Sample Research Paper On Evaluation Of A Company Performance - Target Corporation
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Background of the Public Organization chosen for Analysis – Target Corporation
In 1902, as an American retail company, Target Corporation was founded with headquarter in Minneapolis, Minnesota. After Wal-Mart Stores Inc, Target Corporation is the next discount retail business all across the United States of America possessing the thirty sixth rank on the Fortune 500. The very first store of Target Corporation commenced its operations in 1962 in Roseville, Minnesota. Eventually, the company grew and became one of the largest divisions of Dayton Hudson Corporation and was renamed, in August 2000, as Target Corporation. Target Corporation is one of the competitive components of Standard & Poor's (S&P) 500 indexes.
Traded as a public company, Target Corporation runs its business operations as a retailer of general merchandise all across the Canada and United States. Target Corporation markets various household essentials which include baby care, personal care, cleaning, pharmacy, paper and beauty products. The company under review also deals in delivering movies, music, computer software, books, toys and sports goods. Apart from supplying electronic products, video game software and hardware, Target Corporation provides discounted retail services related to apparel for boys, men, girls, women, infants, toddlers and newborn babies as well as jewelry, intimate apparel, shoes, and accessories.
Not only that, Target Corporation, after Wal-Mart Inc. has expanded its operational activities so much that it also deals in and markets a variety of food products like dairy products, dry grocery, frozen food, snacks, beverages, deli, candy, meat, bakery produces and pet supplies etc. Target Corporation also specializes in providing its target market with home décor and furnishings which comprises of kitchenware, furniture, lighting, bed and bath, small appliances and seasonal merchandise (like holiday décor and patio furniture) as well as automotive products.
Additionally, Target Corporation provides in-store amenities such as Target Clinic, Target Café, Target Photo and Target Pharmacy. Further, this publicly traded business also offers REDcard named debit and credit cards which allows every customer to avail five percent purchase discount and free-of-cost shipment facilities to guests. Target Corporation markets most of its products through a large chain of retail stores and digital channels which includes it website Target.com. As of 15th January, 2015, Target Corporation marketed it operational activities and served every corner of the United States through a total chain of 1,934 stores with around 1,801 stores in the United States and 133 stores were doing business in Canada. In the worldwide industry of retail discount store facility, major competitors to the Target Corporation include the names of major market leaders such as Wal-Mart Stores Inc, Amazon.com Inc, Sears Holdings Corporation and Costco Wholesale Corporation etc.
Pro-Forma Financial Statements for Next Two Years
Under this section, the Pro-forma financial statements concerning Target Corporation are presented for the years 2016 and 2017. For preparation of income statement, it is considered that every year, the sales revenue and cost of goods sold will increase by ten percent. The Pro-forma financial statements are presented as follows:
Because the ten percent increase in sales revenue and cost of goods sold every year will not affect any permanent account in the balance sheet, it will remain the same throughout the years 2016 and 2017 in the following manner:
Financial Performance Examination through Ratio Analysis for 2015
Under this section, two distinct categories are analyzed for the year 2015 to gauge the financial performance of Target Corporation in the said accounting period. For investigation into performance throughout the period of 2015, two ratios from liquidity ratios and two from the category of profitability ratios are looked into. All such analysis, to serve the purpose of this section, is examined in the following manner:
Liquidity Ratio Analysis
This category of ratios includes examination of current and quick ratio to measure the ability of Target Corporation to repay its short-term obligations or current liabilities if they are called back by creditors. These ratios also measure the margin of safety which Target Corporation may provide to its creditors . Both of the current and quick ratio analysis is elaborated in detail as follows considering the tabular representation mentioned below:
The above mentioned table is derived from the financial information extracted from annual reports of Target Corporation. To measure the liquidity strength and performance of Target Corporation for the last fiscal year (2015), it is necessary that current status be compared to that of performance in 2014. The extracted current ratios reveal that during 2014, Target Corporation had $0.91 to cover every dollar of its current liabilities of up to one year. In 2015, the liquidity strength improved by a smaller margin where Target Corporation now has $1.2 ($0.29 more) to repay each dollar of short-term obligations in the event liabilities of short maturity are called back by creditors for repayment. The globally accepted standard for current ratio is 2:1 which makes it apparent that Target Corporation has been underperforming the worldwide industry norm . For a more detailed analysis, the acidity test is performed on Target Corporation by using the quick ratio.
Analysis of Quick Ratio
This ratio is also known as Acid-Test ratio. This is so because quick ratio only includes quick assets which are easily and readily convertible to cash without even a slight decline in their financial worth . Normally, cash, marketable securities and receivables are considered highly liquid or quick assets. In comparison, ending inventories and prepaid expenses are never considered to be highly liquid or quick assets. This is so because they can never be easily sold against cash without even a slight reduction in their financial worth. Instead, in times of financial distress, inventories and prepayments are sold at a Forced Sale Value (FSV) . The extracted ratios from financial information make it clear that the liquidity strength for Target Corporation declined in a substantial manner when current and quick ratios are compared. It has come light to light that much of the current assets of Target Corporation are locked into un-saleable stock of ending inventories which are not yet sold by the company and the prepayments by the Target Corporation. During 2014, Target Corporation had only $0.16 to cover every dollar of current liabilities of up to one year or short-term maturity. This position somehow improved by a slight margin in 2015 where Target Corporation has $0.28 against each dollar of short-term obligation. The global benchmark for quick ratio is 1:1 which specifies that Target Corporation is still underperforming the worldwide standard when it comes to liquidity and working capital management .
In this section, two ratios from the profitability category will be analyzed to measure the efficiency of Target Corporation in generating net income after covering costs of revenue and incurring operating expenses. The following ratios are analyzed for examining the performance of Target Corporation to generate profits:
Return on Assets
This ratio tends to analyze the Target Corporation’s ability to generate a certain amount of net income for every dollar its management invests in acquisition and maintenance of total asset mix. This ratio is calculated by dividing the net income from operations by total assets. Analysis reveals that Target Corporation generated a positive return on assets in 2014. For every dollar the management of Target Corporation invested in total assets, the company was able to generate a net income of approximately $4.25 through efficient and effective utilization of current and fixed assets. Because the investment in assets was made heavily and a sharp decline in profitability due to weak liquidity management, return on assets declined sharply in 2015. Now, Target Corporation is generating a negative return of $3.81 for every dollar invested in total assets which shows the heavy borrowing on part of the company.
Return on Equity
Like the previous ratio, this metric also reflects the ability of Target Corporation to generate net profit from continued operations against each dollar investment by equity or common shareholders . In 2014, Target Corporation produced a positive return of $12 against every $1 provided to it by equity holders. In 2015, due to liquidity management issues and management inefficiencies, profitability of the Target Corporation declined which resulted in a negative return for shareholders.
Overall, from a profit generation capacity perspective, Target Corporation produced negative returns for shareholders due to inefficient asset utilization and ineffective liquidity management. The profitability of Target Corporation declined sharply because it was unable to sell its inventories due to which the ending stock kept accumulating. It also points out that Target Corporation may be indulged in selling of obsolete or unwanted items for which the demand in the target market might have declined.
Calculation of Return on Equity (ROE) using the DuPont System – Target Corporation
DuPont System is a financial metric used for analyzing the performance of any company while focusing on three critical elements of business condition by using a "DuPont Formula". These three critical components, after return on equity is broken down, include the operations management to generate net profits, efficient asset management and involvement of debt in the capital structure. In this section, the same "DuPont Formula" will be used to measure three critical elements of Target Corporation to measure the overall operational efficiency of this company .
ROE = (Profit margin) × (Asset turnover) × (Equity multiplier)
ROE = (Net Profit/Sales) × (Sales/Assets) × (Assets/Equity)
ROE = (Net Profit/Equity)
In above equation, profitability is measured by net profit margin, operational efficiency is gauged by total asset turnover and financial leveraged is looked into by equity multiplier. The calculation for Target Corporation is as under:
ROE = -0.0225 × 1.69 × 2.96
ROE = -0.1126 or -11.26%
The above calculation for DuPont analysis of target Corporation reveals that return on equity for this company is negative because of a dramatic decline in liquidity strength and profit generation capacity in 2015. The ROE is negatively very high because of higher equity multiplier as much of the total assets are financed by debt, which means trouble and financial distress. Capital structure of Target Corporation can be modified easily but management of financial flexibility is difficult.
DuPont analysis makes it apparent that profit generation capacity of Target Corporation is not attractive to shareholders despite its asset utilization to generate sales is positive. One may say that though Target Corporation is generating revenue yet it is unable to cover its costs and expenses to produce lucratively higher profits to attract equity investments and create shareholder value. Equity investors are not better off if they keep investing in Target Corporation due to negative returns.
Target Corporation’s Withdrawal from Canadian Market
After making financial performance analysis of Target Corporation, this section highlights some of the weaknesses of this publicly traded company due to which it has decided to close retail store business operation in Canada by April 12, 2015 after two years of operational activities in the said market. The subsidiary of U.S. based retail discount chain of stores operated in Canada with the name of Target Canada Company. It was formed in the year 2011 with an ambition to look after Target Corporation’s business activities in Canada. Target Canada Company’s major competitor in this market is Wal-Mart Stores Inc. in the discount store category. Some of the other minor business rivals were supermarket chains like Sobeys, Loblaw’s and Metro as well as some retailers such as Shoppers Drug Mart, Canadian Tire, Sears Canada, and Recall.
Target Corporation has decided to abandon its business activities in Canadian market after it posted losses from operations of about $2 billion in 2014 and 2015. It only took the company less than two years to enter and exit Canada. Target company is also withdrawing from Canada is closing its stores because the decision to run business in this market was commercially unsuccessful because the locations of target’s stores were unable to fulfill buyers’ needs and preferences. Additionally, the price of each item displayed in stores was very high and there was lack of wide variety of products which limited the consumer selection which further contributed to the failure Target Canada Company.
In light of the above mentioned consumer concerns and product related issues, sales revenue and store traffic declined significantly right after many of the Target’s stores started operating. Resultantly, because of being too aggressive with regards to Canadian operations, Target Canada Company made an announcement that it is going to close down all stores in Canada by liquidating the inventory. After the Target’s Canadian chain of stores filed for bankruptcy due to $2 billion in losses, the whole chain of stores is scheduled to close by 12th April, 2015.
The senior management of Target Corporation has made a decision to withdraw from Canadian market by completing the liquidation process of ending inventories and will finally close down the whole chain of 133 stores in Canada by 12th of April, 2015. Due to disappointing financial results and burden of bearing huge loss of $2 billion, Target Corporation is closing down operations in Canada due to following prominent reasons:
Empty Store Shelves
Research into failure of target Canada Company makes it clear that one of the causes of its set back was that the company was unable to find a proper inventory mix that could address the needs and buying preferences of its target market. It had surplus of some products and was short in inventories of majority of consumer goods. In addition to this, customers continuously complained that there was no variety of consumer products to select from and most of the shelves remained out of stock or empty. This shows that Target Corporation was not good at inventory management concerning its Canadian subsidiary. While the management identified the problem with regards to its weak inventory management, either it implemented insufficient techniques or it was too late to fill the gap.
The Changing Buying Behavior of Canadian Citizens
Another major factor contributing to the failure of Target Canada Company was its inability to customize its activities depending upon consumer needs and preferences because of being aggressive in its strategic operations. Target Corporation implemented “one-stop shop” model which proved to be highly unsuccessful in the Canadian market since majority of citizens were accustomed to visit and make purchases from numerous chains of stores for the fulfillment of their consumption needs and demands.
Higher Product Prices
Target Canada Company, soon after starting its operations, witnessed an enormous boost in its sales revenue because some of the Canadian citizens were already familiar about Target Corporation and its attractive stores in the United States. They already had made purchases when visited the United States at some point of time. Additionally, through word of mouth arising out of such customer satisfaction and brand awareness, Target’s chain of discount retail stores in Canada saw a substantial increase in sales and profits from operations. As time elapsed, majority of customers started complaining not only about disorganized and empty stores but higher product prices as well. Concerning the product pricing structure and mechanism, there was no conformity or synchronization of business finance processes between stores in the United States and Canada. Due to huge differences in products prices and increased costs of buying an item in Canadian stores, customers soon started switching to business rival’s stores and stopped visiting Target’s Canadian stores due to declined customer traffic.
High Intensity of Competition in Canada
When news about high product prices at Target’s 133 stores spread all across Canada, business rivals such as Wal-Mart Inc. responded quickly to such market information and cutting their product prices and expansion of product varieties they offered to the same target market. Business rivals were quick in opening new retail stores in Canadian market to gain market leadership and competitive edge over Target Canada Company of Target Corporation. Other competitors such as Shoppers Loblaw Cos. Limited and Drug Mart Corporation entered the market of expanding their offerings in clothing and groceries category. Because of shifts in customer preferences, Target suffered a huge loss of $2 billion in Canada.
Lack of Online Presence or Electronic Commerce Facilities
This factor may be simple enough but may have significant impact on the bottom line of financial statements of any company. Unlike its competitors (such as Wal-Mart Inc.), since Target Canada Company had no online presence through which to shop from conveniently, Target was unable to reach a wider scope of target audiences or customers. Target Corporation was unable to adopt electronic commerce activities in its strategic business model while operating in Canada.
Soundness of Policies of Target Corporation and Synopsis of Findings
The company is also suffering from financial distress and is on the verge of bankruptcy because it is inefficiently utilizing its total asset mix to generate net profit and create positive returns as well as value against investments by equity shareholders. The DuPont analysis makes it clear that net profit margin declined sharply in 2015 because the total assets are not efficiently managed by the existing management of Target Corporation. Equity multiplier of Target Corporation is also high which specifies that much of assets of Target Corporation are financed by debt which also exposes this U.S. Company to greater interest rate risk.
The liquidity management issues and vulnerability to bankruptcy due to financial distress could also be confirmed by the aggressive operational strategies of Target Corporation in Canada. Failure to read market information and analyze consumer needs in Canada exposed the company to suffer from loss of $2 billion within just two years. This not only forced Target Corporation to close down its 133 stores in Canadian market as well as file for bankruptcy but also greatly damaged the bottom line of target Corporation’s financial statements and weakened its liquidity strength during the last fiscal year of 2015.
Conclusion and Recommendation for Improvement
After a careful analysis of Target Corporation, it has come to light that this company is not suitable for all those investors who are willing to provide financial support to Target Corporation on a short-term basis. This is so because Target Corporation is suffering from liquidity management issues and financial distress where it may fall into liquidity trap at any time. There is no safety margin that short-term creditors will be paid back. The company is even not suitable for equity investors with long-term pursuit in mind. This is because the company employs its debt heavily to finance its asset mix. Target Corporation is not generating lucrative returns for its equity shareholders regardless of whether they invest with short or long term strategy in view.
If the management of Target Corporation is willing to attract more equity investment, it has to bring in improvements in its liquidity management system. It is recommended for the management to revise and redesign its marketing activities as well as supply chain and distribution activities. Target Corporation should market only those products which are high in demand so that it could escape the burden of increased handling and storing of rising ending inventory levels which greatly harms its liquidity strength. From the lesson learned from business activity closure and withdrawal from Canadian market, it is recommended that wherever Target Corporation expands its operations through internationalization and globalization, it should align its business processes and cost structure with those followed in the parent company of United States.
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