market shares (Cheng, 2021). This is happening due to the global retail market, including the USA, becoming more competitive than before due to Amazon's advancement and some other companies in recent years.

On the other hand, the fluctuation in the income from the operation of Kroger has also shown a similar pattern in which the company has registered negative growth in both financial years ending 2018 and 2017 compared to its previous financial year ending 2017 and 2016 respectively. The only financial year out of the last five financial years in which the company has generated positive operating profit is 2019. However, again in 2020, the company has generated negative growth in its income from operation compared to its previous financial year.

It can be seen that Kroger has generated positive growth in its income from operation in only one financial year which is 2019, but it also the year in which the company has generated negative growth in sales. One of the likely reasons for this contradiction is that the company tried to keep its products' profit margin higher in this financial year than in other years. So, this leads to slightly higher income from the operation of the business. Still, due to strong competition in the market from Amazon and Walmart, which are giving its products at the low-profit margin, Kroger lost some of its market shares, resulting in negative growth. So, when that happened, the company again lowered its profit margin to be able to become more competitive in the market. Other than this financial year, it can be seen that Kroger has also registered negative growth in its income from the operation. One of the likely reasons for it is that the company is trying to hold to its current market share and be competitive in the market by giving products at the low-profit margin.

3. Examination of the cash flows from operations for Walmart and Kroger over a period of five years

Cash flow from the operation  of the two companies for the last five financial years

 

Walmart

Kroger

 

2020

2019

2018

2017

2016

2020

2019

2018

2017

2016

 

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Amount ($millions)

Cash flow  from operation

25,255

27,753

28,337

31,673

27,552

4,664

4,164

3,413

4,272

4,917


Table 3: Cash flow from the operation of the two companies for the last five financial years
(Source: Extracted from Annualreports.com, 2021, Walmart.com, 2021 and S2.q4cdn.com, 2021)

Sales of Walmart in finan 3

Figure 3: Cash flow from the operation of the two companies for the last five financial years
(Source: Created by the learner)

The cash flow from the operation of Walmart and Kroger also show high fluctuation in the last five financial years. It can be seen that the cash flow from the operation of Walmart has increased in the financial year ending 2017 compared to 2016. The company has generated negative growth in its net cash flow from operations in the following three years (S2.q4cdn.com, 2021). One of the significant reason which has been identified for the negative growth of the cash flow from the operation of Walmart is the high volatility in the consolidated net income of the company which has seemed to be declining in all the financial years compared to its previous financial years except for the last financial years 2020 in which there has been a significant increase in the cash flow from operation.

This fluctuation in the consolidated net income has contributed significantly in the fluctuation in the cash flow from operation. However, this is not the only reason as it can be seen that there is also significantly fluctuation in some of the current liabilities and current assets level in the company which has also contributed to this negative growth in the cash flow from the operation of the company. For example, Walmart kept a significantly higher value of inventories in the financial year ending 2019 than other financial years. This led to the company spending higher cash in its inventory management compared to other financial years. Also, there is high fluctuation in the value of the receivable in the company, which means there is volatility in the company's level of goods being sold on credit. All these are the reasons for the fluctuation in the cash flow from the operation of Walmart.

There is fluctuation also in the cash flow from the operation of Kroger in the last five financial years. The cash flow from the operation of Kroger shows negative growth in 2017 and 2018 compared to previous financial years 2016 and 2017, respectively. However, there is positive growth in the cash flow from the operation of Kroger in the financial year ending 2019 and 2020 of the company. There are some significant reasons identified for this high fluctuation in the cash flow from the operation of the company.

One of the significant reasons is the high fluctuation in its cash obligation for its employees' pension plan. It can be seen that Kroger is paying significantly high cash to meet this obligation in 2017 and this could be one of the reasons for the negative growth in the cash flow from the operation of the company in that year. Also, it can be seen that the cash obligation from the accrued expenses has declined in 2019 and 2020. This is one reason for the positive growth in the cash flow from the operation of the company. One of the other working capital management change which has been observed in Kroger which is likely to have a significant impact on the cash flow from the operation of the company is the fact that the company’s large proportion of operating cost comprises of net cash charges as these charges are not considered in the calculation of the cash flow. This impacts the company's cash flow positively as a low proportion of the operating cost is deducted to show the company's net cash flow (Investing.com, 2021).

4. Discussion of the relationship between “sales and income from operations” for Walmart and Kroger over the past five years

Sales of Walmart in finan 4

Figure 4: Sales and Income from the operation of the two companies for the last five financial years
(Source: Created by the learner)

It can be seen that in Walmart, the sales and income from operation do not move together or in the same direction. This is being stated as it can be seen that Walmart has recorded positive growth in its sales in all of its last five financial years. However, the company has registered positive growth in the income from operation only in one financial year, 2019. Therefore, it can be stated that Walmart sales and income from operation do not move together or in the same direction. This can be related to Walmart's business strategy as the company is looking to expand its market share and become more competitive in a highly competitive business environment by help of efficient supply chain, which is likely to be increasing the operating cost of the company. However, the company cannot transfer this high cost of the supply chain to its customers as the company works in a very price competitive retail and e-commerce market. This leads to the sale's positive growth by selling its product at a low price, but negative growth in income from operation as the profit margin of products is declining (Bloomberg.com, 2021).

On the other hand, it can be stated that the sales and income from the operation of Kroger move together but in the opposite direction. This being stated as it can be seen that Kroger has registered positive growth in Sales in three of the last four financial years but on the financial years in which the company has recorded positive growth, the income from the operation of the company has recorded negative growth in all those three financial years. On the other hand, in the financial year 2019, the company has recorded negative sales growth but recorded positive growth in income from operation (Annualreports.com, 2021). Therefore, it can be stated that they move together but in a different direction. The likely reason for it is the surrounding competitive business environment in which if the company increases its profit margin of the products, then its sales decline and income from operation increases but when it lowers the profit margin, the sales increases and income from operation decline.

5. Discussion of the relationship between “sales and cash flows” for Walmart and Kroger for the past five years

Sales of Walmart in finan 5

Figure 5: Sales and Cash flow from the operation of the two companies
(Source: Created by the learner)

The sales and cash flow from the company's operation do not move together in Walmart as it can be seen that there is positive growth in the company's sales in all last four financial years. However, there is positive growth in the cash flow from operation only in 2017, but there is negative cash flow growth from operation in all the following three financial years. Therefore, it can be stated that these two variables do not move together. One of the reasons for such is that the company's working capital management strategy keeps changing, leading to a change in the value of the different current assets and current liabilities of the company. Also, even if the company has generated constant sales growth, the consolidated net income of the company is fluctuating, which has also contributed to this factor.

The sales and cash flow from the operation of Kroger seem to be moving together and even in the same direction to a large extent in these five financial years as it can be seen that although, the sales and cash flow from operation growth of the company seem to be moving in the different direction in 2017 (Annualreports.com, 2021). However, in all of the following years, both growth has followed the same direction. One of the reasons found for these two variables in the financial performance of Kroger moving together is that the company do not spend significantly high amount for any of its current assets and current liabilities management and this lead to a pattern of sales and cash flow from the operation of the company being similar.

6. Discussion of the relationship between “income from operations and cash from operations”, over the five years

Sales of Walmart in finan 6

Figure 6: Income from the operation and Cash flow from the operation of the two companies
(Source: Extracted from Annualreports.com, 2021 and Walmart.com, 2021)

The cash flow from operation and income from the operation of Walmart do not move together as it can be seen that the although both variables in the financial performance have shown negative growth but on the years in which there has been positive growth in of the variables but still other variable growth pattern did not change in that financial years. For example, there was positive growth in the income from operation in 2019. Still, there is negative growth in cash flow from the company's operation, which continued from previous years pattern (S2.q4cdn.com, 2021). These two factors do not move together as non-cash charges like depreciation and amortization play a significant role in calculating income from the operation, but it is considered in calculating cash flows.

The cash flow from operation and income from the operation of Kroger also do move together as except for 2020, the two factors growth patterns have been same in all the four financial years out of the last five financial years. These two factors move together in Kroger as there is some significant cash expense which decides both these factors pattern in the company like the contribution to the pension plan (Annualreports.com, 2021).

Conclusion
From the above analysis, it had been found out that Walmart’s sales growth is more stable than Kroger. Still, income from operation growth of both companies is high volatility and showing negative growth. However, the cash flow from operation growth of Kroger found to be more stable than Walmart’s. It has been found out sales, and income from the operation and cash flow from Walmart's operation seems to be not moving together but under Kroger that is not the case to a large extent.

References
Annualreports.com. 2021. [online] Available at: [Accessed 3 January 2021].

Annualreports.com. 2021. [online] Available at: [Accessed 3 January 2021].

Annualreports.com. 2021. [online] Available at: [Accessed 3 January 2021].

Annualreports.com. 2021. [online] Available at: [Accessed 3 January 2021].

Bloomberg.com. 2021. [online] Available at: [Accessed 3 January 2021].

Cheng, A., 2021. Wal-Mart’S ‘New’ Strategy: Everyday Low Prices. [online] MarketWatch. Available at: [Accessed 3 January 2021].

Garcia, T., 2021. Kroger Downgraded At Bank Of America As Competition With Walmart And Target Heats Up. [online] MarketWatch. Available at: [Accessed 3 January 2021].

Investing.com. 2021. Kroger (KR) Income Statement. [online] Investing.com. Available at: [Accessed 3 January 2021].

Investing.com. 2021. Wal-Mart Stock Price (WMT) - Investing.Com. [online] Available at: [Accessed 3 January 2021].

S2.q4cdn.com. 2021. [online] Available at: [Accessed 3 January 2021].

S2.q4cdn.com. 2021. [online] Available at: [Accessed 3 January 2021].

Swan, A., 2021. Four Ways Kroger Is Fighting Back In The Battle Against Amazon-Whole Foods. [online] Forbes. Available at: [Accessed 3 January 2021].

The Kroger Co. 2021. About Kroger - The Kroger Co.. [online] Available at: [Accessed 3 January 2021].

Walmart.com. 2021. [online] Available at: [Accessed 3 January 2021].

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