This paper analyzes the financial condition of Target Corporation, a major discount general merchandise retailer. It examines Target's profitability through gross, operating, and net margins; evaluates cash flow from operations; and applies a range of financial ratios including current ratio, debt-to-equity, price-to-book, return on assets, inventory turnover, and fixed asset turnover. The paper also compares Target's performance with competitor Kmart and discusses the implications of Target's planned expansion into Canada. The analysis concludes that Target maintains a healthy, low-risk balance sheet with consistent returns, manageable leverage, and strong liquidity relative to its peers in the discount retail segment.
Target is a general merchandise retailer that competes in the discount segment of the market. Target has stores in every state except Vermont, and at the time of this analysis the company was expanding into Canada, adding 125 to 135 stores in that market. Including U.S. expansion, Target was projected to grow around 10% in the following year. Target competes as a cost leader, pitting it against Walmart and Kmart as direct competitors, and more broadly against other major retailers ranging from warehouse stores to department stores, discounters like Marshalls, and online retailers like Amazon. The key success factors for Target include operational excellence that allows it to remain price competitive, real estate selection, and the ability to differentiate itself from other retail outlets.
In the discount retailing industry, firms generally operate on a model that emphasizes delivering low costs to the customer. As a result, companies have very slim margins, and profits are generated primarily through high sales volumes. Target's income statements over the past several years highlight this dynamic. In FY2012, the company recorded a gross margin of 30.8%, the same as the prior year. The company's operating margin was 6.4% in FY2012 and 6.7% in FY2011. The net margins for those two years were 4.2% and 4.3%, respectively. These figures are consistent with what one would expect from a discount retailer. The slight differentiation that Target maintains allows it marginally higher margins overall compared with some competitors. The consistency of these margins at all levels across two years also indicates that Target has good control over both its pricing and its costs.
Cash flow from operating activities is a key measure of a company's ability to generate cash. In the most recent fiscal year, Target earned $5.4 billion in operating cash flow, compared with $5.2 billion the year before. Operating cash flow is generally significantly higher than net income because of the company's substantial depreciation expense. Target's cash outlays are typically a mix of capital expenditures, dividends, and share buybacks. The company scaled back its capital expenditures during FY2009 and FY2010 in response to the economic slowdown, but the expansion into Canada increased these again in the latest fiscal year.
A number of financial ratios can be used to understand Target's financial condition, including liquidity ratios, profitability ratios, operating performance ratios, and investment valuation ratios (Loth, 2012). The current ratio is a good measure of liquidity. For FY2012 this was 1.15, compared with 1.71 the prior year and 1.62 in FY2010. The decline was driven by $3.8 billion in long-term debt appearing as the current portion of long-term debt on the balance sheet, which increased current liabilities. Nevertheless, Target's current ratio remains above 1.0, meaning the company has sufficient assets on hand to meet its pending financial obligations.
Another important ratio covering long-run solvency is the debt-to-equity ratio. For Target this stood at 1.94, with debt composed of a mix of long-term debt and current liabilities. This figure is relatively high, as the company must service this debt out of its cash flows. However, Target has fairly steady operating cash flow and its business is not particularly volatile, with a beta of 0.89. The debt-to-equity ratio was 1.82 in FY2011 and 1.90 in FY2010, indicating that the overall debt level has been broadly stable. While Target could benefit from modest deleveraging, the debt burden is not severe enough to be a major concern.
The price-to-book ratio reflects the market's assessment of Target. At the time of analysis, the current market capitalization was $41.08 billion and the book value of equity (Q3 FY2013) was $16.532 billion, yielding a price-to-book ratio of 2.48. For reference, the P/B ratio was 3.28 at the end of FY2012 and 3.52 at the end of FY2011, suggesting some compression in the market's valuation premium over that period.
The return on assets for Target was 6.3% in FY2012, 6.7% in FY2011, and 5.6% in FY2010. This metric has fluctuated modestly with changes in the asset base and net income, but has remained range-bound across all three years, reflecting a stable and predictable business.
One important asset utilization measure for a general merchandiser is the inventory turnover ratio. A significant portion of Target's working capital is tied up in inventory, so the ability to convert that inventory to cash is critical. Additionally, many items at Target are seasonal in nature, making it important to move merchandise out of stores quickly before it loses value. The inventory turnover in FY2012 was 6.1, down from 6.13 in FY2011 and 6.34 in FY2010. These figures indicate a slight declining trend in Target's ability to move inventory quickly, which is a negative development for the company.
Another metric is the fixed asset turnover ratio, an operating performance measure. This was 2.4 times in FY2012, down from 2.6 times in each of the two prior years. The reduction reflects an approximate $4 billion increase in plant, property, and equipment during the latest fiscal year, most likely attributable to property acquisitions related to the Canadian expansion.
"Inventory turnover and fixed asset efficiency"
"Target's financials benchmarked against Kmart"
"Debt, flexibility, and expansion outlook"
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