Kroger Co., a national supermarket chain, reported the following data (in millions) in its financial statements for a recent year:
Total revenue $108,465
Total assets at end of year 30,556
Total assets at beginning of year 29,281
a. Compute the asset turnover. Round to two decimal places.
b. Tiffany & Co. is a large North American retailer of jewelry with an asset turnover of 0.86. Why would Tiffany’s asset turnover be lower than that of Kroger?
Answer:
a. 3.63 {$108,465 ÷ [($30,556 + $29,281) ÷ 2]}
b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry using a much longer operating cycle than Kroger uses selling groceries. Thus, Kroger is able to generate $3.63 of sales for every dollar of assets. Tiffany, however, is only able to generate $0.86 in sales per dollar of assets. This difference is reasonable when one considers the sales rate for jewelry and the cost of holding jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its longer operating cycle, relative to groceries, with higher gross profits, relative to groceries.