Migros

Financial Analysis
Yi Hsuan Jung
Chi Song

Company Overview
Found in 1925, Zurich, Migros Genossenchafts Bund (Migros) is a cooperative
operating various business, with the primary part in retail sector as in supermarket,
convenience stores and department stores, it is currently the largest retailer in
Switzerland. The company comprises 10 regional cooperatives and 20 food and
beverage plants, with branches in France and Germany. Migros mainly operates
cooperative retail, industrial wholesale, financial services(Migros Banking),
oil(Migrol) and travel(Hotelplan). The company also sells its own products such as
groceries, equipments, house appliances, apparels, hardware, cosmetics and so on, it
sells those goods through its 601 retail stores and online shop. The main competitors
of migros are Coop Genossenschaft, Lidl Dienstleistung GmbH & Co. KG, and ALDI
Group.

Investment Summary
Over the past 2 years, Migros has acquired and disposed several companys shares/
company: In 2009, it acquired 49% of share in German retailer Gries Deco Holding
GmbH, and from 2011, its share gained to 51.1%, controlling the company; In 2011,
the Hotelplan announced an acquisition of 26% share in the Inter Chalet FerienhausGesellschaft mbH; Also in 2011, Migros sold Limmatdruck AG as well as its
subsidiary, Zeiler AG; In 2012, Migros share in Cash+ Carry Angehrn gained from
30% to 80%; Also in 2012, Migros acquired a minority interest of 30% in Galaxus
AG with its online shops digitec.ch and galaxus.ch.

Reformulated balance sheet

2012

net operating assets

operating assets
working cash
mortgages and customer receivables
trade receivables
other receivables
inventories
investment in associates and joint ventures
investment property
tangible assets
intangible assets
assets from employee benefits
current income tax receivables
deferred income tax assets
other assets
non-current assets held for sale
total operating assets
operating liabilities
customer deposits and liabilities
trade payables
other liabilities
provisions
liabilities from employee benefits
current income tax payables
deferred income tax liabilities
liabilities relating to non-current assets held for
sale
net operating assets
net financial obligations
financial obligations
payables due to banks
other financial liabilities
issued debt instruments
total financial obligations
financial assets
cash equivalents
receivables due from banks
other financial assets
net financial obligations
non-controlling interests
common shareholders' equity

2011

2010

119.0
32586.5
605.1
174.3
2200.5
148.5
377.1
11866.9
1339.3
1034.9
13.8
47.2
221.9
0.0
50735.0

117.9
30858.3
611.4
130.7
2162.5
108.8
299.8
11747.8
1380.9
626.0
8.9
22.7
205.2
0.0
48280.9

119.0
28854.0
580.1
145.2
2042.2
94.5
293.5
11602.1
1275.2
561.8
30.9
28.9
218.1
7.0
45852.5

27775.9
1417.1
1664.3
125.1
538.2
102.5
1575.7

25891.3
1546.7
1075.2
116.5
517.5
89.6
1446.4

24300.9
1659.0
1043.6
111.6
520.1
140.3
1487.6

0.0

0.0

0.0

17536.2

17597.7

16589.4

490.0
2022.5
6530.4
9042.9

528.7
2030.6
7069.5
9628.8

737.1
1771.0
6309.3
8817.4

4231.9
1158.1
2039.0
1613.9
15922.3
20.4
15901.9

4451.5
30.1
2418.9
2728.3
14869.4
20.6
14848.8

3006.4
178.5
3337.1
2295.4
14294.0
15.5
14278.5

Residual earnings growth and abnormal earning growth

2012
1045.0
15901.9
6.57%
90.9
379.4

comprehensive income
average shareholders' equity
ROCE(on common equity)
Residual Earnings(6.0%)
AEG(RE

2011
602.4
14848.8
4.06%
-288.5
-368.6

2010
936.8
14278.5
6.56%
80.1
-229.3

2009
1110.3
13348.6
8.32%
309.4

RE growth is driven by ROCE and growth in equity investment. Equity investment

has increased over the years, but ROCE has the same changes with RE.
In 2011, the residual earnings are negative, it indicates that earnings are less than the
cost of equity. But in 2012, RE has a big increase. The numbers of residual earnings
of Migros group are not very high and have some fluctuations. Some items will be
found that drive these changes.

Reformulated income statement

2012

reformulated income statement

operating revenues
cost of goods and services sold
gross margin
operating expenses
internally generated assets
rental and building-lease cost
maintenance
energy and consumables
administration
advertising
revenues from the disposal of
investment property
tangible assets
investments
other operating income
other operating expense
personnel expenses
depreciation and amortization
operating income from sales(before
tax)
taxes
taxes as reported
taxes benefit

255.9
-297.3

2011

2010

23798.9
14371.4
9427.5

23586.0
14302.5
9283.5

23809.7
14550.7
9259.0

20.8
-670.3
-362.2
-469.8
-362.5
-490.2

16.3
-613.5
-355.6
-477.1
-355.0
-483.3

17.6
-550.8
-362.0
-456.5
-342.5
-466.3

10.1
2.9
2.7
212.1
-665.9
-5033.3
-1191.8

-1.6
18.6
-23.2
235.3
-685.2
-5038.5
-1137.2

3.7
2.5
-2.6
211.0
-650.6
-4934.9
-1139.5

430.1

383.5

588.1

133.7
-41.4 -147.8

226.9
-14.1 -195.7

31.2

operating income from sales(after

tax)
other operating income(before tax)
effect from pension plans before
income tax
tax on other operating income(36.3%)
other operating income(after tax)

471.5

341.3
-123.9

217.4
688.9

397.6

556.9

3.9

50.5

-1.4

2.5 -18.3
400.1

32.2
589.1

other financial assets available for sale

70.8

-91.6

82.0

derivative financial instruments held

for cash flow hedges

-11.8

23.0

-9.5

currency translation differences for

foreign subsidiaries

2.9

-9.7

-10.5

share in other comprehensive income

of associates and joint ventures

0.0

3.5

-1.0

-12.1

14.8

-16.0

738.7

340.1

634.1

income tax relating to components of

other comprehensive income
operating income(after tax)
financial income(expense)
financial income
financial cost
interest income
interest expense
impairments
reversals of impairments
net commission income
income from other financial assets
Total profit from the financial services
business
tax effect
net taxable financial income after tax
share of (loss)/profit from associates
and joint ventures
net financial income
comprehensive income

21.9
-99.6
797.3
-322.0
-38.3
8.9
73.9
35.7
555.5

477.8

-77.6
-114.7
806.5
-352.7
-67.3
65.3
76.1
67.6

13.0
-112.5
826.7
-349.1
-15.5
9.8
73.7
42.5

595.5

403.2 588.1

488.6

-173.4
304.4

-146.4
256.8

-177.4
311.2

1.9

5.5

-8.5

306.3
1045.0

262.3
602.4

302.7
936.8

Identifying core income

2012

operating revenues
cost of goods and services sold
gross margin
rental and building-lease cost
maintenance
energy and consumables
administration

23798.9
14371.4
9427.5
-670.3
-362.2
-469.8
-362.5

2011

23586.0
14302.5
9283.5
-613.5
-355.6
-477.1
-355.0

2010

2009

23809.7
14550.7
9259.0
-550.8
-362.0
-456.5
-342.5

23701.1
14455.8
9245.3
-530.8
-360.9
-448.3
-330.3

advertising
core operating expenses
personnel expenses
depreciation and amortization
core operating income from sales(before
tax)
other core operating income(before tax)
effect from pension plans before income tax
core operating income(before tax)
reported operating income

-490.2
-453.8
-5033.3
-1191.8

-483.3
-449.9
-5038.5
-1137.2

-466.3
-439.6
-4934.9
-1139.5

-438.7
-526.9
-4931.7
-1125.3

393.6

373.4

566.9

552.4

341.3
734.9

3.9
377.3

50.5
617.4

171.1
723.5

1326.9

982.9

1226.7

1324.2

Percentage of revenue

reported operating income

core operating income
advertising
rental and building-lease cost
personnel expenses
depreciation and amortization

2012
5.58%
3.09%
2.06%
2.82%
21.15%
5.01%

2011
4.17%
1.60%
2.05%
2.60%
21.36%
4.82%

2010
5.15%
2.59%
1.96%
2.31%
20.73%
4.79%

growth in reported operating income

growth in core operating income before tax

35.00%
94.78%

-19.87% -7.36%
-38.89% -14.66%

2009
5.59%
3.05%
1.85%
2.24%
20.81%
4.75%

Observations:
1. Core operating income as a percentage of sales is about half of the reported

operating income to sales. It indicates that core operating items play a significant
role in creating operating income.
2. From the figures of core operating income, reported operating income and

comprehensive income (2009: 1110.3 million), Migros experience a continuing

drop in income from 2009 to 2011. Then, there was a large growth of income in
2012.
3. Advertising expenses, rental and building-lease cost, and depreciation and

amortization expenses have increased over the years, this may because of the
increased numbers of shops.
4. Personnel expenses make up a large proportion of the income, it is because

Migros group has many retail stores and employees, the wages, salaries and social
benefits must be a great amount of expenditures.

5. The low operating income as well as the net income in 2011 is because of the

effect from pension plans item (it is marked in red in the Identifying Core
Income Sheet). In the footnotes of income statement, it says At the end of 2011,
Migros Group pension funds posted deficits, meaning that the effect of the asset
ceiling did not apply. The small number in this item leads to the low income of
the year 2011.

Analysis of ROCE
2012

ROCE
FLEV
RNOA
NBC

6.57%
0.101
4.21%
-18.98%

2011

4.06%
0.184
1.93%
-9.62%

2010

6.56%
0.161
3.82%
-13.19%

One can show that these numbers reconcile according to the financial leverage
equation:
ROCE=RNOA+ [FLEV*(RNOA-NBC)]
It is strange that the NBCs here are negative! NBC=NFE/NFO, according to the
reformulated balance sheet and income statement, the NFE is negative while the NFO
is positive. From the footnote of net income from the financial services business of
the Migros group, the interest income is overwhelming every year (it is marked in red
in Reformulated income statement), while the number of other financial expenses is
relatively low. The great amount of interest income finally shows the net financial
income instead of net financial expense. And most of the interest income comes from
mortgages and other customer receivables.

ROCE is not high every year, especially in 2011. ROCE is largely influenced by
RONA. Look at the numbers in 2011, although the FLEV was relatively high, but
because of the lowest RNOA of the three years, the ROCE was lower than others.
As RNOA=PM*ATO,
2012
ATO
PM

1.357
0.031

2011
1.340
0.014

2010
1.435
0.027

The ATOs have little differences over three years, so the decline in RNOA in 2011
was largely due to low PM. While PM=OI/Sales, lower operating income results in
lower PM.
In summary, the effect from pension plans before income tax item in 2011 results in
the low operating income and then the low comprehensive income. Accordingly, PM,
RNOA, ROCE decrease, and it also cause the negative residual earnings.

Conclusion
From the financial report of Migros, we can see that it generate a constant income,
and though the profit dropped in 2011, its still stable in general, despite the reduction
in the investment, Migros employees gained from year to year, which counts part of
the reason for the less profit comparing to the former years. Except for the business
downturn in 2011 (which all the important ratios compare to former year showed as
negative), Migros generate a stable profit, whereas it also recovered the normal
performance in 2012. We could also see it from the RNOA, which shows the
sustainability of a company, that its in general positive and stable, though it dropped
a bit in 2011, in 2012, the RNOA went back to a normal percentage again. We can see
Migros is in general and well managed and stable company from multi-analytical
aspects, as it shows its growing profitability and sustainability, its a potential
investment target.