TARGET CORPORATION ANALYSIS
The purpose of this memo is to evaluate Target’s recent performance and compare Target’s five proposed capital budgeting projects.
The first SuperTarget store opened in Omaha, Nebraska in 1995. Target differentiated itself from Wal-mart by focusing on their customer’s shopping experience. The company had been highly successful at promoting its brand awareness with large advertising campaigns and as additional enhancement to the customer shopping experience, Target offered credit to qualified customers through its RED cards.
I. Target’s Recent Performance Evaluation
Wal-Mart Revenue= $315.7 billion Wal-Mart Debt Rating= AA Wal-Mart Beta= 0.80
Costco Revenue= $52.9 billion Costco Debt Rating= A Costco Beta= 0.85
Target Revenue= $52.6 billion Target Debt Rating= A+ Target Beat= 1.05
Table 1: Retail Company Financial Information
Table 1 shows that Target’s total revenue is the lowest as compared to Wal-mart and Costco but it performed better in relation to its company’s debt management. Target’s debt rating of A+ outperforms Wal-mart’s or Costco’s debt rating. This indicates that Target has very efficient debt management system in its company despite the fact that they need to acquire more funds to undertake their capital budgeting projects and the risk of them defaulting on their loan payments is very low. However, Target seems to be the riskiest company with a beta of 1.05 which is higher than the other two companies. I believe that Target’s beta of 1.05 is not a very big issue as the total beta of the retail industry is 1.96 and Target’s beta is still much lower than the overall industry’s beta.
II. Target’s Financial Ratios Evaluation
Net profit Margin (2005) = 6.89% (2006) = 4.58%
Return on Assets (ROA) (2005)= 5.84% (2006)= 6.88%
Return on Equity (ROE) (2005)= 24.55% (2006) = 16.95%
Asset Turnover Ratio (2005)= 1.44 (2006) = 1.50
Inventory Turnover Ratio (2005)=5.84 (2006)= 5.98
Table 2: Target’s Financial Ratios
Table 2 shows that Target’s net profit margin has decreased since 2005. ROE has also decreased since 2005 but ROA increased since 2005. Target’s net profit margin decreased since 2005 because they decreased their interest expense in 2006. Target experienced a growth in sales and a decrease in interest expense from 2005 to 2006 which is a good sign for the company even though this resulted in a decrease in net profit margin. This decrease in net income also led to a decrease in ROE. The decrease in ROE is not a bad sign for Target as the total shareholders’ equity actually increased from 2005 to 2006 which also caused the decrease in ROE. ROA improved from 2005 to 2006 which shows that management is really good at managing Target’s assets to generate earnings.
Asset Turnover Ratio and Inventory Turnover Ratio improved since 2005 which indicates that Target is becoming more efficient in managing their assets and inventories. Turnover ratios are very important in the retail industry to ensure that the company is able to keep their costs low and generate significant profits. The improvement in inventory turnover for Target shows that Target is able to lower their warehouse and inventory costs in 2006 by effectively managing their inventory. This also led to the increase in sales for Target in 2006.
III. Capital Budgeting Projects Comparison
A. Gopher Place
The total population in the area in which it is located is one of the lowest among the others. There is the potential of cannibalism in that area if Target undertakes this project as there is a high density of Target stores already in that area. In addition, Wal-mart also plans to add two new supercenters there. Competition in this area will be pretty high with such a low population and so many stores. This project may not be able to generate high number of sales or profit for Target despite the huge population increase and high median income.
B. Whalen Court
It has the highest NPV due to its location in the most populated area. It will also bring the brand awareness that Target always sought for and provide free advertising to all passerby. However, the initial investment required for this project is huge and raises concerns on Target’s ability to finance it. The risks associated with this project is too high as a small decrease in amount of sales will result in a huge negative NPV and losses to the company. This project may not be able to generate the high amount of sales or profit for Target as sales are expected to remain constant with a low population increase.
C. The Barn
It requires the least investment and produces a very favorable NPV. This small rural area will enable Target to expand their stores to a new market. However, it is located in an area with the second lowest total population. The median income of the population is also pretty low. Target can achieve huge profits in this area as only a small amount of sales is required to generate huge returns and Target will not encounter losses when sales decline. This project will generate huge amount of profit for Target despite the possibility that the amount of sales may be one of the lowest compared to the other projects.
D. Goldie’s Square
It has the lowest NPV among all the other projects and does not look attractive from the NPV standpoint. However, it is located in a densely populated who have a high median income. A population with a high median income may result in Target acquiring many loyal customers. There is also a high population growth which indicates that sales will increase in the future. This project can generate the high amount of sales and profit for Target as growth materializes.
E. Stadium Remodel
It is located in an area with the highest median income and highest percentage of adults with 4+ years of college. Potential of sales look promising. However, there is not enough information to support this as sales has been declining previously. The outlook does not look too promising for this project. It is not a profitable project to undergo at this moment.
IV. Conclusion and Recommendation
Based on my evaluation of Target, I saw an overall improvement on Target’s performance. I believe that Target will be able to earn huge profits and sales by sticking on to their marketing strategy and thorough analysis of future projects The Barn and Goldie’s Square projects are the two projects that I would recommend as these are the most profitable projects among the others.