Corporate Finance Case Study: The Target Corporation
Lei Shi
Company Research Paper (The Target Corporation)
FINA 3301
November 21, 2013
Target Corporation (NYSE: TGT) is one of the top ten largest retailers in the U.S. by sales. In its most recent year in 2012, Target who has proclaimed itself as “cheap chic” produced over $70 billion in revenue through the sales of apparel, house wares, electronics and other products (Exhibit 5). At Target, corporate governance practices have been in place for more than 50 years, and continue to evolve to balance the interests of the Board, shareholders and management to maximize efforts. A majority of the 12-member Board is independent and selected based on success in their field and in relevance to their background in business and how well their skill …show more content…
sets adds diversity to the Board. To ensure that management’s interests are aligned with shareholders, Target has a compensation plan for senior management in the form of long-term equity awards based on Targets performance in comparison to a 15-company retail group. Target prides itself on diversity (suppliers, products, and communities), design, great customer service, affordable quality, and corporate responsibility giving back to the community. Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new emerging markets. As of 2012 it has approximately 1,763 U.S. stores in active operation and holds large plans to expand into the international market to compete with its main competitor, Wal-Mart. In January 2011, Target took its first steps by buying 220 Zellers stores for $2.3 billion in Canada and plans to convert 124 of these stores by 2013. On May 6 2013, “Target announced the soft opening dates for its first stores in Western Canada, including 22 locations opening on May 7 and two locations opening on May 14” (Quote-Stocks.com, n.p.). Target is expanding to Canada first because of it’s already large presence in the U.S. and it is a safe window to start with, what is popular in the U.S. is likely to be popular in Canada.
By analyzing the financial performance of Target over the past six years, we can see that in 2008, Target was affected largely by the change in consumer spending patterns and that negatively impacted their traffic and sales, which lead to weaker than expected sales. In 2007, Target had sales/ credit card revenues of $64948, while in 2008, this only increased by around $3500, which is not what Target was expecting. The credit card issuers were also affected by the crumbling credit, and risk environment and this brought about higher-than -expected bad debt expense. Although in 2010, the Retail Segment sales has shown a significant increase of 3.7% over the year due to a 2.1% comparable-store increase combined with the contribution from the new Target stores. The retail Segment EBITDA and EBIT also shows an increase of 4.9% and 5.8%, respectively, compared to 2009 (Exhibit 5). Another factor that affected the sales growth was inflation that occurred in 2008 by around 2%. In 2008, the gross margin rate was 29.8 percent, which had fallen compared to the 30.2% in 2007. The sales mix in 2008, was what affected the rate in 2008, making it fall by 0.6%. Target operates its merchandise by getting into different arrangements with vendors where they do not buy or pay for any merchandise until and unless it is sold to the customer. Target is consistently seen to be in an excellent position to balance and cover their short-term liabilities as their current ratio has averaged 1.5x over the past five years (Exhibit 3). Over the years 2010, 2009,and 2008, sales that were made with the Target credit card was averaged typically around $3.8 billion and accounted for 6.0% of total sales. Target has been trying to reduce inventory every year by making complete use and efficiently using their supply chain, the inventory turnover ratio and days sales outstanding have been reducing throughout as well which shows an improvement in improvement in their statements.
The total debt to asset ratio increases tremendously from the year 2010 to 2011 which means that more assets of Target Corp is financed by the debt in 2011 so that the company’s debt management is in the bad condition recently and the it has more financial risks. The times interest ratio decreases significantly from 2008 to 2009, but it improves from 2010 to 2011. This ratio could be interpreted in two ways. On one hand, the Target Corp.’s ability to meet its debt obligation is improved in 2011. On the other hand, the higher ratio in 2011 can indicate that paid too much debt with earnings that could be used for projects in order to raise the revenue in the next year. Target Corp.’s operating margin is relatively high in 2007. However, it slightly deteriorated recently from 2010 to 2011 which means that the company earns less from each dollar of sales. The profit margin has the same situation with the operating margin. Target Corp. become less profitable in 2011 and has less control over assets. We can see that the sales increase from 2010 to 2011, but it does not mean that company improves its profits margin because its costs increases at a higher rate than its sales which leads to the low profits. The return on equity keeps improving since 2008 and it reaches the highest level in 2011. It shows that Target Corp. makes more profits in 2011 by using the money from its shareholders. The high return on equity can attracts more shareholders to invest its company since they can get more returns (Exhibit 1). Similarly, the return on assets is also really high in 2011 which shows that Target’s management of assets improves and the company has the ability to make use of its assets to generate profits wisely (Exhibit 2).
From the collective data I put together targets past five years of P/E and M/B ratios.
I then aligned this with the industry averages for each year. The results were somewhat unpromising. Typically a P/E ratio, or price to earnings ratio, represents what the investor should look for in terms of growth in a company, or expected growth. A good average P/E is around 20. Target’s P/E in 2007 was a strong 18.35. This was not a figure that is still somewhat promising. In 2008 this dropped to 14.43 while the industry average remained at 21.73. This gap in ratio is not something to shrug off. This means that in the year ending in 2008 investors were paying a fairer number for each dollar of earnings. Following this yet again was 2009s performance, which was extremely low, with a P/E of 10.19 and an industry average of 15.97. Dropping to a number this low is promising for investors as this means that they are paying just $10.19 for every dollar of earnings on the stock. This is about half of the normal industry average therefore making Target stick extremely attractive to the investors. Holistically this decline in P/E shows two things. One being the optimism of the investor in terms of willingness to pay and two, how much the investor will have to pay for each dollar of earnings. Targets decline in P/E displays both of these things and this is reflective of the times surrounding the decline. In 2008 we hit bottom in what was one of the worst mini recessions in a very long time. In …show more content…
times like those investors are extremely uneasy about the markets, thus driving the P/E down considering the market price of the stock fell. Likewise, investors would have to pay a small price for each dollar of earnings if invested. In terms of the M/B ratio, Target has been somewhat stable throughout the years. They have stayed in the 2-3-area meaning they are consistently slightly undervalued and gain a good return on their assets. In 2010 for instance they have a M/B of 2.7, which is very strong proving that they are efficient with their assets as well as return. (Exhibit 6).
The company’s stock price of the weekly basis reflected the positive situation of the company as the stock price increased moderately in the recent three years (Exhibit 9). I will recommend that we should buy Target stocks due to its aggressive international expansion.
In my opinion I would value Target Corp.
as a “middle-area” company that still needs growth in order to be able to increase its shareholder wealth (Exhibit 8). When looking at Target’s yearly records we can see that its revenue and EPS have increased from 2008-2012, which does show significant growth. Although when we look at the quarterly data we can see that the revenue has been flat across the three quarters and the EPS has went down on the last one. This means that this most recent year the company has been plateauing which means that they are not performing as well as the other top competitors in their industry (Exhibit 7). Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new emerging markets. Target holds large plans to expand into the international market to compete with its main competitor, Wal-Mart. Through global expansion, management choices and consistent supply chain management Wal-Mart has been able to keep a hold on the top spot. In the recent years Target has been trying to enter the international market, which will increase sales in the future. This will promote the growth of the shareholders wealth and increase their general worth in the investor’s eyes. As previously announced, Target plans to open 124 stores across Canada throughout 2013. Target Corporation is pushing its efforts to go international to reduce its dependence on the slow growing U.S. economy, and
already has a “large presence in the U.S. and risks self-cannibalization if it continues to grow aggressively” (Trefis.com). With plans to expand into Mexico and Latin America, Target is expanding to Canada first because it is a safe window to start out in; what is popular in the U.S. is likely to be popular in Canada. Target’s international market has been increasing sales and revenue making its presence just in the recent months as 6.5% of the stock price. This past year Target opened up in new locations in major cities called CityTarget to appeal to the city dwellers and urban trend that the market is growing towards. However there is some speculation that Target might be cannibalizing their own sales because their main stores only reside a few miles away from their CityTarget stores. They will have to find a way to minimize this loss and provide different product options in order to stop themselves from cutting into sales. Target has also been increasing its online sales and mobile applications which make it easier for consumers to purchase their products. Target is also launching initiatives to increase their mobile presence in order to make the consumers experience simpler. Therefore, Target is definitely the company that is worth to be invested in since Target is full speed ahead in it’s innovative expansion and expects to see nothing but growth in their image, products, services and sales. Exhibits
Exhibit 1:
Exhibit 2:
Exhibit 3:
Exhibit 4:
Exhibit 5:
Exhibit 6:
Exhibit 7:
Exhibit 8:
Exhibit 9:
Exhibit 10:
References
“Research and Analysis: Target Corp.” Stock Analysis on Net 100 U.S. Stock Market Leaders. http://www.stock-analysis-on.net/NYSE/Company/Target-Corp#Ratios
“Target Corp Key Developments.” Quote-Stocks.com. http://quote-stocks.com/TGT
“Target News, Articles and Analysis.” Trefis.com. http://www.trefis.com/stock/tgt/articles
“Target Report First Quarter 2013 Earnings”. Investor.Target.com http://investors.target.com/phoenix.zhtml?c=65828&p=irol-news&newsReleasesColumn01.3_rs=11&newsReleasesColumn01.3_rc=10&nyo=0
Company Research Paper (The Target Corporation)
FINA 3301
November 21, 2013
Target Corporation (NYSE: TGT) is one of the top ten largest retailers in the U.S. by sales. In its most recent year in 2012, Target who has proclaimed itself as “cheap chic” produced over $70 billion in revenue through the sales of apparel, house wares, electronics and other products (Exhibit 5). At Target, corporate governance practices have been in place for more than 50 years, and continue to evolve to balance the interests of the Board, shareholders and management to maximize efforts. A majority of the 12-member Board is independent and selected based on success in their field and in relevance to their background in business and how well their skill …show more content…
sets adds diversity to the Board. To ensure that management’s interests are aligned with shareholders, Target has a compensation plan for senior management in the form of long-term equity awards based on Targets performance in comparison to a 15-company retail group. Target prides itself on diversity (suppliers, products, and communities), design, great customer service, affordable quality, and corporate responsibility giving back to the community. Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new emerging markets. As of 2012 it has approximately 1,763 U.S. stores in active operation and holds large plans to expand into the international market to compete with its main competitor, Wal-Mart. In January 2011, Target took its first steps by buying 220 Zellers stores for $2.3 billion in Canada and plans to convert 124 of these stores by 2013. On May 6 2013, “Target announced the soft opening dates for its first stores in Western Canada, including 22 locations opening on May 7 and two locations opening on May 14” (Quote-Stocks.com, n.p.). Target is expanding to Canada first because of it’s already large presence in the U.S. and it is a safe window to start with, what is popular in the U.S. is likely to be popular in Canada.
By analyzing the financial performance of Target over the past six years, we can see that in 2008, Target was affected largely by the change in consumer spending patterns and that negatively impacted their traffic and sales, which lead to weaker than expected sales. In 2007, Target had sales/ credit card revenues of $64948, while in 2008, this only increased by around $3500, which is not what Target was expecting. The credit card issuers were also affected by the crumbling credit, and risk environment and this brought about higher-than -expected bad debt expense. Although in 2010, the Retail Segment sales has shown a significant increase of 3.7% over the year due to a 2.1% comparable-store increase combined with the contribution from the new Target stores. The retail Segment EBITDA and EBIT also shows an increase of 4.9% and 5.8%, respectively, compared to 2009 (Exhibit 5). Another factor that affected the sales growth was inflation that occurred in 2008 by around 2%. In 2008, the gross margin rate was 29.8 percent, which had fallen compared to the 30.2% in 2007. The sales mix in 2008, was what affected the rate in 2008, making it fall by 0.6%. Target operates its merchandise by getting into different arrangements with vendors where they do not buy or pay for any merchandise until and unless it is sold to the customer. Target is consistently seen to be in an excellent position to balance and cover their short-term liabilities as their current ratio has averaged 1.5x over the past five years (Exhibit 3). Over the years 2010, 2009,and 2008, sales that were made with the Target credit card was averaged typically around $3.8 billion and accounted for 6.0% of total sales. Target has been trying to reduce inventory every year by making complete use and efficiently using their supply chain, the inventory turnover ratio and days sales outstanding have been reducing throughout as well which shows an improvement in improvement in their statements.
The total debt to asset ratio increases tremendously from the year 2010 to 2011 which means that more assets of Target Corp is financed by the debt in 2011 so that the company’s debt management is in the bad condition recently and the it has more financial risks. The times interest ratio decreases significantly from 2008 to 2009, but it improves from 2010 to 2011. This ratio could be interpreted in two ways. On one hand, the Target Corp.’s ability to meet its debt obligation is improved in 2011. On the other hand, the higher ratio in 2011 can indicate that paid too much debt with earnings that could be used for projects in order to raise the revenue in the next year. Target Corp.’s operating margin is relatively high in 2007. However, it slightly deteriorated recently from 2010 to 2011 which means that the company earns less from each dollar of sales. The profit margin has the same situation with the operating margin. Target Corp. become less profitable in 2011 and has less control over assets. We can see that the sales increase from 2010 to 2011, but it does not mean that company improves its profits margin because its costs increases at a higher rate than its sales which leads to the low profits. The return on equity keeps improving since 2008 and it reaches the highest level in 2011. It shows that Target Corp. makes more profits in 2011 by using the money from its shareholders. The high return on equity can attracts more shareholders to invest its company since they can get more returns (Exhibit 1). Similarly, the return on assets is also really high in 2011 which shows that Target’s management of assets improves and the company has the ability to make use of its assets to generate profits wisely (Exhibit 2).
From the collective data I put together targets past five years of P/E and M/B ratios.
I then aligned this with the industry averages for each year. The results were somewhat unpromising. Typically a P/E ratio, or price to earnings ratio, represents what the investor should look for in terms of growth in a company, or expected growth. A good average P/E is around 20. Target’s P/E in 2007 was a strong 18.35. This was not a figure that is still somewhat promising. In 2008 this dropped to 14.43 while the industry average remained at 21.73. This gap in ratio is not something to shrug off. This means that in the year ending in 2008 investors were paying a fairer number for each dollar of earnings. Following this yet again was 2009s performance, which was extremely low, with a P/E of 10.19 and an industry average of 15.97. Dropping to a number this low is promising for investors as this means that they are paying just $10.19 for every dollar of earnings on the stock. This is about half of the normal industry average therefore making Target stick extremely attractive to the investors. Holistically this decline in P/E shows two things. One being the optimism of the investor in terms of willingness to pay and two, how much the investor will have to pay for each dollar of earnings. Targets decline in P/E displays both of these things and this is reflective of the times surrounding the decline. In 2008 we hit bottom in what was one of the worst mini recessions in a very long time. In …show more content…
times like those investors are extremely uneasy about the markets, thus driving the P/E down considering the market price of the stock fell. Likewise, investors would have to pay a small price for each dollar of earnings if invested. In terms of the M/B ratio, Target has been somewhat stable throughout the years. They have stayed in the 2-3-area meaning they are consistently slightly undervalued and gain a good return on their assets. In 2010 for instance they have a M/B of 2.7, which is very strong proving that they are efficient with their assets as well as return. (Exhibit 6).
The company’s stock price of the weekly basis reflected the positive situation of the company as the stock price increased moderately in the recent three years (Exhibit 9). I will recommend that we should buy Target stocks due to its aggressive international expansion.
In my opinion I would value Target Corp.
as a “middle-area” company that still needs growth in order to be able to increase its shareholder wealth (Exhibit 8). When looking at Target’s yearly records we can see that its revenue and EPS have increased from 2008-2012, which does show significant growth. Although when we look at the quarterly data we can see that the revenue has been flat across the three quarters and the EPS has went down on the last one. This means that this most recent year the company has been plateauing which means that they are not performing as well as the other top competitors in their industry (Exhibit 7). Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new emerging markets. Target holds large plans to expand into the international market to compete with its main competitor, Wal-Mart. Through global expansion, management choices and consistent supply chain management Wal-Mart has been able to keep a hold on the top spot. In the recent years Target has been trying to enter the international market, which will increase sales in the future. This will promote the growth of the shareholders wealth and increase their general worth in the investor’s eyes. As previously announced, Target plans to open 124 stores across Canada throughout 2013. Target Corporation is pushing its efforts to go international to reduce its dependence on the slow growing U.S. economy, and
already has a “large presence in the U.S. and risks self-cannibalization if it continues to grow aggressively” (Trefis.com). With plans to expand into Mexico and Latin America, Target is expanding to Canada first because it is a safe window to start out in; what is popular in the U.S. is likely to be popular in Canada. Target’s international market has been increasing sales and revenue making its presence just in the recent months as 6.5% of the stock price. This past year Target opened up in new locations in major cities called CityTarget to appeal to the city dwellers and urban trend that the market is growing towards. However there is some speculation that Target might be cannibalizing their own sales because their main stores only reside a few miles away from their CityTarget stores. They will have to find a way to minimize this loss and provide different product options in order to stop themselves from cutting into sales. Target has also been increasing its online sales and mobile applications which make it easier for consumers to purchase their products. Target is also launching initiatives to increase their mobile presence in order to make the consumers experience simpler. Therefore, Target is definitely the company that is worth to be invested in since Target is full speed ahead in it’s innovative expansion and expects to see nothing but growth in their image, products, services and sales. Exhibits
Exhibit 1:
Exhibit 2:
Exhibit 3:
Exhibit 4:
Exhibit 5:
Exhibit 6:
Exhibit 7:
Exhibit 8:
Exhibit 9:
Exhibit 10:
References
“Research and Analysis: Target Corp.” Stock Analysis on Net 100 U.S. Stock Market Leaders. http://www.stock-analysis-on.net/NYSE/Company/Target-Corp#Ratios
“Target Corp Key Developments.” Quote-Stocks.com. http://quote-stocks.com/TGT
“Target News, Articles and Analysis.” Trefis.com. http://www.trefis.com/stock/tgt/articles
“Target Report First Quarter 2013 Earnings”. Investor.Target.com http://investors.target.com/phoenix.zhtml?c=65828&p=irol-news&newsReleasesColumn01.3_rs=11&newsReleasesColumn01.3_rc=10&nyo=0