Target capital budgeting analysis

Case study for Assignment Corporarte Finance ]hs hs aisn stum! ieil!"nm #$n mh%nrnet prkonats ]irjnt Akrpkrithke im tk mnahmn ke aiphtil spnet &kr ''ha prkonat arnitnm tn (kst $ilun iem tn (kst jrk''t &kr tn ak(pie! iem hts sirnklmnrs) B! ieil!"hej tn #eieahil stitn(nets iem n*h+hts k& nia prkonat, tn skluthke mntnr(hens tn pkshth$ns iemenjith$ns k& nia k& tnsn iltnreith$ns) ]n iltnreith$ns ''nrn -kpnr Plian, .ilne Akurt, ]n Bire, -klmhn/s Q0uirn, kr Qtimhu( Rn(kmnl) Ht sk''s k'' kel! EPS iem HRR irn ekt tn kel! mrh$nrs &kr prkonat snlnathke mnahshke) Ht ies''nrs &kur spnah#a 0unsthkes is rn0uhrnm +! ths aisn stum!)

TARGET

CORPORATION

Corporate Analysis (Part A) of:

QUESTION #1

Assess the overall performance of the firm using the Balanced scorecard.

Business Strategy

12,777,000)

=4,229,000/(44,553,000-Assessment:

A higher ROCE indicates more efficient use of capital

Since Target’s ROCE has been declining since 2011,

it indicates that Target has not utilized its capital efficiently

In 2012, Earnings has increased, but total assets in 2011

has increased more than the EBIT It leads to decline of

ROCE in 2012 In 2013, all components of ROCE have

decreased significantly

EVA is a performance metric that calculates the creation of

shareholder value Since Target’s EVA has been increasing

for the past three years, the firm has more profits remained

after the costs of the company’s capital

Cash is the real asset that firms generate FCF gives a much

clearer view of the ability to generate profits Target’s FCF

has been increasing in the trend where cash flows from

operating activities is increasing and capital expenditure

is decreasing It could mean that Target started earning

profit from its investment in the past

• High-end Atmosphere

Customers prefer to shop in an atmosphere where they are treated well and feel good about the store This results in a willingness to pay more for items, and individuals who are not as price sensitive.

Consumer Perspective

• Strategic Objectives

Customer

Service

• Online Customer Service

This hits more of the tech savvy buyers that like to use the internet to search, review and buy products online than going to the store Other than showing products, it also allows the customer to see where their money is being contributed to by the company.

Learning & Growth Perspective

Providing financial assistance

Volunteering

Social organizations

Environmental

efforts Education &

Arts

Internal Business Process

the workplace by enhancing the

individuality of the staff and

employees

THE BALANCED SCORECARD

Understand customer segments

“Expect More Pay Less”

Increase customer confidence

Annual EPS Growth

Effective Leadership

Revenue Growth

QUESTION #2

Identify all threats and opportunities associated with all

7 segments of the general environment

Opportunities • 1,801 stores in the U.S

• 37 Distribution centers

• International locations (India and Canada = Ethnic)

• Continuously expanding

• Over 350,000 team members

• Age structure for all ages target towards families

Threats • Competitors have larger

distribution areas

• Larger amount of stores (Walmart)

Opportunities • Continuous economic

success during economy hardships

• Continuous sales growth

• Customers continue to choose target as one of the top retailers

Threats • Inflation rates could be

higher, lacking due to fall

of economy over the years

Global & Political/Legal

Opportunities • Target Citizens Political

Action Committee determines decisions for corporate

• Joins organizations and associations to be apart of corporate contributions on state/national level

• Expansions outside of U.S.

• Education learning strategies such as book donations, field trips, food pantry visits, and cash donations.

Threats • Backlash from some

donations (Ex Target protests in Minneanapolis due to support of anti-same sex marriage campaigner.)

Sociocultural & Physical

Opportunities • “By fostering an inclusive

culture, we enable all of our team members to leverage their unique talents and high performance standards to drive innovation success.”

• Variety of services, like online store, Super Target, Target Financial Services (Red Card/Visa Card)

• Contributes 5% back to company and is an environment friendly corporation.

Threats • Competitors (Walmart) in

their prices, but have gone forward to ELIMINATE the negative by offering price matches for identical

products.

Opportunities • Very diverse with technology

• Apps through cell phones – Cartwheel – discounts and coupons

• Target.com exclusive deals

• Active through social media such as Facebook and

Twitter

• Social media is used for customer services as well as marketing of products and promotions.

Threats • Security breaches with

personal information such

as social security and credit card information has been stolen by hackers

Porter’s Five Forces

• Diversity of products to be bought.

• Arrange of prices to compliment wide

Porter’s five forces cont.

Bargaining Supply of Suppliers

LOW

• Suppliers give discounts on products.

• Incentives of giving back to the

consumers (Red Card)

• Special types of product promotions

(Donations, BOGO)

Industry Rivalry

STRONG

• Amount of Retailers (Walmart, Kmart,

Kohl's, Meijer's, Etc.)

• Internet outlets (Amazon, etc) at

discounted prices and shipping

incentives.

• Carrying same type of products

Threat of Substitutes

MODERATE

• Products offered at other retailers.

• Similar products being offered at lower prices.

• Choosing another retailer based on convenience

Most Important!

Collectively, we find Target company to be an attractive industry with high profit potential!

Attractiveness of Target Co.

• Simple slogan: Expect more, pay less

• Recognizable branding with products.

• Expanding of stores nationwide.

• High end deigns and innovation of products.

• Higher end products for everyday, affordable

costs.

• Distinguish themselves compared to their

competitors (Ex Target has a distinct logo)

• Competitive incentives such as price matching,

coupons, discounts.

• Target has several different types of programs

for the customers as well as through corporate.

• Continuous growth of consumers and sellers of

products.

Industry Attractiveness

The attractiveness of the industry…

A Attractive: Economic Opportunity…

 Consumers regularly shopping for their

needs/wants

B Unattractive: Industry Rivalry…

 Many different retailers for consumers to

choose from

 Heavy competition from successful

Walmart

Key Success Factors

Many buyers and suppliers

Recognizable Brand

QUESTION #3

To what extent is the firm’s performance attributable to industry attractiveness and to what extent to competitive advantage?

TGT= 43.2% WMT= 24.76% AMZ= 14.71%

Capital Turnover

Inventory Turnover TGT= 8.28 WMT= 10.62 AMZ= 10.05

Fixed Asset Turnover TGT= 2.31 WMT= 4.04 AMZ= 6.80

Receivables Turnover TGT= 12.43 WMT= 71.33 AMZ= 15.62

• Return on Capital Employed

(ROCE) depicts a corporations use

of capital

• The higher the ROCE, the more

efficient the use of its capital

• Let’s utilize this concept to

compare Target’s advantages and

disadvantages with a competitor…

-ROCE = EBIT / (total assets - current liabilities)

 Target has a 10% higher ROCE than Amazon.

 This high ROCE means Target uses their capital more efficiently.

Profit Margin = net income / revenues

 Target’s profit margin is significantly higher due

to its superior net income

 Target’s net income benefits from its lower selling/general/administrative expenses compared with Amazon

Days Sales Inventory = [1/ (sales/inventory)] x 365

 Target’s days sales inventory of 44.08 means that they sell their entire inventory in 44 days However, Amazon sells their entire inventory within 36 days, which is 8 days faster

 This means Amazon doesn’t have to store inventory as long, giving them lower inventory storage costs and the ability to put new merchandise out their sooner

2 Fixed Asset

Turnover

TGT = 72,596,000 / 31,378,000 = 2.31 AMZ = 74,452,000 / 10,949,000 = 6.80

Fixed Asset Turnover = net sales/net property, plant, equipment

 Amazon has a significantly higher fixed asset turnover ratio, indicating that they generate more sales from their fixed asset investments

3 Receivables

Turnover

TGT = 72,596,000 / 5,841,000 = 12.43 AMZ = 74,452,000 / 4,767,000 =

15.62

Receivables Turnover = sales / accounts receivable

 Target’s receivables turnover is slightly lower, meaning they should investigate their method of collecting accounts receivable

 They aren’t quite as efficient as Amazon

 Once again, Target excels at their COGS to sales percentage

 They have a 5 % advantage on Walmart, who is spending significantly more on their goods that they sell

COGS / Sales Target beats both

Amazon and Walmart when it comes to this ratio!

-ROCE = EBIT / (total assets - current liabilities)

 Target’s ROCE is 6.5% lower than Walmart’s, indicating their need to use their capital more efficiently

*days sales inventory = (1 / 10.62) x 365 =

34.37

Inventory Turnover = [1/(sales/inventory)] x 365

 Again, Target sells their entire inventory in 44 days, while Walmart sells its entire inventory within 34 days

 Walmart has lower inventory storage costs as a result.

3 Fixed Asset

Turnover

TGT = 72,596,000 / 31,378,000 = 2.31 WMT = 476,294,000 / 117,907,000 = 4.04

Fixed Asset Turnover = net sales/net property, plant, equipment

 Target’s fixed asset turnover ratio is about half of Walmart’s.

 This means that Target must work on better using their assets to generate revenue

Receivables Turnover = sales / accounts receivable

 Walmart’s receivables turnover is nearly 6 times that of Target.

 Target needs to investigate their method of collecting accounts receivable, in order to become as efficient at it as Walmart.

Profit Margin = net income / revenues

 Walmart once again trumps Target in profit margin, by 66% Target keeps 2.7% of every sales dollar, while Walmart keeps 3.36%.

Target’s Performance –

1 Competitive Advantages

Target will continue to

succeed in this industry

because of its competitive

advantages.

1 Low COGS % of sales

2 Strong ROCE % and Profit

Margin

3 Recognizable Branding

4 Superior Marketing

THE VALUE CHAIN ANALYSIS

Finance Global Workforce IT

Design

Operations

Ship Sell

Use and Reuse

Support

Functions

Primary

Functions

Value Chain Analysis

A Primary Functions

Inbound Logistics

Target Corporation promotes design through imagination, improvement and innovative ideas that enable them to give more While dreaming up new products and sketching new store sites, Target is building

responsibility and sustainability into every brainstorm This is reflected through Target’s CGS/Sales ratios They have a lower percentage than Amazon and Wal-Mart.

Produce

Through Target’s everyday operations, design and raw materials merge

to become the products sold Target collaborates with highly qualified vendors and aim to make production better for the people of the planet Target’s inventory ratios are disadvantages as compared to Amazon and Wal-Mart in that Target’s products sit on the shelves longer than its competitors

Outbound Logistics

Shipping is Target’s outbound logistics process of moving products from the source to the guest Target has reduced loads they’ve shipped and miles traveled in order to save on fuel, reduce our carbon emissions and lower costs, while, getting products to their guests promptly and

efficiently This is reflected in Target’s fixed asset ratios.

Value Chain Analysis

A Primary Functions

Marketing and Sales

Target’s main focus in selling is the guests experience They are focusing mainly on the sustainability and the responsibility of operations from their corporate headquarters in Minneapolis, Minnesota These ratios are reflected in Target’s CGS/Sales ratios.

Customer Service

Use and Reuse is the motto that Target uses when it comes to customer service Guests determine the destiny of the products they buy and Target provides the tools, information and incentives to help them reduce waste and turn their old items into something new Refer to Target’s Sales ratios for the competitive advantages and disadvangtes.

Value Chain Analysis

B Supportive Functions

Finance

A significant portion of Target’s total sales is derived from stores located

in just five states; California, Texas, Florida, Minnesota, and Illinois which results in Target being dependent on a strong local economy in these areas As Target does not own a consumer credit card receivables portfolio, they do share the economic performance of the credit card program with TD(?) Having a deteriorated economic condition, Target could receive lower profit sharing payments.

Global and Changing

Workforce

Target is dependent on their ability to attract, train and retain an appropriate mix of qualified team members, contractors and temporary staff If they are unable to obtain these appropriate levels of staff then the support functions of Target could suffer Target has a concentration

of support functions in India, however, it is more unstable than the US when taking into consideration financial and environmental issues

Hypothesis Relationship

– Principal Functions and competitive advantages.

1 Target ‘s strongest primary function is Distribution and Marketing & Sales.The company has relatively lower 70.5% as COGS/Sales ratio compared to other companies, which means that it maintains its efficient sales department and distribution management

2 Target also has strong ROCE and Profit Margin, which proves that

the company uses its capital more efficiently It leads to the

fact that Target has been managing its business well and

generating profits properly

3 Target is known for its recognizable Branding,

which resulted from its well-designed Marketing & Sales strategy

Driver of Competitive Disadvantage

1 Inventory Turnover

Target has competitive disadvantage as to its Inventory Turnover compared

to Amazon’s and Wal-mart’s Sales have to match inventory purchases

otherwise the inventory will not turn effectively Target’s inventory is 8.48

bigger than the firm’s sales

Bigger number in Inventory Turnover indicates the fact that Target needs

to spend more of their budget on managing and storing its inventory and

has less choices when it needs to put new goods and merchandises.

2 Fixed Asset Turnover

Target’s Fixed Asset Turnover ratio is also inferior to two competitors’.

This illustrates that Target is required to create a new strategy to use their

fixed assets more efficiently rather than keeping the one they are implementing now.

3 Receivable Turnover

The reason for Target’s relatively lower Receivable Turnover is that

there might be some problems in their method of collecting accounts receivable.

As the higher ratio, the more favorable, Target should investigate what causes

its low receivable turnover ratio to improve its account receivable quality

QUESTION #5

What is the firm’s business strategy? To what extent are the firm’s principal functions sustainable?

Business Strategy

BUSINESS

STRATEGY

MODEL Lowest Cost Distinctiveness

Narrow Market

Segments

Focused Cost Leadership

Focused Differentiation

Integrated Cost Leadership &

Differentiation

Target’s Business Strategy

Target uses an integrated cost leadership/differentiation

strategy with “Expect More, Pay Less” It has helped the

store deliver greater convenience, increased savings

and more personalized shopping experience Target

looks to provide the consumers with new ways of

convenient retail shopping

A way that Target puts their plan into action is by

introducing a new formatting of the store called

CityTarget, which is being tested in large urban dwellers

such as Chicago, Los Angeles, Seattle, and San

Francisco, and is continuously growing Target is

looking at having successful branding and formatting of

the stores Target provides its own branding such as Up

and Up, Market Pantry, C9 by Champion and several

other brands.

Target offers price matching to its competitors and

incentives to its consumers with things such as Red

Card Rewards The Target Corporation is always looking

to bring value to its guests by finding new ways to shop

with innovative products, providing a unique experience

for each consumer.