Target Company Financial Statement Analysis

Abstract

I have carried out a financial analysis of Target, a company that deals with consumer goods. The analysis shows that the company is performing well among the industry players and if any investor is wishing to put money in the industry, Target will be a safe place to put the money.

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This report covers the analysis of Target performance of three years that is in the year 2005, 2006 and 2006. Ratios are calculated to draw inferences about the financial soundness of the company.

The result obtained has been compared using industrial average measures.

Industry Information

The company operates in stores and the shopping industry. The industry consists of many competitors to mention a few, they include Wal -mart, Target, Costco, and many others which deal with consumer goods and operate stores in various towns in the country. The companies operating in this industry have various product lines ranging from food, utensils, and other household goods, books, stationeries, electronics, and many other consumable products.

They provide a major challenge to new starters and new starters will find it difficult to join the company. The industry has undergone considerable change in the type of product, management style, and financial performance in the recent past. Various competitors have opened various stores in various parts of the country and these stores have been given authority or empowerment to do business profitably.

The industry has become the focus of national and international business in the last few decades. Most companies produce a lot of consumer goods that need to reach the market and are needed by various consumers. In the last few decades, it has grown as towns are busy growing and disposable income is, therefore, companies must recognize the need and opportunities they avail. This industry helps many companies continue with their operations by providing a market for wastes.

Industry players are is facing stiff competition from rival companies who offer similar services. No single company is operating in the market today without competitors. Competitors offer a challenge to the company and they ensure there are fair prices unless it is a monopoly or oligopoly. The competitors, in this case, include Wal-Mart who is a major competitor, Wega stores, Home depot, and whole-food are some of the largest competitors. They offer rivals through a threat of capturing the market and driving the company out of business.

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The rival companies have grown exceptionally and they have stood out ahead in terms of brand name which has increased their market share although the strategies are different from each other. All rival companies in the industry have also strategically placed themselves in major towns with websites hosted in the U.S. they set their prices above the unit cost making them the cheapest in the market and they have kept competitive prices for various products. They also use prime time advertisements, by weekly newspapers, models, Tyra Banks, Oprah.

The mass enlightenment about online shopping that is taking place has not gone unnoticed. Years ago, small, independent stores were sufficient for meeting the needs of this market, but now it takes supermarkets, “super-naturals” as they have been dubbed.

Giants like home depots and Wal-Mart observed this trend early and enjoys incredible success at serving this growing market. Home depots are the imperial mover in the industry, buying up stores and chains of stores since 1988. Just two months ago, home depot entered strategic alliances with rivals and is taking over operations of all of their stores. This growth, however, is vital if home Depot stands to compete against traditional grocery giants who have expanded their offering of organic and natural products.

Home depots are named one of the largest retailers in the US, and the biggest competition to rivals, including Walmart. Kroger’s, Safeway, and Pathmark have eaten into the market share, as well. These stores take so much of the market share due in large part to volume, and their ability to offer these products at discount prices. Home depots expanded aggressively into stocking foods and textiles, but the actual performance of this merchandise failed to meet expectations. The core values of shoppers are out of synch with home depots.

Regardless of the longevity of home depots’ massive share of the market, this and other conventional grocers, and the slick and popular Wal-Mart Market pose a certain challenge to a new contender in this venue.

Background Company Information

Target was incorporated in Minnesota in the United States of America. Target is the second-largest upscale discounter store in the United States. In the United States, it offers services in three formats. In the United States, the company has 1685 stores in 48 states targeting middle-level income earners.

The organization’s mission is to stay ahead of competitors proving proven consumers, to the USA population and remain competitive. To offer consumer services to the customer through stores through, remain leaders in the market.

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The organization’s objectives and objectives include:

  • Assisting citizens to have consumer goods and services with the aim of bringing them nearer to the people.
  • To provide to both locals and travelers to the UK.
  • To be the best service providers in consumer goods in the upper scale market industry.
  • To offer customers services on a 24-hour basis to the customers.
  • To ensure that the employees are given the best reward to share the profits of the company
  • Introduce brands to the customers and make the foods industry very competitive.
  • To have a steady market growth.

Vision:- To win the lion’s share in the fast foods industry.

Goals:- To achieve a growth rate of 10% in the next five years.

Target has systematically opened new outlets between 2001 and 2005. At least a new outlet was opened every year, and sometimes more than one store was opened annually. They have entered a venture with many suppliers and other industry players and this has helped them to have huge sales throughout the American Market. They have been praised for their great service, creative marketing, cost-effectiveness in serving customers, and great quality products.

The strategy of Target has been to launch new stores with aim of providing quality services. This effort has helped them to keep competition at bay that may offer substitute products or services since Target was giving customers choices. This broad differentiation strategy helped to please many facets of the American market. This one of the five competitive strategies proved to be a successful choice for the efforts of the company.

The use of online shops and marketing in the supply of their merchandise is beneficial to the effort. Online shop is successful in negotiating to attract high quality-conscious individuals.

Target has established itself successfully as a competitor in the American market. The company successfully became a trusted name throughout the USA. They have projected a more professional image and increase sales. Also, new markets of people were gained in the segmenting of the market that led to getting consumer sales.

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Target took the time necessary to get to know the market it was branching into in. Careful study was used to learn the cultures and lifestyles of customers. Collaboration with an established store gave them the competitive edge they needed to prove themselves as a leader in the markets.

Also, Target was able to glean overwhelming success in the market in less than two decades. Their sales have drastically increased in recent years. Visible increases in supply and demand are evident in as few as five-year spans of time.

Target has projected plans to keep expanding. They keep strategic goals for sales in place to meet their goals. Also, they continue to stay up to date by targeting new markets that were once untapped through market segmentation.

Quantitative analysis

To assess the relative financial position of Target corporation concerning Wal- Mart in the face of the volatile inflationary rate and the worldwide crisis presenting a challenging situation for the next year in front of the industry, a general financial analysis of the two companies would be essential (all financial data are in million)

To begin with, let me take a look at the financial details of Target corporation for the years 2008,2007 and 2006 are as follows;

Ratio Formula 2008 2007 2006 Wal mart 2008 Industrial average
Liquidity ratios
  1. Current ratio
Current assets
Current liabilities
18,906
11,782=1.6:1
14,706
11,117=1.3:1
14,405
9,588=1.5:1
47,585
58,454
0.82:1
1.461
  1. Quick ratio
Current assets – stock
Current liabilities
18,906 -6780
11,782=1.02:1
14,706-6254
11,117=0.76:1
14,405-5838
9,588
=0.89:1
47,585-35,180
58,454
=0.22:1
  1. Cash ratio
Cash + marketable securities
Current liabilities
2450+0
11,782
= 0.21:1
813+0
11,117
=0.07:1
1648+0
9,588
0.17:1
5569
58,454
0.1:1
Efficiency ratios
  1. Inventory turn over
Sales
Average inventory
63367
(6780+6254)/2
=9.7 times
59,490
(6254+5838)/2
9.8 times
52,620
5838
9 times
378,799
(35,180+33,685)/2
=11times
  1. Receivable turn over
Sales
Average debtors
63367
(9207+6194)/2
=8.2 times
59,490
(6194+5666)/2
10 Times
52,620
5666
9.3 times
378,799
(3654+2840)/2
=116.7times
  1. Asset turnover.
Sales
assets
63367
(44560+37349)/2
=1.5 times
59,490
(37349+34995)
1.6 times
52,620
34995
1.5 times
378,799
(163,514+151,193)/2
=2.4 times
Leverage ratio
  1. Debt to capital ratio
Total debt
Total assets
29,253 x 100
44,560
=65.6%
21,716x 100
37349
58.14%
20,790x 100
34995
59.41%
98,906×100
163,514
60.5%
  1. Debt to capital ratio
Long term debt
equity
15,126
15,307
=0.99:1
8675
15,633
=0.55:1
9119
14,205
=0.64:1
33,402
64,608
=0.52:1
07:1
  1. Interest coverage ratio
Interest
Earnings before interest & tax
5494
669
= 8.2 times
5094
597
= 8.5 times
4323
463
=9.3times
22,301
2103
=10.6 times
Asset use
  1. Return on assets
Net profit before tax
Total assets
4625 x 100
44560
=10.4%
4497×100
37,343
=11.9%
3860×100
34,995
=11%
22,301×100
163,514
=13.6%
  1. Return on equity
Net profit
equity
2849
15,309
= 18.6%
2787
15,663
= 17.8%
2408
14,205
= 17%
12,884
64,608
=19.9%
19.1%
  1. Net profit margin
Net profit
sales
5494 x 100
63,367
= 8.4%
5094 x 100
59,490
=8.6%
4323 x100
52,620
=8.2%
22,301 x 100
378,799
=5.9%
3.3%
  1. Gross profit margin
Gross profit
sales
21472 x100
63,367
=33.9%
20,091 x100
59,490
=33.8%
17,693 x100
52,620
=33.6%
92,284 x100
378,799
=24.4%

ROA (Return on Assets) is also used for the same purpose of measuring the overall performance. However to be meaningful to calculate the ROA it should be adjusted for implicit interest which is difficult to estimate and hence makes the process unnecessarily complicated. The figures show that performance is fluctuating and the performance ratio is positive for the last three years because the net income was positive and this shows that the stockholders have seen the face of profit for the last three years. It is difficult to say that the performance of the company itself has declined.

However one needs to compare its position with the market and also its rival companies to have a clearer picture. The rate of return on total assets can be taken as a good measure to estimate the firm’s performance, from the shareholders’ point of view. However, it fails to measure the overall performance of the firm. The higher this ratio is the better. If ROA is less than the ‘weighted average cost of capital the firm can be said to be destroying value. In the above statistics, it seems that the shareholders’ viewed the firm’s performance to grow from 2006 to 2008.

The liquidity ratios (Current Ratio, Quick Ratio) show mixed results but it is better than the results of Wal Mart. In the case of Wal-Mart, the current ratio shows that the firm’s position has improved slightly from 2006 to 2008. Current liabilities may or may not include short-term borrowings. Creditors consider current assets as a buffer for current liabilities and hence they prefer a higher ratio. A current ratio of 2:1 is considered optimal.

In this respect, the ratio is higher only in 2007 and this is also supposed to show the overall performance of the company, which is considered to be good according to this ratio. The Quick Ratio shows that the liquidity position of the firm has gone down in terms of its ability to meet short-term obligations. This could be a result of rising fuel costs, which is deterring people from buying these cars.

Again, the quick ratio shows that the liquidity position of the firm has gone down in terms of its ability to meet short-term obligations from 2005 to 2007 although it improved slightly from 2006 to 2007. This is more or less the same result as Wal Mart, which has also shown a declining situation in terms of meeting short-term debt obligations. Although it is more or less the same result for both, which has also lower than 1:1 in terms of meeting short-term debt obligation. This indicates very few liquid assets are there to pay off the short-term interests and therefore for both the companies long-term borrowing would be preferable with a moderate interest rate.

These two trends differ and are opposite to the results of Wal- Mart where the position declines in terms of the liquidity position of the firm. The quick Asset Acid test ratio for Wal -Mart is 0.22:1 and for Target Corporation it is 1.02:1. The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets. It shows that the firms have weak liquidity. Should be there Technical default then the company will not be liquidated as liquid assets are enough.

The debt management ratio is also very important. The debt management ratio has fluctuated from 2006 to 2008 from the creditors’ viewpoint and thus the creditworthiness of the firm is not stable according to results. However, from the manager’s viewpoint, the position has stable. A manager would prefer fewer debts and lesser obligations and this is nearly similar to the case of Wal-Mart were the results of this ratio showed a slight fall in 2007.

The inventory shows that the company taking longer to collect money from customers over the years and the condition has shown improvement in 2008. The inventory turnover rate measures the number of times the firm has turned its inventory during the past 12 months.

The values here show a steady improvement in the firm’s condition of inventory. The higher the debt-to-asset ratio is the better it is from the creditor’s point of view but the manager’s perspective the lower is better. Here the values show an improvement in 2006 but a fall in 2007 before going up. The creditworthiness of the firm now was better in 2008 than what it was in 2006 but has come down in the year, 2007.

The Target Corporation Inventory turnover is 11 times in 2008 which is the lower turnover than Wal Mart of 9.7 times meaning that the average stock was turned 11 times. The rate at which the Target Corporation converts debtors/receivables into cash is less than the Wal Mart. As shown by the account receivable turnover, the debtors’ payments frequency was 8.2 times in 2008 while the Wal Mart is 116.7 times. It means that the efficiency with which the Target Corporation is utilizing its debtors to generate cash is low than Wal Mart.

Target Corporation assets turnover is 1.5 times for 2008 which is lower than Wal Mart’s of 2.4 times. It measures the turnover on assets of most businesses’ ability of an asset to generate high returns create substantial assets for each dollar. It measures how a dollar invested in assets is returned. In the case of Target Corporation, for every dollar invested the company gets 1.5 and Wal Mart 2.4 times of assets.

Revenues have been growing at a considerable rate even though it has dropped in growth which could be due to increasing competition. Despite falling revenue the operating margin has gone up significantly but at the same time ROCE has increased dramatically this is because of increasing revenue as well as investments in acquiring new businesses without injecting more cash

There is also an improvement of the debt to capital employed ratio it changes from 59.4% to 65.4% from 2006 to 2008 respectively, Although there was a slight decrease in the rate in the year 2007 from 59.14% in 2006 to 58.14 The debt ratio is an indicator of the percentage of assets that have been financed through borrowed capital. It means that in 2008 65.6% of the total assets were financed through debt and in 2007 they were 58.14% respectively.

It means the firm might be financing its assets using external sources. While debt to equity ratio was 0.99:1 and 0.52:1 in the years 2005 and 2004 respectively. It measures how much of the debt is available from equity. In this case for every 0. 99 dollars of creditors, there is only 1 dollar from shareholders. This is very dangerous for a company. The interest coverage ratio has also improved from negative to positive.

On profitability, it can be noted that the profitability of the company is improving over time. This is shown by the Gross profit margin ratio, the Return on Assets, and the return on equity ratio. In 2005, the ratio increased to 17.3% from 17% in 2004. The net Return on Assets ratio also improved to 13% in 2005 from 8.4% in 2006. While Return on equity followed suit.

Other performance indicators for the company as compared to the industry figures are as follows: long terms solvency improved and currently stands at 2.9 as compared to the industry, also total assets to liabilities stands at 34.5%, assets turnover for the company ratio also improved as the total assets turnover was 1.3 as compared to the industry while fixed assets turnover was 17.9% as compared to the industry, account receivable turnover was 24.1 as compared to the industry, from this ratio the assets were turned well over above the industry. Growth during the year was also very good as we have seen from the cash flow statement that the operating cash flow improved by 233%, showing that the company has enough cash to pay for short term liabilities and dividends

DuPont analysis

In a DuPont analysis, the expression for ROE is broken up into three parts – profit margin, asset turnover, and equity multiplier. The profit margin measures the operating efficiency of the firm concerned, asset turnover measures the asset use efficiency and the equity multiplier throws light on the financial leverage of the company under analysis. This identity helps one to understand where the superior or inferior return comes from.

Competitive Analysis

FACTOR Target Strength Weakness Competitor Wal-Mart Importance to Customer
Products High-quality consumer goods Unique Narrow target market
Price Cost-plus 10% profit but not lower than the prevailing market price. Lower price The price may fluctuate from time to time due to competition Their prices may be lowered than the Target price to cover only fixed costs The customer is influenced by the price
Quality High quality High-quality products Costly to make Quality products The customer is influenced by the quality of the product.
Selection The products have very few competitors in the market. The unique type of products in the unique industry. Upper-class market Have been in business for many years Customers have view choices
Service Supply through retail Does not require servicing after-sale Customer feedback may not be possible There is no servicing.
Reliability They are a reliable market The market is reliable because there exists already a market. At times it may be affected by the government policy. These products are liable
Stability They have organized a line of credit to ensure the flow of cash at all times. The existence of market banks, will give them a line of credit High debt ratio Also indebted
Expertise We have to know-how in marketing We shall be able to access the market easily We are fresh from college we don’t have enough experience Have been in business for many years.
Company Reputation The company reputation is boosted by hiring a well respected Chief Executive Company reputation is good If proper PR is not carried out properly we may lose a good reputation. They have been in business for many years. They have created a good reputation
Location Well-positioned Located near products, market, and labor Other competitors are in the same location Same locations
Appearance The company logo and packaging is attractive The company uses endorsements from celebrities successive They have been in business for many years
Advertising the use of celebrities endorsement, media advertisement, billboard reaches a big market and create a good appearance for the company It is very costly. They have established budget and policies on an advertisement, therefore it is easier to appeal to the public
Image The company’s reputation, success, and continued existence are largely dependent on the PR specialists within that organization which manage and advocate for its public image. We shall engage PR Improve the image of the company. It is costly They have already established public relationship departments, therefore image branding is easier

Five forces analysis

Buyer Power: – The Company faces the threat of buyers shifting their loyalty to other rival companies. This phenomenon according to porter is referred to as backward integration. To curb this threat, Target has come up with three generic strategies to counter this threat.

  • Cost leadership: – It has reduced the price of some of its foods including the cost of offering Burgers.
  • Differentiation strategy: – The Company has come up with foods that are differentiated from the rival firms. These foods should be economical and are user-friendly in fighting obesity in the USA.
  • Diversification- diversify in various areas in the USA

Supplier Power: – Target is faced with the threat of the suppliers being able to control the price of some of the equipment and consumer mercantile they use. The manufacturers of various products and spices may come up with stringent price control measures. The labor laws are also stringent and the workers are so unionized that treating employees fairly and equitably is inevitable. To counter this force, the company extends its supply chain making the prices of for instance of products come down.

  • Barriers to Entry: – The other force challenging the industry is the entry of new companies with similar services. This would pose the threat of neutralizing the company’s profits as well as its market share. The generic position that the company has taken has been cost leadership.
  • Rivalry: – This force emanates from other companies within the same industry. The threat here is these companies capturing the market. However, the company’s framework/ strategy has been reducing prices whenever faced with such a threat.
  • The threat of Substitutes: – From the economist’s point of view, the threat of substitutes arises when the demand of that good is likely to be affected when the price of the substitute changes. This elasticity of price has formed a real force that the company has to fight if it has to be sustained shortly.

Conclusion

Therefore the operating efficiency is low and declining and this is influencing the value of ROE. More or less we find that the operating efficiency is responsible for the fluctuations of returns in the case of Target unlike Wal- mart, which shows steady progress. Therefore, improvements and innovations are sought on the technological side for Target to catch up with the competitors. While Walmart shows its versatility and ability to reach consumers at all levels, Target has won the edge due to its geographical and brands coverage. An environment-friendly technology or bringing in new packaging, research, and development-oriented towards environmental sustainability would be a profitable area to invest for target and thus catch up with the challenges faced by the industry today.

References

Hitt, M. A. and Ireland, R. D. (1985). Corporate distinctive competence, strategy, industry and performance. Strategic Management Journal, 6, 273-293.

Hofer, C.W. 1980. Turnaround strategies. Journal of Business Strategy, 1, 19-31.

Johnson G, Scholes K and Whittington R, (2006); Exploring Corporate Strategy, Prentice Hall, 7 th Enhanced Media Edition.

Park, C.W., Jaworski, B.J., MacInnis, D.J. (2006), “Strategic brand concept – image management”, Journal of Marketing, Vol. 50 pp.135-45.

Ries, A., Trout, J. (2006), Positioning: The Battle for Your Mind, McGraw-Hill Inc., New York, NY.,.

Target financial statements. Web.

Wal-mart financial statements. Web.

Winer, R.S. (2007). Marketing Management, Prentice Hall, Upper Saddle River, NJ.

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