Running head: TARGET EXPANSION
1
Target: Financial Evaluation for Expansion
Angela Deaton
MGMT510 – Financial Accounting
May 11, 2013
Dr. Joseph Kempker
Southwestern College Professional Studies
TARGET EXPANSION
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Outline
I.
II.
Company History and Background
Financial Performance Analysis
A. Balance Sheet Review
1. Asset Growth and Liabilities
2. Retained Earnings
B. Income Statement Review
1. Revenue and Expenses
2. Net Income
C. Key Financials and Business Management
1.Net Income
2. Gross Profit Margin and Return on Investment
3. Depreciation and Amortization
4. EBIDTA
III.
Industry Outlook
A. Industry Sector Review
B. Competition Review
IV.
Summary and Proposal
TARGET EXPANSION
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Target: Financial Evaluation for Expansion
As the Chief Financial Officer for Target, I present the following findings to the Target
Board of Directors for review. Contained in this report are evaluations of the Balance Statement
and the Income Statement for the last two years. Also included is the evaluation are the key
financial indicators for the health of the business as well as a review of how the company
manages business. In addition to internal reviews, I have also conducted an external comparison
of the overall industry and competition. As a result, I provide a detailed report on the feasibility
of the expansion of 100 new Target stores in 2014.
Company History and Background
In 1902, John Dayton was in the business of building and renting buildings for
commercial use. He completed construction of a building in Minneapolis which he later rented
tothe R.S. Goodfellow Company. In 1956, Dayton opened his first store, Southdale, in Edina,
Minnesota (The history of corporate, n.d.). Southdale was the world’s first fully enclosed
department store.In 1962, Dayton Company ventured into discount merchandising with its first
Target discount store in Roseville, Minnesota and by the end of the year, Dayton formed a new
subsidiary – Target Stores (The history of corporate, n.d.).
In 1969, Target’s parent company, Dayton, merged with JL Hudson Company of Detroit
and became Dayton-Hudson Corporation. Dayton-Hudson Corporation further expanded and
acquired several department store chains in the Western coast; however, due to rapid expansion
and lack of experienced executives to manage its subsidiaries, they reported a drop in sales in
1971 (The history of corporate, n.d.). New and financially sound management rescued the
falling company.
TARGET EXPANSION
4
This historical event is extremely important in the evaluation of future expansion. It is
important to know that Dayton-Hudson (now Target) had experienced quick expansion which
previously led to poor financial results. Thus, it is important that the validation and verification
of the current financial statements be complete and thorough in an attempt to fully dissolve the
issue of expansion in the next year. The current state of business for Target is drastically
different than it was in the 1970s.
In 2000, Dayton-Hudson changed its name to Target Corporation. Target has 1,591 retail
stores in the U.S. (The history of corporate, n.d.). Today, Target is a retail industry that sells an
assortment of items ranging from clothes, to automotive, to groceries. Target’s mission
statement is to be the preferred shopping destination in all channels by delivering outstanding
value, continuous innovation and exceptional guest experiences by consistently fulfilling the
Expect More. Pay Less.® brand promise (Mission and values, 2013).
Financial Performance Analysis
In order to effectively analyze the financial health and profitability of Target, I examined
the 2011 and 2012 Annual Balance Sheets (Target corporation, 2013) as well as the 2011 and
2012 Income Statements (Target corporation, 2013). These statements show the current
financials as well as historical financials which provide me the basis I need to establish whether
or not it makes sense to expand the business.
Balance Sheet
The balance sheet shows Target’s assets and liabilities. Ultimately, the assets must
balance the liabilities plus stockholders equity. These assets include cash, accounts receivable,
inventory, and equipment. The liabilities include accounts payable and loan balances.
TARGET EXPANSION
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The balance sheet is important because it shows the financial position at a specific point
in time, and compares what is owned to what is owed (Fontinelle, 2013). According to the
balance sheet for Target below, all signs are positive. There is growth in tangible and intangible
assets as well as total asset growth. Retained earnings have also increased over the period. Total
liabilities have also increased, however they have increased proportionately to the asset growth
and the percentage difference has remained nearly constant:
Total Liabilities / Total Assets
2011
64.56%
2012
66.07%
2013
65.62%
Balance Sheet for Target Corporation
Fiscal year is February-January. All values USD millions.
Assets
Cash & Short Term Investments
Cash Only
Short-Term Investments
Cash & Short Term Investments Growth
Cash & ST Investments / Total Assets
Total Accounts Receivable
Accounts Receivables, Net
Accounts Receivables, Gross
Bad Debt/Doubtful Accounts
Other Receivables
Accounts Receivable Growth
Accounts Receivable Turnover
Inventories
Finished Goods
Work in Progress
Raw Materials
Progress Payments & Other
Other Current Assets
Miscellaneous Current Assets
Total Current Assets
2011
1.36B
234M
1.13B
-26.20%
3.12%
7.42B
690M
(690M)
-9.85%
9.08
7.6B
7.6B
0
0
0
830M
830M
17.21B
2012
794M
600M
194M
-41.75%
1.70%
6.93B
430M
(430M)
-6.69%
10.09
7.92B
7.92B
0
0
0
810M
810M
16.45B
2013
784M
654M
130M
-1.26%
1.63%
6.86B
6.46B
6.46B
0
395M
-1.01%
10.69
7.9B
0
0
0
7.9B
844M
534M
16.39B
TARGET EXPANSION
Net Property, Plant & Equipment
Property, Plant & Equipment - Gross
Buildings
Land & Improvements
Computer Software and Equipment
Other Property, Plant & Equipment
Accumulated Depreciation
Total Investments and Advances
Other Long-Term Investments
Long-Term Note Receivable
Intangible Assets
Net Goodwill
Net Other Intangibles
Other Assets
Tangible Other Assets
Total Assets
Assets - Total - Growth
6
25.49B
37.05B
23.08B
5.93B
2.53B
4.94B
11.56B
497M
497M
0
107M
59M
48M
395M
279M
43.71B
-1.86%
29.15B
41.53B
26.84B
6.12B
2.47B
5.14B
12.38B
485M
485M
0
118M
59M
59M
429M
305M
46.63B
6.69%
30.65B
43.96B
28.65B
6.21B
2.57B
5.36B
13.31B
354M
354M
0
224M
59M
165M
338M
338M
48.16B
3.29%
2012
3.79B
0
3.79B
6.86B
3.50%
257M
3.39B
202M
1.06B
2.12B
14.29B
13.7B
12.42B
12.42B
0
1.27B
449M
1.19B
1.19B
2013
2.99B
0
2.99B
7.06B
2.90%
272M
3.71B
232M
1.1B
2.38B
14.03B
14.65B
12.7B
12.7B
0
1.95B
1.12B
1.11B
1.31B
Liabilities & Shareholders' Equity
ST Debt & Current Portion LT Debt
Short Term Debt
Current Portion of Long Term Debt
Accounts Payable
Accounts Payable Growth
Income Tax Payable
Other Current Liabilities
Dividends Payable
Accrued Payroll
Miscellaneous Current Liabilities
Total Current Liabilities
Long-Term Debt
Long-Term Debt excl. Capitalized Leases
Non-Convertible Debt
Convertible Debt
Capitalized Lease Obligations
Provision for Risks & Charges
Deferred Taxes
Deferred Taxes - Credit
2011
119M
0
119M
6.63B
1.75%
144M
3.18B
176M
1.08B
1.93B
10.07B
15.61B
15.27B
15.27B
0
333M
441M
934M
934M
TARGET EXPANSION
Deferred Taxes - Debit
Other Liabilities
Other Liabilities (excl. Deferred Income)
Deferred Income
Total Liabilities
Non-Equity Reserves
Total Liabilities / Total Assets
Preferred Stock (Carrying Value)
Redeemable Preferred Stock
Non-Redeemable Preferred Stock
Common Equity (Total)
Common Stock Par/Carry Value
Retained Earnings
ESOP Debt Guarantee
Cumulative Translation
Adjustment/Unrealized For. Exch. Gain
Unrealized Gain/Loss Marketable
Securities
Revaluation Reserves
Treasury Stock
Common Equity / Total Assets
Total Shareholders' Equity
Total Shareholders' Equity / Total Assets
Accumulated Minority Interest
Total Equity
Liabilities & Shareholders' Equity
7
1.17B
770M
396M
28.22B
0
64.56%
0
0
0
15.49B
59M
12.7B
0
1.19B
764M
421M
30.81B
0
66.07%
0
0
0
15.82B
56M
12.96B
0
206M
493M
493M
31.61B
0
65.62%
0
0
0
16.56B
54M
13.16B
0
0
0
-
0
0
0
35.44%
15.49B
35.44%
0
15.49B
43.71B
0
0
0
33.93%
15.82B
33.93%
0
15.82B
46.63B
0
0
0
34.38%
16.56B
34.38%
0
16.56B
48.16B
Income Statement
The income statement summarizes Target’s revenue and expenses. Revenues are sales
and other sources of income and expenses include cost of goods sold, payroll, taxes, and interest.
The bottom line of the income statement shows Target’s net income. These values are important
because it indicates whether Target is profitable or not. Net income is calculated by taking
revenues and adjusting for the cost of doing business, depreciation, interest, taxes, and other
TARGET EXPANSION
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expenses (Fontinelle, 2013). In Target’s case, not only is net income substantially positive, it
continues to increase as time goes by. The net income over the time period is as follows:
Net Income
2011
2.92B
2012
2.93B
2013
3B
Income Statement for Target Corporation
Fiscal year is February-January. All values USD millions.
Sales/Revenue
Sales Growth
Cost of Goods Sold (COGS) incl. D&A
COGS excluding D&A
Depreciation & Amortization Expense
Depreciation
Amortization of Intangibles
COGS Growth
Gross Income
Gross Income Growth
Gross Profit Margin
SG&A Expense
Research & Development
Other SG&A
SGA Growth
Other Operating Expense
Unusual Expense
EBIT after Unusual Expense
Non-Operating Income/Expense
Non-Operating Interest Income
Equity in Affiliates (Pretax)
Interest Expense
Interest Expense Growth
Gross Interest Expense
Interest Capitalized
Pretax Income
Pretax Income Growth
Pretax Margin
Income Tax
2011
67.39B
3.11%
48.67B
46.59B
2.08B
2.06B
24M
2.23%
18.72B
5.46%
13.47B
0
13.47B
2.99%
0
(51M)
51M
0
3M
0
811M
0.87%
809M
(2M)
4.5B
16.09%
1.58B
2012
69.87B
3.67%
50.44B
48.31B
2.13B
2.11B
24M
3.63%
19.43B
3.78%
14.11B
0
14.11B
4.73%
0
(41M)
41M
0
3M
0
910M
12.21%
915M
5M
4.46B
-0.87%
1.53B
2013
73.3B
4.92%
53.18B
51.04B
2.14B
2.12B
22M
5.43%
20.12B
3.58%
27.45%
14.91B
0
14.91B
5.73%
0
(44M)
44M
161M
0
806M
-11.43%
806M
0
4.61B
3.43%
6.29%
1.61B
TARGET EXPANSION
Income Tax - Current Domestic
Income Tax - Current Foreign
Income Tax - Deferred Domestic
Income Tax - Deferred Foreign
Income Tax Credits
Equity in Affiliates
Other After Tax Income (Expense)
Consolidated Net Income
Minority Interest Expense
Net Income
Net Income Growth
Net Margin Growth
Extraordinaries& Discontinued Operations
Extra Items & Gain/Loss Sale Of Assets
Cumulative Effect - Accounting Chg
Discontinued Operations
Net Income After Extraordinaries
Preferred Dividends
Net Income Available to Common
EPS (Basic)
EPS (Basic) Growth
Basic Shares Outstanding
EPS (Diluted)
EPS (Diluted) Growth
Diluted Shares Outstanding
EBITDA
9
1.13B
0
445M
0
0
0
0
2.92B
0
2.92B
17.36%
0
0
0
2.92B
0
2.92B
4.03
21.75%
723.6M
4
21.21%
729.4M
7.34B
1.16B
0
371M
0
0
0
0
2.93B
0
2.93B
0.31%
0
0
0
2.93B
0
2.93B
4.31
6.95%
679.1M
4.28
7.00%
683.9M
7.45B
1.61B
18M
138M
(152M)
0
0
0
3B
0
3B
2.39%
4.09%
0
0
0
0
3B
0
3B
4.57
6.03%
656.7M
4.52
5.61%
663.3M
7.35B
Key Financials and Business Management
Net income is the bottom line of the company and is used to calculate value per share.
Target’s net income continues to increase over time, even as new stores are opened. Target’s
2011 net income was $2.92B in 2011 and its 2012 net income was $2.93B. The expected net
income for 2013 is estimated at $3.0B. This is a positive indicator that Target is financially
sound and conducting business in a profitable manner.
TARGET EXPANSION
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In addition to the evaluation of the balance sheet and the income statement, it is also
important to look at other key indicators. One way to determine the health of Target is to
calculate specific financial ratios. Below , I review additional key indicators includinggross
profit margin and return on investment. These ratios show liquidity, profitability, debt, operating
performance, cash flow, and investment valuation (Fontinelle, 2013).
Gross Profit Margin: 27.45% (from Income Statement, 2013)
Return on Investment (ROI) = (gain from investment –cost of investment)
cost of investment
ROI = Gain from Investment: Target’s sales per store: $38.8
million (Hicken, 2012)
ROI = Cost of investment per store: $12.4M(Construction
costs,2013)
ROI = (38.8M– 12.4M)
12.4M
ROI = 212.9% per store (average)
Depreciation and amortization of actual assets were included in the financial results
statement summary as shown below. Depreciation and amortization show the loss of value of
assets over time. Depreciation and amortization methods are used to spread the cost of an asset
throughout its useful life and provide a more accurate picture of financial health (Latham, 2013).
FINANCIAL RESULTS: (IN MILLIONS)
Sales
Credit card revenues
Total revenues
Cost of sales
Selling, general and administrative expenses
2012
2011
$71,960 $68,466
1,341
1,399
73,301 69,865
50,568 47,860
14,914 14,106
TARGET EXPANSION
Credit card expenses
Depreciation and amortization
Gain on receivables held for sale
Earnings before interest expense and income taxes
Net interest expense
Earnings before income taxes
Provision for income taxes
Net earnings
PER SHARE:
Basic earnings per share
Diluted earnings per share
Cash dividends declared
(Financial summary, 2013)
11
467
2,142
-161
5,371
762
4,609
1,610
$2,999
446
2,131
5,322
866
4,456
1,527
$2,929
2012
$4.57
$4.52
$1.38
2011
$4.31
$4.28
$1.15
In addition to depreciation and amortization, EBITDA is also used to show the health of a
company’s financials as well as to compare companies in similar industries. EBITDA stands for
earnings before interest, taxes, depreciation and amortization and shows the profitability of core
operations. The EBITDA value for Target is found on the income statement. In 2011, Target’s
EBITDA value was $7.34B. In 2012, the EBITDA value for Target was $7.45B. This value is
significant in proving the good health that Target has achieved financially.
My assumptions about how the business will perform are based on the abovekey financial
numbers and historical trends. Net income is trending positive as well as sales and revenue.
Even though we are in an ‘uncertain’ economy, Target is able to provide astounding numbers.
Overall, the greatest indicator of financial health and stability for Target is net income. Because
this number is substantial and continues to grow, it is evident that expansion is needed. The
necessity for more local Target brick and mortar stores will increase as demand increases. In
order to validate this concept, I investigated the industry outlook and reviewed Target’s
competition.
TARGET EXPANSION
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Industry Outlook
Target is a part of the department store industry sector. Department stores retail a broad
range of general merchandise, such as apparel, jewelry, cosmetics, home furnishings, general
household products, toys, appliances and sporting goods. Discount department stores are also
included in this industry sector. It is important to note that big-box retailers and supercenters
that offer fresh groceries in their stores and warehouse clubs that operate under membership
programs are not included in this industry (Department stores, 2013).
Industry Sector Review
Department stores have been impacted from the recent downturn in the economy as
shoppers have reduced spending. I believe that department stores will recover as shopper
confidence increases. “Spending on discretionary goods sold by industry operators will improve
alongside consumers' wallets, however, stores will have to keep an eye on online-only retailers,
which will likely leech customers away from traditional stores by offering similar products at
lower prices” (Department stores, 2013).
Competition Review
Not many department stores could manage increased sales during the recession, let alone
the last decade. However, according to Business Insider, Target surpassed JCPenney, Sears, and
Kmart during the last ten years. As shown above, Target's 2011 year-end sales were $68.5
billion which was more than double its 2001 revenues (Hicken, 2012). It is evident that Target
was able to retain customers when other companies were not. Additionally, in 2001, Target’s
average sales per store were $30.9 million, which were nearly double the same ratio for
TARGET EXPANSION
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JCPenney and Kmart and nearly triple the average sales per store for Sears(Hicken, 2012).And to
top it off, Target continues to expand in store count.
Target’s Growth Chart
Year
Store Count States
1969
17
4
1979
80
11
1989
399
31
1999
912
44
2002
1147
47
2003
1225
47
2004
1308
47
2005
1397
47
2006
1488
47
2007
1591
47
2008
1684
48
(Fast facts, 2009)
Summary
In conclusion, it is important to review Target’s financial history. In addition to the key
financial metrics provided and analyzed above, it is also imperative to note that in the last two
years, according to Hicken, Target opened roughly 700 new stores and as anticipated, sales
numbers grew accordingly. In fact, in 2011, Target’s average sales per store were up to $38.8
million (Hicken, 2012).
As CFO, I advise that the expansion proposal of 100 new stores in 2014 be brought to
fruition. The upward trend in sales, revenue, profit margin, net income, assets and stockholders
equity, and cash including EBITDA are all direct indicators that point to the fact that expansion
at this time is not only appropriate, it is in high demand. Target scores higher than the
competitors on multiple levels and continues to hold the customer base all while continuing to
expand in the market. With Target’s cash flow and ability to use capital funds with high rate of
TARGET EXPANSION
return on investment, the expansion and growth of 100 new stores can and should be fully
supported.
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TARGET EXPANSION
References
Construction cost estimates for department stores. (2013) Reed construction.Retrieved from
http://www.reedconstructiondata.com/rsmeans/models/department-store/.
Department stores in the US: market research report. (2013). IBISWorld.Retrieved from
http://www.ibisworld.com/industry/default.aspx?indid=1090.
Fast facts.(2009). Retrieved from http://pressroom.target.com/news/fastfacts.
Financial summary. (2013).Retrieved from https://corporate.target.com/annualreports/2012/financials/financial-summary.
Fontinelle, A. (2013).Business plan: your financial plan. Investopedia.Retrieved from
http://www.investopedia.com/university/business-plan/business-plan7.asp.
Latham, A. (2013). Depreciation and amortization methods.SFGate.Retrieved from
http://homeguides.sfgate.com/depreciation-amortization-methods-2881.html.
Hicken, M. (2012). Watch how Target has completely destroyed its competition.Business
insider.Retrieved from http://articles.businessinsider.com/2012-0307/strategy/31131100_1_sears-and-kmart-target-sales-drop.
Mission and values.(2013). Retrieved from https://corporate.target.com/about/mission-values/.
Target corporation. (2013). Market Watch.Retrieved from http://www.marketwatch.com/
investing/stock/TGT/financials/balance-sheet.
The history of corporate: target corporation. (n.d.).Avista Capital Partners. Retrieved from
http://www.thehistoryofcorporate.com/companies-by-industry/traderetail/targetcorporation/.
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