1. Dupont Analysis Adapted by P. V. Viswanath with permission
from

2. The Du Pont Identity ROA = NI/ TA ROE = NI / TE
ROA = (NI/ Sales)*(Sales / TA)
ROA = (Net Profit Margin)*(Asset Turnover)
ROE = NI / TE
ROE = (NI/Sales)*(Sales/TA)*(TA/TE)
= Net Profit Margin*Asset Turnover*Equity Multiplier
Net Profit margin is a measure of the firm’s operating efficiency – how well it controls costs
Total asset turnover is a measure of the firm’s asset use efficiency – how well it manages its assets
Equity multiplier is a measure of the firm’s financial leverage.
Let’s first look at the ROA identity – a firm could have a high volume/low margin strategy, which would be reflected in high asset turnover but low profit margins or the reverse.
P.V. Viswanath

3. ROA: Turnover vs Margin
High Turnover
Unattainable
Low
Margin
High
Margin
Failure
Low Turnover
Two of the four segments might be unattainable or undesirable. But how should a manager improve the firm’s positioning in the other two segments?

4. Illustrations of the Dupont Identity
The Dupont identity is fairly well known as an accounting identity. Accountants use it as a model for managerial control and as a basis for firm valuation.
However, it can also be the basis for alternative marketing strategies.
Let us see how this works, as reflected in the practices of some US corporations.
We first look at Provo Bakery and Zales Jewelry, two firms in two different industries.

5. Return on Assets Net Profit X Asset = Return on Margin Turnover Assets
Provo Bakery % X 9 times = %
Zales Jewelry % X 1 time = %
Both firms have the same ROA, but different combinations of profit margin and asset turnover. Perhaps the different approaches simply reflects the difference in industries?
Let’s now look at two firms in the same industry: Tiffany, a jewelry retail firm and Walmart, which is another jewelry retail firm – and, according to its website, the world’s largest – but quite different. (

6. Income Statements: Wal-Mart vs Tiffany (2013, in millions)
Wal-Mart Tiffany
Net sales $ 469, $ 3,794
Less: Cost of goods sold $ 352, $ 1,631
Gross margin $ 116, $ 2,163
Less: Operating expense $ 88, $ 1,466
Less: Interest expense $ $
Total expense $ 90, $ 1525
Other Income, Net $
Net profit, pretax $ 25, $
Less: Taxes* $ 7, $
Tax rate % %
Net profit after tax $ 17, $
* Effective tax rates often differ among corporations due to different tax breaks and advantages.
Which has the higher net margin?
Source: Wal-Mart Stores Inc (WMT) Annual Report (10K) 2013
Tiffany & Co. (TIF) Annual Report (10K) 2013

7. Profit Margin Model: Wal-Mart vs Tiffany (2013, in millions)
Net Sales
$469,162
$3,794
Gross
margin
$116,674 (24.9%)
$2,163 (57%) -
Top Number = Wal-Mart
Bottom Number = Tiffany
Cost of goods sold
$352,488
$1,631
Net profit
before tax
$25,737
$638+5 -
Net profit
after taxes
$17,756
$417
Operating
expenses
$88,873
$1,466 -
Net profit margin
3.78%
10.96%
Total expenses
$90,937
$1,525
Taxes
$7,981
$227 / +
Net sales
$469,162
$3,794
Interest expenses
$2,064
$59

8. Profit Margins
Clearly, Tiffany has the larger profit margin (gross margins 57% vs 24.9%; net margins 10.96% vs 3.78%)%.
The model in the previous slide also shows exactly where the profit margin comes from.
The focus in this approach is on the numerator of the profit margin ratio, viz. on Net Profit After Taxes (NPAT).
It behooves the savvy manager to look at the components of NPAT as a fraction of sales.
Is it possible to improve cost of goods sold and operating expenses as a fraction of sales – but without affecting sales?
How are these being used to improve sales?
It costs more to serve a Tiffany’s customer; each customer’s needs are different. Hence it is necessary to invest more in employee training, in product layout and a whole variety of things when selling a Tiffany’s product, compared to a Walmart product.

9. Asset Turnover Model: Wal-Mart vs Tiffany (2013, in millions)
Accounts receivable
$6,768
$174
Top Number = Wal-Mart
Bottom Number = Tiffany
What does this represent? +
Merchandise inventory
$43,803
$2,234
From income statement
Net sales
$466,114
$3,794
Total current assets
$59,940
$3,152
Asset turnover
2.29
0.82 + /
Cash
$7,781
$504
Total assets
$203,105
$4,631 +
From balance sheet
The sales $ generated by each $ of assets +
Fixed assets
$143,165
$1,479
Other current assets
$1,588
$238

10. Asset Turnover Clearly, Walmart has the larger asset turnover.
The model in the previous slide also shows exactly what is the source of the higher asset turnover.
The focus in this approach is on the denominator of the asset turnover ratio, viz. on Total Assets.
It behooves the savvy manager to look at the components of total assets in terms of how they contribute to sales.
Is it possible to reduce accounts receivable and merchandise turnover and other assets – but without affecting sales?
How are these assets being used to improve sales?
You can see how much of each kind of asset is being used to generate each dollar of asset and thus the efficiency of each kind of asset.

11. Dupont Analysis: Wal-Mart vs Tiffany (2000, in millions)
2000 data
Net Profit Margin
Net Income/Net Sales
Asset Turnover
Net Sales/TA
ROA
Walmart
3.78
2.29
8.66
Tiffany’s
10.96
0.82
8.98
Although Walmart and Tiffany clearly have different marketing/merchandising strategies, they end up with approximately the same ROA!
In principle, this approach could be extended to look at ROE and include leverage choices as part of the mix. The next slide shows how different firms have made different choices in terms of net profit margin, asset turnover and leverage.

12. Financial Objectives: The Strategic Profit Model (SPM)
Return on
Investment
Return on
Assets
Leverage
Ratio = x
Net Profit
Net Worth
Net Profit
Total Assets
Total Assets
Net Worth
Return on
Assets
Net Profit
Margin
Asset
Turnover x
Net Sales
Total Assets
The $ sales generated by each $ of assets
The net profit generated by each $ of sales =
Net Profit
Total Assets
and so ...

13. SPM Examples Return on Equity = Investment x x
Asset
Turnover =
Net Profit
Margin %
Leverage
Ratio x x
Big Lots: 24.6%
Albertson’s: 18.9%
The Dress Barn: 32.4%
Land’s End: 40.2%
The Limited: 32.3%
The Gap: 25.5%
1998 data

14. ROI Model, Including The Strategic Profit Model
Which is … the income statement? Balance sheet? SPM?
Net Sales
Net Sales
Cost of
goods sold
Variable
expenses
Fixed
Gross
margin
Total
Net profit
Asset
turnover
Return on
assets
Inventory
Accounts
receivable
Other current
Total current
Net sales
Income Statement
Balance Sheet
Strategic Profit Model
Financial
Leverage
Net Worth
Gross
margin -
Cost of
goods sold -
Net profit
Variable
expenses
Net profit
margin +
Total
expenses
Net Sales
Fixed
expenses
Return on
assets x
Inventory
Return on
Net Worth x =
Net sales +
Asset
turnover
Financial
Leverage
Accounts
receivable
Total current
assets
Total
assets + +
Other current
assets
Fixed
assets

15. Retail Stratgies
Look at some of these firms and figure out their strategy
As the previous slide points out, the two arms of the Dupont ROA identity could be thought of as reflecting alternatives focusing on the income statement (profit margin) versus on the balance sheet (volume).
However, both approaches really reflect different uses of a company’s assets/capabilities.
The next two slides show how Walmart has worked on one aspect of its balance sheet, while the remaining slides look at how Tiffany’s marketing focus on profit margin is reflected in its asset choices.

16. Walmart’s focus on efficient asset use
The use of information technology has been an essential part of Wal-Mart's growth. A decade ago Wal-Mart trailed K-Mart, which could negotiate lower wholesale prices due to its size. Part of Wal-Mart's strategy for catching up was a point-of-sale system, a computerized system that identifies each item sold, finds its price in a computerized database, creates an accurate sales receipt for the customer, and stores this item-by-item sales information for use in analyzing sales and reordering inventory. Aside from handling information efficiently, effective use of this information helps Wal-Mart avoid overstocking by learning what merchandise is selling slowly. Wal-Mart's inventory and distribution system is a world leader. Over one 5 year period, Wal-Mart invested over $600 million in information systems.

17. Walmart’s focus on efficient asset use
Wal-Mart uses telecommunications to link directly from its stores to its central computer system and from that system to its supplier's computers. This allows automatic reordering and better coordination. Knowing exactly what is selling well and coordinating closely with suppliers permits Wal-Mart to tie up less money in inventory than many of their competitors. At its computerized warehouses, many goods arrive and leave without ever sitting on a shelf. Only 10% of the floor space in Wal-Mart stores is used as an inventory area, compared to the 25% average for the industry.

18. Financial Information
Tiffany
2012
2011
2010
2009
2008
Net Sales/Cash from Sales
0.993
0.995
1.003
1.006
0.991
Net Sales/Net A/R
18.600
15.602
15.791
16.401
11.915
Net Sales/Inventory
1.757
1.898
1.786
2.141
Asset Turnover
0.876
0.826
0.777
0.922
0.979
Net Income/Sales
12.06%
11.94%
9.80%
7.69%
11.01%
ROA
10.56%
9.86%
7.62%
7.09%
10.78%
ROE
18.70%
16.92%
14.11%
13.85%
18.85%
Signet Jewelers
1.001
0.999 1
3.445
3.673
3.815
4.033
3.952
2.875
2.903
2.791
2.439
2.536
1.038
1.112
1.075
1.086
1.212
Zales
N/A
2.517
2.418
2.299
2.404
2.743
1.594
1.464
1.393
1.446
1.503
Do you see a difference in the strategies of the three firms?
Tiffany, in particular, has a low asset turnover compared to Whitehall and Zales, particularly in the later years. Let’s see why..

19. The Tiffany Approach
In the following videos, consider Tiffany’s asset use and think of our previous discussion.
Let’s now look at how Tiffany’s management considers the issue in its 10K report.

20. Tiffany Brand Strategy
Tiffany focuses on the profit margin. To do this, it needs to spend more on certain assets than Walmart.
The TIFFANY & CO. brand is the single most important asset of Tiffany. The strength of the Brand goes beyond trademark rights and is derived from consumer perceptions of the Brand. Management monitors the strength of the Brand through focus groups and survey research.
Management believes that consumers associate the Brand with high-quality gemstone jewelry, particularly diamond jewelry; excellent customer service; an elegant store and online environment; upscale store locations; “classic” product positioning; distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box); and sophisticated style and romance.
Intangible Assets consist primarily of Product Rights and Trademarks (about $10m. in 2010)

21. Tiffany Brand Strategy
Tiffany’s business plan includes many expenses and strategies to maintain the strength of the Brand. Stores must be staffed with knowledgeable professionals to provide excellent service.
Elegant store and online environments increase capital and maintenance costs.
Display practices require sufficient store footprints and lease budgets to enable Tiffany to showcase fine jewelry in a retail setting consistent with the Brand’s positioning.
Stores in the best “high street” and luxury mall locations are more expensive and difficult to secure, but reinforce the Brand’s luxury connotations through association with other luxury brands.

22. Tiffany Brand Strategy
The classic positioning of Tiffany’s product line supports the Brand, but limits the display space that can be afforded to fashion jewelry. Tiffany’s packaging practices support consumer expectations with respect to the Brand and are more expensive.
Some advertising is done primarily to reinforce the Brand’s association with luxury, sophistication, style and romance, while other advertising is primarily intended to increase demand for particular products.
Maintaining its position within the high-end of the jewelry market requires Tiffany to invest significantly in diamond and gemstone inventory and accept reduced overall gross margins; it also causes some consumers to view Tiffany as beyond their price range.

23. The Walmart Stores
In the following videos, look at Walmart’s asset use and think of our previous discussion. How does it differ from Tiffany?
Walmart Stores

24. Crafting strategy post Dupont
Once we look at the firm’s Dupont and other ratios (such as Sales/GSA Expense ratio), we might want to suggest that the firm move in the direction of increasing profit margin or in the direction of increasing volume.
This decision has to be taken, keeping in mind the capabilities and resources that the firm possesses. It is also necessary to look at the competitive environment. If there are many competing brands, then it might not be a valuable strategy to create a new brand, ab initio, in the same space. All the other Porter framework forces have to be considered.
If the decision is to move in the direction of higher profit margin, then the firm has to think of a better brand. It might want to look at the ratio of Sales to advertising expenses.
It might want to increase trade promotion efforts, as well.
If it pursues the goal of higher volume, then a lower price and all that it entails is indicated. However, this may be achieved through different strategies, e.g. coupons or other off-price methods. Better credit terms may also be an option.