Comparing Talbots. S. And Chico's FAS Inc.

Register to read the introduction… As we are dealing and focusing on retail businesses, understanding this ratio is paramount to the industry, as this is the heart of the business. The inventory turnover is calculated by taking the cost of goods sold divided by the average inventory for the year. This ratio measures the efficiency of a company's inventory management and should be compared against industry averages. A low turnover implies poor sales and therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. For FY 2005, Chico's inventory turnover was 6.5, while Talbots was 4.8. Based on these numbers, we can see that Chico's inventory moves more quickly through the production process to the ultimate sale to the customer, thus reducing storage and miscellaneous costs. Since 2001, inventory turnover has increased each year for Chico's, while Talbots inventory turnover has decreased during the past year. Much of this has to do with the hurricanes during September, as well as incorrectly forecasting customer's patterns of when they would buy products, thus resulting in price markdowns. To note, the industry average inventory turnover is 4.56. Gross profit margin ("GPM") is also a very important measure for retailers. The GPM shows the relationship between sales revenue and cost of sales and indicates the portion each dollar of sales that contributes to the company's profit. GPM is calculated as revenue minus cost of goods sold divided by revenue. Chico's GPM was 61% in FY 2005, 61.4% in FY 2004 and 60.5% in FY 2003. The GPM for Talbots during the past three years was 36.2% in FY 2005, 35.6% in FY 2004 and 38.3% in FY 2003. Gross profit margin serves as the source for paying additional expenses and future savings. As with most retailers, they [i.e. the industry] are very fickle with fashion (i.e. wrong guess in style and design could ruin an entire season). This typically results in price markdowns. In this particular case, I feel that Talbots' fluctuation between FY 2003 to FY 2005 could be based on the fact that they had bad styling and designs for the line of clothing and accessories, and the customers were not pleased. Another ratio I will discuss is the net profit margin ("NPM") . It is calculated as net income divided by net sales. Based on FY 2005 results, the NPM for Chico's was 13.8% while the NPM for Talbots was 5.15%. What NPM truly shows is management's effectiveness at controlling revenues and expenses to generate greater shareholder returns. Basically, it measures the portion of sales a company actually keeps in earnings. Since 2003, Chico's NPM has steadily increased, while Talbots' NPM has steadily decreased. The NPM since 2003 for Chico's was 13.24% in FY 2004 and 13.04% in FY 2003. The NPM for Talbots over the same time span was 5.62% in FY 2004 and 6.44% in FY 2003. This may also be attributable to Talbots' inefficiency to sell and market their products. I will now touch upon another very important ratio, the quality …show more content…
They are both highly motivated to produce the highest quality merchandise and they scale their merchandise to the mid-income families, more towards the women 35 and over. While one company was gaining ground versus their peers, the other was having an average year, but the negativity was centered on the hurricanes and bad judgement of when styles were in and when to have their sales. Much can be said about these companies, and where they are heading. Both CEO's seem very upbeat and optimistic about the "market" as well as their expansion. Both companies feel that their future success relies on the many different factors, and that uncertainties will occur. These potential risks and uncertainties include the financial strength of retailing in particular and the economy in general, the extent of financial difficulties that may be experienced by customers, the quality of merchandise received from vendors, the extent and nature of competition in the markets in which the companies operate, and the extent of the market demand and overall level of spending for women's private label clothing and related accessories, to name a few. Hopefully, after reading this analysis and comparison of Chico's and Talbots, you were able to understand a bit more about the nature of their businesses and management