Join Jim Stice for an in-depth discussion in this video Harry Winston vs. Walmart, part of Running a Profitable Business: Understanding Financial Ratios.
- Jim, do you recall when we traveled to Hong Kong together? It was about 10 years ago. - I do. I remember it well. - We stayed on the Kowloon side in a hotel right next door to The Peninsula Hotel. - The Peninsula? Isn't that the hotel that picks its customers up in a Rolls-Royce? - Yeah, that's the hotel we didn't stay in. Now, off the lobby of The Peninsula's a set of very nice shops. One of 'em is called Harry Winston. - Ah, Harry Winston, the famous luxury jewelry store. - That's right. That's exactly right. Now how much does a luxury jewelry store mark up its products? - About 100%.
So if Harry Winston buys a diamond ring for $20,000, the selling price would be marked up to about $40,000. - Wow. So by comparison, how much does Walmart mark up its products? - Walmart marks its items up only about 33%. So if Walmart buys something for $75, the selling price would be marked up to $100. - The Harry Winston markup is 100%. The Walmart markup is 33%. So Harry Winston must be much, much more profitable than Walmart. - Ah, not so fast.
You've forgotten about inventory turnover. When you looked in the window of Harry Winston at The Peninsula Hotel in Hong Kong, how many customers did you see in there? - None, none. All I saw were two salespeople and a frowning security guard looking back at me. - Now think about the most recent time you went to Walmart. Did you see any customers there? - Of course, there were hundreds of them. - That is evidence that Walmart has much more rapid inventory turnover than does Harry Winston. On average, it takes Harry Winston almost 18 months to sell a particular item.
So the diamond necklace you saw there when you were there last year is probably still there. - How about Walmart? - Ah, Walmart sells its inventory items, on average, in about 45 days. - So overall profitability's a combination of the profitability on each sale and the speed with which the inventory turns over. We need to learn more about these efficiency measures.
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- What are financial statements?
- Understanding the DuPont framework
- Working with common-size financial statements
- Reviewing profitability, efficiency, and leverage ratios
- Analyzing potential-pitfall ratio