A financial statement is a report of the financial activities of a company. It is an easy to read and understand breakdown of the financial activities of a company. There are four basic kinds of financial statements: the balance sheet, income, cash flow and owner equity statements. The balance sheet is the present financial position of the company. It lists the assets, liabilities and equities. Total assets are a sum of the liabilities and equities. Assets can either be fixed or current. Current assets can be converted into cash easily while fixed assets are like land, equipment and buildings. Liabilities are those assets that the company owes creditors while equities are the portion owned by the owner(s) or shareholders.
The income statement presents the company’s monetary operations. On the other hand, the income is the difference between the revenue generated from providing services and expenses incurred during the delivery of such services. Tentatively, the statement of owner’s equity is the description of how much the owner or shareholder retains from the income. Undoubtedly, the cash flow statement is a breakdown of the company’s ability to pay its bills. It gives information on the sources of cash in an organisation, what it uses its cash on and how much remains in cash balance.
Dillard’s is among the biggest department stores in the United States. It has over 300 stores in 29 states and has its headquarters in little rock, Arkansas. As such, William T. Dillard started the company in 1938, and most of its managers and board members are currently members of the Dillard family. Its specialty is the provision of clothing for men and women. It also deals in cosmetics, cookware and furniture. Additionally, it faces inflexible competition from companies like JC penny, Neiman Marcus and Nordstrom’s. Moreover, the company maintains its competitive edge by offering rational prices and customer satisfaction.
Dillard’s Company Strategy
Dillard’s remain at the forefront of its competition by offering incredible difference. The company realigned its goals and overhauled its board in 2008 in order to reinvent itself in the marketplace. Dillard’s strives to remain profitable by offering an improved merchandise mix. They actively seek to be dissimilar from their competitors by providing the right assortment of improved products. In an industry with stiff competition, Dillard’s remains competitive by laying emphasis on customer service and competitive pricing. Several factors place Dillard’s in a superior position in the industry. These factors are reputation, location, credit availability, price, advertising and quality. Dillard’s builds its stores in strategic locations in order to attract new customers and retain the old ones. They offer competitive pricing and quality customer service and a good range of products.
Dillard’s emphasises on brand image constantly seeking to portray itself as the store that offers superior quality and customer service. Certainly, it offers 24 hour online customer support and a section for customer care in each of its stores. Dillard’s has an additional noteworthy advantage over competitors in that it offers credit cards to their customers. Owning a card makes a costumer legible for monthly discounts. It plans to augment market share through strategies such as eliminating underperforming products, customizing their stores to local needs and demands, improving their website and generating higher profits with less expenditure. Dillard’s commitment to their customers, their competitive prices, and product variety keep them ahead in the industry. Dillard’s constantly seeks to expand by opening new stores, keeping its product lines modern, and maintaining its image as a quality service provider.
Cash Flows Analysis
Dillard’s recognises revenue at point of sale, in order to facilitate its sales point. The company recognises and record allowances for sales returns as a component of net sales during the time of recording of the said sales. The gift card business is also profitable for Dillard’s. As such, selling gift cards is fundamental in predicting future trends and expected inventory sales. Preparation and anticipation of changing trends in fashion is a key factor in the management of Dillard’s inventory. Dillard’s accounting strategy requires the company to have low input cost in inventory. Tentatively, the firm does not spend as much in transportation and delivery of commodities from the manufacturers to the customers. All this results in just an adequate amount of inventory to display in the stores thus avoiding costs associated with stock piling inventory. The net operating cash flow for the year 2010, considering a year to be the period from February to January, was 554.01 million U.S dollars. Net investing cash flow for the same period totalled 63.45 million, and the net financing cash flow was 245.68 million. Free cash flow added up to 467.12 million while the net change in cash was 244.87 million (marketwatch.inc, 2012).
Dillard’s depends on high quality products and since the demand for designer products is increasing, their sales are sky rocketing. As such, it attributes this to the evolving of the fashion industry. Consumers are willing to pay for good quality products and Dillard’s provides them with these products. The retail business is a seasonal industry; moreover, Dillard’s income comes predominantly during the holiday season. Dillard’s is a cyclical company, meaning its incomes are dependent on the GDP. Timing is crucial in maximising profits. One has to anticipate drops or rises of business. Dillard’s takes advantage of the pricing regime of its competitors in order to maximise its sales.
Changes in local and economic conditions have reduced the spending patterns of customers and their preferences. Dillard’s has also changed to become accustomed to these economic conditions. As a result, it uses mark downs to manage its inventory and evade overstocking. Certainly, managers have the accounting freedom to enforce mark ups and mark downs according to recent sales. This allows for maximisation of revenue and provides an avenue for liquidation of overstocked merchandise. In 2004 and 2005, Dillard’s exhibited high returns on equity as a result of the decrease in total assets and total liabilities at a constant rate. This was necessary to maintain equity equal to the previous year. This shows a higher profitability by maintaining a steady amount of equity invested into the firm.
Recently, Dillard’s shares hit 52 week record high of $86.80 (Zacks, 2012) on Friday, November, 2012. The company posted impressive returns; exceeding the quarterly earnings expectations for the quarter ending of October 2012. Better inventory management practices facilitated this, thus, the efficient timing of receipts with demand led to a reduction in markdowns. On the other hand, managerial strategies that facilitate cost reduction have also boosted productivity.
Dillard’s is ranked in the fortune 500, a list of America’s largest companies. This year, Dillard’s reported a third quarter net income rise of 79 percent from the same period last year. The department stores reported a 5 percent rise in same store sales and almost double the earnings per share (Turner, 2012). Dillard’s reported record profits in 2011 and looks set to do the same for 2011. The department stores chain has averaged a comparable increase of 4% in store sales in the year 2012 to date. Some financial researchers attribute these profits to the struggle of rival chains, notably JCP. They predict a struggle by Dillard’s in 2013 due lower consumer and stronger competition from JC Penney as it gets back on track with its restructuring.
The factors that threaten profitability in the retail industry are the level of existing and possible competition. The five forces model explains the risk to the profit potential of a company in a competitive market such as this one. The five forces model involves rivalry between existing firms, the threat posed by new entrants, the threat of a substitute and the bargaining powers of buyers and suppliers.
Talking about competitive rivalry, it is important to mention that the high end retail industry has inflexible competition and firms must find means to stand out. Large companies have the biggest market share, but also face competition from small businesses. Competition canters on the sectors of fashion, price, quality, advertising and customer service, as such, offering a better sales platform. The ideal aspect to change would be price, but since most firms are incapable to change prices significantly, they resort to customer service. The majority of the larger firms have expanded their business to the Internet, and this has given them an advantage over the smaller firms. Internet sales have increased returns and provide a way for offering more personal customer service.
Threat of new entrants, when entering a competition with stiff competition, a company has to invest in a lot of products that will not be immediately sold or work at less capacity. Economies of scale are, therefore, significant. Large firms that can produce large economies of scale are at an advantage. It is hard to enter a new market and to achieve monopoly or instant success. The threat of new entrants is, therefore, low.
Threat of substitute products: the fact that there are numerous high end stores offering the same products makes it easier for an individual to substitute products in one store with those from another. The threat of substitute products is extremely high.
Supplier power: the bargaining power of suppliers is low, because there are scores of supplier’s selection. In fact, large retail outlets operate with the principle of not depending on a single supplier. Supplier threat can be enormous if there are few companies to supply, but this is not the case in the high end retail industry.
Bargaining power of buyers: there are elements that determine the power of buyers. These are the extent to which they look to bargain prices (price sensitivity and the relative bargaining power. On the other hand, the relative bargaining power is how many buyers are successful in forcing the price down. Other firms offer most of the Dillard’s products, and this increases the power of the buyer over price. As such, the level of price sensitivity is high, and this pushes prices down.
Evaluation of the financial statements of Dillard showed positive results. Forecasting as far as ten years into the future shows the possibility of growth. Dillard was going south in 2007, but a change in business tactics and management put it back on track. Cost cutting and repositioning strategies put it back on the map in terms of profitability in 2009. Three models in 2007 concluded that Dillard had better sales. The abnormal earnings growth, free cash flows and the residual income models all concluded that the stock price overstated by about $20.
Conclusively, an effective marketing strategy forms the basis for success of any enterprise. As such, better risk evaluation offers a better platform in understanding the predominant market.