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Comparing Abercrombie & Fitch and TJX Companies Following are selected financial statement data from Abercrombie &...

Comparing Abercrombie & Fitch and TJX Companies
Following are selected financial statement data from Abercrombie & Fitch (ANF-upscale clothing retailer) and TJX Companies (TJX-value-priced clothing retailer including TJ Maxx) -- both dated the end of January 2008 or 2007.

($ millions) Company Total Assets Net Income Sales
2007 TJX Companies Inc. $6,086
2008 TJX Companies Inc. 6,600 $ 772 $18,647
2007 Abercrombie & Fitch 2,248
2008 Abercrombie & Fitch 2,568 476 3,750

(a) Compute the return on assets for both companies for the year ended January 2008

(b) Disaggregate the ROAs for both companies into the profit margin and asset turnover.

(c) Which of the following is a likely interpretation of the results of your computations for parts a and b?

ANF turns its assets much faster than TJX and this is the primary reason for its higher return on assets.

ANF is realizing a higher return on assets as a result of its lower investment in assets.

ANF's profit margin more than offsets its lower asset turnover, thus generating higher returns on assets.

ANF's higher return on assets is the result of its greater level of sale

Solutions

Expert Solution

Solution a:

Return on Assets - Original Formula
Particulars Choose Numerator / Choose denomerator = Return on Assets
Formula Net Income / Average Total Assets = Return on Assets
TJX Companies Inc $772.00 / $6,343.00 = 12.17%
Abercrombie & Fitch $476.00 / $2,408.00 = 19.77%

Solution b:

Profit Margin Profit Margin
Division Choose Numerator / Choose denomerator = Profit Margin
Details Amount Details Amount
TJX Companies Inc Net income $772.00 / Sales $18,647.00 = 4.14%
Abercrombie & Fitch Net income $476.00 / Sales $3,750.00 = 12.69%
Asset Turnover Turnover
Division Choose Numerator / Choose denomerator = Asset Turnover
Details Amount Details Amount
TJX Companies Inc Sales $18,647.00 / Average Total assets $6,343.00 = 2.94
Abercrombie & Fitch Sales $3,750.00 / Average Total assets $2,408.00 = 1.56

Solution c:

The most likely interpretation of the results for computation in Part a and b is "ANF's profit margin more than offsets its lower asset turnover, thus generating higher returns on assets."

Hence 3rd option is correct.


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