The Name Of The Company Is Target Corporation Report
a) The core reason behind selecting the company is too unearth the trend in the financial position as the stock has been hit hardly after its decision to shut down operations in Canada. This will help us to come up with a concrete investment recommendation over the stock. In addition, study of the independent auditor report and MD& A section of the annual report, will provide us an in-depth overview of the financial standing of the company.
b) The primary motivation of analyzing the latest annual report of the company is to forecast the stock behavior on the basis of accessing the trend in the financial performance of the company for the past three year, and comparing the same with the industrial averages. This will help me with a conclusion, i.e. if I should invest in the company, or not.
Chapter 1: Company and Annual Report Essentials
Headquarters of the company are located at 100, Nicollet Mall, Minneapolis, Minnesota, United States
Below is the link to the homepage of the company’s website:
Telephone Number: (800) 775-3110
The company is listed on New York Stock Exchange(NYSE)
The company is listed on New York Stock Exchange under the ticker symbol of ‘TGT’.
SIC Code: 5331
Sector: Retail-General Merchandise/ Department Stores
There are in total 10 Board Members in the company.
The Annual Meeting of Shareholders was scheduled for June 11, 2014 at 1:30 p.m. (Central Daylight Time) at Union Station, 400 South Houston Street, Dallas, TX 75202
Company Strategy and Business Environment
Interestingly, We did not find any message from the chairman in the annual report of the company.
Interestingly, We did not find any message from the chairman in the annual report of the company.
-Type of Business: Discounted Retailing of household and other affiliated items
-Major Business Segments: US and Canada(closed with effect from February, 2015)
-Primary Customers: General Consumers
-Primary Products: Everyday essentials and affiliated items
The major source of supply of the company is sourced from China, and any negative vibes between US and China, can prove detrimental to the company. However, if everything runs smoothly, then the supply chain will remain efficient.
US economy is showing signs of significant improvement in the level of consumer spending, and if the trend continues, it will be a boon for retailer like Target Corporation.
Target Corporation is already facing 80 litigation cases relating to data breach of credit card and personal information because of technological loophole exploited at its stores by an intruder. Thus, the company will need to be technology capable and updated to avoid any such circumstances in the future.
The company is increasingly volunteering in the social activities with society giving more reference to entities serving the community through CSR activities.
Referring to the above table, we can infer that during the current year, Target Corporation has not been able to generate improved sales, as the sales figures soared down from $73301 million to $72596 million. Subsequent effect was visible on the other financial items such as net income, EPS and Total Assets figure that also decreased accordingly.
General Company and Marketing Information
The company has been aggressively involved in the community work and also gives 5% of its annual profit toward building a strong and healthy community.
Reports by Management
-The Chairman and CEO of the company is responsible for maintain the internal controls
-‘’ To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures’’
- External Independent Auditors, Ernst and Young, audited management’s assessment of the effectiveness of company’s internal control over financial reporting.
Independent Auditor Report
-Ernst and Young are the external auditors of the company and are headquartered in London, United Kingdom.
-External auditors are responsible to check the internal control measures designed by the company, and also to ensure that the financial transactions and information presented are meaningful and provides fair view about the financial standing of the company.
-The company itself is responsible for preparing information to be included in the financial statements, while auditors are only responsible for auditing them
-Audit was conducted in accordance of Public Company Oversight Board.
-The auditors have provided an unqualified opinion for the financial statements of the company and assert that the financial statements are presented fairly.
Management Discussion and Analysis
The management declared that the cash position during the current year has increased significantly, and similar is the situation with short-term investments. Thus, we believe that over a year, the company has improved its liquidity position.
During the year, the cash position of the company improved significantly while unsecured bonds were also issued by the company amounting to $1 billion.
Chapter 3: Statement of Cash Flows
Yes, the cash flow statement is prepared for the same year as Income Statement and Balance Sheet.
As we can witness from the table above, above financial multiples are not moving in same direction. For Instance, during 2012(prior year of financial reporting), sales figure peaked high from $68466 million to $71960 million, however, the CFO figure declined marginally from $5434 million to $5325 million while net income surged to $2999 million. In general, a company generating high CFO amount than its net income is considered to be financially strong, and the same is case here. However, the decline in CFO amount could be attributed to increase in gain on receivable transaction and marginal increase in account receivables that offset the effect of increase in depreciation expense, thus, resulting in decreased CFO figure while net sales and net income were in increasing trend.
Interestingly, the trend was opposite in 2013(current year of financial reporting), as during the year, the sales figure and CFO figure surged, but net income declined significantly from $2999 million in 2012 to $1971 million. The reason was clearly cited in the CFO statement where along with increased depreciation expense and accounts payable, proceeds on sale of account receivables amounting to $2703 million inflated the CFO figures while net income was on declining trend.
During 2013, the company spent $3453 million on purchase of plant and equipment.
During 2013, an amount of $3002 million was raised on sale of account receivable originated at third party.
Referring to cash flow from investing activities, the company has been spending a hefty amount on purchasing new capital assets, and this shows the confidence of the management over future well-being of the company. Important to note, the proceed of $3002 million from sale of account receivable originated at third party, is not a recurring capital transaction for a company, and overall, the outflow over investing activities has been consistently high.
During 2013, an amount of $3463 million has been paid to redeem long-term debt of the company.
During 2013, cash inflow of $456 million has been realized on exercise of stock option and related tax benefits. Apart from this, there was no source of cash inflow.
As noted from the CFF statement, the company has not made any sort of addition, either through debt or equity to its capital structure during 2013. In fact, the company has been aggressively retiring its debt and is also engaging into repurchase of capital stock. Thus, we can infer that the company is trying to be self-reliant on its retained earnings and is avoiding any sort of borrowings to be included in its capital structure.
Chapter 3: Statement of Shareholder Equity
Consolidated Statement of Shareholder Investment or Statement of Shareholder Equity of Target Corporation, comprise of the following items:
i) Cash Dividend per Share: $1.65 per share
ii) Payout Percentage: DPS/EPS
iii)Dividend Yield: DPS/ Market price
Comparing Dividend Yield to Industry Peers
The dividend yield of the company is well above the average industrial multiple of 1.9%. In addition, with US stock markets back on bullish trend, the dividend yield is very much alignment with the sentiments of the market.
Chapter 3: Notes to the Financial Statements
Referring to Note 9 of the Financial Statements, in addition to liquid cash, the cash equivalents includes highly liquid investments with original maturity of less than three months. In addition, Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions.
Referring to Note 10 of the financial statement, Target Corporation value its inventory using retail inventory accounting method(RIM) using Last-in-First-out(LIFO) method, while the inventory is valued at lower of cost or market value. On a generalized basis, Inventory Valuation Method is used by the company to value the cost of goods sold and inventory. LIFO is one of the inventory valuation method which assumes that the entity first sells the latest inventory purchased.
*As of now, Target Corporation operates only in United States, hence there is no information over valuation of international inventory
No, Target Corporation has not made any investment in marketable securities.
i)Income Tax expense during the year: $1132 Million
ii)Income Tax paid during the year: $1386 Million
iii) Elements that give rise to Deferred Tax Assets
-Carry forward of unused tax losses
-Carry forward of unused tax credits
-Deductible temporary differences
iv)Elements that give rise to deferred tax liabilities
- Higher depreciation rate as per tax laws
v) Effective Tax Rate for the current year: 36.5%
- Statutory Tax Rate for the current year: 35%
Referring to note 12 of the financial statements, the company have following fixed asset group:
Goodwill amount reported during the year: $151 Million
Note 1: Goodwill was disclosed as one item of other non-current assets
Note 2: No impairment of the Goodwill amount was recorded during 2013
Note 3: No information is provided by the management relating to accounting of Goodwill amount
-Minimum payment for operating lease payments: $4103 Million
-Minimum payment for capital lease payments: $5313 Million
-Ratio of operating lease payments to capital lease payments: 4103/5313= 0.77
-Concern over undisclosed operating lease payments:
Assuming that the company of our interest has leased the asset and is not the lessor itself, in such case, if operating lease are not disclosed in the balance sheet, we will not be concerned as such leases leaves the balance sheet unaffected and only rental expense(lease payments) is recognized in the income statement.
Referring to Note 14 of the financial statement, we have sourced the following information relating to notes payables by the company:
Note: Separate information relating to each note and bond is not provided in the annual report of the company
-Interest expense recognized during the year: $1126 million
-Cash paid for interest expense during the year: $1120Million(net of capitalized interest)
-Projected Benefit Obligation (PBO) during the year (qualified plans): $3173 Million
-Post-retirement benefit obligation (APBO) during the year (qualified plan): $73 Million
-Amount of pension expense during the year: $115 Million
-Amount of other post-retirement healthcare benefits expense during the year: -$2 Million (net of amortization expense)
-Cash contribution to 401K defined contribution plan: $229 Million
-Fair Value of plan assets: $3267 Million
Referring to Note 17 of the financial statement, we found that the company has more than 80 pending litigations registered against it in relation to data breach related credit card information and personal by an outside intruder, using malware at a point of sale at the company’s store. The company declares that it is expecting some penalties in this concern from the Federal and State Courts, but the range of such penalties cannot be estimated.
Target Corporation has not disclosed any separate operating segment results. However, referring to note 28 of the financial statements, the company has only two geographical segments, i.e. in USA and Canada, with following revenue and operating income figures:
Revenue: $71279 Million
Operating Profit: $4959 Million
Revenue: $1317 Million
Operating Profit: -$941 Million
Target Corporation has two geographical segments, USA and Canada, with following revenue figures:
Revenue: $71279 Million
Revenue: $1317 Million
Below are the items that comprise of the comprehensive income of the company:
Referring to the table above, we can witness that over the years, the profit margins of the company has been reducing consistently. Important to note, the gross margins of the company are marginally lower than the industrial average of 30.59%. Similar trend is witnessed in the net margins of the company that are well below the industrial average of 10.54%.
Interestingly, the revenue figures, operating income and operating cash flow tell the different story, because the operating cash flow figure of the company has been significantly higher than the operating income, which itself is a concrete indication of financial soundness of the company. Hence, we believe that the loss in the profitability margins of the company is a temporary phase, and the company will soon improve its profitability margins.
Referring to the table above, we can witness that the current ratio of the company is on declining trend, but the multiple is well above the industrial average of 0.81. However, on checking the liquidity of the company with the stringent measure of the quick ratio, we found that during the latest year, the company has faced significant stroke to its liquidity with quick ratio multiple falling to 0.15, while the industrial average is 0.61.
As for the solvency position, the debt/equity ratio of the company has declined marginally to 0.95 as compared to 1.06 during the previous year. However, as compared to the industrial average of 0.50, the capital structure seems to be significantly over-leveraged. Moreover, the declining trend in the interest coverage ratio of the company which is also well below the industrial average of 18.9, indicates that the company is losing its ability to honor interest obligations.
Thus, considering the above analysis, we can assert that the current financial condition in the company is a source of concern.
Referring to the table above, we can assert that over the period of three years, the company has disappointing trend in relation to return generated on equity investments and asset base. As for ROE multiple, although the company has higher ROE than the industrial average of 9.46%, but the same cannot be sustainable as it was majorly sourced from decreased equity base of the company.
Similarly, the ROA multiple, which indicates the return generated using the asset base is also on declining trend and well below the industrial average of 5.11%
Our concern over the inefficiency of the company’s management is confirmed after witnessing the trend in the asset management ratios. While the results for receivable turnover seems satisfactory with improved multiple, our core concerns underlies within the asset turnover and inventory turnover ratio of the company which although are in increasing trend but below industrial averages.
This indicates that the in comparison to the industrial peers, management of Target Corporation is inefficient in using its asset base to generate revenue figures.
Z-Score for current year: 2.6484
Z-Score for previous year: 2.6439
Z-Score for two year back: 2.6321
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