Comparative Financial Analysis of Target Corporation and JC Penney - Example

Running head: Comparative Financial Analysis Comparative Financial Analysis of Target Corporation and JC Penney Comparative Financial Analysis of Target Corporation and JC Penney Business background of JC Penney and Target Corporation In this report, the financial conditions and performance of two companies are going to be compared. JC Penney and Target Corporation, the two companies which shall be assessed, are both retail companies that sell general merchandise for the individual and household consumers. The first Target store was opened in 1962 although its predecessor department store dates back to the early 1900s (Target, 2011). JC Penney likewise had its beginnings in a small dry goods store in 1902 (JC Penney, 2011). Target operates some 1,750 stores within the United States; JC Penney also operated some 2,000 stores at one time, although some have since then been closed due to the economic crisis. Sources of data Data for this study were sourced from the companies’ respective 10-K reports and annual stockholders’ reports from the years 2005 to 2010,and from thence sourced the needed financial statements (income statement and balance sheet), and their accompanying notes and explanations. The reports and additional data were downloaded from the companies’ official websites. Capital accounts: Market and book values The spreadsheets attached to this report show the six-year comparative balance sheets and income statement as they originally appear; as common size, per cent of assets balance sheet and per cent of sales income statement; and then as ratios to the accounts for 2005, the designated base year. Then a spread sheet shows the comparative financial ratios computed for the two companies, indicating liquidity, activity, debt, profitability, and per share ratios. For the capital accounts, the most recent per share valuation figures, which are drawn from the spread sheets, are as follows: Indicator Target JC Penney Earnings per share (EPS) $4.03 $1.64 Book value per share (BVPS) $21.99 $22.94 Market price per share (MPS) $44.09 $29.17 Price to earnings ratio (PER) 10.78 X 17.8 X Price to book value (PBV) 2.0 X 1.27 X Dividends per share $0.92 $0.80 Payout ratio 23 % 50 % Data sources: JC Penney 2010 10-K Report; Target 2010 Annual Report From these figures, it is apparent that the two companies have nearly identical book value per share, but significantly different EPS. Target’s EPS is nearly three times that of JC Penney, and in that sense it is more profitable for the shareholders. This higher profitability makes Target more attractive to investors, so its market price is considerably higher (Cooper & Argyris, 1998:505; Lee & Lee, 2006:176; De Pamphilis, 2009:292). Target may have a higher price to book value (PBV) and therefore appears more expensive than JC Penney in this regard, but based on PER Target is still cheaper at only 10 times, compared to JC Penney’s nearly 18 times. Target also gives out a higher cash dividend per share, even though payout ratio is smaller and more earnings are being retained in the company. Fixed and non-current assets The balance sheets show that Target’s assets are more than two times that of JC Penney although they have roughly the same number of outlets. The common-size balance sheets show that Target’s current assets average only 40% of the total assets, while JC Penney’s current assets average 50% of its total assets. This does not necessarily mean that JC Penney is under-invested and holds too much liquidity. The sales figures show that JC Penney is only undertaking one-third the business of Target, therefore it may need a greater proportion of its assets for working capital and to bankroll the inventory turnover. Target appears to be operating more efficiently than JC Penney, devoting a lower proportion of its assets to generate a higher volume of sales. Both companies have a measure of goodwill and intangible assets, although their fair values exceed their carrying value. Deferred tax accounts and tax treatment The companies both have deferred tax accounts. There are liabilities for tax positions which are considered uncertain, because tax rate changes take effect on enactment date and there is always a chance of unexpected higher taxes. According to the notes to financial statement, however, auditors for both companies assure that the future consequences of settling these accounts will have no material adverse impact on the consolidated financial statements (JC Penney 2010 Annual Report, 2011; Target 2010 Annual Report, 2011). Liquidity The comparative financial ratios are shown in spread sheet form attached to this report. From the data, Target is shown to have a higher net working capital than JC Penney by nearly twice, showing that Target has more cash and near cash to sufficiently meet its higher level of business (higher sales, etc.). Looking at the current ratio, JC Penney is using a greater proportion of its current assets to meet its current liabilities. The acid test ratio shows likewise. Target has an increasing current ratio but decreasing quick ratio; for JC Penney, both current and quick ratios are rising. This may indicate that JC Penney is devoting more of its liquidity towards financing its inventory, a move that might be interpreted as gradually increasing its level of business. This is not supported by the figures, however, because while JC Penney’s sales are gradually moving downwards and sideways, Target’s total sales figures have been gradually increasing. JC Penney therefore does not appear to be strategically raising its level of business. Solvency The companies’ solvency is seen in its debt ratios (Bragg, 2010). Debt should not increase so far that its assets or its business turnover are not sufficient to meet periodic repayments and interests. The companies’ debt ratios average 60 %, they are not far from each other and do not necessarily show failure to meet obligations. Times interest earned ratios are declining for both companies, but they are going down much faster for JC Penney, having come from a higher level and now much less than that of Target. Target’s higher EBIT to liabilities ratio means that Target is better able to meet its periodic interest payments than JC Penney. Neither of them appear to be at risk of insolvency or bankruptcy. Profitability and efficiency ratios Profitability, efficiency and productivity are indicated by the activity and profitability ratios in the comparative ratios for JC Penney and Target (last page of this report). For activity, the inventory turnover indicates how fast inventory goes through the cash cycle and becomes liquidated again (Bragg, 2010). The higher the inventory turnover, the more efficiently cash resources are used, because collections are effected faster and liquidity is generated more quickly to finance the next purchase of materials. Target has nearly twice the inventory turnover of JC Penney. This may explain the less urgent need for current assets, given the higher sales. The average collection period is also an activity ratio, showing the approximate time receivables are collected. The comparative ratios indicate that JC Penney needs fewer days for collections, averaging about 6 or 7 days, while Target registers a much higher average collection period. In collections, therefore, Target corporation is much less efficient than JC Penney, probably due to a higher level of credit sales or stronger online purchases. A slightly longer clearing period may be necessary for online stores because of the transition of the payment which is wired or transmitted through Paypal, however, the time for these should not be one month long. On the other hand, it may be that Target may have a higher level of bulk deliveries than JC Penney, and would therefore necessitate a longer float. For the rest of the activity ratios, both companies appear to register the same performance for fixed asset and total asset turnover. However, there is material observation for return on investment and return on equity. Target’s ROI holds steady while that of JC Penney appears to quite clearly go down. As for ROE, the same may be said for the two companies, with Target maintaining the same level of profitability, while JC Penney’s continues to drop. This may be a warning sign for JC Penney that aside from its dropping efficiency, there is also a disturbing reduction in profitability. Dropping profits and rising costs are just two of the indicators of impending losses if intervention is not undertaken. Recommendations to increase profitability Target appears to be doing comparatively well, given the steady profitability, the strong sales performance, the maximization of investment of assets into less current but more profitable ventures. JC Penney is a different story, however, because of the manifestation of a drop in sales, its difficulty in keeping costs at the same level, and the fact that while it has as many, if not more, brick and mortar stores than Target, is just generating a fraction of the sales that Target is able to raise. In order therefore to increase profitability for the two stores, more especially for JC Penney, the companies must take a second look at its fixed and other non-current assets and take away or sell those assets which are considered as non-performing assets. This should lower carrying cost and free up additional liquidity. Where prices cannot be raised because the market in crisis cannot tolerate a price increase, a reduction in cost should likewise improve profitability where sales remain steady. Data sources: JC Penney 10-K and Annual Reports, from years 2005 to 2010. Retrieved from JC Penney corporate website Target Corporation Annual Reports for 2005 to 2010. Retrieved from Target corporate website References cited: Bragg, S. M. (2010) Business Ratios and Formulas: A Comprehensive Guide, 2nd edition. Hoboken, N.J.: John Wiley & Sons, Inc. Cooper, C.L. & Argyris, C. (1998) The Concise Blackwell Encyclopedia of Management. Malden, Massachusetts: Blackwell Publishers, Inc. DePamphilis, D. (2009) Merger, Acquisitions, and Other Restructuring Activities. Burlington, MA: Elsevier JC Penney (2011) “About Us”. Retrieved from http://www.jcpenney.net/default.aspx Lee, C.F. & Lee, A.C. (2006) Encyclopedia of Finance. New York, N.Y.: Springer Target Corporation (2011) “Our Company”. Retrieved from http://sites.target.com/site/en/company/page.jsp?contentId=WCMP04-030795 TARGET No. of shares TARGET 704 million EPS = 4.08 Average share price = $44.09 PER= 10.78 X Book value per share = $21.99 MTB = 2.0 X JC PENNEY Based on recent data: Market value, close of 2010: $29.17 EPS = 1.64 No. of shares: 238 million PER = 17.8 X BVPS = $22.94 MTB = 1.27 X Read More