Target vs Walmart Financial Analysis

Target vs. Walmart Financial Analysis

Synopsis of the Companies

Wal-Mart Store Inc. became originally established in the year 1945 and is in the present day undertaking its operations in retail stores in over twenty-seven countries. The company is split into three key segments. These are Walmart International, Walmart United States and Sam's Club. The business undertaken by Walmart as a company encompasses restaurants, superstores, retail stores and also warehouse clubs. The company also undertakes e-commerce through its website Walmart.com. In terms of retail products, the merchandises being sold in Walmart's retail stores include baby products, healthcare products, household goods, electronics, books, automotive products, clothing, furnishings and decor, alcohol, grocery, paper products and so much more. The leadership and control of the company is held by the Walton family, which owns about forty-eight percent of the shares of the company. Walmart was established by Sam Walton and therefore shows why the family owns majority of the business (Walmart Website, 2016).

Target Corporation is the second biggest retailer in the United States, behind Walmart. The company was established by George Dayton. The initial and first store was opened in the year 1962 with the parent firm at the time being referred to as Dayton Corporation. By becoming the division generating the highest earnings in the firm and causing nationwide expansion, the parent firm was renamed Target Corporation in the year 2000. In recent periods, the company experienced a massive security breach with regard to the data of its consumers and also its opened subsidiary in Canada was a failure. However, the firm is expected to have a serious rejuvenation in the United States. The central offices of the company are located in Minneapolis. The leadership of the company is headed by Brian Cornell who is the Chief Executive Officer of the firm. The company offers a wide variety of products which include clothing and apparel, furniture and fixtures, entertainment products, electronics, health and beauty products and also toys for kids (Target Corporation Website, 2016).

Profitability Ratios

1. Operating Profit Margin

Walmart

2016

2015

2014

Income from Operations

24,105,000

27,147,000

26,872,000

Sales

482,130,000

485,651,000

476,294,000

Operating Margin

0.04999689

0.05589817

0.05641893

Target

2016

2015

2014

Income from Operations

4,910,000

4,535,000

4,779,000

Sales

73,785,000

72,618,000

71,279,000

Operating Margin

0.06654469

0.06245008

0.0670464

2. Net Profit Margin

Walmart

2016

2015

2014

Net Income

14,694,000

16,363,000

16,022,000

Sales

482,130,000

485,651,000

476,294,000

Net Profit Margin

0.03047726

0.03369292

0.03363889

Target

2016

2015

2014

Net Income

3,363,000

-1,636,000

1,971,000

Sales

73,785,000

72,618,000

71,279,000

Net Profit Margin

0.04557837

-0.0225288

0.0276519

3. Return on Assets

Walmart

2016

2015

2014

Net Income

14494000.00

16,363,000

16,022,000

Total Assets

199581000.00

203,490,000

204,751,000

Return on Assets

0.072622143

0.08041181

0.07825114

Target

2016

2015

2014

Net Income

3,363,000

-1,636,000

1,971,000

Total Assets

40,262,000

41,172,000

44,553,000

Return on Assets

0.083527892

-0.03973574

0.04423945

The operating profit margin provides a measure of the profit level generated by a company once the variable costs incurred are paid off. In particular, the operating profit margin points toward the percentage of sales revenue that remains once the operational costs are paid off. This outlines how effective a company is in managing its revenue and also controlling the costs related to the operations of the company (Ross, Westerfield, & Jaffe, 2013). The operating margin for the past three fiscal years has consistently declined. The ratio decreased from 5.64% in 2014 to 5.59% in 2015 and further down to 5% in 2016. On the other hand, the operating profit margin for Target has been wavering. The ratio declined from 6.7% in 2014 down to 6.24% in 2015. However, the ratio went on to increase to 6.65% in 2016. In the past three years, the operating profit margin of Wal-Mart has been lower compared to that of Target. The implication of this is that Target is more effective with regard to generating income from operations. For instance, in the 2016 fiscal year, Target generated a return of 6.65 cents for every dollar of sales generated, whereas Walmart only generated 5 cents for every dollar of sales. One of the ways in which the management can improve the ratios is to decrease and minimize the cost of sales incurred by the firm. This in turn will improve the income generated from operations.

Similar to the operating profit margin, the net profit margin is also a key metric for analysis and other stakeholders and indicates the profitability level of a company. In particular, the net profit margin points toward the percentage of sales revenue that remains once all the total expenses incurred by the company were paid off. Basically, this ratio delineates the amount of profit that a company can conjure up from the total revenues (Ross, Westerfield, & Jaffe, 2013). The net profit margin of Walmart in the 2014 and 2015 fiscal years remained constant at 3.34%. However, in 2016, the net profit margin slightly declined to 3.05%. On the other hand, the net profit margin was wavering and inconsistent. The ratio significantly declined from 2.77% in 2014 down to -2.25% in 2015. However, in the following year 2016, the ratio considerably rose up to 4.56%. As indicated in the diagram below, despite Target having a superior net profit margin in 2016, Walmart has had a more consistent and steady profit margin. In this case, Walmart has generated a consistent return on 3 cents for every dollar of assets generated compared to Target, which made a loss of 2 cents and thereafter generated a profit of 4 cents. One of the ways in which the management can improve this particular ratio is through decreasing the expenses incurred by the firm. Through this way, the company will generate a greater net profit, which will bring about a greater profit margin.

The return on assets ratio is a measure of the profitability of a company in relation to how effective it is in making use of its assets to generate a return. The return on assets ratio is obtained by dividing the total assets by the net income (Weygandt, Kimmel, & Kieso, 2008). The return on assets ratio of Walmart increased 7.83% in 2014 to 8.04% in 2015 but went on to decrease to 7.26% in 2016. On the other hand, the return on assets ratio largely deteriorated from 4.42% in 2014 to -3.97% in 2015. However, in the subsequent year, the ratio went on to significantly rise to 8.35% in 2016. Between the two companies, it can be perceived that Walmart has had a steadier return on assets ratio compared to that of Target, which has been considerably inconsistent. This shows that the company invests properly on its assets. This implies that the company makes a return of 7.83 cents for every single dollar that is invested in the assets of the company. Walmart maximizes on the investment of its assets. One of the ways in which the management can improve the ratio is better utilization of the assets of the company to generate income. This can also be done through the acquisition of total assets, which can generate income. In turn, this will result in a greater return on assets ratio.

News Events

There happens to be several current national as well as international events connected to Walmart that are critical. Initially, the company had recently gone to court to file suits against the State of Texas insisting and asserting that the Commission of Alcoholic Beverage in the state have placed regulations and codes of practice that are discriminative to Walmart as well as other firms that are publicly traded simply by excluding them illegally from having the right to retail distilled spirits in their stores (Mitchell, 2015). This is a legal move that, if successful, will be of benefit to the company. This is for the reason that Walmart consumers will have easier and more convenient access to the products. This will in turn have a boost in the revenues of the retail stores in the state of Texas (Tolbert, 2015). Another major event that is of great significance to the company is the recent drop in the revenue generated from the company retail stores in China. It is well-known that China is indeed one of the best markets for the company. However, reports show that the performance levels in the nation has been one of the poorest among the over twenty-seven countries that Walmart operates (Bloomberg News, 2014). This is an area that necessitates research as it can cost the company a lot of revenue as well as have an adverse impact on the consumer base of the company. Another aspect that necessitates research and development from the company, particularly in the forthcoming periods, is the aspect of mobile banking. According to Maddox (2015), the company is joining forces with GoBank as it plans on entering into the business of internet banking. Walmart plans to work hand-in-hand with this financial institution so as to be able to offer online banking for its consumers. This will not only be able to increase the consumer base of the company but also be perceived as a new form of revenue stream. This news brings about a positive perspective of the company. For starters, in merging with GoBank, the company will be able to offer more and better services to the consumers. Greater revenue stream is a constructive and positive move for the firm.

In the same manner, there are news events that have shaped and influenced the financial information reported by Target Corporation. In accordance to Financial News Release (2015), Target entered into a settlement pact with MasterCard International in relation to the data breach that the firm experienced in the course of the end of the 2013 fiscal year. In particular, Target came to the agreement to offer funding of up to $19 million pre-tax. These costs were reflected in the liabilities of the company in the 2013 and 2014 financial results. The settlement was accustomed on issuers of at least 90% of the entitled MasterCard accounts agreeing to their alternative recovery propositions, either directly or by means of their sponsoring issuers, by May of 2015. Target plans to go on safeguarding itself forcefully against any evaluations made by MasterCard in the best interests of MasterCard issuers that do not agree to take their offers (Financial News Release, 2015). Another major news event is in relation to merger and acquisitions. In 2015, CVS Health made the announcement that it will make the acquisition of 1,600 pharmacies and 80 clinics owned by Target for an amount of $1.9 billion, with the strategic plan of running them as in-store shops. This purchase significantly improved the earnings generated by Target as reported in the financial statements (Thau, 2015). This news brought about positive perspectives from investors and other stakeholders. This is largely for the reason that the investors will perceive Target as being more responsible and accountable, particularly for the hack that had somewhat tarnished the firm's name.

Income Statement Analysis

1. Walmart Income Statement Analysis

2016

2015

Total Revenue

482,130,000

485,651,000

-0.73%

Cost of Revenue

360,984,000

365,086,000

-1.12%

Gross Profit

121,146,000

120,565,000

0.48%

Operating Expenses

Research Development

Selling General and Administrative

97,041,000

93,418,000

3.88%

Non-Recurring

Others

Total Operating Expenses

Operating Income or Loss

24,105,000

27,147,000

-11.21%

Income from Continuing Operations

Total Other Income/Expenses Net

81,000

113,000

-28.32%

Earnings Before Interest and Taxes

24,186,000

27,260,000

-11.28%

Interest Expense

2,548,000

2,461,000

3.54%

Income Before Tax

21,638,000

24,799,000

Income Tax Expense

6,558,000

7,985,000

Minority Interest

-386,000

-736,000

-47.55%

Net Income from Continuing Ops

15,080,000

16,814,000

-10.31%

Non-recurring Events

Discontinued Operations

285,000

Extraordinary Items

Effect of Accounting Changes

Other Items

Net Income

14,694,000

16,363,000

-10.20%

Preferred Stock and Other Adjustments

Net Income Applicable to Common Shares

14,694,000

16,363,000

-10.20%

2. Target Income Statement Analysis

2016

2015

Total Revenue

73,785,000

72,618,000

1.61%

Cost of Revenue

51,997,000

51,278,000

1.40%

Gross Profit

21,788,000

21,340,000

2.10%

Operating Expenses

Research Development

Selling General and Administrative

14,665,000

14,676,000

-0.07%

Non-Recurring

Others

2,213,000

2,129,000

3.95%

Total Operating Expenses

Operating Income or Loss

4,910,000

4,535,000

8.27%

Income from Continuing Operations

Total Other Income/Expenses Net

620,000

0

Earnings Before Interest and Taxes

5,530,000

4,535,000

21.94%

Interest Expense

607,000

882,000

-31.18%

Income Before Tax

4,923,000

3,653,000

34.77%

Income Tax Expense

1,602,000

1,204,000

33.06%

Minority Interest

Net Income from Continuing Ops

3,321,000

2,449,000

35.61%

Non-recurring Events

Discontinued Operations

42,000

-4,085,000

-101.03%

Extraordinary Items

Effect of Accounting Changes

Other Items

Net Income

3,363,000

-1,636,000

-305.56%

Preferred Stock and Other Adjustments

Net Income Applicable to Common Shares

3,363,000

-1,636,000

-305.56%

In analyzing the income statements of the two companies in the 2015 and 2016 financial years, it can be perceived that Target had a better financial performance compared to Walmart. To begin with, the total revenue, operating income, and net income generated by Walmart decreased by 0.73%, 11.21% and 10.20% respectively. On the other hand, with regard to Target, the corporation's total revenue, gross profit, operating profit and net profit generated increased by 1.61%, 2.10%, 8.27% and 305.56% respectively. This indicates that the company had a better financial performance. One of the ways in which Walmart can improve the income generated is through the reduction of expenses incurred by the firm. By being cost-effective, it implies that the total operating expenses incurred by the firm will be decreased and therefore the net income applicable to common shares will be much more superior. The same case applies to decreasing the costs of sales. This will also improve the gross profit generated by the company.