Target-Stock Analysis
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Target, the nations #2 discount chain, now operates more than 1,500 Target and Super Target stores in 47 states, as well as an online business called Target.com. Target and its larger grocery-carrying stores, Super Target, have carved out a niche by offering more upscale, fashion-forward merchandise than rivals Wal-Mart and Kmart. After years of struggling to turn around its Marshall Fields and Mervyns departments stores divisions, the discounter sold them both in 2004. Target also owns apparel supplier The Associated Merchandising Corp. and issues Target Visa and its proprietary Target Card (www.Answers.com/topic/target-corporation).
Year over year, Target Corp. has been able to grow revenues from $51.3B to $57.9B. Most impressively, the company has been able to reduce the percentage of sales devoted to cost of goods sold from 69.64% to 69.29%. This was a driver that led to a bottom line growth from $2.4B to $2.8B. Target outperformed (corporate governance quotient) 85.5 % of S&P 500 companies and 97.7 % of discount retail stores. The corporate governance quotient incorporates the values of transparency, accountability, integrity, and responsibility towards maximizing shareholder value. Yahoo analysts opinions mean recommendation is currently a 2.2, indicating moderate buy to hold (a 1.0 is a strong buy and a 5.0 is a strong sell).
Moodys Investors Service downgraded the retailers long-term rating on debt to A2 from A1. The credit-rating company said the cut is due to Targets plan to use debt to help finance its $10 billion stock buyback. The company’s buyback represents more than 20 percent of outstanding shares and is expected to be completed within three years. The CEO believes the new program will maintain strong investment-grade debt ratings within a prudent range while allowing for substantial value to be returned to shareholders (www.investors.target.com). Moodys also called Targets free cash flow “thin,” given the discount retailers sizable capital spending for store expansion and its growing credit card operations (www.Marketwatch.com). The contribution from the companys credit card operations to third quarter earnings before taxes, net of the allocated interest expense, was $157 million, an increase of $23 million, or 17.1 percent, from the same period in 2006.
Ratios — 3rd Quarter Ending 3-Nov-07 (in millions)
Current – 18,334 / 13,563 = 1.35
current assets / current liabilities
Quick — 18,334 – 8,746 / 13,563 = .71
current assets — inventories / current liabilities
Inv. Turnover — 14,835 / 8,746 = 1.69
sales / inventories
Total Assets Turnover (TAT) — 14,835 / 43,289 = .34
sales / total assets
Total Debt — 14,138 / 43,289 = .3265
total debt / total assets
ROA — 483 / 43,289 = .0112
net income / total assets
ROE — 483 / 16,160 = .0299
net income / common equity
Price/Earnings — 57/3.42 = 16.67
price per share / earnings per share
Market/Book – 57/19.124260 = 2.981
market price per share / book value per share
Equity Multiplier (EM) — 43, 289 / 16,160 = 2.679
total assets / common equity
Profit Margin (PM) — 483 / 14,835 = .03255
net income / sales
Ks = 3.83 + 1.23(12.4 — 3.83)
Ks = 14.3711 %
CONSTANT GROWTH
Ks = [.56(1.1637)/57.00] + .1637
Ks = 17.5133 %
Third quarter financial results were somewhat disappointing. Comparable-store sales decreased from 4.6% in third quarter 2006 to 3.7% in third quarter 2007, amounting to a 0.9% net decrease.
Liquidity:
We evaluated Target’s liquidity by two different measures: current ratio and quick ratio. Target’s current ratio of 1.35 indicates that for every $1.00 in current liabilities, Target has $1.35 in current assets. Therefore, Target is more than able to meet immediate debt obligations at any given point. Quick ratio is a more conservative measure of liquidity because it excludes inventory values from its calculation. This is especially important when evaluating general and discount retailers because these outlets typically have large inventories, resulting in overly optimistic current ratios. As indicated, liquidity decreases from 1.35 to .71 when inventory is excluded from the calculation.
DuPont Model:
The DuPont Model is an excellent evaluation tool because it considers three critical elements of financial