Target
Summary of the Firm
Target is a general merchandise retailer that competes in the discount segment of the market. Target has stores in every state except Vermont, and next year the company will be expanding into Canada, adding 125 to 135 stores in that market. Including U.S. expansion, Target will grow around 10% in the next year. Target competes as a cost leader, pitting it against Walmart and K-Mart as direct competitors, and more broadly against other major retailers ranging from warehouse stores to department stores, discounters like Marshalls, or online retailers like Amazon. The key success factors for Target include operational excellence that allows it to remain price competitive, real estate selection, and the ability of Target to differentiate itself from other retail outlets.
Profitability
In the discount retailing industry, firms generally operate on a model that emphasizes delivering low costs to the customer. Thus, companies have very slim margins and profits are generated primarily through the cultivation of high volumes. Target's income statements over the past several years highlight this. In FY2012, the company recorded a gross margin of 30.8%, the same as the prior year. The company's operating margin is 6.4% and 6.7% in FY2011. The net margins for the past two years are 4.2% and 4.3% respectively. These figures highlight that Target's margins are consistent with what one would expect from a discount retailer. The slight differentiation that Target has allows it slightly higher margins overall, compared with some of the company's competitors. The other thing that these figures highlight is that Target has good control over both its pricing and its costs, for its margins to be so consistent at all levels over the course of two years.
The cash flow from operating activities is the key measure of a company's ability to generate cash. For the last year, target earned $5.4 billion in cash and $5.2 billion the year before. The cash flow from operating activities is generally significantly higher than the net income, because of the amount of the company's depreciation expense. Target's cash outlays are typically for a mix of capital expenditures, dividends and the retirement of stock (share buybacks). The company scaled back its capital expenditures during FY2009 and FY2010 in response to the economic slowdown, but the move into Canada has increased these again for the latest fiscal year.
Ratios
There are a number of ratios that can be used to help understand the financial condition of Target. Financial ratios include the liquidity ratios, profitability ratios, operating performance ratios and investment valuation ratios (Loth, 2012). The current ratio is a good measure of the company's liquidity. For FY2012 this was 1.15, compared with 1.71 the year previous and 1.62 in FY2010. The reason for this spike is that Target had $3.8 billion in long-term debt coming as the current portion of long-term debt on the past year's balance sheet. This increased the current liabilities. However, Target's current ratio is still above 1.0, meaning that it has the assets on hand to meet its pending financial obligations.
Another ratio, one that covers the long-run solvency of the company, is the debt-to-equity ratio. For Target this is 1.94 and the debt is a mix of long-term debt and current liabilities. This figure is relatively high, because the company must cover this debt out of its cash flows. However, Target has fairly steady cash flow from operations, and its business is not particularly volatile (beta 0.89). Thus overall Target has a fair amount of debt, could benefit from reducing it a little bit, but the debt burden is not so great that it is a major concern for the company. The debt/equity ratio was 1.82 in FY2011 and 1.90 in FY2010.
The price to book ratio reflects the market's impressions...
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