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Financial Analysis Spring 2005 Peter Hwang Group 4 Sasibeh Beyene Janet Joines Mary Le Vanisha Mist

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Financial Analysis Spring 2005 Peter Hwang Group 4 Sasibeh Beyene Janet Joines Mary Le Vanisha Mist Powered By Docstoc
					                 Financial Analysis
                    Spring 2005
                    Peter Hwang
                      Group 4




Sasibeh Beyene    Janet Joines     Mary Le    Vanisha Mistry

          Ngoc-Linh Nguyen       Hang Nguyen-Xuan
Background Analysis

What is Target?
Target is America’s second largest
general merchandise retailer.




                       Expect More. Pay Less.
Where we came from:
1900s - 1950s
•   Founder George Dayton opens the first store named Goodfellows in downtown Minneapolis, Minnesota.
•   In 1946, the Dayton Company begins the tradition that keeps us strong today: 5% of federally taxable
    profits go back to the communities we serve.
•   In 1956, The Dayton Company opens Southdale, the world's first fully-enclosed two-level shopping
    center.

1960s
•   In 1962, the Dayton Company enters discount merchandising with the opening of its first Target stores.
•   In 1967, Dayton Corporation goes public with its first offering of common stock.
•   In 1969, the company merges with J. L. Hudson Company and adopts the name: Dayton Hudson
    Corporation (DHC)

1970s
•   For the first time, the corporation's revenues top $1 billion.
•   Dayton Hudson Corporation acquires Mervyn's to become the 7th largest U.S. retailer.
•   Target Stores becomes the corporation's largest revenue-producer by the end of the decade

1980s
•   Revenues more than double to $10 billion.
•   In 1984, Dayton's and Hudson's combine to form Dayton Hudson Department Store Company, the largest independent
    U.S. department store.
1990s
•   Dayton Hudson acquires Marshall Field's in 1990.
•   In 1994, Bob Ulrich becomes Chairman and CEO of the corporation.
•   A year later, Target launches the first-ever discount store credit card
      (Target Guest Card), and opens its first SuperTarget stores.
•   In 1997, Target introduces Take Charge of Education.
•   In 1998, the company acquires Rivertown Trading and launches its direct mail and e-
    commerce efforts.
•   The same year, Target acquires Associated Merchandising Corporation (AMC), a global
    sourcing organization.
•   By the end of the decade, revenues exceed $30 billion.



2000 - 2003
•   Dayton Hudson Corporation begins a new era with a new name: Target Corporation.
•   The next year, Dayton Hudson Department Store Company changes its name and all of
    its stores names to Marshall Field's.
•   Also in 2001, Target rolls out its Target Visa card nationwide.
•   In 2002, the company celebrates the 40th anniversary of Target Stores and the 150th
    anniversary of Marshall Field's, and marks the 35th year of being a publicly-traded
    company.
3 Operating Segments
             Store Count in the United States-2003



                       4%
           17%
                                                Target

                                                Mervyn's California

                                                Marshall Field's

                                       79%




Target: an upscale discount chain located in 47 states and has
   about 1,225 stores.

Mervyn’s California: a middle-market promotional department
  store located 14 states in the West, South and Midwest and
  has about 266 stores.

Marshall Field’s: a traditional department stored located in 8
  states in the upper Midwest which has only 62 stores.
Revenues from Operating Segments
                                                            Target
                                                            Mervyn's
                                                            Marshall Field's
                            5%      1%
                       7%                                   Other




                                                      87%



          Company                Revenue (millions)            Percentage of Revenue
 Target                     $                41,346.00                         87%
 Mervyn's California        $                 3,553.00                         7%
 Marshall Field's           $                 2,584.00                         5%
 Other                      $                   680.00                         1%
             Total          $                48,163.00                     100%
2004
•   Introduced the Target Business Card to enhanced reporting features and
    flexible payment terms for smaller business guests.



•   Target to a T was lunched on Target.com, the apparel program allowed
    guests to customized the color, pocket-style and fit Mossiomo jeans for
    women and Merona shirts and Cherokee chinos for men.



•   Target Corporation sold Marshall Field's and Mervyn's businesses to focus
    on its primary brand and growth vehicle: Target Stores
How quickly had Target grown?
    o   In 1962, first Target store opened
    o   By 1969, 17 stores in 4 States
    o   20 years later, 399 stores in 31 states
    o   Today, 1,250 stores in 47 states
How many employees?
Over 270,000 team members, all with diverse backgrounds and talent

Who are our typical guests?
• Young, well-educated, moderate-to-better income families with active lifestyles
• The average age of our guests is 45, the youngest of all major discount retailers
• 80% are female and 40% have children at home

How many stores?
• More than 1,250 stores in 47 states
• More than 100 SuperTarget stores
• 1,000 photo labs
• 880 pharmacies
• 250 optical centers
• 150 portrait studios
                                                 Market Capitalization of Top Five Companies
                                                  3.67%

                                            4.16%                                 Wal-Mart Stores, Inc.
                                         5.36%                                    Target Corporation
                                14.46%                                            Kohl's Corporation
                                                                                  J.C. Penney Compnay, Inc.

                                                                                  Sears, Roebuck & Co.

                                                                     72.36%




Company                     Market Capitalization (mil)             Percentage of Market Share
Wal-Mart Stores, Inc.              220636.578                                      72.36%
Target Corporation                  44081.816                                      14.46%
Kohl's Corporation                   16350.57                                       5.36%
J.C. Penney Company, Inc.           12672.233                                       4.16%
Sears, Roebuck & Co.                11192.673                                       3.67%
Total                               304933.87                                      100.01%
                                        Sales of Top Five Com panies


                            4.92%                             Wal-Mart Stores, Inc.

                        6.13%                                 Target Corporation
                    8.83%                                     Sears, Roebuck & Co.
              11.55%                                          Coles Myer Ltd. (ADR)
                                               68.57%
                                                              Kmart Holding Corporation



Company                                   TTM Sales (millions)           Percentage of Top Sales
Wal-Mart Stores, Inc.               $                   280,360.00                 68.57%

  Target Corporation                $                   47,216.00                  11.55%

Sears, Roebuck & Co.                $                    36,099.00                    8.83%
Coles Myer Ltd. (ADR)               $                    25,056.73                    6.13%
Kmart Holding Corporation           $                    20,120.00                    4.49%
Total                               $                   408,851.73                 99.57%
                           Fun Facts
•IT does not play music in its stores, commonly known as elevator music and often
distributed by Muzak

•Target calls its customer “guest” and its employees “team members”

•There is also a Target operating as a department sore under the same logo and
similar style in Australia with over 150 stores. Coles Myer owns this brand in
Australia.

•Target Stores made a corporate decision for not allowing the Salvation Army to
station the red kettles and bell ringers at store entrances.
Board of Directors
Financial Ratios
Growth Rates %                                          Company         Industry   S&P 500
Sales (Qtr vs year ago qtr)                                -3.30         -10.20      7.10
EPS (YTD vs YTD)                                          137.00          2.00       7.90
EPS (Qtr vs year ago qtr)                                  77.80         -15.90     13.80
Sales (5-Year Annual Avg.)                                 8.01           7.00       3.44
EPS (5-Year Annual Avg.)                                   16.92         12.95       0.80
Dividends (5-Year Annual Avg.)                             7.10          13.10       1.83


                                 Overall Target’s Growth Rate is FAIR

Price Ratios                                            Company         Industry   S&P 500
Current P/E Ratio                                          15.5           24.8       23.1

P/E Ratio 5-Year High                                      30.3           53.9       64.8
P/E Ratio 5-Year Low                                       12.7           19.2       16.9
Price/Sales Ratio                                          0.93           0.79       1.64
Price/Book Value                                           3.65           4.52       3.22
Price/Cash Flow Ratio                                      10.10         16.40      13.90


                              Overall Target’s Price Ratio is SATISFACTORY
Financial Ratios cont.

 Profit Margins %                                     Company     Industry   S&P 500
Gross Margin                                             33.5        24.6      47.1
Pre-Tax Margin                                           6.5         5.1       10.7
Net Profit Margin                                        6.6         3.2       7.3
5Yr Gross Margin (5-Year Avg.)                           32.6        24.0      47.4
5Yr PreTax Margin (5-Year Avg.)                          5.8         4.9       9.2
5Yr Net Profit Margin (5-Year Avg.)                      3.6         3.0       5.7

                                 Overall Profit Margin is SATISFACTORY

 Financial Condition                                  Company     Industry   S&P 500
Debt/Equity Ratio                                        0.73        0.44      1.24
Current Ratio                                            1.6         1.2       1.5
Quick Ratio                                              0.7         0.3       1.0
Interest Coverage                                        6.3         12.7      3.3
Leverage Ratio                                           2.6         2.4       6.1
Book Value/Share                                        13.85       10.33     11.40

                           Overall Target’s Financial Condition is FAIR
Financial Ratios cont.

 Investment Returns %                                     Company       Industry      S&P 500
Return On Equity                                             26.0            18.5       14.3
Return On Assets                                             10.1             7.8       2.4
Return On Capital                                            15.0            12.8       6.4
Return On Equity (5-Year Avg.)                               18.0            17.9       11.8
Return On Assets (5-Year Avg.)                                6.1             7.4       2.0
Return On Capital (5-Year Avg.)                               9.2            12.1       5.5


                    Overall Target’s Investment return is Excellent

Management Efficiency                                     Company       Industry      S&P 500
Income/Employee                                             10,000           6,000     23,000
Revenue/Employee                                            148,000         176,000   310,000
Receivable Turnover                                           9.8            52.3       7.0
Inventory Turnover                                            5.0             6.9       8.1
Asset Turnover                                                1.5             2.4       0.3



                                  Overall Management Efficiency is : Poor
Holding Period Return
                                                   2005 (12/31)    2004      2003    2002

1.Background
    Analysis:

. HPR = Ending Price – Beginning Price +
    Distributions                                                 0.3563   -0.3433


                     Beginning Price

                           Earnings growth rate
                                estimate (2005)         0.1350


                                       Dividend           0.33      0.30     0.26     0.24


                                           Price         56.60     37.96    28.21    43.35


                                           HPR          0.4997    0.3563   -0.3433


                                                    (expected)
     Free Cash Flow
                          2005    2004    2003    2002    2001


NI                                1,841   1,654   1,368


(+)Deprecitaion                   1,320   1,212   1,079


(-)Capital Expenditures           2,919   3,189   3,131


(-)∆ in working capital            202    1,818   1,591
(+) ∆ in long-term debt             31    2,098   2,454
FCFE                        81      71      -43    179


                          (Mil)   (Mil)   (Mil)   (Mil)
                                                     2005    2004     2003    2002    2001


Note:


Capital Expenditures                                         2,919    3,189   3,131

Additions to property, plant, and equipment                  3,004    3,221   3,163


(-) Disposition of property and equipment                      85       32      32




∆ in working capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)]       202     1,818   1,591


CA                                                          12,928   11,935   9,648   7,304


CL                                                           8,314    7,523   7,054   6,301




∆ in long-term debt =LTD02-LTD01                               31     2,098   2,454

LTD                                                         10,217   10,186   8,088   5,634
                    Discounted Cash Flow Model

                                                                                      2005          2004          2003          2002

P0=(FCFE1/Shares0)/(Ke0-G1)        FCFE                  12/31/2005           80,585,000      71,000,000    -43,000,000   179,000,000
                                                                          895,400,000,00
ke0=[(FCFE1/shares0)/P0] +G1       shares outstanding                                  0      911,808,051   909,801,560   905,164,702

G1=(FCFE1-FCFE0)/FCFE0             G                      12/31/2005                 0.1350       2.6512        -1.2402



                                   P                      3/23/2005                   49.99        37.96          28.21         43.35



                                   Ke(required return on equity)                    0.1350        0.1373        2.6539        -1.2413



.ke(Constant dividend growth model)



Po=D1/(ke-G)=>Ke=(D1/Po) +G                                                                       0.1087        0.1645        0.0893



EX: Ke2001=(D2002/P2001)+g2002; D2002=D2001(1+g2002); g2002=(D2002 - D2001)/D2001
Risk Analysis
                                        2005    2004     2003     2002     2001

    Beta TGT                        0.8311     1.0008   1.0278   1.1418   1.1546


    Beta= COV(RTGT, RS&P500)/VAR(RS&P500)


                                                2004     2003     2002     2001


    Unlevered Beta                             0.4442   0.4294   0.4710

    [Equity/(Equity +((1-T)Debt))]*
        BetaEquity=Beta_unlevered


    Equity                                     11,065    9,443    7,860


    Debt                                       20,327   19,160   16,294

    Income from continuing operations before
        income taxes                            3,519    3,264    2,680


    Provision for income tax                    1,119    1,022     839


    Tax rate                                   0.3180   0.3131   0.3131
Cost of Capital

                                                                           2005(3/23)    2004     2003      2002      2001

.Ke (CAPM)                             Rf                                     0.0275    0.0119   0.0102   0.0163    0.0386

Ke= Rf + Beta(Rm-Rf)                   Rm-Rf                                  0.0190    0.1182   0.3206   -0.2261   -0.1497



                                       Beta                                   0.8311    1.0008   1.0278   1.1418    1.1546



http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html




                                       Ke(required return on
                                           equity)                           0.0433     0.1302   0.3397   -0.2419   -0.1342

                                       The company is currently under-priced because
                                         Ke (DCF model) > Ke (CAPM); 0.1350 > 0.0433
      Cost of Capital and Optimal Capital Structure

                                                    2004     2003     2002


 We= Equity/(Equity+Debt+Preferred Stock)          0.3525   0.3301   0.3254


 Wd=Debt/(Equity+Debt+Preferred Stock)             0.6475   0.6699   0.6746


 Ke                                                0.1087   0.1645   0.0893


 Kd                                                0.0489   0.0519   0.0692




 WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp            WACC   0.0599   0.0782   0.0611




*Target Corp issued no preferred stock.
                   Capital Structure
                          2002
                                             Target’s capital structure remains
                                             consistent between years 2002-2004.
                                    Equity
                   Debt                                      2003


                                                                     Equity
                                                      Debt


The company appears to be composed of
65% debt and the remaining 35% equity, bad
when compared to the industry.

                                                       Industry 2004
                   2004


                           Equity                                   Equity
                                                     Debt
            Debt
               MM Proposition
        0.09
        0.08
        0.07
        0.06
 WACC




        0.05
        0.04
        0.03
        0.02
        0.01
           0
           0.645   0.65   0.655   0.66   0.665    0.67   0.675   0.68
                              Debt/Total Assets

A model cannot be determined based on three years worth of data.
Market Efficiency

         Company Specific News
         Target Corporation Reports
         February Sales From Continuing
         Operations Up 16.1 Percent
         March 03, 2005
         • Good News
         • No Form


         Two members of the Board of
         Directors Retired
         March 09, 2005
         • Bad News
         • Weak Form
   Market efficiency cont.

Non-company News

Fed Funds Rates Increased
March 23, 2005 10:35 AM
• Bad News
• Weak form
5 Year Stock Price Evaluation
 Strengths and Weaknesses
Strengths
• 5% Ownership Does not Exist
• High Gross Margin Ratios
• High Return on Equity & Return on Assets
• Increasing Net Income
• Low Beta
• Stable WACC

Weaknesses
• High Debt to Total Asset Ratio
• Fluctuating FCFE
         Buy, Hold or Sell?
                                                         Mean Recommendation
                                                         Conversion Table
                                                         1.0 =          Strong Buy
                                                         1.1 thru 2.0 = Moderate Buy

                                                         2.1 thru 3.0 = Hold
                                                         3.1 thru 4.0 = Moderate Sell

                                                         4.1 thru 5.0 = Strong Sell




Recommendations   Current   1 Month Ago   2 Months Ago           3 Months Ago

Strong Buy          8           9              9                       8
Moderate Buy        4           4              4                       5
Hold                11          10            10                       9
Moderate Sell       0           0              0                       0
Strong Sell         0           0              0                       1
Mean Rec.          2.11        2.02           2.02                    2.15
As a group, we also say:




             HOLD!

				
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