Company Background: Target Corporation is among the top two discount chains in the US. Target operates in the US and in the District of Columbia. The company is headquartered in Minneapolis, Minnesota and employs 351,000 people; this figure includes full-time, part-time, and seasonal employees. The company recorded revenues of $65,357 million during the financial year ended January 2010 (FY2010), an increase of 0.6% over 2009.
1. The industry environment
o In September 2010, the National Bureau of Economic Research (NBER) announced that the recession ended in June 2009, 18 months after it had begun in December 2007, making it the longest recession since World War II. Although the economy is in an early stage of recovery, consumer confidence remains weak and unemployment high. Nevertheless, business for many retailers has stabilized over the past year, albeit at lower levels than have been seen in the past.
o One area of strength has been high-end retail, which implies to us that the affluent (households with annual income of $100,000 or more) are generally feeling positive about the future. This is an important indicator because the affluent have led the consumer out of prior recessions. Although they comprise only 20% of US households, they account for over 50% of the nation’s income and about $1.2 trillion in discretionary spending. We believe that as long as the economy and stock market don’t derail, the affluent will continue to support a broader recovery in discretionary spending.
o The recession hit department stores harder than discounters, as consumers made mostly need-based purchases. Consumers can live without new fashion apparel and accessories, fine jewelry, and home furnishings during an economic downturn. Since fall 2009, however, same-store sales have rebounded at department stores, with a few chains actually outperforming discounters. Better and moderate department stores emphasizing fashion, quality, and value have also seen a rebound in sales.
2. Firm strategy
o Target Corp. seeks to drive sales by matching main competitor Wal-Mart Stores, Inc.’s prices on identical and similar items in local markets, and by discounting its differentiated products, which include exclusive fashion apparel brands such as Converse One Star.
o Since fiscal 2005 (ended January 2005), the company has also been expanding food assortments in its stores as a means of increasing the frequency of customer visits. Through its PFresh store-remodeling program, Target completed, by October 2010, the addition of a fresh food product line in 340 stores, which had been its target number of stores for the entire fiscal year 2011.
o As we see it, Target’s “Expect More. Pay Less.” brand message has traditionally put more emphasis on product design than low prices. To become more competitive, the company has increased its efforts to communicate low prices in its circulars, in-store signage, and merchandise presentation.
o It also offers money-saving direct mail, online, and mobile 2D coupons. The company has introduced more than 800 value-priced items in over 40 categories under its new “up & up” private label. In addition, Target is now matching advertised prices from competitors on identical items in local markets and is offering coupons (which are updated weekly) online for customers to print and use in-store.
o Under the company’s new “Our Low Price Promise” guarantee, customers who bring back an actual printed competitor ad and a Target receipt showing in-store purchase of the same item will receive a price adjustment within seven days of purchase. The company launched Our Low Price Promise nationwide in mid-July 2009 after testing it in the Denver, Orlando, and Minneapolis markets. We see these efforts to strengthen Target’s value proposition beginning to pay off, as the company has reported traffic-driven same-store sales increases in recent quarters.
o Since mid-October 2010, Target has also offered holders of its REDcard (Target Credit Card, Target Visa Card, or Target Check Card) a 5% discount on nearly all purchases made in-store and online every day.
o The company expects its new REDcard rewards program to add about one percentage point to same-store sales and to have little to no impact on earnings in the fourth quarter of fiscal 2011, and to add between one to two percentage points to same-store sales and to be accretive to earnings in fiscal 2012.
3. Financial results for the company over the periods presented and compared to its industry results
o See the appendix attached with this paper.
4. Outlook for the future
o The future of the target corporation is broad and vast. Here if we see from the data we can see that their sales are increasing. In 2009, deflation affected sales growth by approximately 4 percentage points. The operating profit of the company was $4,673 million during FY2010, an increase of 6.2% over 2009. The net profit was $2,488 million in FY2010, an increase of 12.4% over 2009.
o Also the quick ratio and the current ratios are much higher from the industry ratios. Also they had a significant increase in the net earning by 51% over the past five years where as their expenses had only increased by 49%.
o More over during the time of recession they are doing well as to increasing their revenue by 6.52%. The only threat I see that they have a very High debt to equity ratio (1.11) by 0.34 more than the industry ratio (0.77) and which is risky because in the time of recession if their sales failed to increase or decreased dramatically then they can go into a solvency and can be bankrupt.
o On January 13, 2010, Target has agreed to purchase 220 sites occupied by Zellers Inc. and will give Target the opportunity to expand to Canada by 2013. Target expects to 100 to 150 stores in Canada by 2013-2014.
o Target Corp. will also launch two store prototypes this year that are larger than existing Target stores, are green certified and add more space for food and electronics. The new general-merchandise stores will span 132,400 square feet, roughly 6,000 square feet larger than the current model. The new “SuperTarget” stores will be 186,000 square feet, about 12,000 square feet larger than existing locations and pushing closer to the average size of Wal-Mart’s Supercenters, which are about 197,000 square feet. SuperTarget stores include full-service groceries. This new concept will help Target Corporation increase their revenues.
o Whether visiting a Target store or shopping online at Target.com, guests enjoy a fun and convenient shopping experience with access to thousands of unique and highly differentiated items, this can be beneficial to the company in increasing their net earnings.
Using this information, if I look at Company’s net profit margin (%) then it is almost consistently same in past 10 year. It would make me re-think whether to invest money in Target Corp. or not. But after looking at the outlook of the company, its firm strategy and its new innovative ideas, I feel that one should definitely invest money in this company. The sales did go down in the year 2008-09, but if we compare it with industry then we can see that it was down for whole industry during recession period. Still target worked hard and tried to maintain its debt/equity ratio. Even the price/sales is increased 0.22 compared to last year, which is quite high. So one should definitely invest money in Target Corp.
Appendix
Appendix
COMPANY | INDUSTRY | |
Growth Rate% | ||
Sales (Qtr vs year ago qtr) | 2.2 | 4.2 |
Net Income (YTD vs YTD) | 21.5 | 10.3 |
Net Income (Qtr vs year ago qtr) | 22.7 | 14.1 |
Sales (5-Year Annual Avg.) | 6.89 | 7.52 |
Net Income (5-Year Annual Avg.) | 5.71 | 6.48 |
Dividends (5-Year Annual Avg.) | 16.67 | 14.16 |
Price Ratios | ||
Current P/E Ratio | 13.7 | 15.6 |
Price/Sales Ratio | 0.55 | 0.51 |
Price/Book Value | 2.47 | 3.02 |
Price/Cash Flow Ratio | 7.5 | 9.5 |
Profit Margins % | ||
Gross Margin | 30.8 | 24.9 |
Pre-Tax Margin | 6.5 | 5.4 |
Net Profit Margin | 4.2 | 3.6 |
Financial Condition | ||
Debt/Equity Ratio | 1.11 | 0.77 |
Current Ratio | 1.6 | 1.1 |
Quick Ratio | 0.7 | 0.4 |
Leverage Ratio | 3 | 2.8 |
Book Value/Share | 21.02 | 18.72 |
Investment Return | ||
Return On Equity | 18.9 | 20.8 |
Return On Assets | 6.2 | 8.2 |
Return On Capital | 8.5 | 12.8 |
Return On Equity (5-Year Avg.) | 17.4 | 18.8 |
Return On Assets (5-Year Avg.) | 6.4 | 7.9 |
Return On Capital (5-Year Avg.) | 8.7 | 12.2 |
Management Efficiency | ||
Income/Employee | 8,037 | 9,199 |
Revenue/Employee | 190,630 | 294,372 |
Receivable Turnover | 10.3 | 138.8 |
Inventory Turnover | 4.9 | 7.5 |
Asset Turnover | 1.5 | 2.3 |
10-YR SUMMARY | AVG P/E | PRICE/SALES | PRICE/BOOK |
1/11 | NA | NA | NA |
1/10 | 12.9 | 0.59 | 2.49 |
10/9 | 16.1 | 0.37 | 1.71 |
2/8 | 18.0 | 0.77 | 3.05 |
2/7 | 16.7 | 0.91 | 3.41 |
1/6 | 19.7 | 0.92 | 3.33 |
1/5 | 22.2 | 0.96 | 3.38 |
1/4 | 20.5 | 0.83 | 3.11 |
2/3 | 24.1 | 0.69 | 2.72 |
2/2 | 24.2 | 0.99 | 4.99 |
10-YR SUMMARY | NET PROFIT MARGIN % | BOOKVALUE/SHARE | DEBT/EQUITY |
1/11 | NA | NA | 0.00 |
1/10 | 3.8 | 20.61 | 1.10 |
10/9 | 3.4 | 18.22 | 1.37 |
2/8 | 4.5 | 18.70 | 1.12 |
2/7 | 4.5 | 18.18 | 0.64 |
1/6 | 4.6 | 16.25 | 0.69 |
1/5 | 4.0 | 14.63 | 0.73 |
1/4 | 3.9 | 12.21 | 0.99 |
2/3 | 3.7 | 10.38 | 1.18 |
2/2 | 3.4 | 8.68 | 1.14 |
10-YR SUMMARY | RETURN ON EQUITY | RETURN ON ASSETS | INTEREST COVERAGE |
1/11 | NA | NA | NA |
1/10 | 16.2 | 5.6 | 4.8 |
10/9 | 16.1 | 5.0 | 4.0 |
2/8 | 18.6 | 6.4 | 6.9 |
2/7 | 17.8 | 7.5 | 7.5 |
1/6 | 17.0 | 6.9 | 7.9 |
1/5 | 14.5 | 5.8 | 5.1 |
1/4 | 14.5 | 5.2 | 4.7 |
2/3 | 14.6 | 4.8 | 3.8 |
2/2 | 14.4 | 5.7 | 4.7 |
