ANALYSIS OF THE OBJECTIVE COMPANY
The purpose of this memorandum is to assess Target’s recent performance and compare Target’s five proposed capital budget projects.
The first SuperTarget store opened in Omaha, Nebraska in 1995. Target differentiated itself from Wal-mart by focusing on the shopping experience for its customers. The company had been very successful in promoting brand awareness with extensive advertising campaigns, and as a further enhancement to the customer’s shopping experience, Target offered credit to qualified customers through its RED cards.
I. Recent Target Performance Review
Wal-Mart Revenue= $315.7 billion Wal-Mart Debt Rating= AA Wal-Mart Beta= 0.80
Costco Revenue = $52.9 billion Costco Debt Rating = A Costco Beta = 0.85
Target Revenue = $52.6 billion Target Debt Rating = A + Target Exceedance = 1.05
Table 1: Financial information of the retail company
Table 1 shows that Target’s total revenue is the lowest compared to Wal-mart and Costco, but it performed better when it comes to managing its company’s debt. Target’s debt rating of A+ beats Walmart or Costco’s debt rating. This indicates that Target has a very efficient debt management system in place even though they need to acquire more funds to carry out their capital budgeting projects and the risk of defaulting on their loan payments is very low. . However, Target appears to be the riskier company with a beta of 1.05, which is higher than the other two companies. I think Target’s beta of 1.05 is not a big deal as the total retail industry beta is 1.96 and Target’s beta is still much lower than the overall industry beta.
II. Target Financial Ratios Assessment
Net profit margin (2005) = 6.89% (2006) = 4.58%
Return on Assets (ROA) (2005)= 5.84% (2006)= 6.88%
Return on equity (ROE) (2005)= 24.55% (2006) = 16.95%
Asset turnover ratio (2005)= 1.44 (2006) = 1.50
Inventory Turnover Ratio (2005) = 5.84 (2006) = 5.98
Table 2: Target Financial Ratios
Table 2 shows that Target’s net profit margin has decreased since 2005. ROE has also decreased since 2005, but ROA has increased since 2005. Target’s net profit margin decreased since 2005 because it decreased its interest expense in 2006 Target experienced sales growth and interest expense decline from 2005 to 2006, which is a good sign for the company, although this did result in a decline in net profit margin. This decrease in net income also led to a decrease in ROE. The ROE decline is not a bad sign for Target, as total stockholders’ equity increased from 2005 to 2006, which also caused ROE to decline. ROA improved from 2005 to 2006, showing that management is really good at managing Target’s assets to generate profit.
Asset Turnover Ratio and Inventory Turnover Ratio have both improved since 2005, indicating that Target is becoming more efficient at managing its assets and inventory. Turnover rates are very important in the retail industry to ensure that the company can keep its costs low and generate significant profits. Target’s improved inventory turns show that Target can reduce its inventory and warehouse costs in 2006 by effectively managing its inventory. This also led to increased sales for Target in 2006.
third Comparison of capital budgeting projects
A. Gopher Place
The total population in the area in which it is located is one of the lowest among the others. There is potential for cannibalism in that area if Target undertakes this project as there is already a high density of Target stores in that area. Additionally, Wal-mart also plans to add two new supercenters there. Competition in this area will be quite high with such a low population and so many stores. This project may not be able to generate a lot of sales or profit for Target despite the huge increase in population and high median income.
B. Whale Cut
It has the highest NPV due to its location in the most populated area. It will also bring the brand awareness that Target has always sought and provide free publicity to all passersby. However, the initial investment required for this project is huge and raises concerns about Target’s ability to finance it. The risks associated with this project are too high, as a small decrease in the amount of sales will result in a huge negative NPV and loss for the company. This project may not be able to generate the high amount of sales or profit for Target as sales are expected to remain constant with low population growth.
C. The Barn
It requires the least investment and produces a very favorable NPV. This small rural area will allow Target to expand its stores into a new market. However, it is located in an area with the second lowest total population. The median income of the population is also quite low. Target can make big profits in this area, as it only takes a small number of sales to generate big profits, and Target won’t experience losses when sales decline. This project will generate a large amount of profit for Target despite the possibility that the number of sales will be one of the lowest compared to the other projects.
D. Goldie Square
It has the lowest NPV among all other projects and does not look attractive from the NPV point of view. However, it is located in a densely populated area that has an upper middle income. An upper median income population can result in Target acquiring many loyal customers. There is also a high population growth which indicates that sales will increase in the future. This project can generate a lot of sales and profits for Target as growth materializes.
E. Remodeling of the Stadium
Located in an area with the highest median income and highest percentage of adults with 4+ years of college. Sales potential looks promising. However, there is not enough data to support this, as sales have previously declined. The outlook does not look very promising for this project. It is not a profitable project to undertake at this time.
IV. Conclusion and recommendation
Based on my evaluation of Target, I saw an overall improvement in Target’s performance. I believe Target will be able to reap huge profits and sales by sticking to their marketing strategy and thoroughly analyzing future projects. The Barn and Goldie’s Square projects are the two projects I would recommend as these are the most profitable projects among the others. .