Target vs. Walmart Financial Analysis: Ratios & Performance

Company Overviews

Walmart Stores, Inc. was originally established in 1945 and today operates retail stores in over twenty-seven countries. The company is divided into three key segments: Walmart International, Walmart United States, and Sam's Club. Walmart's business encompasses restaurants, superstores, retail stores, and warehouse clubs. The company also conducts e-commerce through its website, Walmart.com. Products sold in Walmart's retail stores include baby products, healthcare products, household goods, electronics, books, automotive products, clothing, furnishings and décor, alcohol, groceries, paper products, and much more. The Walton family controls the company, owning approximately forty-eight percent of its shares. Walmart was founded by Sam Walton, which explains why the family retains majority ownership of the business (Walmart Website, 2016).

Target Corporation is the second-largest retailer in the United States, behind Walmart. The company was founded by George Dayton, and its first store opened in 1962, with the parent firm at the time known as Dayton Corporation. As Target became the division generating the highest earnings within the firm and drove nationwide expansion, the parent company was renamed Target Corporation in the year 2000. In recent years, the company experienced a major security breach involving consumer data, and its Canadian subsidiary failed. However, the firm is expected to undergo a significant rejuvenation in the United States. The company's central offices are located in Minneapolis, and its leadership is headed by Brian Cornell, Chief Executive Officer. Target offers a wide variety of products, including clothing and apparel, furniture and fixtures, entertainment products, electronics, health and beauty products, and toys (Target Corporation Website, 2016).

Profitability Ratios

1. Operating Profit Margin

Walmart

2016: Income from Operations — 24,105,000 | Sales — 482,130,000 | Operating Margin — 0.04999689
2015: Income from Operations — 27,147,000 | Sales — 485,651,000 | Operating Margin — 0.05589817
2014: Income from Operations — 26,872,000 | Sales — 476,294,000 | Operating Margin — 0.05641893

Target

2016: Income from Operations — 4,910,000 | Sales — 73,785,000 | Operating Margin — 0.06654469
2015: Income from Operations — 4,535,000 | Sales — 72,618,000 | Operating Margin — 0.06245008
2014: Income from Operations — 4,779,000 | Sales — 71,279,000 | Operating Margin — 0.06704640

2. Net Profit Margin

Walmart

2016: Net Income — 14,694,000 | Sales — 482,130,000 | Net Profit Margin — 0.03047726
2015: Net Income — 16,363,000 | Sales — 485,651,000 | Net Profit Margin — 0.03369292
2014: Net Income — 16,022,000 | Sales — 476,294,000 | Net Profit Margin — 0.03363889

Target

2016: Net Income — 3,363,000 | Sales — 73,785,000 | Net Profit Margin — 0.04557837
2015: Net Income — -1,636,000 | Sales — 72,618,000 | Net Profit Margin — -0.02252880
2014: Net Income — 1,971,000 | Sales — 71,279,000 | Net Profit Margin — 0.02765190

3. Return on Assets

Walmart

2016: Net Income — 14,494,000 | Total Assets — 199,581,000 | Return on Assets — 0.072622143
2015: Net Income — 16,363,000 | Total Assets — 203,490,000 | Return on Assets — 0.08041181
2014: Net Income — 16,022,000 | Total Assets — 204,751,000 | Return on Assets — 0.07825114

Target

2016: Net Income — 3,363,000 | Total Assets — 40,262,000 | Return on Assets — 0.083527892
2015: Net Income — -1,636,000 | Total Assets — 41,172,000 | Return on Assets — -0.03973574
2014: Net Income — 1,971,000 | Total Assets — 44,553,000 | Return on Assets — 0.04423945

The operating profit margin provides a measure of the profit level generated by a company once variable costs are paid. Specifically, it indicates the percentage of sales revenue that remains after operational costs are covered, reflecting how effectively a company manages its revenue and controls operating costs (Ross, Westerfield, & Jaffe, 2013). Walmart's operating margin consistently declined over the past three fiscal years, falling from 5.64% in 2014 to 5.59% in 2015 and further to 5.00% in 2016. Target's operating profit margin, by contrast, was more variable: it declined from 6.70% in 2014 to 6.24% in 2015, then rose to 6.65% in 2016. Over the three-year period, Walmart's operating profit margin was lower than Target's in every year, indicating that Target is more effective at generating income from operations. For instance, in fiscal year 2016, Target generated a return of 6.65 cents for every dollar of sales, while Walmart generated only 5 cents. One way in which management can improve this ratio is to reduce the cost of sales, which would directly improve operating income.

Similar to the operating profit margin, the net profit margin is a key metric for analysts and other stakeholders, indicating a company's overall profitability. It represents the percentage of sales revenue remaining after all expenses have been paid — essentially, how much profit a company derives from its total revenues (Ross, Westerfield, & Jaffe, 2013). Walmart's net profit margin remained relatively stable at approximately 3.34% in both 2014 and 2015 before declining slightly to 3.05% in 2016. Target's net profit margin, on the other hand, was highly inconsistent: it fell sharply from 2.77% in 2014 to -2.25% in 2015, then rebounded to 4.56% in 2016. Although Target posted a superior net profit margin in 2016, Walmart demonstrated far greater consistency across all three years. Walmart generated a steady return of approximately 3 cents per dollar of sales, while Target swung from a loss of 2 cents to a gain of 4 cents. Management can improve net profit margin by reducing overall expenses, which would increase net income and thus expand the margin.

The return on assets ratio measures how effectively a company uses its assets to generate profit. It is calculated by dividing net income by total assets (Weygandt, Kimmel, & Kieso, 2008). Walmart's return on assets rose from 7.83% in 2014 to 8.04% in 2015, then fell to 7.26% in 2016. Target's ratio was far more volatile, deteriorating from 4.42% in 2014 to -3.97% in 2015 before rising sharply to 8.35% in 2016. Between the two companies, Walmart has maintained a steadier return on assets, suggesting that it invests more consistently in productive assets. The company generates approximately 7.83 cents for every dollar invested in its assets. Management can improve this ratio by better utilizing existing assets to generate income or by acquiring assets with strong income-generating potential, both of which would increase the return on assets ratio.

News Events Affecting Financial Performance

Several recent national and international events are relevant to Walmart's financial position. First, the company filed suit against the State of Texas, asserting that the Texas Alcoholic Beverage Commission had imposed regulations that discriminated against Walmart and other publicly traded firms by illegally excluding them from the right to sell distilled spirits in their stores (Mitchell, 2015). If successful, this legal action would benefit the company by giving consumers easier access to these products, thereby boosting retail revenues in Texas (Tolbert, 2015). Second, a significant concern is the decline in revenue from Walmart's retail stores in China. Although China is one of Walmart's most important markets, performance there has ranked among the poorest of the more than twenty-seven countries in which the company operates (Bloomberg News, 2014). This issue warrants further research, as continued underperformance could cost the company substantial revenue and erode its consumer base in that region. Third, the company is exploring mobile and online banking through a partnership with GoBank. According to Maddox (2015), Walmart plans to collaborate with GoBank to offer online banking services to its customers. This initiative could expand the company's consumer base and create a new revenue stream, representing a positive strategic development for the firm.

Target Corporation has also been shaped by several significant news events. According to a Financial News Release (2015), Target reached a settlement agreement with MasterCard International in connection with the data breach the company experienced at the end of fiscal year 2013. Under the agreement, Target agreed to provide funding of up to $19 million pre-tax. These costs were reflected in the company's liabilities as reported in its 2013 and 2014 financial results. The settlement was contingent on issuers of at least 90% of the eligible MasterCard accounts agreeing to their alternative recovery proposals — either directly or through their sponsoring issuers — by May 2015. Target indicated it would continue to defend itself vigorously against any claims by MasterCard on behalf of issuers who chose not to accept the offer (Financial News Release, 2015). Another major event involved mergers and acquisitions: in 2015, CVS Health announced it would acquire 1,600 Target pharmacies and 80 clinics for $1.9 billion, with plans to operate them as in-store shops. This transaction materially improved Target's reported earnings (Thau, 2015) and was received positively by investors and other stakeholders, who viewed it as a sign that Target was taking responsible steps to rebuild its reputation following the data breach.