Running head: TARGET EXPANSION
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Target: Expansion of 100 Stores
Stanley J. Cochran
MGMT510 – Financial Accounting
February 15, 2014
Steve Adams
Southwestern College Professional Studies
TARGET EXPANSION OF 100 STORES
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Abstract
Target is a retail store that had over $72 billion dollars in revenue in 2013. Target sales
several different types of merchandise and these consist of health and beauty products, clothes,
food, and home furnishings. One of the future goals of Target is to expand and build and open
100 more stores. Target has been profitable for the past few years and they have continued to
expand and grow in different markets. Target has set itself up and established its personality and
differentiation by having value and a unique assortment of goods and the foundation of their
“Expect More. Pay Less” brand promise (“Annual reports”, 2013).
Target has been able to grow and keep customers returning by giving them a shopping
experience different than the competition. From the beginning in 1881 to today Target has set
itself differently from others by having a unique shopping experience that brings back retuning
customers and has allowed them to grow the business. The main goal of expansion for Target is
made difficult with retail market and many others like Penny’s having difficulties and struggling
to remain in business making the decision to expand more difficult. Can growth continue and
meet the expectations of the investors.
TARGET EXPANSION OF 100 STORES
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Target
Founder George D. Dayton started in retail business in Minneapolis in 1881 and called
the fist store the Dayton Dry Goods Company, today known as Target Corporation ("Target
through the," 2014). It was 1962 before the first Target discount store opened and sold a variety
of merchandise at a low price. Part of the Target experience is to have stores that presented itself
as a high quality experience. The main goal of Target is in their mission statement and how they
want to give the customer the best shopping experience at a price that makes the customer happy
and builds a continuing relationship. Target’s mission statement is: Our mission is to make
Target your preferred shopping destination in all channels by delivering outstanding value,
continuous innovation and exceptional guest experiences by consistently fulfilling our “Expect
More. Pay Less” brand promise ("Mission and goals," 2014).
In the 1950’s Dayton’s began expanding into the suburbs and during this time opened one
of the stores in what we call a shopping mall today where all the store fronts face the inside of a
large building all under one roof. With the success of the stores in 1960 the company decided to
expand into the mass market discount stores and in 1962 the idea became a reality and this is
when the store name changed to Target and had the red bulls-eye as part of the trademark.
As early as 1915 the Dayton family became known for their generosity and started giving
back to the community. With each generation that took over after George Dayton this philosophy
still stands and the Target Corporation continues to give back to the communities. The Dayton’s
have even been recognized by President Reagan for its giving back to the communities. In 1997
Target is recognized by President Clinton for its good neighbor volunteer program.
In 1979 Target had grown to 74 stores in 11 states and had reached the milestone of 1
billion dollars in annual sales per year ("Target through the," 2014). Target leadership has always
been innovative in their approach to the business and was the first mass retailers to use the UPC
bar codes. This system helped in inventory management and also led to shorter wait times in the
check-out lines. In 1995 Target opened the first Super Target Store that included groceries with
the idea it gave the customer the one stop shopping experience. The customer did not have to go
to several stores to meet all the family’s needs. In 2005 Target reached more than 50 billion in
annual sales. Today Target has more than 1700 stores with more than 70 billion in annual sales
and is still growing.
Financial Performance
The Target Corporation in 2012 has more than $70 billion in annual sales, with close to
$3 billion dollars in net earnings. George Steinhafel, Chairman, President and CEO, Target
reported in 2012 that Target reached new highs of $72 billion in sales and diluted earnings of
$4.52 per share, and the goal of opening more than 100 new stores in 2013 (“Annual reports”,
2013). The CEO wants to continue the growth of Target by adding stores and by creating a
shopping experience that sets them apart from the competition.
When you look at Appendix “A” you see where Target has grown the sales every year
since 2011, $67M in 2011, $69 in 2012, $73 in 2013. When looking at several of the different
ratios of financial performance Target has maintained or improved in all aspects of the business
as you can see in table 1. Return on sales is stable at 4.0% average for years 2011 through 2013.
The asset turnover ratio is holding stable for the last 3 years; return on assets has gone down
slightly from 6.7% in 2011 to 6.2% in 2013, liquidity and solvency show improvement. Table 1
shows the numbers for the last 3 years giving us a picture of their performance.
TARGET EXPANSION OF 100 STORES
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Table 1: Ratio's
Ratio
ROS x
Type
Profitability
Formula
2013
2012
2011
NI/
Revenue
4.0%
4.1%
4.0%
Asset
Turnover =
Efficiency
Revenue/
Total
Assets
1.52
1.50
1.54
ROA
Current Ratio
Profitability
Liquidity
NI/
Current Assets/
Total
Current Liabilities
Assets
6.20%
6.30%
6.70%
1.17
1.15
1.71
Debt Ratio
Solvency
total
Liabilities/
Total assets
65.6%
66.0%
64.5%
Cochran.
One important aspect of any company is the liquidity of current operations. Here we can
see that the current ratio of current assets divided by current liabilities is above 1. This is
considered healthy for liquidity (Schoenebeck & Holtzman, 2013, p. 39). The debt ratio gives us
information about the company’s ability to pay debt over a long period. This gives us the
information that 65% of debt is financed by debt and 35% is financed by stockholders’ equity.
This is a lot of financed debt and must be considered when looking at the possibility of more
debt. Can Target continue to make the needed payments if debt increases? One thing to consider
is that Target has been growing and they have not increased the debt ratio much. The current
trends for Target appear not to be out of control.
In (Appendix B) the income statement we see that the return on sales and asset turnover
are both steady. The return on assets gives us the info on how the assets are used to generate
income. More information that we can gather from (Appendix B) is the gross profit margin. The
gross profit margin equals gross profits divided by sales revenue. We can see that the gross profit
margin can be seen in (Appendix C) of that each year was about 29% gross profits. Gross profit
is very important to a business like Target where the smallest of increases means millions of
dollars. With the customer base that Target is aiming to bring into their stores gives them a better
chance to charge a little bit more for products with higher quality than the competition giving
them a chance to increase their gross profit.
The next aspect to consider is how is Target performing against the competition? In
(Appendix E) we can see that Target’s performance is similar to Wal-Mart. We can see
similarities in several aspects like; operating margins, gross margins and P/E which is current
market price per share divided by earnings per share are all similar. Target’s performance is
much like its competitors with nothing standing out that could lead to problems for growth.
Target is in a very competitive business where you have to separate yourself from the
competition and Target has set themselves apart from Wal-Mart and K-Mart with a different
style that attracts a different customer base. Target has the customer base that is looking for a
low price but is very interested in quality. Target gives the customer a more pleasant shopping
experience. The competition is mostly interested in customers that are looking at low prices.
TARGET EXPANSION OF 100 STORES
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Industry Outlook
The future for companies like Target is difficult to predict because of the fast changing
aspects that attract customers. We are constantly hearing about large chains that are having
financial difficulties like Penny’s, Sears, and K-mart. Penny’s recently closed several stores
across the United States because of financial difficulties. For Target they are constantly changing
in how they do business by adapting to customer expectations. Being able to purchase goods
over the internet is causing many businesses to close due to lower sales. Target has adapted to
this cycle by offering all their products they stock in stores and many they do not on the web site.
No longer do certain retail chains hold the brands that consumers want, now they can go
straight to the name brand manufacture to make their purchase (Hoium, 2012). Target must
constantly adapt to consumer desires for shopping because most customers want to see what they
are buying not just a picture on a web site. The advantage for online shopping is the price may be
cheaper due to overhead costs like having stores all across the country. The future is hard to
predict but companies have to be willing and able to change to meet customers’ demands and
expectations.
Before companies like Target can think about expanding it is important that they
understand the outlook of the economy. 2013 had moderate growth for the year at around 3.7
percent. 2014 has as economic outlook of growth around 4.1 percent (Kleinhenz, 2014). 2013
was a difficult year for consumers with higher taxes, gas prices still climbing, and the
government shutdown, consumer confidence was shaky. 2013 still showed growth and this gives
us the hope that 2014 will finally support job growth and lead to growth for companies like
Target.
Growth
In 2014 should Target continue to expand operations by opening 100 new stores? Target
has continued to increase sales revenue each year and increased 2013 by almost $4 billion from
the previous year. Stockholders’ Equity has grown by close to $1 billion in the last three years
giving investors confidence that Target is moving in the right direction. There are many other
aspects that need to be considered before making a large financial decision of adding 100 more
stores to the Target Corporation.
One aspect we need to consider is the long term debt of Target and can they continue to
support more debt. The debt equity ratio of total liabilities divided by Stockholders’ Equity gives
how the company is financing the debt. As seen in table 1 the debt ratio for the past 3 years has
stayed around 65%. This is not bad considering that Target expanded stores the last couple of
years and it continues to look at current stores by closing and relocating non-profitable stores.
Overall long-term debt has decreased $1 billion since 2011. Target’s short-term debt seems to be
stable the liquidity of Target and the ability to continue to pay short-term liabilities is stable
which is 1.17% and is considered good for being able to repay short-term liabilities. The three
year average has held steady at 1.3% as seen in table 1.
How does Target compare to the competition in the same markets and same types of
sales? When looking at (Appendix E) we can see that the major competition is Wal-Mart with
others like K-mart (Pvt1) and Costco that are smaller than Target but have similar consumers.
The main aspects to compare are gross margins, earnings per share, P/E, operating margin and
net income. When you look at the gross margin of Target of .29 it compares to Wal-Mart of
.25% and is better than the other competitors. The earnings per share is smaller compared to
TARGET EXPANSION OF 100 STORES
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Wal-Mart and Costco but is still considered good at 3.74. The P/E ratio for Target is 15.08 is
close the major competitor in the market, Wal-Mart of 14.17, and this number is considered the
target range for the P/E ratio. Target’s operating margin is higher than all the competitors at .07
and Target’s net income of 2.41 billion is good in comparison to total revenue of all the
competition.
Conclusion
Target remains profitable and has been performing to stockholders’ expectations. The
market that Target is in is very competitive and it is important to keep an identity that brings in
the right customers. Target continues to remain competitive and has an identity that brings in the
right type of consumers that helps them meet financial performance goals while expanding. The
main question is can Target continue to grow and should they open 100 more stores.
With the performance of the past three years and growing revenues and profits and the
expected growth in the economy I would recommend that Target continue with the objects of
growing and look for markets to place the expansion of the 100 stores. It will be important to not
only look at expanding but to evaluate the current stores to make sure they should remain in
business. The goal of opening 100 stores may not lead to the total growth of 100 more stores but
it should lead to the growth of 100 more profitable stores.
TARGET EXPANSION OF 100 STORES
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References
Annual reports. (2013). Retrieved from
http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsAnnual
Hoium, T. (2012, December 28). What does the futer of retail look like? . Retrieved from
http://www.dailyfinance.com/2012/12/28/what-does-the-future-of-retail-look-like/
Kleinhenz, J. (2014, February 6). Looking back looking forward: Stronger econmy points to a
brighter outlook for retail. Retrieved from http://blog.nrf.com/2014/02/06/looking-backlooking-forward-stronger-economy-points-to-brighter-outlook-for-retail/
Libby, R., Libby, P., & Short, D. (2011). Financial accounting. (7th ed.). New York, NY:
McGraw-Hill Irwin.
Schoenebeck, K. P., & Holtzman, M. P. (2013). Interpreting ans analyzing financial statements:
A project-based approach. (6th ed.). Upper Saddle River, New Jersey: Prentice Hall.
Mission and goals. (2014). Retrieved from https://corporate.target.com/about/mission-values
Target through the years. (2014). Retrieved from
https://corporate.target.com/about/history/Target-through-the-years
Yahoo finance: Competitors. (2014). Retrieved from http://finance.yahoo.com/q/co?s=TGT
Competitors
TARGET EXPANSION OF 100 STORES
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Appendix “A”
Income Statement
Income Statement
All numbers in thousands
View: Annual Data | Quarterly Data
Period Ending
Feb 2, 2013
Jan 28, 2012
Jan 29, 2011
Total Revenue
73,301,000
69,865,000
67,390,000
Cost of Revenue
50,568,000
47,860,000
45,725,000
Gross Profit
22,733,000
22,005,000
21,665,000
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
-
-
-
15,220,000
14,552,000
14,329,000
-
-
-
2,142,000
2,131,000
2,084,000
-
-
-
5,371,000
5,322,000
5,252,000
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
-
-
-
5,371,000
5,322,000
5,252,000
762,000
866,000
757,000
Income Before Tax
4,609,000
4,456,000
4,495,000
Income Tax Expense
1,610,000
1,527,000
1,575,000
-
-
-
2,999,000
2,929,000
2,920,000
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
2,999,000
2,929,000
2,920,000
-
-
-
2,999,000
2,929,000
2,920,000
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
TARGET EXPANSION OF 100 STORES
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Appendix “B”
Balance Sheet
Balance Sheet
All numbers in thousands
View: Annual Data | Quarterly Data
Period Ending
Feb 2, 2013
Jan 28, 2012
Jan 29, 2011
784,000
794,000
1,712,000
-
-
-
Net Receivables
5,841,000
5,927,000
6,153,000
Inventory
7,903,000
7,918,000
7,596,000
Other Current Assets
1,860,000
1,810,000
1,752,000
16,388,000
16,449,000
17,213,000
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Total Current Assets
Long Term Investments
-
-
-
30,653,000
29,149,000
25,493,000
Goodwill
-
-
-
Intangible Assets
-
-
-
Accumulated Amortization
-
-
-
1,122,000
1,032,000
999,000
Property Plant and Equipment
Other Assets
Deferred Long Term Asset Charges
-
-
-
48,163,000
46,630,000
43,705,000
11,037,000
10,501,000
9,951,000
2,994,000
3,786,000
119,000
-
-
-
Total Current Liabilities
14,031,000
14,287,000
10,070,000
Long Term Debt
14,654,000
13,697,000
15,607,000
Other Liabilities
1,609,000
1,634,000
1,607,000
Deferred Long Term Liability Charges
1,311,000
1,191,000
934,000
Minority Interest
-
-
-
Negative Goodwill
-
-
-
31,605,000
30,809,000
28,218,000
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
54,000
56,000
59,000
12,698,000
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Liabilities
Stockholders' Equity
Retained Earnings
13,155,000
12,959,000
Treasury Stock
-
-
-
Capital Surplus
3,925,000
3,487,000
3,311,000
Other Stockholder Equity
(576,000)
(681,000)
(581,000)
Total Stockholder Equity
16,558,000
15,821,000
15,487,000
Net Tangible Assets
16,558,000
15,821,000
15,487,000
TARGET EXPANSION OF 100 STORES
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Appendix “C”
Debt ratio = total liabilities / Total assets
Balance sheet
Total Liabilities
Total assets
Debt Ratio
Asset Turnover = Sales Revenue / total assets
Income statement
Sales revenue
Total Assets
Asset Turnover
Return on sales = Net income / sales revenue
Income statement
Net income
Sales revenue
Return on sales
Return on assets = Net income / total assets
Income statement
Net Income
Total assets
Return on assets
Current ratio = current assets / current liab.
Balance sheet
Liquidity
Current assets
Gross profit margin = gross profits / sales rev.
Income statement
Gross Profits
Current Liab.
Current Ratio
Sales revenue
Gross Profit
Mar.
Cost of sales
Stores
opened
closed
relocated
total
2012
31,605,000
48,163,000
0.656209123
2011
2010
30,809,000
28,218,000
46,630,000
43,705,000
0.660711988 0.645646951
65.6%
73,301,000
48,163,000
1.52
66.0%
69,865,000
46,630,000
1.50
64.5%
67,390,000
43,705,000
1.54
2,999,000
2,929,000
2,920,000
73,301,000
0.040913494
69,865,000
67,390,000
0.04192371 0.043329871
4%
2,999,000
48,163,000
0.062267716
4.10%
4%
2,929,000
2,920,000
46,630,000
43,705,000
0.062813639 0.066811578
6.20%
16,388,000
14,031,000
1.17
6.30%
16,449,000
14,287,000
1.15
6.70%
17,213,000
10,070,000
1.71
21,392,000
73,301,000
20,606,000
69,865,000
20,061,000
67,390,000
0.29
0.29
0.30
50,568,000
47,860,000
45,725,000
1,763
23
-5
-3
1,778
1,750
21
-3
-5
1,763
TARGET EXPANSION OF 100 STORES
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Appendix “D”
Outline
1. History of the company.
a. Founded by and dates.
b. How did the company grow?
c. How was Target built and what was the mission statement?
2. Financial performance.
a. Current CEO’s performance and expectations.
b. List ratios of health.
c. Chart of expectations.
d. How does Target compare to the competition?
3. Industry growth.
a. What are the future plans of Target’s growth?
b. Will the economy support this growth?
4. Summary/conclusion
a. Recommendation as to growing 100 stores.
TARGET EXPANSION OF 100 STORES
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Appendix E
Performance Measures Against Competition.
Competitors
Direct Competitor Comparison
TGT
COST
PVT1
WMT
Industry
Market Cap:
35.61B
50.15B
N/A
238.64B
N/A
Employees:
361,000
103,000
N/A
2,200,000
N/A
0.02
0.06
N/A
0.02
0
1
474.88B
N/A
Qtrly Rev Growth
(yoy):
Revenue (ttm):
73.81B
106.46B
Gross Margin
(ttm):
0.29
0.13
N/A
0.25
0
EBITDA (ttm):
7.10B
4.05B
N/A
36.98B
N/A
0.07
0.03
N/A
0.06
0
1
17.20B
N/A
Operating Margin
(ttm):
Net Income (ttm):
15.28B
2.41B
2.05B
EPS (ttm):
-34.00M
3.74
4.64
N/A
5.2
N/A
P/E (ttm):
15.08
24.59
N/A
14.17
N/A
PEG (5 yr
expected):
1.62
2.08
N/A
1.7
N/A
P/S (ttm):
0.48
0.47
N/A
0.5
N/A
COST = Costco Wholesale Corporation
Pvt1 = Kmart Corporation (privately held)
WMT = Wal-Mart Stores Inc.
Industry = Discount, Variety Stores
1
= As of 2012
Yahoo finance: Competitors, (2014). http://finance.yahoo.com/q/co?s=TGT Competitors