Target Corporation

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Target Corporation Powered By Docstoc
					Tommy Hutchison, Matt Dewey, WonWoo Lee
          Investment Research
           November 6, 2008
     Introduction / Company Overview
 Target is an American retailing company founded in
    Minneapolis in 1902
   Fifth largest retailer by sales revenue in the US
      Behind Wal-Mart, Home Depot, Kroger, and Costco
   Ranked #31 on the Fortune 500 and component of S&P
   Target is a chain of discount department stores that are
    about 95,000 to 135,000 square feet and carry regular
    products and goods, clothing, and a limited amount of
    groceries, mostly non-perishable
   Target Greatland and SuperTarget = larger stores
    Introduction / Company Overview
 Operates an “Expect More, Pay Less” philosophy
    Emphasizes Target’s position as a retailer focused on
     providing quality products at low prices
    Target has a special focus on design, which is unique for a
     discount retailer
    Attracts a relatively more wealthy customer base than
     most discount stores
 Target’s management is focusing on expanding the
  company’s operations within US by adding new stores
  and renovating and expanding existing ones
    End of 2006, total of 1,488 stores in US
    End of 2007, total of 1,591 stores in US
    Goal = 2,000 stores by 2011
             Investment Thesis
 Relatively safe buy

 A consumer staple

 Company shows great potential in becoming
  a good high yield investment with Bill Ackman
  (Pershing Square Capital) REIT plan
                Ackman REIT Plan
 Activist investor, Bill Ackman, is pushing Target to change
  its structure significantly to free up cash flow and
  generate a REIT (real estate investment trust) that would
  generate large dividends

 Ackman recently presented his plan to have Target spin
  off the land it owns into a new, publicly traded REIT to
  raise the company's stock price

 Ackman owns about 10% of Target’s shares outstanding
                 Ackman REIT Plan
 How plan would be carried out:
    Target would pay REIT about $1.4 billion a year under a
     75-year lease
    Target would still own actual buildings
    Target’s cash flow would improve significantly due to a
     change in tax liabilities, hence increasing earnings moving
    Tax laws allow for a REIT to remain exempt from income
     taxes as long as it distributes 90% of its earnings to
     shareholders via dividends
    Target would reduce its dividend to a nominal amount
     while providing a great yield from the REIT
    Target owns land under over a thousand stores
                 Ackman REIT Plan
 How plan would be carried out: (continued)
    Ackman claims the deal would result in a very safe
     dividend on the REIT since it would hold the physical
     buildings as collateral and they would be highly unlikely to
    The REIT would pay dividends twice per year on same day
     government announces CPI numbers, so dividend would
     essentially act as inflation protected instrument
                   Ackman REIT Plan
 Analysis (positives)
    The outcome would theoretically be a stronger Target with
     a now reduced dividend with improved cash flow and then
     a REIT with an above market yield for its given risk
    Ackman thinks the plan would eventually lead to a 100%
     increase in Target’s stock value
    Similar plan was suggested by Ackman in late 2005 to
          Plan was not enacted, but shares of MCD jumped from
           the mid $30s when he unveiled the plan to near $60 now
                  Ackman REIT Plan
 Analysis (negatives)
    Some investors are worried that a REIT spin-off could hurt
     profit margins
    Target is worried that its credit rating would likely be hurt,
     and it would raise the company’s cost of capital
    Target is also worried about the validity of assumptions
     that Pershing Square has made in their market valuations
     of Target and the REIT
    Target is also concerned about the reduction in the
     company’s financial flexibility due to the conveyance of
     valuable assets to the REIT and the large expense
     obligation created by the proposed lease payments, which
     could increase over time
            SWOT (Strengths)
 Focuses on wealthier crowd than the majority of its
  competitors through its メcheap but chicモ motto,
  therefore better protecting itself against changes in
  spending patterns than other similar companies,
  although Target still correlates strongly with
  macroeconomic trends.
 Consistent addition of around 100 stores each year
  keep steady growth.
 Addition and recent increase in the number of target
  superstores, which include grocery stores as well as
  general merchandise.
         SWOT (Weaknesses)
 Hampered by the fact that Wal-Mart generally has
 lower prices on products specifically generic drugs and
 therefore Wal-Mart controls many of the prices in the

 No intentions to expand internationally could hamper
 future growth.
        SWOT (Opportunities)
 Wal-Mart and other competitors fare worse in regards
 to current economic crisis than Target.

 Increased use in Target Credit Cards, “RedCards”.
                 SWOT (Threats)
 Decreasing prices of competitive firm will decrease
    expected results.
   Consumer boycotts and/or other organized activities.
   Changes in credit card use and default rates will decrease
    profits that Target accrues from its credit card operations
   Further recession, tax changes, inflation, and credit
    availability alter spending and can lead to decreased
   Changing energy costs change costs of operating stores and
    transportation goods and by affecting consumer spending
           Porter’s Five Forces
 Rivalry = extremely high as Target fights with
  competitors such as Wal-Mart, K-Mart and other small
  and large retail stores for consumers.
 Threat of Substitutes = High since one could consider
  its competitors substitutes and therefore a consumer
  could easily go to Wal-Mart instead of Target thus
  there is a high threat of substitutes.
 Buyer Power = pretty weak as there are a lot of buyers
  none of which can individually pose significant threats
  to Target by not buying their product.
            Porter’s Five cont.
 Supplier Power = Relatively weak as there are many
  competitive firms in the retail store market, although
  Wal-Mart does have some say over market prices
  therefore, one could say its neutral.
 Barriers to Entry = High, because it is extremely
  difficult to start up a retail store. Fixed costs such as
  property and construction of building are very
Income Statement
                Income Statement
 An additional $1.4 billion cost on Target’s income

 However, at least 90% of this cost will go to shareholders
  through dividends distributed by the REIT

 Increased cash flow
Balance Sheet
                    Balance Sheet
 Ackman is valuing Target’s land at $39 billion
 On their balance sheet, Target only has to value their
  land at $24 billion because they just need to account for
  the purchase price of the land and not the appreciation,
  and Target has likely owned some of their land for a long
 Property plant and equipment value would decrease
 Long term debt and liabilities would increase
    This is what scares Target about Ackman’s plan, as based
     on their new balance sheet, their debt rating would likely
     be hurt
          Competitor Analysis
 Target’s chief competitor is Wal-Mart.
 The average household income for Target customers is
 about $70,000 a year; by comparison, the average
 yearly income for a Wal-Mart customer is $59,000,
 below the overall US average of $65,000. This
 advantage in terms of customer wealth makes Target
 less vulnerable to market fluctuations than is Wal-
 Mart, because the wealthier consumers have spending
 patterns that are less elastic with respect to energy
 prices and general economic strength.
             Valuation Metrics
 Market Cap :28.49B        Market Cap :212.95B
 Trailing P/E :11.26       Trailing P/E:16.11
 Forward P/E:10.85            Forward P/E:14.10
 PEG Ratio: 0.96            PEG Ratio :1.42
 Price/Sales:0.48      Price/Sales:0.56
 Price/Book:2.32              Price/Book:3.31
Beta: .91
 Target = red               Wal-Mart = black
      DCF (original)

Click the invisible text box above for DCF
DCF (Ackman plan enacted)

   Click the invisible text box above for DCF
 While this may be an oversimplification, it is best to think about the
  Ackman REIT plan as forming two companies that really act as one
  and just transfer funds between each other. Shareholders receive
  stock in the new REIT company if it is eventually formed.
 Also, Ackman can help increase the value of Target Corporation
  stock even if only parts or none of his plan is enacted. (see
  McDonald’s example)
 While the execution of his plan may have a 50/50 chance of
  occurring, Target will likely have to do something to appease Ackman
  because he has too much power within the company, as his hedge
  fund owns 10% of TGT.
 Therefore, Target will eventually find one or way or another to unlock
  the value of its land (it owns over 90% of the land under its stores) to
  increase stock value for its shareholders.

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