Financial Analysis: Wal-mart and Target - Case Study Example

Financial analysis: Wal-mart and Target Wal-Mart Store Inc. and Target Corporation Wal-Mart Stores Inc. was founded in 1945 and has its headquarters in Bentonville, Arkansas. It operates retail stores in various forms all over the world, operating in three segments. It runs supermarkets, discount stores, hypermarkets, warehouse clubs, drug stores, convenience stores and several retail websites such as walmart.com. The company stores offer a wide range of products and services such as food products, baby products, and household chemicals, electronics such as cellular phones, cameras, and pharmaceutical products among many others. As per June 2014, the company operated approximately 11000 stores in 27 countries and e-commerce websites in 10 countries. Target Corporation is the second largest American retail company that was founded in 1902 and has its headquarters in Minneapolis, Minnesota, second to Wal-Mart. The first Target store was opened in Minnesota in 1962, and the company has continued to grow to become as it is. It operates 1934 stores in the United States now and began its operations in Canada in 2013. Target stores offers financial and retail services, target sourcing services, target commercial interiors, target brands, electronics such as phones and accessories, clothing, housewares- lighting, bedding and decors and body and beauty products among many others. Target provides employment for over 23 000 people. In terms of their competitive position, Wal-Mart is highly focused on winning in terms of price when compared to its competitors. It offers lower prices than a competitor such as target in order to drive foot traffic and sales. It has been effective in this area though Target has an edge too. Before Target got a data breach, it was found to be 2% more expensive than Wal-Mart. Their prices though are still more affordable than those for most retailers, so the question would be whether or not one is willing to pay a slight premium for a more comfortable shopping experience. A cleaner and more comfortable atmosphere give Target an edge over Wal-Mart. Target however, has a secret weapon, the RED card that makes sure that those using it have goods at 1.4% cheaper than Wal-Mart, and they visit the store frequently making up to 5 purchases and thereby saving up to 5%. The challenge for Target thus is to increase these RED card memberships. Target is also offering free online shipping for RED card memberships. Target is not expanding its margins, but the red card offers an opportunity for growth, in stealing the market share and increasing its e-commerce presence. As far as pricing is concerned, Wal-Mart has an edge. From an investment perspective, Wal-Mart is better situated as of the present, even though, both appear to be long term winners. Target also has the disadvantage of the data breach, which it is still getting over. The business of Target Corporation is subject to several risks. These risks depend on the companys ability to successfully develop and maintain reliable and relevant multichannel experience for its guests, its ability to respond to the fast changing consumer preferences, its ability to manage its growing workforce, its ability to address product safety concerns that can highly affect the company sales and operations, its ability to differentiate the company products from its competitors, and stock price fluctuations among many others. Wal-mart also faces a risk of its successful development and maintenance of reliable and relevant multichannel experience for its customers, fluctuation in the prices of its stocks, changes in interest rates and fluctuations in currency exchange rates. 2. Strengths and weaknesses of Wal-Mart Inc. relative to Target Corporation 3 component Du-Pont equation ROE= Net income/sales x Sales/Total Assets x Total Assets/Average shareholder equity Wal-Mart Inc. Year ROE Net income/sales (Profit margin) Sales/Total Assets (Asset turnover) Total Assets/Average shareholder equity (financial leverage) 2014 0.212 16,022/476,294 = 0.034 476,294/204,751= 2.326 204,751/(76,255) =2.69 2013 0.44 16,999/468,651= 0.036 468,651/203,105= 2.31 203,105/(76,343/2)= 5.32 Target Corporation Year ROE Net income/sales (Profit margin) Sales/Total Assets (Asset turnover) Total Assets/Average shareholder equity (financial leverage) 2014 0.24 1.9/72.6= 0.027 72.6/44.55= 1.63 44.55/(16.23/2)= 5.49 2013 0.36 3/73.3= 0.041 73.3/48.16=1.52 48.16/(16.56/2)= 5.81 2 component DuPont equation Wal-Mart Inc. Year ROE Net income/total assets Leverage (Total Assets/Average shareholder equity) 2014 0.18 16,022/204,751= 0.067 204,751/ (76,255/2)= 2.69 2013 0.47 16,999/203,105= 0.089 203,105/(76,343/2)= 5.32 Target Corporation Year ROE Net income/total assets Leverage 2014 0.24 1.9/44.5 = 0.044 44.5/ (16.23/2)= 5.49 2013 0.36 3/ 48.16 = 0.062 48.16/ (16.56/2)= 5.81 Profit margin for Wal-Mart increased from 2013 to 2014, an indication that every sale brought more money to the company resulting in higher return on equity. Asset turnover and financial leverage for the company also increased resulting in a higher return on equity. Asset turnover, profit margin and financial leverage for Target Corporation on the other hand decreased within the two financial years resulting to a lower return on equity. The strength of Wal-Mart is that it recorded a higher return on equity over Target Corporation whose weakness is a reduction in return on investment. Target Corporation relies on high leverage ratio in the generation of an acceptable level of return on equity to attain a competitive advantage while Wal-Mart derives its competitive advantage from selling its products a higher profit margin. 3. Detailed analysis of the strengths and weaknesses of Wal-Mart relative to Target a. Operation: Assets use efficiency (asset turnover)= Sales/Total Assets Total asset turnover measures a companys efficiency or the ability of a company to use its assets in the generation of sales. Year 2014 2013 Wal-Mart 476,294/204,751= 2.326 468,651/203,105= 2.31 Target Corporation 72.6/44.55= 1.63 73.3/48.16=1.52 Wal-Mart recorded a higher asset turnover ratio as compared to Target, and this shows that Wal-Mart was highly efficient in the use of its assets to generate sales. The strength of Wal-Mart over Target is that Wal-Mart used its assets in a more efficient manner than Target. b. Operation: Sales efficiency (profitability)- Profit margin = Net income/sales Year 2014 2013 Wal-Mart 16,022/476,294 = 0.034 16,999/468,651= 0.036 Target Corporation 1.9/72.6= 0.027 3/73.3= 0.041 Profit margin is used in measuring the efficiency of a company to convert its sales into net income. The two companies had low-profit margin an indication that their expenses were too high and, therefore, the need for the management to budget and cut on the company expenses. c. Financing: leverage (Total debt ratio)= total liabilities/ total assets Debt ratio provides information on the total amount of debt that is in the company balance sheets as compared to its assets. The two companies had a total debt ratio of 0.6 or 60% for the two financial years, an indication that they were more dependent on leverage and hence the two companies were riskier. Year 2014 2013 Wal-Mart 128,496/ 204, 751= 0.63 126,762/ 203,105= 0.624 Target Corporation 28.32/ 48.16= 0.63 31.61/ 44.55= 0.66 d. Financing: liquidity – Current ratio= Current assets/ current liabilities Current ratio measures the ability of a company to use its current assets to pay off its short-term obligations. Year 2014 2013 Wal-Mart 61, 185/ 69,345 =0.88 59, 940/71, 818 = 0.83 Target Corporation 11.63/ 12.78= 0.91 16/42/ 14.03= 1.17 The strength of Target Corporation over Wal-Mart is that Target can easily make current debt payments (it is highly able to pay off its current liabilities using its current assets and this is because of the high current ratio recorded during the two financial years. 4. Measure of company efficiency of human resources Return on investment (ROI) is a good measure of the efficiency of human resources in the two companies. ROI measures the financial return obtained from an investment. Calculating ROI is very important as it provides a way for the HR professional to demonstrate their worth in the HR profession. ROI is used in the evaluation of projects as well as program in the company in order to determine which one of not financially efficient. The efficiency of human resources depends on how they execute programs and projects and which of the executed programs and projects is financially efficient. 5. Overall conclusion of Wal-Marts strengths and weakness relative to Target Corporation From the above analysis, it is evident that the performance and efficiency of Wal-Mart have been higher than that of Target Corporation. That is, Wal-Mart prides itself on high efficiency, profitability and liquidity over Target. The increased performance and efficiency of Wal-Mart has given it a competitive advantage in the market over Target Corporation. Wal-Mart has a weakness when it comes to using its current assets to pay for its short-term obligations as indicated by its relatively low current ratio as compared to Target. One of the major weaknesses of Target is that is riskier than Wal-Mart judging by the relatively higher leverage ratio over Wal-Mart. 6. Stock Analysis a. The current P/E ratio (Price per earning ratio) for Wal-Mart is 17.19 while that of Target Corporation is 32. 29. P/E ratio is the ratio of the share price of a company to the company’s per-share earnings. The high P/E ratio in Target Corporation suggests that the company investors are expecting higher earning growth in the future as compared to the investors of Wal-Mart. This means that the stocks of Target Corporation are performing better in the market as compared to those of Wal-Mart and therefore it is better to buy the stocks of Target Corporation now as the investor will be assured of higher earning in the future. b. Based on stock chart below, it would be advisable for investors to sell the stocks of the two companies. The prices of stocks for the two companies are fluctuating, but there has been a recent increase in the prices, which means the investors could sell the stocks at a profit. c. It is important for investors to look at the trend of stock prices as well as the P/E ratio when choosing which stock to buy. This is because these two aspects of stock will help them determine which of the stocks will have high earnings in the future and which of the stocks will earn them a profit if they decide to sell them. 7. Limitations of the analysis The use of financial ratios to determine the performance of the company has its share of limitations. Financial ratios are based on financial statements that are prepared using historical cost concept, and therefore they do not reflect the current reality in the business. Financial ratios perform poorly in comparing performance between companies. This is because different companies use different accounting policies, which affect the financial statements and the financial ratios as well. Different companies normally use different accounting policies, and this makes it difficult to use financial ratios to compare them since their valuations are different. References Needless, Powers & Crosson. Principles of Accounting. Cengage Learning, 2012 Neely. Business Performance Measurement: Theory and Practice. Cambridge University Press, 2002 Taticchi. Business Performance Measurement and Management: New Contexts, Themes and Challenges. Springer Science & Business Media, 2010 Wal-Mart 2014 annual report. Retrieved from http://www.sec.gov/Archives/edgar/data/104169/000010416914000019/wmtform10-kx13114.htm Target Corporation 2014 Annual Report. Retrieved from http://www.bloomberg.com/research/stocks/financials/secfilings.asp?ticker=TGT Appendix Balance sheet for Wal-Mart Income statement for Wal-Mart Balance sheet for Target Corporation Income statement for Target Corporation Read More