Financial statement analysis

TABLE OF CONTENTS

  INDUSTRY ANALYSIS  3

  COMPANY ANALYSIS  3

  Nordstrom  3

  Gap Inc  4

  Abercrombie Fitch  4

  ACCOUNTING POLICIES  4

  Depreciation Method  

  Inventory Method  

  Allowances  

  Tax Accounting  

  Dividend policy  

  Revenue Recognition  

  Goodwill  

  Long term investments  

  Pensions  4

  QUALITATIVE EVALUATION  7

  Profitability  

  Assets Utilization Liquidity  

  Solvency  

  LIMITATIONS  11

  RECOMMENDATIONS  11

2

INDUSTRY ANALYSIS

The companies we selected are from the SEC Industry group 5651-Retail Clothing stores. This industry has a variety of stores ranging in age, distribution, and reputation. The companies we will financially analyze are Nordstrom, Gap Inc. and Abercrombie & Fitch. These three businesses represent the variety which the clothing industry contains.

This report will consider and examine various financial aspects of our companies. By analyzing key figures from financial statements, we will be able to compare key issues between the companies. Such issues include liquidity, leverage, profitability, overall financial standing and accounting methods implemented. First we will begin with a brief description of each company.

COMPANY ANALYSIS

Nordstrom Nordstrom was founded in 1901 by John W. Nordstrom. His philosophy was to offer customers the best possible service, selection, quality and value. The company is committed to the idea of which it began with, earning trust form customers one at a time. Nordstrom created its fashion departments to fit individual’s lifestyles. They currently have five channels of operation: full line stores, off/price stores, boutiques, catalog and the internet. Nordstrom began as a shoe store. In the 1960s it was the largest shoe chain in the US. Toward the mid/1960s they added clothing to become the fashion retailer it is today. Recent goals of Nordstrom include driving top-line growth, implementing a new perpetual inventory system and to continue lowering expense levels as a percentage of sales.

The Gap Inc. This company was founded by Donald and Doris Fisher in 1969. Today it is one of the largest specialty retailers with three of the most recognized names: Gap, Banana Republic and Old Navy. The company employees over 165,000 people and has about 4,200 stores in the US, UK, Canada, France, Japan and Germany. The Gap is focusing on their international locations and continual expansion of company owned and operated stores. They are committed to monitor and improve the clothing production factories conditions overseas. The Gap continues to evolve and adopt good corporate governance revolving on conducting business in a responsible, honest and ethical matter (www.gap.com).

Abercrombie & Fitch A & F was introduced in 1997 and spun off The Limited in 1998. It is a leading specialty retailer encompassing three concepts: Abercrombie & Fitch, Abercrombie and Hollister Co. The company focuses on high quality merchandise to compliment a casual American lifestyle, while targeting age’s 18-college. Abercrombie & Fitch claims their most important strategy: building their brands. Presently they are focusing on developing their women’s and girls departments. In 2002 they grew rapidly opening 112 new stores whereby at the end of the year the company had 597 locations nationwide (www.abercrombie.com).

ACCOUNTING POLICIES

In the research of our three companies, we examined various accounting methods implemented to see how any differences may influence a company’s financial position. Differences were quite hard to come by and this is likely because the companies are so similar in operation and content. Subjects we searched for variation included depreciation, inventory

counting, allowance for doubtful accounts, taxes, stocks and dividends, revenue recognition, goodwill, long-term investment and pensions.

Depreciation method All companies claimed they use the straight-line depreciation method, which allocates an equal portion of depreciation expense to each period of the asset’s useful life. Nordstrom admitted using a combination of straight- line and accelerated method. Accelerated depreciation recognizes larger amounts of expense early in the asset’s life and smaller amounts in the later years. This indicates the possibility of a smaller asset balance, considering these assets with accelerated depreciation were acquired recently.

Inventory method All companies use the first-in- first-out (FIFO) inventory method. This is logical for retail companies, enabling them to match the cost of goods sold account with what is physically sold. Allowances Gap and Nordstrom stated they value their allowances based on the likelihood of a portion of deferred tax assets not being recognized, and historical trends, aging of accounts and write-off expectations respectively. Abercrombie does not value allowances due to believing net deferred tax assets will be recognized in the future. Although the clear differences in considering allowance for doubtful accounts between the companies, none of the balance sheets indicated the contra-asset account existing at all. This means if any company believed allowances were to exist for the year, they were not deducted from the accounts receivables account.