Lumber Liquidators, Inc., competes with Lowes in product lines such as hardwood

Question

Lumber Liquidators, Inc., competes with Lowes in product lines such as hardwood flooring, moldings, and noise-reducing underlay. The two companies reported the following financial results in fiscal 2013:

                                                                        Lumber Liquidators                           Lowe’s

Gross Profit Percentage

41.1%

34.6%

Net Profit Margin

7.7%

4.3%

Return on equity

28.5%

17.8%

Earnings per share

$2.77

$2.18

Required:

a. Calculate the difference in gross profit percentage between Lumber Liquidators and Lowe’s.

b. Calculate the difference in net profit margin between Lumber Liquidators and Lowe’s.

c. Using your answers to requirements 1 and 2, identify the company that best controls operating expenses other than cost of goods sold.

Gross Profit Percentage

41.1%

34.6%

Net Profit Margin

7.7%

4.3%

Return on equity

28.5%

17.8%

Earnings per share

$2.77

$2.18

Explanation / Answer

a. Difference in gross profit percentage

Lumber's Gross Profit percentage = 41.1%
Lowe's Gross Profit percentage     = 34.6%
Difference (absolute)= 41.1 - 34.6 = 6.5%
Difference (%) = 6.5 / 34.6 x 100 = 18.79%

So, Lumber's Gross Profit percentage is 18.79% more than that of Lowe's.

b. Difference in net profit margin

Lumber's Net profit margin = 7.7%
Lowe's Net profit margin     = 4.3%
Difference (absolute)= 7.7 - 4.3 = 3.4%
Difference (%) = 3.4 / 4.3 x 100 = 79.07%

So, Lumber's Net Profit margin is 79.07% more than that of Lowe's.

c. Company that best controls the operating expenses other than the cost of goods sold

Return on equity is calculated on the basis of operating profits. Operating profit is calculated after deducting operating expenses other than the cost of goods sold from the Gross Profit. So, the percentage of operating expenses can be calculated by deducting Return on equity from Gross Profit percentage.

Percentage of operating expenses for Lumber liquidators = 41.1 - 28.5 = 12.6%
Percentage of operating expenses for Lowe's                    = 34.6 - 17.8 = 16.8%

The percentage of operating expenses other than the cost of goods sold is less for Lumber liquidators than that of Lowe's. So, Lumber liquidators best controls operating expenses other than cost of goods sold.

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