ANALYSIS OF THE TARGET CORPORATION
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 differs from Wal-mart by focusing on the shopping experience for its customers. The company had been very successful in promoting its brand awareness with large advertising campaigns and, as a further enhancement to the customer shopping experience, Target offered credit to qualified customers through its RED cards.
I. Target’s recent performance review
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 Hit = 1.05
Table 1: Financial information of the retail company
Table 1 shows that Target’s total revenue is the lowest compared to Wal-mart and Costco, but it performed better relative to managing its company’s debt. Target’s A + debt rating outperforms Wal-mart or Costco’s debt rating. This indicates that Target has a very efficient debt management system in its company even though they need to acquire more funds to undertake their capital budgeting projects and the risk of defaulting on their loans is very low. However, Target appears to be the riskiest company with a beta of 1.05, which is higher than the other two companies. I think Target’s beta of 1.05 is not a big deal, as the total beta for the retail industry is 1.96 and the beta for Target is still much lower than the beta for the industry as a whole.
II. Target financial ratio 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 rate (2005) = 5.84 (2006) = 5.98
Table 2: Target financial ratios
Table 2 shows that Target’s net profit margin has decreased since 2005. ROE has also decreased since 2005, but ROA has increased since 2005. Target’s net profit margin decreased since 2005 because it decreased its interest expense in 2006 Target experienced sales growth 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 the 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 total shareholders’ equity 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 profit.
The asset turnover ratio and inventory turnover ratio have improved since 2005, indicating that Target is becoming more efficient in managing its assets and inventories. Turnover rates are very important in the retail industry to ensure that the company can keep costs down and generate significant profits. Target’s inventory turnover improvement shows that Target can reduce its inventory and warehouse costs in 2006 by effectively managing its inventory. This also led to Target’s increased sales in 2006.
III. Comparison of capital budgeting projects
A. Gopher Place
The total population of the area in which it is located is one of the lowest among the others. There is the potential for cannibalism in that area if Target undertakes this project, as there is a high density of Target stores in that area. Additionally, Wal-mart also plans to add two new super centers there. Competition in this area will be quite high with such a low population and so many stores. This project may not be able to generate a large number of sales or profits 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 has always sought and provide free advertising to all passersby. However, the initial investment required for this project is huge and raises concerns about Target’s ability to finance it. The risks associated with this project are too high, as a small decrease in the amount of sales will result in a huge negative NPV and losses for the company. This project may not be able to generate the large 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 allow Target to expand its stores into a new market. However, it is in an area with the second lowest total population. The average income of the population is also quite low. Target can make big profits in this area as only a small amount of sales is required to generate large returns and Target will not experience losses when sales decline. This project will generate a large amount of profit for Target despite the possibility that the number of sales will be one of the lowest compared to the other projects.
D. Goldie Square
It has the lowest NPV among all the other projects and does not seem attractive from a NPV point of view. However, it is in a densely populated area that has a high median income. An upper-middle-income population can lead to Target acquiring many loyal customers. There is also high population growth, indicating that sales will increase in the future. This project can generate a great deal of sales and profit for Target as growth materializes.
E. Stadium remodeling
It is located in an area with the highest median income and the highest percentage of adults with more than 4 years of college. The sales potential looks promising. However, there is not enough information to support this as sales have been declining previously. The prospects do not look too promising for this project. It is not a profitable project to do at this time.
IV. Conclusion and recommendation
Based on my evaluation of Target, I saw an overall improvement in Target’s performance. I believe that Target will be able to achieve great profits and sales if it sticks to its marketing strategy and a thorough analysis of future projects. The Barn and Goldie’s Square projects are the two projects I would recommend, as these are the most profitable projects among the others. .