Target Corporation Financial Analysis - Case Study Example

Student Name: Instructor Name: Unit: Date: Target Corporation Financial Analysis Executive Summary Target Corporation, the second largest discount stores company on the United States has good financial indicators which show that it has a bright future. The indicators testify to solid management decisions made for the benefits of shareholders. Target Corp is profitable and it has sufficient liquidity to finance its expansion strategy Table of Contents Introduction 3 Financial Indicators 4 Liquidity 4 Gross margin 5 Total Current Liabilities 6 Cash conversion cycle 7 Operating Margin 8 Net Profit Margin 9 Conclusion 10 Introduction Target Department Stores is the second largest department stores company in the United States after Walmart. Stores under Target sell a wide range of products including food, clothing, furniture, groceries and even private label products. Target stores are in two formats, large stores, which are usually 170,000 feet square or larger and smaller stores whose area is less than 50,000 square feet. The company also has an agreement with CVS which allows CVS to operate clinics in the stores. The pharmacies and clinics were a part of Target’s operation until December 2015 when they were sold to CVS, a transaction which ended up with the agreement mentioned above. The company attempted international expansion into the Canadian market but the Canadian operation folded up in January 2015 due to low profits. Target also offers credit and debit cards as a service to its customers. Due to the nature of its business, most earnings in the company are attained in the last quarter of the calendar year due to the holiday season when people engage most in shopping. During this holiday season, working capital needs for the company are higher than during the rest of the year. The logistical model used by Target includes distribution centers to which some vendors take their products. There are currently 40 distribution centers, some vendors also take their products directly to the stores. In January 2016, the company had 341, 000 full time employees, the number increases during peak season which is during or around the holidays. Employees have different types and of benefits depending the nature of the work they do as well as length of service among other considerations. Financial Indicators Liquidity Liquidity refers to how easily company assets can be converted into cash without devaluing them. While liquidity may depend on the market in which a business operates, it mostly depends on the nature of the assets a company has and how attractive they are in the market. Cash is the most liquid asset since it is already in a state where it can be used immediately, cash is also the main yard-stick for liquidity. The considerable amount of cash and cash equivalents available to the company means that it has the capacity to not only run its operations smoothly but also invest in projects that would assist its expansion. Since the company has grown on the purchase of other department stores, the available liquidity is likely to come in handy during expansion should the management chose to go that way. Target’s cash equivalents balance was as follows in million dollars 2013 2014 2015 $695 $2,210 $4,046 Table i: Target’s Cash equivalent balance. Chart i: Cash equivalents balance The considerable increase between 2014 and 2015 was from the proceeds realized from the sale of Target’s pharmacy and clinics to CVS. This notwithstanding, from the data, above, Target is healthy is as far as liquidity is concerned. Gross margin This the mount of revenues that remain with a company after the cost of goods sold has been deducted. The figure is then divided with the total sales, Gross margin is expressed in percentage; when the percentage is high, the amount retained by the company for every dollar of sales is high which means that the company has made more money and therefore it is more financially healthy. These gross margins when compared to the net margins which are listed elsewhere in the paper shows operating expenses are eating considerably into profits, decision makers should look into which areas it would be possible to reduce these costs. 2013 2014 2015 29.8 % 29.4% 29.5% Table ii: Target Corp.’s Gross Margins Chart ii: Gross Margin The gross margin in the three years analyzed above has been higher than the industry average of 24.16 % in all the three years. Total Current Liabilities Current liabilities, refer to the debts a company has that need to be paid within one year of reporting. These include short term debt, accounts payable as well as other accrued debts ands and liabilities. The ratio of these liabilities is indicative of a company’s financial health in that if they are high, they reduce the resources available to a company thus affecting its overall area. Target’s current liabilities for years 2013, 2014 and 2015 are as follows. 2013 2014 2015 28.68 28.35 31.35 Table iii: Target’s Total Current Liabilities Chart iii: Total current liabilities An analysis of the trend shows that the ratios remained basically the same in 2013 and 2014 but increased by three points in 2015. Despite the increase, the financial position of the company is still healthy since from the information gathered from indicators like, liquidity and gross margin, it can easily meet its obligations. Cash conversion cycle This is a metric that assesses a company’s ability to convert the cash it has into inventory and back to cash through sales and accounts payable. A high cash conversion rate shows the company’s effectiveness in making money and avoiding dead stock. This is especially important to Target stores and other discount store companies. The importance of these is because retail profitability depends on the number of items 2013 2014 2015 8.28 10.16 10.05 Table iv: Cash conversion cycle Chart iv: Cash conversion cycle Target’s conversion cycle improved in 2014 and remained virtually constant in 2015. This indicates that the business generally became more efficient. This is could be one of the reasons why liquidity increased from $695 Million in 2013 to $2,210 million in 2014, a further improvement in the cycle would ensure that the overall worth of the business increases for the benefit of the shareholders. Operating Margin This refers to the proportion of revenues that remain at hand after the company has paid for all variable costs of production. The costs included here include wages, transport, cost of production et cetera. The figure is obtained by dividing the company’s operating income with the net sales. Operating margin is also referred to as the operating profit margin. Target’s operating margin for 2014 was 5.83%, it increased in 2015 to 6.25% and it increased again in 2016 to 7.59%. These ratios show that the company is healthy and its financial health is increasing as time goes. This means that the earnings per dollar are increasing which in return translates to higher profits for the shareholders. 2013 2014 2015 5.83% 6.25% 7.49% Table v: Operating Margin Chart v: Target Corp.’s operating margin Net Profit Margin Net profit is what remains when a business has deducted all its expenses from revenues. It is what remains for shareholders to work with in deciding whether they should give themselves dividends or plough back to the company. The net profit margin, on the other hand, is calculated through dividing net income by revenue. In 2013, Target Corporation’s net profit margin reduced later improving from 2014 to 2015 to surpass the levels it was at in 2013. It was at 2.72% in 2013 but reduced to -2.25% in 2014, this was a significant drop that was probably contributed by the corporation’s Canadian subsidiary which later folded up. The increase in ration in 2015 could be attributed in part to the sale of the pharmacy and clinics division. The increase in the net margin means that Target may be rewarded with an increase in share price in the market giving its shareholders greater value. An increase in the net margin is good news for the investor. 2013 2014 2015 2.72% -2.25% 4.56% Table vi: Target Corp.’s operating profit margin Chart vi: Target Corp.’s operating profit margin Conclusion In conclusion, Target Corporation is in excellent financial health, many of its financial indicators show that the decisions made concerning its expansion have led it to a place of robust growth which puts it in a pole position to continue with its expansion which will continue benefitting the shareholders as long as the sound management practices currently in place continue being applied and adjusted as need arises. Works Cited Target Corp. (TGT) | Profitability". Stock Analysis On Net, 2016, https://www.stock-analysis-on.net/NYSE/Company/Target-Corp/Ratios/Profitability. Read More