History
Target Corporation is an American retailing company with its headquarters in Minneapolis, Minnesota. It is the second larges discount retailer in the United States behind Wal-Mart Stores Inc.
Target Corporation history has its roots in 1902, when George Dayton first launched the Goodfellow Dry Goods Store in Minneapolis. The business experience rapid growth and was renamed Dayton Company in 1911. The company acquired an Oregon-based Lipmans department store company, Portland, in the 1950s. This was followed by the opening the world’s maiden fully enclosed double-level shopping center, Southdale, in the Minneapolis suburb of Edina. Shortly thereafter, the company transformed into a retail chain following the opening of its second store in Southdale.
In May 1962, the Dayton Company opened its first Target discount store in Roseville, Minnesota. The new subsidiary was named Target Stores. It did not fare well in the initial years but found its footing in 1965, where it reported first gains amounting to $39 million in sales. At the moment Target Stores had increased in stores in Minneapolis to five. However, Target Stores expanded further outside of Minneapolis and opened a couple of stores in Denver and Colorado. Its sales was in excess of $60 million at the time. When 1967 checked in, Dayton Corporation went public with its initial offering of common stock and increased its Target stores in Minnesota to nine units. By 1970, Target Stores had expanded to 24 units earning the company $200 million in sales.
In 1972, Target Stores experienced another significant transition phase where it registered its first decrease in profits since its inception years. This was attributed to the chain’s rapid expansion together with the lack of experience in discount retailing on the part of its top executives. The chain’s great loss in operational revenue was attributed to overstocking along with the practice of carrying goods over several years in total disregard of the inventory and storage costs. Consequently, Stephen Pistner took over from Dayton Hudson as Target Stores’ chief executive officer in 1973. The new management was able to salvage the chain by marking down merchandise so as to clean out its overstock and leaving only a single new unit to be opened that year. Target Stores added two more stores, making it a total of 49 units in nine states. They all earned the chain a whopping $511 million in sales in 1975, making it Dayson Company’s top revenue producer.
Up to 1981, Target Stores’ expansion was limited to Central United States. In the following year, however, the chain spreading to the West Coast of the United States with its distribution located in Los Angeles. The chain store steadily expanded to 167 units earning $2.41 billion in sales in 1983 and increased to 215 stores and sales total of $3.55 in 1984.
In 2000, the Target Corporation name was adopted to replace that of Dayton Hudson Corporation.at the moment, Target Stores contributed between 75 percent and 80 percent of all of Dayton Hudson Corporation’s sales. The store expanded to 977 stores in 46 states and their total sales reached $29.7 billion at the close of 2000. By 2002, Target Stores accounted for 84% of the revenues of the parent company.
Since its inception in 1902, Target has been on a mission to distinguish itself from other rival discount retailers through a more “up-style” selection. To this effect, Target has succeeded in carving out a niche for itself by focusing on a rather hip, stylish brand image and products. This is to mean the company has be strategic enough not to concentrate purely on price competition. Target Corporation earns most of its sales from its everyday items in addition to its inexpensive higher quality brand name product lines like Method, Michael Graves, Issac Mizrahi, and Mossimo.
Target Corporation’s Product line
Target Corporation is a top operator of general merchandise stores in the United States. It offers an array of products as follows:
a) Household essentials – e.g. beauty, pharmacy, baby care, personal care, paper products and cleaning
b) Hardlines – e.g. video game hardware and software, electronics, computer software, music, books, sporting goods, toys, and movies.
c) Apparel and accessories – e.g. apparel for men, women, boys, girls, newborns, infants, toddlers, intimate apparel, accessories, jewelry, and shoes.
d) Home furnishings and décor products – e.g. furniture, kitchenware, lighting, small appliances, home décor, home improvement, bed and bath, and automotive products.
e) Seasonal merchandise – e.g. patio furniture, and holiday décor
f) Food and pet supplies – e.g. dry grocery, frozen food, dairy, beverages, snacks, candy, deli, produce, meat, bakery, and pet supplies.
Target Corporation offers its general merchandise products through private-label, as well as under exclusive licensed and designer brands. Furthermore, it provides in-store amenities. The products are also sold through the Corporation’s Website, Target.com. The company has a network of distribution centers through which it distributes it merchandise besides third parties and direct shipping means. In addition, the company provides credit to guest using its branded proprietary credit card, the Target Card, Target Visa and Target Debit Card.
Senior management
For decades, Target Corporation has shown exemplified corporate governance practices which has contributed greatly to its success in the industry. The company’s practices and policies adhere to those founded by the founders of the company, Dayton brothers. As such the senior management has strong beliefs pertaining to good corporate governance such as an independent board that is highly accountable to the company’s shareholders. Since 2009, Target Corporation has been under the able leadership of Gregg Steinhafel.
Target Corporation has achieved a lot under the leadership of Gregg Steinhafel. The number of locations for the company has almost tripled while sales have increased more than four times. This has made Target Corporation one of the most respected and admired brands in the retail industry, both domestically and internationally. During the tenure of Steinhafel, the Corporation has achieved an annualized total return of 18 percent on its shares.
Overview of nearest competitors
The retail industry is by nature a highly competitive one. Target Corporation has a several major competitors in the industry which include Wal-Mart Stores Inc., Kmart Corporation, Sears, Roebuck & Company, Federated Department Stores, May Department Stores, J.C. Penney Company Inc., Dillard’s Inc., Kohl’s Corporation, and Saks Inc. however the major rivals of Target Corp are Wal-Mart Stores, Inc., The Home Deport, Kroger, Kroger, Kmart Corp., and Costo Wholsesale Corp. They all deal in the same products and offer same services as does Target Corp.
Generally, Target Corporation has been able to hold off the intense competition from rivals through a number of mechanisms. These include: differentiating of its shopping experience through creation of attractive value proposition as a result of combining price, convenience, merchandise assortment, marketing efforts and guest service. In addition, the positive guest perception of Target Corporation’s cleanliness and safety of their stores, together with its in-stock levels have been sources of competitive edge in the industry.
Target has fought off competition through their own website, internet advertising, mergers and acquisition as well as partnerships. Through www.target.com, an e-commerce corporate domain, Target facilitates a team called Target direct which runs online marketing initiatives. Similarly, the Corporation has undertaken aggressive expansion of its store outlets in such areas as Arizona, Alabama, California, Ohio, and Texas. The company has also expanded its distribution centers in California and Rialto to boost its marketing.
Target Corporation has also worked to expand its market and distributional coverage through mergers, acquisitions, and partnership. For example, the company has entered into partnership and cooperation engagements with Amazon.com and American Online on strategic alliance. Target Corp. and AOL also established a multi-year strategic alliance, joint marketing & marketing initiatives in 2000.
Figure 1. Target direct competitor comparison as of 2011
Target Corporation Costco Wholesale Corporation Wal-Mart Stores Inc Industry
Market Cap: 40.79B 41.97B 252.04B 11.83B
Employees: 365,000 92,000 2,200,000 29.61K
Qtrly Rev Growth (yoy): 0.06 0.08 0.09 0.07
Revenue (ttm): 70.80B 95.10B 455.78B 9.10B
Gross Margin (ttm): 0.30 0.12 0.25 0.30
EBITDA (ttm): 7.49B 3.46B 35.30B 975.80M
Operating Margin (ttm): 0.08 0.03 0.06 0.06
Net Income (ttm): 2.94B 1.58B 16.08B N/A
EPS (ttm): 4.33 3.58 4.64 2.42
P/E (ttm): 14.24 27.10 16.05 24.20
PEG (5 yr expected): 1.26 1.89 1.81 1.70
P/S (ttm): 0.57 0.44 0.55 0.83
Target Corporation recorded revenues of $67,390 million in the financial year ended January 2011 (FY2011), which represented a 3.1% increase over FY2010. Its operating profit was $5,252 million in FY2011, representing a 12.4% increased over FY2010. The net profit for the Corporation was $2,920 million in FY2011, representing an increase of 17.4% over FY2010.
Walmart reported a solid financial performance for the same fiscal year. It increased it net sales to $419 billion (34 percent) and more than $25 billion (6.4 percent). Further, its diluted earnings per share increased 12 percent to $4.18 per share. The company ended the year with nearly $11 billion in free cash flow.
The main competitive advantage of Target Corporation over Wal-Mart is its customer base: while the average household income for a Wal-Mart customer is a mere $35,000 annually, that of Target’s customer is $50,000 a year. Similarly, Target has an edge over Wal-Mart because of its quality-at-value-prices strategies targeted at higher-income demographics, where sales are not influenced by price alone. On the other hand, Wal-Mart relies on low prices for its products, something which puts the company at a disadvantage when it comes to promoting higher-quality products or private labels that go for higher prices. Therefore, the higher-income customer base of Target Corporation gives it more stability compared to Wal-Mart, especially with increase in energy costs and slow in the real estate market.
Kmart is the second major competitor of Target Corporation. However, Kmart has reported consistent declining sales since the turn of the 21st century and thus lost significant market share to the two leading companies.
Figure 2. 2011 financial review of Target’s main competitor
Source: http://www.walmart.com/
Economic forecast for the industry
Players in the retail industry must remain cautiously optimistic pertaining to the future business outlook. It is expected that there will continue to be modest improvements in revenue earning and hiring in the near future. With the recovery of the US economy not expected until 2014 or beyond, the longer term outlook of the retail industry remains guarded. With slow positive momentum continuing to be experienced at the moment, players in the industries plan to step up their spending in priority areas such as information technology. There is bound to increased focus on online shopping, e-mail campaigning, utilization of social media platforms and mobile technologies to do retailing business. Going forth, it is almost certain the growth of a company will depend on its ability to add and retain customers.
Figure 2. Key determinants of company’s revenue growth in retail industry.
(KPMG, 2012)
Characteristics of common stocks
Common stock refers to a form of equity that represents ownership of a firm. As such, common stockholders can be said to be residual owners of a corporation as their claim to earnings and assets remains after settling the initial claims of different creditors and preferred stockholders. This also translates the common stockholders hold the final risks and realize the full rewards of ownership. However, the stockholders have limited liability owing to the fact they cannot lose money above what they invested in the common stock (Hallman & Rosenbloom, 2003).
Common stock lacks a maturity date although it exists as long as the corporation continues to exist. They also lack upper limit on the payment of its dividends. The dividend payments are required to be declared each period (often quarterly) by the corporation’s board of directors.
The equity claim element of common stock means that the holders have voting rights and claim to the residual income of the corporation. When residual income is invested in the firm, it increases the market value of the common stock because of the liabilities reduced or assets acquired. The dividend paid to common stockholders as determined by the ability and willingness of the company to pay. The value of a common stock is equivalent to its current value of all future dividends expected to be received by the stockholder. Furthermore, common stockholders have the right to inspect the firm’s books, meaning they are supplied with quarterly and annual reports of the corporation (Powell & Baker, 2005).
Characteristics of bonds
i) Claims on assets and income – bonds are honored first before common stock and preferred stock are settled in the face of insolvency of the corporation. They are also afforded first claim on income (Keown, 2003). Failure to pay the interest on bonds can make bond trustees to classify the corporation of insolvent and throw it into bankruptcy.
ii) Par value – this refers to the face value, which is returned to bondholders when they mature. Corporate bonds often come in denominations of $1,000 and their prices are quoted as a percentage of the bond’s par value.
iii) Coupon interest rate – this reflects the percentage par value of the bond which will be paid out yearly in form of interest.
iv) Maturity of the bond is the length of time until the issuer of the bond returns the par value to the bondholder and then terminates or redeems the bond. A bond that matures within a year is more predictable and therefore less risky than a one that matures in a long time such as 20 years (Keown, 2003). Thus, in general, the longer the maturity time, the higher its interest rate. Also, all factors held constant, a longer term bond often fluctuates more compared to a shorter term bond.
v) Current yield on a bond is the ration of the annual interest payable to the bond’s present market price. It equals the annual interest payment divided by the market price of the bond. (Keown, 2003).
Recommended
Target Corporation has consistently dividends on its common stock since 1965 besides increasing its payments to common shareholders annually for the last 44 years. Therefore, an investor looking forward to invest in Target’s common stock has everything to gain.
References:
Baker, K. H. & Powell, E. G. (2005). Understanding Financial Management: A Practical Guide. New York: John Wiley & Sons.
Hallman, V. G. & Rosenbloom, S.J. (2003). Personal Financial Planning. New York: McGraw-Hill Professional.
Keown, J. A. (2003). Foundations of Finance: The Logic and Practice of Financial
Management. Connecticut: Cengage Learning.
