Wal-Mart v. Canadian Tire

Posted in Uncategorized by qmarks on August 22, 2010

In retail industry, core differentiator of the Return on Equity is Asset Turnover. In other words, every dollar created from a company’s asset base. Those company’s assets in the discount retailing sector are the shelves, distribution channel equipments and the labour, that’s all. In order to create more revenue, you should have high customer traffic with shoppers full of baskets in their both hands, plus those who kept the baby at home to save some space in the shopping-cart. So having high volume in a fixed space shall create a competitive advantage in this low profit margin sector. On a cloudy sunday afternoon in Toronto, I was hanging at Rotman Financial Research and Trading lab, sailing around the retail industry data in Bloomberg. I was comparing the ROE performance of American companies and their peers in Canada. I come up with Wal-Mart and Canadian Tire Corp. Below are the results;

Obviously the competitive advantage that Wal-Mart has over Canadian Tire is its asset turnover. Wal-Mart generates more revenue from its asset base which means ceteris-paribus, Wal-Mart’s earnings should be higher than Canadian Tire. In conclusion Wal-Mart deserves a premium price over Canadian Tire. (Aug 20, closing prices WMT US$ 50.22, CTC/A C$ 54.81)

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