Gap Inc. and Hennes & Mauritz (H&M): Company Analysis

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Abstract

A comprehensive analysis of the performance and status of a company is paramount. Such analysis provides stakeholders of a company with important information that can aid them in decisions making. Specifically, the stakeholders of a company are interested in the financial analysis. It gives them information on the financial strengths and weaknesses of the company. Ratio analysis is a significant tool for carrying out financial analysis of a given company. Apart from the financial perspective, analysing a company from the management perspective is also important. It gives information on the efficiency of the management in achieving the goals and objectives of the company. This paper seeks to carry out a comprehensive company analysis of two fashion clothes retailers. The two companies are Gap Inc. and Hennes & Mauritz (H&M). The analysis will focus on discussing the history of the companies, evaluating the performance of the company and giving recommendations on which company is suitable for investment.

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A brief description of the history and current position

The Gap Inc., established in 1969, is a multinational company that is based in California, America. The company trades in clothing and other accessories. The company was founded by Donald Fisher and Doris Fisher. Further, the company trades on the New York Stock Exchange with a ticker symbol of GPS. Also, it is a component of the S&P 500 index. Currently, the company carries out its operations in six key segments, these are, Athleta, Piperlime, banana republic, Old Navy, and Intermix. The brands of the company comprise of Gap, GapBody, GapKids, BabyGap, and GapMaternity. The current number of employees stands at 136,000. It has approximately 3,400 outlets across the world with over 2000 outlets in the United States. Further, the company has more than 300 franchise stores located in regions such as Latin America, Africa, Middle East, Asia, Australia, and Eastern Europe (Gap Inc., 2013, p. 1).

On the other hand, H&M, established in 1947, is a multinational company that is based in Sweden. The headquarters is located in Stockholm Sweden. The company sells clothing and other accessories. Further, H&M trades on the Stock Exchange with a ticker symbol of HMB. The company is the second largest after Inditex. The current number of employees is approximately 104,000 (H&M., 2012, p. 8). Finally, in late 2012, the company had approximately 2,776 outlets across the world (in 48 markets).

An analysis of the performance of each company from the management perspective

H&M

Strategies

The management of H&M has concentrated on global expansion of the company. Specifically, the management intends to achieve a growth that ranges between 10 to 15 percent every year. For instance, in 2012, the management exceeded their expansion targets. The team had planned to open 275 stores while it opened 304 stores. Apart from expansion, the management has ensured that the quality and sustainability of their products are also growing with the growth in the number of outlets. The team of management aims at attaining sustainable development in their operations. The team is of the view that sustainability enhances social development and protection of the environment. To achieve sustainability, the management strives to embrace ethics, anti-corruption, human rights, and the environmental concerns in their day to day operations (H&M, 2012, p. 28). Further, the management is committed to growing the online platform for sale. This has contributed immensely to the growth of sales over the years. The final strategy that is employed by the company is corporate social responsibility. The company gives back to the community massively. It increases the presence of their brand in the regions they operate in.

Financing policy

The financing policy of the company can be evaluated by analyzing the capital structure of the company.

2010
$ millions
2011
$ millions
2012
$ millions
Debt 0 0 0
Proportion 0% 0% 0%
Shareholders’ equity 44,172 44,104 43,835
100% 100% 100%
Total 44,172 44,104 43,835

The company does not have debt in its capital structure. This shows that the company has a defensive financing policy.

Summary of key financial data

2010 2011 2012
Current assets 40,932 39,918 37,232
Non-current assets 18,250 20,270 22,941
Current liabilities 13,847 14,757 14,010
Non-current liabilities 1,163 1,327 2,328
Shareholders’ equity 44,172 44,104 43,835

Source of data – H&M., 2012, pp. 48 – 55.

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The value of current assets declined over the three years while the value of non-current assets increased over the period. It may be an indication that the company reschedule the proportion of current and non-current asset. Further, non-current liabilities increased while the value of shareholders’ equity declined over the period. This has an effect on the capital structure of the company.

Cost of capital

Cost of debt = (risk free rate + default spread) (1 – t)

Risk free rate = 6%

Default spread = 0.4

Tax rate = 34% (corporate tax in the US is 34%)

Substitute the values

(6% + 0.4) 0.66 = 4.224%

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Cost of equity = risk free rate + Beta * Risk premium

= 6% + 1.37 * 5.82% = 13.9734%

The weighted average cost of the capital = cost of equity * proportion equity the capital

structure + cost of debt * proportion debt in the capital structure.

Weighted average cost of capital = 13.9734% * 100% + 4.224% * 0% = 13.9734%

Gap Inc.

Strategies

The executive management of Gap Inc. is made up of eleven members. The team is led by Glenn Murphy as the Chairman and Chief Executive Officer. The main goal of the company is to “engage customers and maximize shareholder returns” (Gap Inc., 2013, p. 1). The management of the company has focused on increasing their presence across the world. Further, the team ensures that the decisions made by the company do not impact on the community negatively because the company seeks to build a stronger relationship with the customers. Further, the management actively responds to customer needs and expectations across the world. These expectations are incorporated during product development and in the supply chain. This strategy has significantly improved customer loyalty and competitive advantage of the company. Further, the company reaches out to the customers through the online platform. This has contributed significantly to the growth of sales of the company. The team of the management has continuously focused on the expansion of outlets across the world. Finally, the management also increased their allocation for corporate social responsibility. This has significantly improved their presence in the regions they operate in (Gap Inc., 2012, p. 13).

Financing policy

Capital structure. Source of data – Gap Inc., 2013, pp. 32 – 33.

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2010
$ millions
2011
$ millions
2012
$ millions
Debt 890 2,598 2,232
Proportion 17.91% 48.53% 43.54%
Shareholders’ equity 4,080 2,755 2,894
Proportion 82.09% 51.47% 56.46%
Total 4,970 5,353 5,126

The proportion of debt in the capital structure increased to a value greater than 40%. This shows that the company has an aggressive financing policy.

Summary of key financial data

2010 2011 2012
Current assets 3,926 4,309 4,132
Non-current assets 3,139 3,113 3,338
Current liabilities 2,095 2,128 2,344
Non-current liabilities 890 2,539 2,232
Shareholders’ equity 4,080 2,755 2,894

Source of data – Gap Inc., 2013, pp. 32 – 35.

The value of current assets increased between 2010 and 2011. It later declined in 2012. The value of non-current assets followed the opposite trend, it declined between 2010 and 2011 and later increased in 2012. The company experienced a general increase in the value of current liabilities and non-current liabilities. The value of shareholders’ equity declined over the period. Generally, H&M has a stronger balance sheet than Gap Inc.

Cost of various sources of capital

Cost of debt = (risk free rate + default spread) (1 – t)

Risk free rate = 5%

Default spread = 0.4

Tax rate = 34% (corporate tax in the US is 34%)

Substitute the values

(5% + 0.4) 0.66 = 3.564%

Cost of equity = 5% + 1.2 * 4.96% = 10.952%

The proportion of 2012 will be used in the calculation below.

Weighted average cost of capital = 10.952% * 56.46% + 3.564% * 43.54% = 7.74%

The cost of equity, cost of debt and weighted average cost of capital for Gap Inc. is lower than that of H&M. This shows that investing in H&M promises higher returns than investing in Gap Inc.

An analysis of the performance of each company from the shareholder and potential investor perspective

The financial statements of a company are used by several stakeholders. For instance, shareholders and potential investors would be interested in the financial performance of the company over a given period. Specifically, they will be interested in the profitability, liquidity, leverage and efficiency of a company. The ratios will be calculated to evaluate these attributes of the two companies. The subsequent section discusses the four areas.

Profitability

Gap Inc.
Profitability 2010 2011 2012
Net Margin % 8.21 5.73 7.25
Return on Assets % 16 11.5 15.24
Return on Equity % 26.84 24.37 40.18
Return on Invested Capital % 22.4 15.18 22.79
Sales growth % 3.29 -0.78 7.57
Operating profit margin % 13.4 9.9 12.4
H&M
Profitability 2010 2011 2012
Net Margin % 17.22 14.38 13.96
Return on Assets % 32.91 26.51 28.03
Return on Equity % 44.07 35.84 38.36
Return on Invested Capital % 44.05 35.84 38.35
Sales growth % 6.99 1.40 9.82
Operating profit margin % 22.7 18.5 18.0

Source of data – H&M., 2012, pp. 48 – 55 and Gap Inc., 2013, pp. 32 – 35.

The net profit margin of Gap Inc. fluctuated during the three year period. The company experienced a decline in the value of net profit margin in 2011. On the other hand, the net profit margin for H&M declined over the three year period. The decline in net profit margin was as a result of increase in costs of production. However, the net profit margin for H&M was higher than that of Gap Inc. Further, the return on assets, return on equity, return on invested capital, sales growth, and operating profit margin for Gap Inc. followed the same trend as the net profit margin. The trend was as a result of a decline in net income earned by the company in 2011. In the case of H&M, return on assets, return on equity, return on the invested capital and sales growth declined in 2011 and thereafter increased in 2012. The operating profit margin declined over the period. In summary, the profitability of H&M is higher than the profitability of Gap Inc.

Liquidity

Gap Inc.
Liquidity 2010 2011 2012
Current Ratio 1.87 2.02 1.76
Quick Ratio 0.89 1.03 0.79
H&M
Liquidity 2010 2011 2012
Current Ratio 2.96 2.71 2.66
Quick Ratio 1.47 1.22 1.24

Source of data – H&M., 2012, pp. 48 – 55 and Gap Inc., 2013, pp. 32 – 35.

The liquidity ratios for Gap Inc. increased in the year 2011 and thereafter declined in 2012. The decline in liquidity experienced in 2012 was a result of an increase in the value of accounts payable, accrued liabilities and income taxes payable. The current ratios were fairly high. This shows that the company is in a position to pay the current liabilities. However, the company will not be in a position to adequately pay the current liabilities from the quick assets. On the other hand, the liquidity ratios of H&M were quite high. However, the values declined over the three year period. This was as a result of a decline in the value of current assets. The values of both current and quick ratios show that the company can adequately pay the current liabilities. The comparison above indicates that the liquidity position of H&M is better than that of Gap Inc. However, the declining trend in the liquidity position of H&M may not be a good indication to a potential shareholder or investor.

Leverage

Gap Inc.
Leverage 2010 2011 2012
Financial Leverage 1.73 2.69 2.58
Debt/Equity 0.22 0.92 0.43
Interest Coverage 19.5 22.39
H&M
Leverage 2010 2011 2012
Financial Leverage 1.34 1.36 1.37
Debt/Equity
Interest Coverage

Source of data – H&M., 2012, pp. 48 – 55 and Gap Inc., 2013, pp. 32 – 35.

The financial leverage of Gap Inc. was quite high in 2011. This was as a result of the increase in the amount of debt in 2011. The value declined in 2012 due to debt repayment. The increase in debt led to an increase in the value of debt/equity ratio in 2011. The interest coverage ratio increased in 2012. This means that the solvency of the company increased. On the other hand, the financial leverage of H&M increased by a small margin between 2010 and 2012. The company did not have debt in its capital structure during the three year period. In conclusions, the overall leverage position of H&M is better than that of Gap Inc.

Efficiency

Gap Inc.
Efficiency 2010 2011 2012
Payables Period 43.18 41.62 42.54
Receivables Turnover 71.53 57.96 49.84
Inventory Turnover 5.67 5.73 5.62
Fixed Assets Turnover 5.65 5.72 6.09
Asset Turnover 1.95 2.01 2.1
H&M
Efficiency 2010 2011 2012
Payables Period 34.64 34.43 31.86
Receivables Turnover 51.07 47.88 53.17
Inventory Turnover 3.7 3.47 3.37
Fixed Assets Turnover 6.99 6.69 6.61
Asset Turnover 1.91 1.84 2.01

Source of data – H&M., 2012, pp. 48 – 55 and Gap Inc., 2013, pp. 32 – 35.

The payables period for H&M was shorter than that for Gap Inc. This implies that H&M pays debt within a shorter period than Gap Inc. Besides, the debtors of H&M pays their debts within a shorter period than the debtors of Gap Inc. because the receivables turnover for H&M are less than those of Gap Inc. Moreover, it can be observed that the rate of inventory turnover for Gap Inc. is higher than that for H&M. It implies that Gap Inc. replenishes its stock faster than H&M. Further, the fixed asset turnover for H&M is slightly higher than that of Gap Inc. This implies that the sales generated from a unit of fixed assets are higher at H&M than at Gap Inc. Finally, the asset turnover ratio of the two companies was fairly equal. The asset turnover ratios for Gap Inc. were higher than those of H&M. It can be concluded that the efficiency of H&M is slightly higher than that of H&M.

Investment ratios

Gap Inc.
Investment 2010 2011 2012
Price/Earnings 4 4.6 4.4
Price/Book 1.7 1.6 1.7
Price/Sales 0.7 0.7 0.6
Price/Cash Flow 3.4 4.2 3.9
Earnings per share 1.88 1.56 2.33
Payout ratio % 21.3 28.8 26.8
H&M
Investment 2010 2011 2012
Price/Earnings 12.3 10.7 15.2
Price/Book 3.1 3.4 4.7
Price/Sales 1 0.7 1
Price/Cash Flow 8.6 7.2 7.8
Earnings per share 11.29 9.56 10.19
Payout ratio % 10.5 12.2

Source of data – H&M., 2012, pp. 48 – 55 and Gap Inc., 2013, pp. 32 – 35.

The price/earnings ratios for H&M were higher than those of Gap Inc. This implies that the expected growth in earnings for H&M are higher than those of Gap Inc. Further, the price/book value ratio show that the shareholders of H&M pay a higher value of the net assets than those Gap Inc. Further, the price/sales ratios show that the shareholders of H&M pays more for every unit of sales than Gap Inc. The payout ratios indicate that H&M is retaining a large proportion of the earnings for reinvestment. In summary the investment ratios for H&M are higher than those of Gap Inc.

Recommendation

The paper carried out a comprehensive company analysis of two fashion clothes retailers. The two companies that were discussed are Gap Inc. and H&M. Based on the above discussion, it can be observed that the performance of H&M is better than that of Gap Inc. However, H&M experienced a decline in performance in some areas. Therefore, a potential investor and a shareholder should monitor the performance of the company for another three to five years to ascertain if the trend will change.

References

Gap Inc. (2012). 2012 annual report. Web.

Gap Inc. (2013). Key facts. Web.

H&M. (2012). Annual report 2012. Web.

H&M. (2013). About H&M. Web.

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BusinessEssay. (2022, March 28). Gap Inc. and Hennes & Mauritz (H&M): Company Analysis. Retrieved from https://business-essay.com/gap-inc-and-hennes-and-amp-mauritz-h-and-ampm-company-analysis/

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BusinessEssay. (2022, March 28). Gap Inc. and Hennes & Mauritz (H&M): Company Analysis. https://business-essay.com/gap-inc-and-hennes-and-amp-mauritz-h-and-ampm-company-analysis/

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"Gap Inc. and Hennes & Mauritz (H&M): Company Analysis." BusinessEssay, 28 Mar. 2022, business-essay.com/gap-inc-and-hennes-and-amp-mauritz-h-and-ampm-company-analysis/.

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BusinessEssay. (2022) 'Gap Inc. and Hennes & Mauritz (H&M): Company Analysis'. 28 March.

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BusinessEssay. 2022. "Gap Inc. and Hennes & Mauritz (H&M): Company Analysis." March 28, 2022. https://business-essay.com/gap-inc-and-hennes-and-amp-mauritz-h-and-ampm-company-analysis/.

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BusinessEssay. "Gap Inc. and Hennes & Mauritz (H&M): Company Analysis." March 28, 2022. https://business-essay.com/gap-inc-and-hennes-and-amp-mauritz-h-and-ampm-company-analysis/.