Target and Kroger merger strategy to compete with Amazon

Financial Report on Target Corporation
Introduction
Target Corporation, incorporated in 1902, has developed to become of the key players in the retail industry. Notably, it is ranked as the eighth largest discount retailer in the United States. The main center of operations for the company is located in Minneapolis in the state of Minnesota and has approximately 1,800 retail stores, just about 40 distribution centers and almost 350,000 members globally (Target, 2016). The main objective of this paper is to provide a comprehensive report to the CEO of the company based on different financial aspects including the different strategy or policy recommendations. Mergers and Acquisitions in Target's Market The significant changes in the present-day economy have mirrored the significance of continuing technological progressions in numerous industries. The intensified competition emanating from the developing global economy has given rise to new industries. More imperatively, the economic and technological forces have had a substantial impact on the structure of industries, providing an incentive for merger and acquisition activity. Mergers and acquisitions are beneficial in empowering the level of research and development in retail, which can be important in coming up with significant breakthroughs in the industry. There is also the need for the quest for economies of scale, the capability to cut unit costs or increase productivity and outcomes by means of increased volumes. Organizations have the opportunity to make acquisitions of other companies to increase their economies of scale. In addition, the organizations have the ability to expand their business revenue to a global scale and drive their revenue levels (Jemison and Haspeslagh, 1991). In order for corporations to remain competitive, it is essential to make adaptations to the industry changes (Fin 660 Week 11 Lecture). This is especially the case in the retail industry and for Target to continue succeeding and having a competitive advantage in the market, there is a major need for merger and acquisition.
The recommendation is for Target Corporation to merge with Kroger. First of all, Target and Kroger are facing a severe mutual competitor in the form of Amazon. Imperatively, in recent times, Amazon has made major strides in the retail industry by acquiring Whole Foods Market together with its forceful drives in offline retail and this is making the company to become a major threat. Amazon has become the second biggest retailer of apparel in the United States evolving from brand experiments in outdoor furniture in over a decade ago, home merchandise, electronic appliances, diapers, and presently delving into perishables. Numerous companies are facing significant competition where Amazon is facing business prospects. For instance, subsequent to acquiring Whole Foods, major corporations such as Walmart and Target and experiencing increased competition. According to Vena (2017), the strategies that these companies need to embrace are online innovation and e-commerce. In actual fact, Amazon has grown in recent years whereas the revenues generated by both Target and Kroger have deteriorated in the past three years. At the current $200 billion revenue generated by Amazon, is perceptibly conceivable for Target and Kroger to report positive equivalent sales growth. However, with the continued growth in sales for Amazon, it is substantially unlikely that these companies will match up unless Target and Kroger merge (Lango, 2018).
In the contemporary setting, the key shortcoming for Target Corporation is grocery. Specifically, the company continues to lack the capacity to efficaciously scale the business. In contrast, the strong suit for Kroger is grocery. In spite of Whole Foods attaining a fresh makeover subsequent to the Amazon acquisition, Kroger continues to report positive comparable sales growth. In the meantime, the key shortcoming for Kroger is delivery (Lango, 2018). The company has experienced some achievement with different programs such as ClickList. Nonetheless, the firm has been largely ineffective and struggled with attaining a proper grocery delivery program. On the other hand, delivery is rapidly transforming into the strong suit for Target Corporation. The firm is positing strong growth in e-commerce sales and has also made an acquisition of Shipt, which offer delivery of products in the same day (Lango, 2018).
Undoubtedly, it can be perceived that there exists synergy for these two companies. To begin with, Kroger can aid Target Corporation in growing and developing its grocery business operations. On the other hand, Target can largely benefit Kroger in growing and developing its delivery business operations. Furthermore, in the present day, both of these corporations are forcefully advancing their private-label businesses. As a result, the merger between these two companies would give rise to one of the largest private-label businesses in the world (Lango, 2018). Target Corporation Must Better Leverage a Retail ERP System ERP is fundamentally well-defined as a packaged software application comprising of several modules, in quest of the establishment’s business procedures and information-dispensation necessities. What is more, ERP makes the most of a mutual integrated databank to provide establishments the prospect for more effectual and efficacious utilization of social, monetary, physical, and other organizational informational resources. In essence, ERP is basically utilizing computer expertise and know-how, comprising of software and hardware constituents for the purposes of data and information storage and tracking in favor of the mission and objectives of the entity (Al-Mashari, 2003).
The business implications of leveraging a retail ERP system are without a doubt massive. In the present-day business setting where privatization, liberalization as well as globalization are dominant and prevailing, majority of the retail businesses across the globe conduct their operations in intensely competitive market conditions. This sort of fierce rivalry has given rise to minimal profit margins in the industry. Bearing this in mind, in order for Target to continue being competitive in the market place, the company cannot meet the expense of the extravagances of systemic inefficiencies or delayed decision-making. In both of these business activities, whether it encompasses rising productivities in the business process or the capacity to take practical decisions hastily, necessitates a comprehensive cognizance of the business process (Plunkett, 2013).
As pointed out in research undertaken by Almgren and Bach (2014), ERP gives rise to increased sales and profits for the organization by augmenting profitability. Based on the research study, ERP brings about a general decline in the costs incurred in conducting business and as a result increase the sales generated and the profit margin of the organization. In actual fact, statistics reported demonstrate that approximately 70 percent of the firms generating the greatest amount of sales and returns and 90 percent of the high ranking and dominant corporations in terms of their market caps have undertaken enterprise resource planning system (Wanyoike, 2017). Furthermore, the implementation of ERP had a positive impact on numerous indicators of sales and financial performance comprising of return on assets, profit margin, return on investment, asset turnover as well as capital turnover. This is indicative of the significant need for Target Corporation to leverage ERP into its business operations.
Target Corporation is one of the major retailers with business operations spanning across the different parts of the United States and beyond. Management of such a distributed network is a daunting task indeed. The retail ERP packages will be beneficial for Target in attaining better management in its enterprise-wide business operations. The retail ERP systems offer an all-encompassing solution for the retail information processing challenges faced by Target Corporation by offering an extensive solution to the management of its intricate retail business. By leveraging ERP, Target will be able to manage the business significantly better in an effective and efficient way by rendering assimilated and incessant information flow. This facilitates the simpler tracking of all the transactions undertaken by the retailer. Furthermore, the ERP is recommended owing to the reason that it will enable Target Corporation to have automated recording of its retail business transactions in real-time setting. ERP can be a largely essential implement to survive the competitive retail sector and increase the profitability of the company (Finne and Sivonen, 2008). Target Performance Metrics Ratio analysis is an implement that is useful undertaking quantitative analysis on figures obtained from the financial statements. Ratios provide a common approach for making a comparison of financial strength and performance for two or more corporations. Imperatively, ratios can reveal a company’s financial strength or weakness as well as reveal trends concerning business conditions and profitability (Noreen, Brewer, and Garrison, 2017).
Liquidity
Liquidity ratios attempt to measure the ability of a company to pay back its short-term debt obligations. Fundamentally, it covers the ability of a company to make use of its current assets to meet its short-term liabilities (Lan, 2012).
1. Current Ratio
Current ratio indicates if the company has the ability to pay off its short-term liabilities in the event of an emergency through the liquidation of its current assets.
Current Ratio = Current Assets / Current Liabilities
= 12,519 / 15,104
= 0.83
2. Quick Ratio
The quick ratio measures the liquidity but does not take into consideration particular line items like prepaid expenses that cannot be expediently liquidated.
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
= (12, 519 – 9,497) / 15, 104
= 0.2

The current ratio of Target is 0.83. Typically, the ideal current ratio should be 2:1. However, in this case, bearing in mind that the ratio is less than 1, it is indicative that the company is unable to cater to its short-term obligations fully. In the same manner, the quick ratio is 0.2, which indicates that most of the company’s current assets are inventory and therefore the company cannot easily cater to its short-term obligations subsequent to liquidating the current assets. In addition, it implies that the company is largely reliant on its inventory to meet its short-term payments. The performance of the quick ratio for the company indicates that Target Corporation does not have a healthy financial performance. These financial metrics indicate that the liquidity of Target Corporation is below par and therefore the company needs to incorporate greater current assets in order to cater to its short-term obligations. This indicates that the company is not in great financial health as it cannot pay its debt when they come due and still have remaining resources.
Profitability
Profitability ratios measure the capability of firm to generate a sufficient return. They measure the capacity of a firm to generate profit. It is imperative to note that high profitability ratios are a good indicator and demonstrate that the firm is operating as it should (Lan, 2012).
1. Gross profit Margin
Gross profit margin = (Gross profit / Sales) * 100
= 21,135 / 74, 433
= 28.39%
2. Operating profit = (Operating margin / Sales) * 100
= 4,110 / 74,433 * 100
= 5.52 %
3. Net profit margin = Net profit / Sales * 100
The net profit margin is a profitability ratio that point toward what percentage of the total revenues generated by the firm is constituted by and signified by net income. In reality, the net profit margin forms the amount of revenues that are excess or accessible consequent to the compensation or payment all variable or operating expenditures, interest, taxes and preferred stock dividends from the revenue generated (Lan, 2012).
= 2,937 / 74, 433 * 100
= 3.95%
4. Return on Equity
Return on equity measures the income level that is attributed to shareholders against the investment that is put into the company by shareholders.
Return on Equity = Net Earnings / Shareholders’ Equity
= 2,937 / 11,297
= 26%
5. Return on Assets
Return on assets (ROA) is a metric that determines the efficiency of a firm in capitalizing its assets.
Return on assets = Net earnings / Total assets
= 2,937 / 41,290
= 7.11%

The profitability level of Target Corporation as indicated by the financial ratios is relatively commendable. The net profit margin of Target is 3.95 percent and this means that for every dollar of sales, the company generates a return of 3.95 cents. Taking into consideration that the gross profit margin of Target Corporation is 28.39 percent and therefore there is a gross return of 28.39 cents. The significant decline between the two ratios implies that the company has major expenses, which if diminished can improve the profitability of the company. The ROE of the company is 26 percent. The inference of this is that Target effectively capitalizes on the shareholders’ equity as it generates a return of 26 cents for every dollar expensed. The ROA of the company is 7.11 percent and this implies that the company generates a return of 7.11 cents for every dollar of assets that is expensed. Nonetheless, this indicates that there is a greater need for improved utilization of corporate assets to generate returns.

Activity
Activity ratios are metrics that divulge the efficiency of the firm in utilizing its resources.
1. Accounts receivable
This takes into account the total amount of money due for a corporation for the products or services retailed on credit. It reveals how fast the firm collects what is owned to it
Accounts receivable turnover = Total credit sales / Accounts receivable
= 71,897 / 929
= 77.39
2. Average collection period
Average collection period = 365 days / Accounts receivable turnover
= 365 / 77.39
= 4.71
3. Inventory turnover
This ratio indicates how effective a corporation is in terms of utilizing its inventory. Imperatively a higher inventory turnover shows that there is more effective cash management and diminishes the incidence of inventory outmodedness
Inventory turnover = Total Sales or cost of goods sold / Inventory cost
= 75,356 / 9,497
= 7.93
4. Total asset turnover
Total asset turnover = Net sales / Average total assets
= 75,356 / [(41, 290 + 38,999) / 2]
= 1.88
The financial ratios indicate that Target Corporation has been effective in capitalizing on its resources. For instance, the high turnover ratio shows that the company ensures that there is quick inflow and outflow of the inventories to ensure that none of them become obsolete. In the same manner, it indicates that the company takes solely 77 days to collect the money that is owed to this. This is relatively remarkable. However, the company could improve on this aspect in order to enhance its liquidity levels that are poor.
Leverage
A leverage ratio is any one of numerous financial metrics that take into consideration how much capital comes in the form of debts / loans or measures the capability of a company to meet its financial obligations. Leverage or capital structure ratios are financial metrics that delve into the amount of capital in the firm in regard to debt. These ratios investigate the ability of a company to meet its financial obligations. These ratios play an important role owing to the reason that firms are reliant on an amalgamation of both debt and equity to facilitate the financing of their operations. In this regard, making a determination of the debt amount held by a firm is beneficial in assessing whether it has the ability to pay off its debt obligations when they become due (Noreen et al., 2017).
1. Debt to equity ratio
Debt to equity ratio = Total liabilities / Shareholders’ equity
= 29,993 / 11,297
= 2.65
2. Debt to capital ratio
Debt to capital ratio = Total liabilities / Total Capital
= 29,993 / 6,042
= 4.96
3. Interest coverage ratio
The interest coverage ratio is employed to ascertain how easily a corporation can reimburse their interest expenses on unsettled debt. The ratio is computed by dividing a business's earnings before interest and taxes (EBIT) by the business's interest expenses for the similar period
Interest coverage ratio = earnings before interest and taxes / interest expenses
= 2,930 / 461
= 6.36
The results of the leverage ratios indicate that Target Corporation has a high debt to equity ratio and this largely specifies that the corporation has been forceful in financing its growth with debt. One of the key concerns for this that the CEP needs to take note of is that it can give rise to volatile earnings on account of the extra interest expense. If the firm's interest expense develops too high, it may increase the firm's probabilities of a default or bankruptcy (Lan, 2012).
Forensics and Financial Analysis
Forensic accounting analysis takes into consideration investigating beyond basically whether transactions were reported to the right accounts or be adherent to a sensible interpretation of GAAP. Imperatively, forensic analysis might necessitate comprehensively analyzing subject company to examine what went wrong. As indicated by Financial Shenanigans book, there are key aspects to look for in undertaking an accounting forensic analysis:
1. Weak Internal controls
Based on the financial statements of the company, Target Corporation maintains comprehensive systems of internal control that are intended to provide meaningful assurance that assets are protected and transactions are carried out in line with the established procedures. The notion of reasonable assurance is centered on recognition that the cost of the corporation’s controls ought not to surpass the benefit that is derived. Imperatively, the board of directors properly conducted its role of oversight with regard to Target’s systems of internal control fundamentally through its audit committee that consists of independent directors. The committee was able to administer over the systems of internal control, accounting procedures, financial reporting and audits to make a determination whether their level of quality, integrity as well as objectivity are adequate to safeguard the investments of the shareholders (Target Corporation, 2018). Furthermore, there have not been any sort of changes in Target’s internal control over financial reporting in the course of the preceding fiscal quarters that have substantially impacted or are meaningfully probably to substantially impact the company’s internal control.
2. Behavior of Common Financial Measures Over Time
Based on the financial statements of Target Corporation over the past three financial years, there are no unexplained major changes in sales, cost of goods sold or gross profit. In the past three years, the revenues of the company have progressively increased from $69.495 billion in 2017 to $71.879 billion in 2018 and further up to $75.356 billion in 2018. The increase in sales is largely linked to the improvement in delivery by the company after making the acquisition of Shipt, a firm that is efficacious in same-day delivery of products. The same is the case for the cost of goods sold, with an increase from $20.35 billion to $20.754 billion and further up to $22.057 billion for 2017, 2018 and 2019 financial years respectively.
3. Trend Analysis
Income Statement Trend Analysis
Revenue
2/2/2019
2/3/2018
Amount Change
Percentage Change

Total Revenue
75,356,000
71,879,000
3,477,000
4.84%

Cost of Revenue
53,299,000
51,125,000
2,174,000
4.25%

Gross Profit
22,057,000
20,754,000
1,303,000
6.28%

Operating Expenses

Research Development

Selling General and Administrative
15,723,000
14,157,000
1,566,000
11.06%

Non-Recurring

Others

Total Operating Expenses
71,246,000
67,476,000
3,770,000
5.59%

Operating Income or Loss
4,110,000
4,403,000
-293,000
-6.65%

Income from Continuing Operations

Total Other Income/Expenses Net
-434,000
-757,000
323,000
-42.67%

Earnings Before Interest and Taxes
4,110,000
4,403,000
-293,000
-6.65%

Interest Expense
-461,000
-543,000
82,000
-15.10%

Income Before Tax
3,676,000
3,646,000
30,000
0.82%

Income Tax Expense
746,000
718,000
28,000
3.90%

Minority Interest

Net Income from Continuing Ops
2,930,000
2,928,000
2,000
0.07%

Non-recurring Events

Discontinued Operations
7,000
6,000
1,000
16.67%

Extraordinary Items

Effect of Accounting Changes

Other Items

Net Income

Net Income
2,937,000
2,934,000
3,000
0.10%

Preferred Stock and Other Adjustments

Net Income Applicable to Common Shares
2,937,000
2,934,000
3,000
0.10%

Balance Sheet Statement Trend Analysis

2/2/2019
2/3/2018
Amount Change
Percentage Change

Current Assets

Cash and Cash Equivalents
1,556,000
2,643,000
-1,087,000
-41.13%

Short Term Investments

Net Receivables

929,000

Inventory
9,497,000
8,657,000
840,000
9.70%

Other Current Assets
1,466,000
154,000
1,312,000
851.95%

Total Current Assets
12,519,000
12,564,000
-45,000
-0.36%

Long Term Investments

Property Plant and Equipment
27,498,000
25,018,000
2,480,000
9.91%

Goodwill

630,000

Intangible Assets

79,000

Accumulated Amortization

Other Assets
1,273,000
708,000
565,000
79.80%

Deferred Long Term Asset Charges

Total Assets
41,290,000
38,999,000
2,291,000
5.87%

Current Liabilities

Accounts Payable
9,761,000
8,677,000
1,084,000
12.49%

Short/Current Long-Term Debt
1,218,000
270,000
948,000
351.11%

Other Current Liabilities

1,876,000

Total Current Liabilities
15,014,000
13,201,000
1,813,000
13.73%

Long Term Debt
12,227,000
11,317,000
910,000
8.04%

Other Liabilities
2,752,000
2,772,000
-20,000
-0.72%

Deferred Long Term Liability Charges

73,000

Minority Interest

Negative Goodwill

Total Liabilities
29,993,000
27,290,000
2,703,000
9.90%

Stockholders' Equity

Misc. Stocks Options Warrants

Redeemable Preferred Stock

Preferred Stock

Common Stock
43,000
45,000
-2,000
-4.44%

Retained Earnings
6,017,000
6,553,000
-536,000
-8.18%

Treasury Stock
-805,000
-747,000
-58,000
7.76%

Capital Surplus
6,042,000
5,858,000
184,000
3.14%

Another Stockholder Equity
-805,000
-747,000
-58,000
7.76%

Total Stockholder Equity
11,297,000
11,709,000
-412,000
-3.52%

Net Tangible Assets
11,297,000
11,000,000
297,000
2.70%

Based on the trend analysis, it is perceptible that the net income for the company is not increasing whilst the cash is experiencing a downward spiral. The net income increase is in line with the increase in the cash for the company, indicating that there are no areas that are vulnerable to fraud or bankruptcy for Target. In the same manner, the sales of the company have been trending up while at the same time the cash is also trending up. Corporate Governance Analysis Corporate Governance is divided into three bodies: Ownership who have the possessing power of the company, Executive who have the power and responsibility of overseeing day to day operations and implementing delegated rights and obligations, and Inspection who monitors and checks the ownerships and executive body. The board of directors is pivotal in governance, and it can have major ramifications for equity valuation. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. In brief, regulation requires boards of directors and their risk committees to oversee the undertaking and management of risks by financial institutions. Corporate governance therefore serves the purposes of supervisors, to the extent that it should prevent the undertaking of excessive risk by financial institutions (Dionne and Triki, 2005).
The main objective of the Sarbanes-Oxley Act is to augment the quality of disclosure and financial reporting, reinforce the independence of accounting firms, and facilitate the increased role of audit committees and the accountabilities of management for corporate disclosures as well as financial statements (Romano, 2004). In regard to compliance, Target Corporation has been a strong exponent and supporter of good corporate governance practices and principles for a lengthy period now. Several of the corporate governance reforms authorized by the Sarbanes-Oxley Act and current Securities and Exchange Commission (SEC) and New York Stock Exchange regulations have been in operation at Target. Target Corporation has developed an audit committee, which consists of members of the Board of Directors and encompasses executives from a range of businesses (Target Corporation, 2018). Imperatively, the audit committee of the company is mandated with the responsibility of helping the Board of Directors to administer and watch over the financial reporting practice of Target Corporation. The fundamental culpability falls to the management of the company for the consolidated financial statements and reporting procedure, which encompasses internal controls. So as to provide assistance to the Board of Directors, the audit committee creates and attends meetings with the internal auditors as well as independent registered public accounting corporations, either with the presence or lack thereof of management, to deliberate upon the general scope and plan for their respective audits, the outcomes of their investigations and their assessments of the company’s internal controls (Target Corporation, 2018).
According to Zhang et al. (2013), one of the key aspects that hamper the readiness and lack of compliance of the Sarbanes Oxley Act encompasses having audit committees that have minimal financial understanding. If audit committee quality is related with the quality of internal controls, it appears sensible to consider that a more efficacious audit committee will safeguard opportune remediation of material weaknesses so as to sustain the efficacy of internal controls. When controlling the financials of the organization, management should make an effort to ensure that the task is performed by a person with knowledge in that particular area. In some cases, these functions are performed by people who are incompetent and they negatively affect the operations of the organization. It may be difficult for the firm to reach its profitability goals (Zhang et al., 2013). Target demonstrates its readiness to meet the Sarbanes Oxley Act as its audit committee members are not only independent but also qualify as audit committee financial specialists (Target Corporation, 2018). Conclusion This report conducts an extensive financial analysis of Target Corporation in regard to different areas to not only assess its financial performance and health but also its compliance with corporate governance rules and regulations. There are various recommendations for the CEO of Target Corporation. First of all, based on the advanced competition in the retail industry and the major rise of Amazon, it is recommended that Target should create a merger with Kroger. The latter can help Target in advancing its grocery business operations whereas Target can largely benefit Kroger in the development of its delivery business. Secondly, it is also recommended that Target should leverage and implement ERP. By leveraging ERP, Target will be able to manage the business significantly better in an effective and efficient way by rendering assimilated and incessant information flow. Furthermore, the retail ERP packages will be beneficial for Target in attaining better management if their enterprise wide business operations. In regard to performance metrics, it is perceptible that the key area that the CEO needs to work on is the liquidity levels. The company is presently unable to cater to the short-term obligations and at the same time still have remaining resources in the prevailing financial year. Most of all, analysis of the company’s financial reports, it is perceptible that Target demonstrates its readiness to meet the Sarbanes Oxley Act as it audit committee members are not only independent but also qualify as audit committee financial specialists.

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