LVMH & Warnaco

LVMH & Warnaco
1. Calculate ROIC for both companies for fiscal 2011. For calculations requiring a tax rate, assume 33.3% for LVMH (the French corporate rate), and 35% for Warnaco (the U.S. corporate rate). Based on this analysis alone, how do the companies compare in terms of their performance?

LVMH
Warnaco

EUR mil
USD mil

2011 Operating Income
5,154.00
181.50

Tax rate
33.3%
35.0%
[1]
Tax
1,716.28
63.53

NOPAT
3,437.72
117.98

Ending Investment Capital

Total Equity
23,512.00
897.20

+ Long Term Borrowing
4,132.00
208.48
[2] [3]
+ Short Term Borrowing
3,134.00
47.51
[3]
Ending Investment Capital
30,778.00
1,153.19

Beginning Investment Capital

Total Equity
18,204.00
972.61

+ Long Term Borrowing
3,432.00
0
[3]
+ Short Term Borrowing
1,834.00
32.17
[3]
Beginning Investment Capital
23,470.00
1,004.78

2011 Average Investment Capital
27,124.00
1,078.98

ROIC
12.67%
10.93%

Our analysis shows that the ROIC for LVMH and Warnaco are fairly similar – ROIC for LVMH was 12.67% compared to the 10.93% for Warnaco. While we see that LVMH’s operating income is substantially larger than the operating income of Warnaco, the difference in ROIC of 172 basis points shows that the underlying performance of the two companies are much more comparable when taking into account their relative sizes.
When calculating ROIC, we have made a few assumptions, which are noted below:
[1] For calculating Tax, we have started with Operating Income and deducted the respective Income Tax provided in the case for each company. One could argue that a more accurate result could be derived by taking operating profit, subtracting the actual tax on the income statement and then adding back the effective tax on the financial items below the operating income line.
[2] For Warnaco, we have not included "Redeemable Non-controlling interest" in