FINANCIAL ANALYSIS

Financial Analysis

Financial Analysis

Target Corporation

Target is one of the largest retailers in North America, with about 1,800 units. Target large-format stores offer general merchandise and now a full assortment of food products. The company is set to enter Canada, but a vast majority of stores will still operate in the United States. Target sells roughly 20% of general merchandise under private label. The firm has an expanding Internet sales presence and issues its own consumer credit card, the RED card, which gives customers a 5% discount on all purchases for retaining the card.

Management & Stewardship

We believe management is making the right strategic decision to deploy to a much higher degree the inelastic product that is food. In our view, driving consistent comps in general merchandise will be very challenging in what appears to be a sustained high unemployment macro environment. The recent payroll prints suggest the economy is nowhere near moving the unemployment rate below 9%, and that cannot be good for nonessential same-store sales.

President and CEO Gregg Steinhafel took over from Robert Ulrich in 2008 and was also named chairman in 2009. Steinhafel has held many positions since joining the firm in 1979. The senior management team consists mostly of homegrown executives. Although we would prefer the CEO and chairman roles be split to provide added oversight, corporate governance appears sound. The 11-member board includes 10 independent directors with considerable and relevant experience. The company is open to shareholder proposals and board nominations, and considered such requests from investment firm Pershing Square in 2009. In an effort to increase its influence on the company's strategic direction, Pershing Square made an attempt to gain seats on the board. However, Target shareholders supported the company's incumbent director nominees and determined to maintain the current board size. Management compensation is in line with industry norms and is largely based on the economic value (Clark, 2008).

Financial Performance of Target Corporation

Target reported earnings per share of $1.03, ahead of the $0.97 consensus estimate. As we had forecast, EBITDA margin declined at the retail segment by roughly 20 basis points, as the company continues to shift its sales mix toward lower-margin grocery. The gross margin rate at the retail segment fell 35 basis points. Expense leverage on a solid comp and the credit card business once again helped to offset some of the gross margin pressure at retail stores. The overall consolidated operating margin declined roughly 13 basis points in the quarter from the year-ago period. That, along with a slightly lower tax rate and greater share repurchases, moved EPS ahead of consensus. Management raised its full-year earnings outlook to $4.15-$4.30 per diluted share. We are not making any changes to our $4.21 EPS estimate, but consensus numbers are likely to move higher from the current $4.14 forecast (David, 2003).

Target's returns on invested capital are set to decline as the firm transitions a larger portion of assets to the lower-return food business, PFresh. This initiative is similar to the strategy Wal-Mart WMT implemented (to great ...