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Empire Company Limited and Loblaw Companies Limited are large conglomerates operating primarily in food retail. Consequently, both companies expand by utilizing corporate investments, including franchise subsidiaries in other industries. Nevertheless, the emphasis and areas of operations of the organizations slightly differ. According to annual reports, Loblaw focuses substantially on peripheral activities, such as pharmacy, beauty products, general merchandise, and other (Loblaw Companies Limited, 2017). On the other hand, Empire transparently highlights food retailing as its primary business, while other industries are emphasized as secondary (Empire Company Limited, 2017). Nevertheless, both companies are influential Canadian conglomerates operating in food retail.
The total amount of reported inventory in the analyzed annual reports is $4,438 and $1,322 in millions of Canadian dollars for Loblaw and Empire, respectively. The total assets for Loblaw accounted for $35,106 (all numerical data is in millions of dollars), and the current assets accounted for $11,327 (Loblaw Companies Limited, 2017). Therefore, according to the calculations, approximately 13% of total assets or 39% of current assets were invested in inventory at Loblaw Companies Limited in 2017. Consequently, the total assets for Empire accounted for $8,695 and current assets for $2,166, which is a significantly smaller number than in Loblaw (Empire Company Limited, 2017). Percentage-wise, approximately 15% of total assets or nearly 61% of current assets were invested in inventory. Compared to the previous year, Loblaws respective percentage numbers were 12.7% and 43%, while Empires statistics were 14% and 49% in 2016. As seen from the data, the most drastic difference concerns the ratio of inventory to current assets in the case of Empire Company Limited.
Both companies utilize the inventory policy of evaluation at the lower of cost and estimated net realizable values. It is a generally recognized practice of accounting, which ensures comparability between the companies and allows for more weighted financial decisions. Similar to the notes in the annual report, this requirement makes the companies use estimates of inventory to mitigate cost fluctuation and other external factors (Loblaw Companies Limited, 2017). As a result, this is a general practice of inventory cost assessment, which is registered as a lower value than historical or market value cost. Consequently, Empires annual report states that there might be certain deviations of inventory cost due to estimations of vendor allowances, internal charges, spoiled provision, or inventories valued at higher costs (Empire Company Limited, 2017). Thus, the said metrics are open to significant estimation and should be taken into account. This note implies that the overall inventory evaluation on the consolidated balance sheets may differ from the objective assessment.
The prepaid expenses were equal to $224 and $117.5 (in millions of Canadian dollars) for Loblaw and Empire, respectively. In the previous financial year, the expenses accounted for $190 and $117.3. Empire recognized $18.1 of these costs as inventory expenses in 2017 and $18.6 in 2016. Consequently, Empire reported $3.5 for the write-down of inventories in 2017 and $1.2 in 2016. On the other hand, Loblaw recognized $39 for the write-down of inventories in 2017 and $29 in 2016. For both companies, there were no reversals of written-down assets.
Vendor rebates and allowances directly affect the cost of inventories, and both companies take this factor into consideration. The overall inventory cost is calculated after receiving rebates and allowances, resulting in the reduction of value. Furthermore, both companies recognize the allowances for volume purchases, listing fees, and exclusivity allowances as a reduction of inventory cost. It is an appropriate treatment that increases the transparency of the consolidated balance sheets and makes it less complex to analyze for potential investors.
Inventory turnover generally refers to the financial ratio, which describes how often the company sold its inventory in a certain period.
, where Average Inventory is (inventory at start + inventory at end)/2. Therefore, the calculations for both companies are the following:
; from these considerations, DSI for each company is the following:
As seen from the calculations above, Empire demonstrates a significantly higher inventory turnover ratio and days sales of inventory metrics. The analysis implies that Empire can sell all of its stock in 26 days, which is highly impressive for a large conglomerate. The calculated turnover ratio also means that the goods of the company are in high demand, and it manages its stock well. The parameters of Loblaw are also considerably high for a conglomerate of similar scale; nevertheless, it is significantly lower than Empires metrics. One of the reasons for the difference might be the expenses for inventory write-down since Loblaw demonstrated much higher costs in this aspect. Nevertheless, the primary contrast between the companies is the general demand for goods and stock management, which explains the differences in inventory turnover.
References
Empire Company Limited. (2017). Annual report 2017. Web.
Loblaw Companies Limited. (2017). Annual report 2017. Web.
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