Comparing Ratios for Luxury and Budget Retailers
Following are selected financial statement data from Capri Holdings (a retailer that owns upscale brands Michael Kors, Jimmy Choo, and Versace) and Five Below (a value-priced toy and novelty retailer).
| Capri Holdings ($ millions) | Five Below ($ thousands) | |||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Sales | $4,718.6 | $4,493.7 | $1,559,563 | $1,278,208 |
| Cost of sales | 1,859.3 | 1,832.3 | 994,478 | 814,795 |
| Net income | 592.1 | 551.5 | 149,645 | 102,451 |
| Average equity | 1,805.0 | 1,794.0 | 536,826 | 394,982 |
Required
a. Calculate the gross profit for each company for both years. Gross profit is equal to sales minus the cost of sales.
b. Calculate gross profit as a percentage of sales for each company for both years.
c. Compute the return on equity for each company for both years.
Notes:
For gross profit, enter Capri Holdings in millions and Five Below in thousands.
Round gross profit percentage and ROE to one decimal place (example: 0.2345 = 23.5%).
| Capri Holdings | Five Below | |||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| a. Gross profit | ||||
| b. Gross profit percentage | ||||
| c. Return on equity (ROE) | ||||
d. Which of the following best explains why the ratios for Five Below and Capri Holdings differ?
Select the corresponding number for the correct answer:
- Capri Holdings is much larger than Five Below and so its ratios are naturally larger.
- Five Below is a younger company and so its ratios are naturally lower.
- Capri Holdings’ brand recognition creates a competitive advantage, which allows the company to add a bigger markup to the products it sells.
- Five Below imports its products from Southeast Asia, which allows the company to keep product costs down.
Related Answers: (Solution) The following table contains financial statement information for Walmart Inc.
Solution
Gross profit is equal to sales minus the cost of sales.
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