Framework for Business Analysis

• Business Strategy Analysis– Degree of Actual&Potential Competition

• Rivalry among Existing Firms• Threat of New Entrants• Threats of Substitutes products

– Bargaining Power in Input&Output Markets– Competitive Strategy

• Financial Analysis– Profitability Analysis– Risk Analysis

Industry AnalysisRivalry Among Existing Firms

Rivalry is high as a result of:– Competitors are numerous and are roughly equal in size

and resources.

– Almost no switching costs.

– Competitors are diverse is strategies

– Competitors with high strategic stakes

– Exit barriers are high

– Rivalry is changing as a result of acquisitions, new category killers and value oriented sellers.

Industry AnalysisThreat of New Entrants

Threat of new entrants is low because:– Scale Economies in procurement, distribution and

advertisement.

– Capital requirements for keeping and managing inventory and for opening of new stores.

– Product Differentiation based in brand equity and positioning .

– Distribution Access/Relationships to malls, suppliers.

– Costs advantage resulting from favorable locations.

Industry AnalysisThreat of Substitute Products

• Threat of Substitutes Products is low because all the potential competitors are already in:– Individual Specialty Stores

– Discount Retailers

– Mass Retailers

– Department Stores

– Chains of Specialty Stores

Industry AnalysisBargaining Power of Buyers

Bargaining power of buyers is high as a result of:– Facing low Switching Costs

– Product is an important purchase for buyers

Bargaining power of suppliers is low because:– It is Easy to switch from one supplier to another

– Number of Suppliers Relative to Number of Buyers

• The Limited: over 3500 suppliers!

– No differentiation or threat of upward integration.

Industry AnalysisConclusion

This industry is characterized

by a high degree of rivalry

and high bargaining power of

its customers which could

foster a change in the potential for profitability from medium to low in the future.

Competitive StrategyThe GAP

• The GAP – GAP is pursuing a differentiation strategy.

– Its focus is in the youth segment of the population

– Focus on selling value rather than fashion.

– Less stores but larger size and higher sales per square foot.

– Focus on the design and accessibility of the stores.

– More mass marketing oriented

Competitive Strategy The Limited

• The Limited– Focus on fashion and quality

– High degree of diversification

– Higher Brand Equity

– Focus on more in-store advertising

– Larger Number of Stores

– Lower stores size and lower sales per store

– Higher price point customers

– Catalog Sales and Credit Card.

Competitive AdvantageGAP

• The Gap is a more focused company. It is pursuing a higher-margin niche strategy targeting only the youths population. GAP has a better management of inventories and fixed assets. Its improved logistic in its stores represents higher sales per squared foot and more efficient use of advertising. Gap line is more standard and value oriented than The Limited’s and directed toward lower prices points customers. Gap carries less SKU but more depth in its stores reducing obsolescence.

Competitive AdvantageThe Limited

• The Limited is a more diversified company, trying to compete in a variety of different product categories.

• This prevent them from an efficient use of resources. Consequences are lower inventory turnover and higher expenses in advertising.

• The broad assortment of products and the different nature of its products pose difficulties in The Limited management of suppliers and sales per store.

• The limited has less penetration outside the USA

Financial Analysis

• Time Series Analysis– Profitability Analysis

• Profit Margin

• Assets Turnover

– Risk Analysis• Short-Term Liquidity Risk

• Long-Term Solvency Risk

• Cross Section Analysis– Profitability

– Risk

Time Series AnalysisThe GAP

• Profitability Analysis– ROA: affected in year 6 increased in year 7.

• Profit Margin:– Higher COGS due to growth of Old Navy stores. S&G grew due

to opening of new stores.

– Lower COGS in year 7 as a result of a more favorable retailing environment

• Assets Turnover: – Increased slightly despite of increase in Inventories T/O due to

new stores rollout.

– ROCE: same path as ROA.

Time Series AnalysisThe GAP

• Risk Analysis – Short-term Liquidity Risk:

• Decline in cash and buildup in inventory due to new Old Navy Stores.

• Cash Flow to Current liabilities Ratio over 40%

– Long-term Solvency Risk:• Increased slightly over the three years but still at healthy

levels.

Time Series AnalysisThe Limited

• Profitability Analysis– ROA: decreased in year 6 but recover in year 7.

• Profit Margin: – Difficulties in pricing and reduced profitability in women’s

group sales caused higher COGS in year 6.

– Improvement in Retail environment and swift in sales toward more profitable segments (Intimate brands) decreased COGS.

• Assets Turnover:– Increased slightly as a result of higher Receivables T/O. Sale of

credit card subsidiary offset higher Inventory T/O.

– Improved as a result of growth in sales per squared foot plus sale of credit card business.

Time Series AnalysisThe Limited

– ROCE• Increased from 6 to 7 due to an increase in the leverage ratio to

finance buyback of common stocks.

• Risk Analysis – Short-term Liquidity Risk:

• Affected by decline in cash and buildup of inventories (maybe obsolete?).

• Cash Flow to Current Liabilities over 40%

– Long-Term Solvency Risk:• Red flag: debt ratios are high and cash flow and coverage

ratios are low.

Cross Section Analysis

• Profitability Analysis– ROA: GAP exceeds the Limited in each year.

• Profit Margin:– GAP has lower COGS as a result of more standard product line,

less competition in non-mall locations and less obsolescence compared to Limited’s more fashion oriented product line.

– Limited COGS affected by in-store promotions whereas GAP uses advertising.

• Asset Turnover– GAP higher Receivables T/O results from not having its own

credit card.

– Higher plant assets T/O comes from higher sales per square foot.

Cross Section Analysis

• Risk Analysis– Short-term Liquidity Risk

• GAP’s liquidity ratios exceed those of The Limited but neither of the two companies present short-term liquidity risk.

• The Limited seems to pay its suppliers so quickly.

– Long-term Liquidity Risk• GAP exhibits less long-term solvency risk, Its debt, cash flow

and coverage ratios are superior to those of The Limited.