Target Corporation Finance Analysis

Target is the second largest discount retailer in the United States, behind Wal-Mart. The company is also ranked number thirty on the Fortune 500, and is part of the Standard & Poor’s 500 Index. Target can do better through partnerships than it ever could on its own, which is why Target turn to its stakeholders and listen to their ideas, concerns, and perspectives. Target has ongoing relationships with stockholders, customers, team members, Investors, and vendors (ValueWalk: Earnings previews: Target corporation and Wal-Mart stores inc, 2017). At the same time, Target provides financial reports online and has established the practice of Sarbanes-Oxley of 2002, for the benefit of stakeholders.

As stated above every stakeholder plays an important role and involvement in the success of Target. “Costumers get involved online by providing feedback with guest satisfaction surveys. Input from interaction with Targets’ Guests Relations team. Which responds to direct guest inquiries. Costumers have fact to face interactions every day inside Target stores” (TGT Stakeholder, 2017). The stakeholders above are interested in identifying whether the company is in a position to make them profitable or not.?

The company has a focus group to gain insights into what guests want and expect form the company. The role of customers is critical to the company’s survival and success. Through the purchase decisions they make each day, they select which companies will prosper and which will fail. They also provide valuable feedback to the company about its products and customer service level. This feedback enables the company to improve what it offers and to come up with entirely new solutions to customer needs based on what its customers asked for (TGT Stakeholder, 2017).??

According to Zolkos (2014), “Stockholders’ initial role is to provide the capital a company needs to grow and expand, or in the case of a startup venture, the capital it needs to launch its products or services into the marketplace. In private companies, stockholders may take an active role in setting the strategic direction for the venture” (p.10). They sometimes provide guidance or advice to the company’s management. Zolkos (2014) argued that; in public companies, stockholders can attend an annual meeting and ask questions of the company’s top management, including the CEO, about the decisions they have made and the direction the company is going (Zolkos, 2014).

The company’s ability to fill its customer orders on time and bring the highest quality goods to the marketplace depends in part on the role its vendors or suppliers play. “The company relies upon raw materials or components being available when they are needed and at reasonable prices” (Target Corporation, 2010). If the supply of one key item is interrupted, it can cause a disruption in the company’s entire manufacturing schedule. Vendors also play the role of introducing new applications or solutions to the company so it can become more efficient, more productive and lower its costs and increase its margins and profits.?

The community provides the skilled workforce that a company depends upon to maintain its competitive edge. TGT Stakeholder (2017) stated that; Members of the community, including the news media, often play a watchdog role, ensuring that the company is a good citizen with fair business practices, concern for the environment, and a willingness to contribute to charitable and social causes.?

The various stakeholders in a business have differing roles and their level of involvement in the enterprise varies from full-time to barely involved at all. The company’s CEO seeks to utilize the skills, experience and knowledge of each stakeholder group to further the organization’s long-term goals.

Targets expenses included a “$23 million workforce-reduction charge primarily related to severance and benefits costs, a $22 million charge related to part-time team member health benefit changes, $19 million in impairment charges related to certain parcels of undeveloped land, and $17 million of Data Breach-related costs, net of expected insurance proceeds” (Target Corporation, 2016).

According to Jindra, & Moeller (2015), “Net interest expense was $1,126 million in 2013. This increase of 47.7 percent, or $364 million, from 2012 was due to a $445 million loss on early retirement of debt in 2013, partially offset by the benefit from 2013 debt reductions. Net interest expense was $762 million for 2012. This decrease of 12.0 percent, or $104 million, from 2011 was primarily due to an $87 million loss on early retirement of debt in 2011” (p. 45).

Capital expenditures increased in 2013 from the prior year due to Canadian expenditures in advance of 2013 store openings, partially offset by fewer remodels and new stores in the U.S. “The decrease in capital expenditures in 2012 from the prior year was primarily driven by the 2011 purchase of Zellers leases in Canada and fewer 2012 U.S. store remodels, partially offset by continued investment in new stores in the U.S. and Canada and technology and multichannel investments” (Jindra, & Moeller, 2015).??

Hahn, Kwak, & Palys, (2015) stated that; “Target expect approximately $2.4 to $2.7 billion of capital expenditures in 2014, reflecting an estimated $2.1 to $2.3 billion in our U.S. Segment, including the previously discussed acceleration of our investment in chip-enabled smart card technology, and approximately $0.3 to $0.4 billion in our Canadian Segment” (Hahn, Kwak, & Palys, 2015).?

?The 2015 operations were funded by both internally and externally generated funds. Cash flow provided by operations was $5,434 million in 2011 compared with $5,271 million in 2013(Hahn, Kwak, & Palys, 2015). During 2011, Target issued $3.5 billion of debt that matures between January 2013 and January 2022 (Business Ethics Case Analyses, 2014). This cash flow, combined with prior year-end cash position, allowed Target to fund capital expenditures, retire outstanding debt obligations, pay dividends and continue purchases under our share repurchase program (Business Ethics Case Analyses, 2014). During 2012, Target also completed the real estate transaction with Zellers (Business Ethics Case Analyses, 2014). This transaction resulted in a final net purchase price of $1,636 million (Business Ethics Case Analyses, 2014).

According to Mainwaring (2014), “The 2013 period-end gross credit card receivables were $6,357 million compared with $6,843 million in 2010, a decrease of 7.1 percent. Average gross credit card receivables in 2012 decreased 11.1 percent compared with 2010 levels. This change was driven by the factors indicated in the U.S. Credit Card Segment above” (p.22).?

In 2011, Target retired its 2008 credit card financing with JPMorgan Chase by making principal and make-whole payments totaling $3,080 million. As of January 28, 2012, $1 billion credit card receivables portfolio was funded by third parties (Business Ethics Case Analyses, 2014). Target intends to pursue a sale of its credit card receivables portfolio, which might provide additional liquidity in 2012.

Target repurchased 37.2 million shares in 2011, of their common stock for a total cash investment of $1,894 million ($50.89 per share) under a $10 billion share repurchase plan authorized by their Board of Directors in November 2007 (Business Ethics Case Analyses, 2014). In 2010, they repurchased 47.8 million shares of our common stock for a total cash investment of $2,508 million (Business Ethics Case Analyses, 2014).?

Board of Directors authorized a $5 billion share repurchase plan in January 2012. The company expects to begin repurchasing shares under this new authorization upon completion of the current program (Hahn, Kwak, & Palys, 2015). Target intends to complete this new program primarily through open market transactions in the next 2 to 3 years.

Target paid dividends totaling $750 million in 2011 and $609 million in 2010, an increase of 23.1 percent. The company declared dividends totaling $777 million ($1.15 per share) in 2011, an increase of 17.8 percent over 2010 (Business Ethics Case Analyses, 2014). In 2010, we declared dividends totaling $659 million ($0.92 per share), an increase of 31.1 percent over 2009 (Business Ethics Case Analyses, 2014). They have paid dividends every quarter since their first dividend was declared following our 1967 initial public offering, and it is Targets intent to continue to do so in the future (Hahn, Kwak, & Palys, 2015).

Financing strategy is to ensure liquidity and access to capital markets, to manage the net exposure to floating interest rate volatility, and to maintain a balanced spectrum of debt maturities (Hahn, Kwak, & Palys, 2015). Within these parameters, Target seek to minimize the borrowing costs. Consolidated revenues were $69,865 million for 2011, an increase of $2,475 million or 3.7 percent from the prior year (Steinhafel, 2012). Consolidated earnings before interest expense and income taxes for 2011 increased by $70 million or 1.3 percent over 2010 to $5,322 million (Steinhafel, 2012). Cash flow provided by operations was $5,434 million, $5,271 million and $5,881 million for 2011, 2010 and 2009, respectively (Steinhafel, 2012). Diluted earnings per share in 2011 increased 7.0 percent to $4.28 from $4.00 in the prior year (Steinhafel, 2012). Adjusted diluted earnings per share, which they believe is useful in providing period-to-period comparisons of the results of our U.S. operations, increased 14.3 percent to $4.41 in 2011 from $3.86 in the prior year (Steinhafel, 2012).

“In 2015, year-end inventory levels increased $322 million, or 4.2 percent from 2012. Inventory levels were higher to support traffic-driving strategic initiatives, such as our remodel program, including expanded food assortment and pharmacy offerings, in addition to comparatively higher retail square footage” (Abrams, 2017). Accounts payable increased by $232 million, or 3.5 percent over the same period (Abrams, 2017).

Total sales and diluted earnings per share reached new highs of $72.0 billion and $4.52, respectively (Target Corporation, 2016). “We invested $3.3 billion of capital in our U.S. and Canadian businesses, and we returned over $2.7 billion to our shareholders through share repurchase and dividend payments” (Target Corporation, 2016). Targets full-year results were right on track with our Long-Range Plan to reach at least $100 billion in sales and $8 in earnings per share in 2017 (Target Corporation, 2016).

Target Corporation (2016), “Sales were $69,495 million for 2016, a decrease of $4,290 million or 5.8 percent from the prior year, primarily due to the Pharmacy Transaction. Earnings from continuing operations before interest expense and income taxes in 2016 decreased by $561 million or 10.1 percent from 2015 to $4,969 million, primarily due to the 2015 gain on the Pharmacy Transaction” (p. 2). The operating cash flow provided by continuing operations was $5,329 million, $5,254 million, and $5,157 million for 2016, 2015, and 2014, respectively. In 2015, proceeds from the Pharmacy Transaction are included in investing cash flows provided by continuing operations.

The decrease in 2016 sales reflects a decrease of approximately $3,815 million due to the Pharmacy Transaction and a comparable sales decrease of 0.5 percent, partially offset by the contribution from new stores (Target Corporation, 2016). The increase in 2015 sales reflects an increase in comparable sales of 2.1 percent and the contribution from new stores, partially offset by a decrease of approximately $550 million due to the Pharmacy Transaction (Target Corporation, 2016). Inflation did not materially affect sales in any period presented.

Targets SG&A expense rate was 19.2 percent in 2016, 19.6 percent in 2015, and 20.0 percent in 2014. The decrease in 2016 primarily resulted from the benefit of the Pharmacy Transaction and technology-related cost savings, partially offset by increased hourly payroll. “The decrease in 2015 primarily resulted from cost-saving initiatives and reduced marketing expense, partially offset by investments in other initiatives, none of which were individually significant” (Target Corporation, 2016).?

Net interest expense from continuing operations was “$1,004 million, $607 million, and $882 million for 2016, 2015, and 2014, respectively. Net interest expense for 2016 and 2014 included a loss on early retirement of debt of $422 million and $285 million, respectively” (Target Corporation, 2016). According to Target Corporation (2016), “Our period-end cash and cash equivalents balance decreased to $2,512 million from $4,046 million in 2015, primarily reflecting deployment during 2016 of proceeds from the Pharmacy Transaction and payment of related taxes” (p. 34). Due to the timing of the sale late in 2015, Target did not fully deploy the net?proceeds by the end of 2015. Short-term investments of $1,110 million and $3,008 million were included in cash and cash equivalents at the end of 2016 and 2015, respectively.

?At January 28, 2017, our exposure to market risk was primarily from interest rate changes on our debt obligations, some of which are at a LIBOR-plus floating-rate (Target Corporation, 2016). Our interest rate exposure is primarily due to differences between our floating rate debt obligations compared to our floating rate short term investments. According to Target Corporation (2016), “At January 28, 2017, our floating rate debt exceeded our floating rate shortterm investments by approximately $140 million” (p. 9). Based on the balance sheet position at January 28, 2017, the annualized effect of a 0.1 percentage point increase in floating interest rates on our floating rate debt obligations, net of our floating rate short-term investments, would not be significant (Target Corporation, 2016). In general, we expect our floating rate debt to exceed our floating rate short-term investments over time, but that may vary in different interest rate environments. Revenues are recognized net of expected returns, which we estimate using historical return patterns as a percentage of sales and our expectation of future returns. Commissions earned on sales generated by leased departments are included within sales and were $42 million, $37 million, and $32 million in 2016, 2015, and 2014, respectively (Abrams, 2017).

Revenue from gift card sales is recognized upon gift card redemption. Guests receive a 5 percent discount on virtually all purchases and receive free shipping at Target.com when they use their REDcard. The discount is included as a sales reduction in our Consolidated Statements of Operations and was $899 million, $905 million, and $832 million in 2016, 2015, and 2014, respectively (Morningstar, 2017).?

According to Morningstar (2017), “Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. These investments were $1,110 million and $3,008 million at January 28, 2017 and January 30, 2016, respectively. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables typically settle in less than five days and were $346 million and $375 million at January 28, 2017 and January 30, 2016, respectively” (p. 18).

As per the companies’ act, every organization or corporate firm needs to disclose their financials to the exchange in a 10k form (Zolkos, 2014). This information is considered the most reliable source for analyzing the companies’ financial health. Sarbanes-Oxley marks the beginning of a new reporting era for public companies. According to Financial Highlights (2014), “Many of its requirements are broad and untested, but expectations by both the public and regulators are high. In the early reporting stages, some companies will of necessity respond with “fire-drill” or add-on reviews of controls in order to fulfill their reporting responsibilities” (p. 11).?

However, over the long term, companies will need to build in the required processes to ensure that their corporate reporting on internal controls is part of the way they do business, not just an afterthought.The reality of the Sarbanes-Oxley Act is that each public company needs to develop an individualized approach to reporting and compliance (Business Ethics Case Analyses, 2014). For Section 404, it begins with a self-assessment of the internal controls the organization has around its financial reporting process.?

This self-assessment will typically involve internal stakeholders as well as an external audit firm that will work through a standardized framework (COSO) to identify the gaps in compliance, as well as any associated risk. “This framework allows audit firms to map internal control objectives back to SOX requirements, enabling organizations to then apply process frameworks, like the one described in the April 2004 National Cyber Security Partnership (NCSP) Corporate Governance task force report entitled “Information Security Governance: A Call to Action”, to address the relevant gaps for compliance” (Financial Highlights, 2014).

Once the assessment has been completed, organizations must then establish a process to achieve compliance within the relevant timeframe (Jindra, & Moeller, 2015). “Working with their audit firm, organizations will be looking to not only address the gaps that have been identified within the legislated timeframe, but do so in a cost-effective manner” (Jindra, & Moeller, 2015). According to Gurbach (2007), “In today’s economically challenging times, compliance means a balance between both time and cost, particularly since this is not a one-time event and that there may be more far-reaching costs than simply implementing internal controls” (p. 5).

According to Business Ethics Case Analyses (2014), “No company can afford to ignore the new reporting requirements, even though SEC rules impacting a number of key areas have yet to be finalized” (p. 27). CEOs and CFOs must be committed and prepared to comply with all rules as they become effective to avoid the risk of the tough civil and criminal penalties that are built into Sarbanes-Oxley. In particular, they must understand Sarbanes-Oxley and SEC reporting obligations and guide their companies in managing compliance efforts. By having effective control structures in place to meet these obligations, including the required review and evaluation procedures, companies can provide complete, accurate, and trustworthy information to their stakeholders.

If we look at the companies’ profitability ratio over the last five years, it has performed at a constant level (Morningstar, 2017). However, there is huge gap remains between the Gross margin and Net Margin, which indicates that the company is paying out costs and expenses to a larger extent while running its operations (Morningstar, 2017). “Target has maintained good liquidity over the period as well as it has effectively managed its receivables days, which has fallen to 3.85 days in 2016 from 30.96 in 2012” (Target Corporation, 2016).

The company’s debt ratio remained almost the same although, and over the period the firm has reduced its debt financing to a small extent (SABA, 2016).” Based on long-term-debt-to EBIT ratio has fallen despite the increase in operating income” (SABA, 2016).

The company’s ROA and ROE both as improved over the last five years, which indicates a good sign towards its profitability. According to Abrams (2017), “Return on assets is calculated as net income divided by its average total assets. Target Corp's annualized net income for the quarter that ended in Apr. 2017 was $2,724 Mil. Target Corp's average total assets for the quarter that ended in Apr. 2017 was $37,325 Mil. Therefore, Target Corp's annualized return on assests (ROA) for the quarter that ended in Apr. 2017 was 7.30%. During the past 13 years, Target Corp's highest Return on Assets (ROA) was 8.26%. The lowest was -3.82%. And the median was 6.41%” (p. 23).??

“Target Capital Inc (TSXV:TCI), with its ROE of 3563.5 over the past 12 months, performed better than the industry, which averaged 12.47% in the same period” (Abrams, 2017). However, investors focused only on Return on Equity, often ignore the rising interest costs which result in the actual return being significantly lower. Thus, we must look at how a company’s debt profile changed during the same time period (Business Ethics Case Analyses, 2014). One more thing to be noticed here is that its Equity Multiplier has improved at a significant rate, which shows the percentage of assets owned by the equity holders. The increase in ratio indicates the firm is leveraging equity over debt for financing activities.?

References

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Business Ethics Case Analyses (2014).Target: Costly Security Breach (2013). Retrieved from https://businessethicscases.blogspot.com/2014/02/target-costly-security-breach-2013- 2014.html Cornell, B. (2016).

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Hahn, L., Kwak, L., & Palys, J. (2015).Retrieved from https://economicsfiles.pomona.edu/jlikens/SeniorSeminars/sagegroup2005/Reports/Targetreport.pdf Henkel delivers on 2014 financial targets. (2015). Focus on Surfactants, 2015(5), 6-7. doi:10.1016/j.fos.2015.05.035

Jindra, J., & Moeller, T. (2015). TARGET FINANCIAL INDEPENDENCE AND TAKEOVER PRICING: Target financial independence. Journal of Financial Research, 38(3), 379-413. doi:10.1111/jfir.1206?

Mainwaring , S. (2014). Walmart And Target Partner To Redefine Industry And Cultural Leadership. Retrieved from https://www.forbes.com/sites/simonmainwaring/2014/08/08/walmart-and-target-partnerto-redefine-industry-and-cultural-leadership/#4becb2c16760

Morningstar (2017). Target Corp TGT. Retrieved from https://investors.morningstar.com/ownership/shareholders-major.html?t=TGT Rowley, L. (2003). On target: How the world's hottest retailer hit a bull's-eye. Hoboken: Wiley [Imprint].

SABA, J. (2016). Target’s Turnaround Still Faces Challenges. Retrieved from https://www.nytimes.com/2016/11/18/business/dealbook/targets-turnaround-still-faceschallenges.html?ref=topics

Skaife, H. A., & Wangerin, D. D. (2013). Target financial reporting quality and M&A deals that go bust. Contemporary Accounting Research, 30(2), 719-749. doi:10.1111/j.1911- 3846.2012.01172.x

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