In this paper, we demonstrate the use of actual financial data for financial ratio analysis of Timberland.
In this paper, we demonstrate the use of actual financial data for financial ratio analysis. After analysis with using of search engine we found that the data belong to the company Timberland CO. for 1994 – 1998 years. All further analysis will be based on Timberland Co. & industry activity for these years.
Timberland Co. Segment analysis
Timberland LLC is a US-based global manufacturer and retailer of outdoors wear with a focus on footwear. Best known for making men's, women's, and kids' footwear,
The Company's products fall into two primary groups: (1) footwear and (2) apparel and accessories (including product care and licensed products).
The following table presents the percentage of the Company's total product revenue(excluding royalties from third party distributors and licensees) derived from the Company's sales of footwear and of apparel and accessories for 1997 – 1999 years.
In 1973, company produced first pair of waterproof leather boots under the Timberland brand. Timberland brand footwear offerings within each of our men’s, women’s and kids’ lines include (i) basic, premium and sports boots, including hikers; (ii) handsewn oxfords, boat shoes and casual footwear; and (iii) performance footwear. The Timberland PRO series for skilled tradespeople and working professionals is an additional footwear category developed to address those consumers’ distinct needs.
The Timberland PRO series targets working professionals whose jobs demand footwear that stands up to the harshest working conditions. Timberland PRO has an assortment of occupational footwear products across categories including Industrial, Healthcare and Duty, and builds on the marketplace success of its Anti-Fatigue Technology.
Apparel and accessories
Timberland(R) adult apparel products consist primarily of rugged outerwear, sweaters, shirts, pants and shorts for men. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. Timberland(R) boys' apparel products are
The Company operates in an industry which includes the designing, engineering, marketing and distribution of footwear and apparel and accessories products for men, women and children. The Company has five revenue generating business units with separate management teams and financial reporting accountability. For financial reporting purposes, the Company aggregates these business units into the following three reportable segments, each sharing similar product, distribution, marketing and economic conditions: U.S. Wholesale, U.S. Retail and International.
The following table presents the percentage of the Company's total revenue generated by each of these reporting segments for the 1997-199 years:
The Company's wholesale customer accounts within the United States range from better-grade department and retail stores to athletic stores. Many of these wholesale accounts merchandise Timberland's products in selling areas dedicated exclusively to Timberland's products, or "concept shops."
At December 31, 1999, the Company operated 19 specialty stores and 45 factory outlet stores in the United States.
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The Company sells its products internationally through its operating divisions in the United Kingdom, France, Germany, Italy, Spain, Austria and Chile.
At December 31, 1999, the Company operated 19 specialty stores and seven factory outlet stores in Europe and Chile.
Timberland(R) products are sold elsewhere in Europe and in the Middle East, Africa, Central America and South America by distributors, franchisees and commission agents, some of which also may operate Timberland specialty and factory outlet stores located in their respective countries.
In 1999, as has been historically the case, the Company's revenue was higher in the last two quarters of the year than in the first two quarters.
The Company has two manufacturing facilities located in Puerto Rico and the Dominican Republic. During 1999, the Company manufactured approximately 18% of its footwear unit volume, compared to approximately 20% during 1998 and 28% during 1997.
The case illustrates the complexity of financial analysis.
In 1999, five suppliers provided, in the aggregate, approximately 70% of the Company's leather purchases. One of these suppliers provided approximately 42% of the Company's leather purchases in 1999. The Company believes that leather will continue to be available from these or alternative sources. The
The Company's footwear, apparel and accessories products are marketed in highly competitive environments that are subject to rapid changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of the Company's competitors are larger and have substantially greater resources than the Company, including athletic shoe companies, many of which compete directly with some of the Company's products. In addition, the Company faces
Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Return on equity = Profit margin * Asset turnover * Equity multiplier
(Net income/Equity) = (Net income/Sales) * (Sales/Total assets) * (Total assets/Equity)
Growth of ROE in Y3-Y5 is coming from huge growth in profit margin (from -1.8% in Y2 to 6.87% in Y5, due to better managers work) and in slow growth of asset turnover (due to better managers work and increase of cash amount). Financial leverage halved from Y1 to Y5.
Return for equity for ABC company for Y5 and Y4 remains at a same level and this level twice higher from industry.
In Y2 - 1995: Timberland closes its U.S. factories, shifting much of the production to outsourcers; the company posts its first loss.
If we will compare activity from 1991 to 1996 we can see than profits began falling in 1994, although the sales have increased, the profit was tiny because of the decrease in price..
From company history overview we can see a list of factors that affect to financial activity of a company.
Sales slumped in the winter of 1995-96 because of mild weather and a low retail environment. Inventory surged to more than $200 million as the company's distribution and tracking systems were unable to keep up with the higher volumes of merchandise the company was now handling after the rapid sales gains of the early 1990s. In response to these travails, Timberland's stock price plummeted from a peak of $85 in November 1993 to $22 in May 1995.
To turn the company around, a wide-ranging restructuring was launched in early 1995. To cut costs, Timberland closed its two domestic manufacturing plants in North Carolina and Tennessee, resulting in the elimination of 500 jobs, and cut back on its workforce at its factory in the Dominican Republic. Like other footwear makers, Timberland would now outsource much of its production. The company also overhauled its product lines, making a new commitment to get back in touch with its customers as it did so. During 1995 the firm was also able to begin significantly reducing both its inventory and its relatively high debt load. For the year, sales rose only 2.7 percent, while the company fell into the red for the first time, posting a net loss of $11.6 million. This net loss figure was affected both by a $16 million pretax restructuring charge and a $12.1 million pretax gain. The latter resulted from the sale of subsidiaries in Australia and New Zealand to U.K.-based trading firm Inchcape plc, which became the exclusive distributor of Timberland products in the Asia-Pacific region.
As Timberland got its inventory and distribution systems under control, revenue growth returned during the late 1990s, with sales growing smartly from $690 million in 1996 to $917.2 million by decade's end. More importantly, Timberland significantly increased its profit margins during the same period. The company's net income as a percent of sales stood at just 3 percent in 1996 but vaulted to 8.2 percent by 1999 when net income was a record $75.2 million.
Return On Assets tells you what earnings were generated from invested capital (assets).
ROA is also increasing from Y2 to Y5 due to reliable asset management (Total assets increased from Y1 . Growth dynamics of Assets to Sales (Gross profit) can be analyzed from the graph above.
Comparative Company Analysis – Apparel & Footwear
Timberland co. financial ratio analysis
Evaluating Timberland Co relative to footwear industry, we first note that Timberland has a better liquidity position than the average firm in the industry, with both a current ratio and a quick ratio that is 30% higher than the industry average. Timberland a higher fixed and indirect cost structure.
It suggests that funds are not being efficiently employed within the firm. Amounts of inventory, accounts receivable, idle cash balances contribute to a high current ratio.
The balance sheet shows a large increase of 35% in Timberland’s cash account in Year 5, and accounts receivables of 4.1%. At first glance, Timberland has slow-paying accounts. But the income statement shows that Timberland had a healthy sales increase of 7.6% in Year 5. Furthermore the company reports 8.7% inventory fall.
Timberland collects receivables quicker than the average firm in this industry. Timberland’s average collection period at 33.4 is higher than industry average of 39 days, indicated that Timberland has normal credit policies.
Liquidity analysis focuses on the speed with which receivables and inventory turn into cash during normal business operations as well. On average, it takes Timberland less than one month to pay its suppliers. Company’s payment period remained declining over five years. Subsequent to the results of Year 5 payment period worked 17 days quicker than the industry.
The operating cycle is the duration between the time cash is invested in goods and services to the time that investment produces cash. Here is an operating cycle of Timberland Co
- Purchase raw material and produce goods, investing in inventory
- Sell footwear generating sales, which may or may not be for cash
- Extend credit, creating accounts receivables, and
- Collect accounts receivables, generating cash.
It takes 97 days to convert the investment in inventory into sold goods.
A ratio of 1.5 (median) indicates a reasonably liquid position for shoe manufactory industry. At the end of Year 5 Timberland company made quick ratio up to 2.7 levels. An immediate liquidation of marketable securities at their current values and the collection of all accounts receivable, plus cash on hand, would be adequate to cover the ABC’s current liabilities. As this ratio follows an upward trend year to year ABC increasingly rely on converting inventories to sales in order to meet current liabilities as they come due.
Total debt to assets ratio
ABC’s total debt ratio has greatly changed during last 5 years, meaning that the firm’s debt load grew at the diverse rate than its asset base. Compared to industry median, a total-debt-to-asset ratio that is relatively high tells that the opportunities for securing additional borrowed funds are limited. Additional debt funds may be more costly in terms of the rate of interest that will have to be paid. Lenders will want higher expected returns to compensate for their risk of lending to a firm that has a high proportion of debt to assets.
The equity multiplier ratio
In order to acquire assets, ABC must pay for them with either debt (liabilities) or with the owner’s capital (shareholder’s equity). More assets relative to equity suggest greater use of debt. Thus, larger values of the equity multiplier imply a greater use of leverage by ABC. The ABC Company was more relied on debt till the last year when the equity multiplier almost reached industry medium of 1.7.
Total debt to equity ratio
ABC’s ratio for Year 5 was 0.76. This means for every dollar of equity, the firm has borrowed about 76 cents.
Fixed asset turnover (15.2) is above the footwear industry averages (9.2), indicating that Timberland is using its fixed assets more efficiently than the industry average in generating sales. Total asset turnover (1.8) on a same level as an industry. Strong fixed asset turnover may indicate insufficient capacity caused by good forecasts of future sales.
Timberland’s debt ratio (43.3 )and debt to equity (76.3) ratio indicate that Timberland is more leveraged than the average firm in the industry.
The ratios indicate that Timberland has a lower cost of sales than the average firm in the industry, resulting in a higher gross profit margin, and lower indirect costs, resulting in lower net profit margin performance relative to the industry.
Du Pont Method of Ratio Analysis
The Du Pont analysis is the technique of breaking down return on total assets and return on equity into their component parts.
A Dupont analysis of Timberland, the footwear industry is shown in the table below.
Relative to the industry as a whole, Timberland has an low advantage in its leverage ratio (Assets to Equity of 1.76 compared to 1.7 for the industry), low advantage in Asset Turnover, and huge difference in profit margin.
Profit margins vary across industries, making it important to compare a potential investment against its competitors. Although the general rule-of-thumb is that a higher profit margin is preferable, it is not uncommon for management to purposely lower the profit margin in a bid to attract higher sales. A high profit margin signals a strong operating management.
COMMON-SIZED BALANCE SHEET FOR TIMBERLAND AND INDUSTRY
Despite the importance of cash reserves cash-rich firms are more likely than other firm to attempt acquisition. Equity holders would prefer that cash above the optimal buffer level of reserves be paid out. Freedom from external financing that makes cash reserves valuable to equity holders can be abused by managers. Acquisitions are primary method by which managers can spend cash instead of paying it out to their shareholders.
In 2006, the company acquired Howies, the Welsh clothing company. In 2007, Timberland acquired skateboard-footwear company, Ipath, which was sold in 2011. In 2011, Timberland signed a definitive merger agreement with VF Corporation at $43 per share or approximately $2 billion Howies was divested by VF in 2012.
Normalized Income Statement for Timberland and Industry
Net income of Timberland company has steadily increased, the main reasons for that is that Cost of sales were decreasing from year to year. At the same time the Gross profit rises from 35% (Y1) to 41.7% (Y5). As it is seen from the picture the selling, administrative and general expenses also were slightly reduced from Y1 to Y5 . Company had to pay less interest expenses that effected Net Income to rise rom 2.8% to 6.9% respectively.
List of sources:
- Company Histories & Profiles: The Timberland Company -
Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 for the fiscal year ended December 31, 1999 of Timberland Co.
- Timberland Report VOL. 1, NO. 4 Copyright Ó 1999 James W. Sewall Company. http://www.sewall.com/files/timberlandreport/v1n4.pdf
Data from: Company Histories & Profiles: The Timberland Company - http://www.fundinguniverse.com/company-histories/The-Timberland-Company-Company-History.html