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[solution] » You chair the Board of Directors at Target Corporation. After the

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You chair the Board of Directors at Target Corporation. After the
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You chair the Board of Directors at Target Corporation. After the firm released its 2014 financial

 

statements, you are faced with an important decision. The first agenda item at the next board

 

meeting is whether to retain or dismiss the company?s chief executive officer. As head of the board,

 

you will introduce this issue, state your position, and moderate the ensuing discussion. As you

 

contemplate this important recommendation, you consider the following items about your company

 

and its industry.

 

Target Corporation is a Minnesota company incorporated in 1902. Target described itself in its 2014

 

annual report by stating, ?We offer our customers everyday essentials and fashionable differentiated

 

merchandise at discounted prices.? Target is the second largest discount retailer in the United States

 

behind Walmart when measured by sales revenues, total assets, and market capitalization.

 

Retailing is the economic sector that links the producer of products to end­use customers. It is the

 

largest segment of the American economy. The totality of retail transactions constitutes about two­

 

thirds of the gross domestic product (GDP) in the United States, according to U.S. Department of

 

Commerce. Financial analysts view merchandising as a mature industry, defined by intense

 

competition, low profit margins, and business consolidation.

 

Numerous economic factors affect retailers. Notable among them are real changes (inflation­

 

adjusted) in GDP, levels of disposable income, and consumer confidence. In short, people shop

 

when they have money, and they are confident that they will have it in the future. Consequently,

 

retailers tend to thrive during economic expansions and suffer during economic contractions.

 

The 2007­2009 economic down turn hurt sales for all retailers. Sales have rebounded in the

 

five years after the recession, but many analysts feel that industry performance remains sluggish.

 

Marketers note the post­recession watchword for retail customers is value. Consumers, regardless

 

of economic standing, want quality at a relatively low price.

 

A recent threat to traditional bricks and mortar retailers, such as Target, has been the

 

rise of online retailing. Firms such as Amazon have taken sales and market share away from Target,

 

Walmart and others who primarily sell their goods at fixed locations. In addition to this general

 

industry threat, Target has faced numerous company issues. The primary ones are an ill­fated

 

attempt to launch stores in Canada, an extensive data breach to its customers? information, and the

 

erratic performance of its Target credit card business. More importantly, some analysts have

 

criticized Target from losing sight of its objective as theupscale discounter; a purveyor of cheap

 

chic, which differentiated the firm from its competitors.

 

You turn your attention to Target?s four most recent income statements, balance sheets, and

 

statements of cash flows excerpts:

 

Target Corporation

 

Income Statements (in

 

millions of dollars)

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Total revenues

 


 

$ 72,596

 


 

$ 73,301

 


 

$ 69,865

 


 

$ 67,390

 


 

Costs of sales

 


 

51,160

 


 

50,568

 


 

47,860

 


 

45,725

 


 

Gross profit

 


 

21,436

 


 

22,733

 


 

22,005

 


 

21,665

 


 

Operating expenses

 


 

17,207

 


 

17,362

 


 

16,683

 


 

16,413

 


 

Operating income

 


 

4,229

 


 

5,371

 


 

5,322

 


 

5,252

 


 

Net interest cost

 


 

1,126

 


 

762

 


 

866

 


 

757

 


 

Income before income taxes

 


 

3,103

 


 

4,609

 


 

4,456

 


 

4,495

 


 

Income tax expense

 


 

1,132

 


 

1,610

 


 

1,527

 


 

1,575

 


 

Net income

 


 

$ 1,971

 


 

$ 2,999

 


 

$ 2,929

 


 

$ 2,920

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Cash

 


 

$ 695

 


 

$ 784

 


 

$ 794

 


 

$ 1,712

 


 

Accounts receivable

 


 

­

 


 

5,841

 


 

5,927

 


 

6,153

 


 

Inventories

 


 

8,766

 


 

7,903

 


 

7,918

 


 

7,596

 


 

Prepaid expenses and other

 


 

2,112

 


 

1,860

 


 

1,810

 


 

1,752

 


 

Total current assets

 


 

11,573

 


 

16,388

 


 

16,449

 


 

17,213

 


 

Property, plant, & equipment, net

 


 

31,378

 


 

31,663

 


 

29,149

 


 

25,493

 


 

Other assets

 


 

1,602

 


 

1,122

 


 

1,032

 


 

999

 


 

Total assets

 


 

$ 44,553

 


 

$ 48,163

 


 

$ 46,630

 


 

$ 43,705

 


 

Target Corporation

 

Balance Sheets (in millions

 

of dollars)

 

Assets:

 


 

Liabilities and Shareholders'

 

Equity:

 

Current liabilities:

 


 

Accounts payable

 


 

$ 7,683

 


 

$ 7,056

 


 

$ 6,857

 


 

$ 6,625

 


 

Other current liabilities

 


 

5,094

 


 

6,975

 


 

7,430

 


 

3,445

 


 

Total current liabilities

 


 

12,777

 


 

14,031

 


 

14,287

 


 

10,070

 


 

Long­term liabilities

 


 

15,545

 


 

17,574

 


 

16,522

 


 

18,148

 


 

Total liabilities

 


 

28,322

 


 

31,605

 


 

30,809

 


 

28,218

 


 

Contributed capital

 


 

4,523

 


 

3,979

 


 

3,543

 


 

3,370

 


 

Retained earnings

 


 

12,599

 


 

13,155

 


 

12,959

 


 

12,698

 


 

Other shareholders' equity

 


 

(891)

 


 

(576)

 


 

(681)

 


 

(581)

 


 

Total shareholders' equity

 


 

16,231

 


 

16,558

 


 

15,821

 


 

15,487

 


 

Total liabilities & shareholders'

 

equity

 


 

$ 44,553

 


 

$ 48,163

 


 

$ 46,630

 


 

$ 43,705

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Cash flow from operations

 


 

$ 6,520

 


 

$ 5,325

 


 

$ 5,434

 


 

$ 5,271

 


 

Fixed asset purchases

 


 

3,453

 


 

3,277

 


 

4,368

 


 

2,129

 


 

Cash dividends

 


 

1,006

 


 

869

 


 

750

 


 

609

 


 

Shareholders' Equity:

 


 

Cash Flow Data

 


 

As a competitive benchmark, you also gather the last four years financial statements for Walmart:

 

Wal-Mart Stores

 

Income Statements (in

 

millions of dollars)

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Total revenues

 


 

$ 476,295

 


 

$ 468,651

 


 

$ 446,950

 


 

$ 421,849

 


 

Costs of sales

 


 

358,069

 


 

352,297

 


 

335,127

 


 

315,287

 


 

Gross profit

 


 

118,225

 


 

116,354

 


 

111,823

 


 

106,562

 


 

Operating expenses

 


 

91,353

 


 

88,629

 


 

85,265

 


 

81,020

 


 

Operating income

 


 

26,872

 


 

27,725

 


 

26,558

 


 

25,542

 


 

Net interest cost

 


 

2,216

 


 

2,063

 


 

2,160

 


 

2,004

 


 

Income before income taxes

 


 

24,656

 


 

25,662

 


 

24,398

 


 

23,538

 


 

Income tax expense

 


 

8,634

 


 

8,663

 


 

8,699

 


 

8,663

 


 

Net income

 


 

$ 16,022

 


 

$ 16,999

 


 

$ 15,699

 


 

$ 16,389

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Cash

 


 

$ 7,281

 


 

$ 7,781

 


 

$ 6,550

 


 

$ 7,395

 


 

Accounts receivable

 


 

6,677

 


 

6,768

 


 

5,937

 


 

5,089

 


 

Inventories

 


 

1,909

 


 

1,551

 


 

40,714

 


 

36,318

 


 

Prepaid expenses and other

 


 

460

 


 

37

 


 

1,774

 


 

3,091

 


 

Total current assets

 


 

61,185

 


 

59,940

 


 

54,975

 


 

51,893

 


 

Property, plant, & equipment, net

 


 

115,364

 


 

113,929

 


 

109,603

 


 

105,098

 


 

Other assets

 


 

28,202

 


 

29,236

 


 

28,828

 


 

23,672

 


 

Total assets

 


 

$ 204,751

 


 

$ 203,105

 


 

$ 193,406

 


 

$ 180,663

 


 

Wal-Mart Stores

 

Balance Sheets (in millions

 

of dollars)

 

Assets:

 


 

Liabilities and Shareholders' Equity:

 


 

Current liabilities:

 

Accounts payable

 


 

$ 37,415

 


 

$ 38,080

 


 

$ 36,608

 


 

$ 33,557

 


 

Other current liabilities

 


 

31,930

 


 

33,738

 


 

25,692

 


 

24,927

 


 

Total current liabilities

 


 

69,345

 


 

71,818

 


 

62,300

 


 

58,484

 


 

Long­term liabilities

 


 

54,067

 


 

49,549

 


 

55,345

 


 

50,932

 


 

Total liabilities

 


 

123,412

 


 

121,367

 


 

117,645

 


 

109,416

 


 

Contributed capital

 


 

2,685

 


 

3,952

 


 

4,034

 


 

3,929

 


 

Retained earnings

 


 

76,566

 


 

72,798

 


 

68,691

 


 

63,967

 


 

Other shareholders' equity

 


 

2,088

 


 

4,808

 


 

3,036

 


 

3,351

 


 

Total shareholders' equity

 


 

81,339

 


 

81,738

 


 

75,761

 


 

71,247

 


 

Total liabilities & shareholders' equity

 


 

$ 204,751

 


 

$ 203,105

 


 

$ 193,406

 


 

$ 180,663

 


 

Cash Flow Data

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Cash flow from operations

 


 

$ 23,257

 


 

$ 25,591

 


 

$ 24,255

 


 

$ 23,643

 


 

Fixed asset purchases

 


 

13,115

 


 

12,898

 


 

13,510

 


 

12,699

 


 

Cash dividends

 


 

6,139

 


 

5,361

 


 

5,048

 


 

4,437

 


 

Shareholders' Equity:

 


 

You make a few final mental notes about the financial statements. First, Target did not report any

 

accounts receivable in 2014. That is because Target sold its credit card business to TD Bank at the

 

end of 2013. Second, the fiscal year end for Target and Walmart differ. Like most retailers, Target

 

and Walmart end their fiscal years at the end of January, after the holiday selling and return season

 

ends. In its annual reports, Target refers to its fiscal year in which the 11­month majority took place.

 

For example, Target?s 2013 annual report referred to the year started on February 1, 2013 and

 

ended on January 31, 2014 as 2013. Walmart, on the other hand called that same fiscal year 2014.

 

To avoid confusion in your analysis, you have recast Target?s financial statements on a comparably­

 

dated basis as those of Walmart.

 


 

Required: (1) Complete the following tables by computing the required 2013 and 2014 ratios for

 

Target and Walmart.

 

Target Corporation

 


 

2014

 


 

2013

 


 

2012

 


 

2011

 


 

Return on equity

 


 

18.5%

 


 

18.9%

 


 

Return on total assets

 


 

11.4%

 


 

12.0%

 


 

Operating profit margin

 


 

4.2%

 


 

4.3%

 


 

Asset turnover

 


 

1.50

 


 

1.54

 


 

Working capital

 


 

2,162

 


 

7,143

 


 

Current (working capital) ratio

 


 

1.151

 


 

1.709

 


 

Inventory turnover

 


 

6.04

 


 

6.02

 


 

Days in inventory

 


 

60.4

 


 

60.6

 


 

Accounts receivable turnover

 


 

11.8

 


 

11.0

 


 

Days in accounts receivable

 


 

30.96

 


 

33.33

 


 

Operating cycle

 


 

91.35

 


 

93.96

 


 

Accounts payable turnover

 


 

6.98

 


 

6.90

 


 

Days in accounts payable

 


 

52.29

 


 

52.88

 


 

Net cash conversion cycle

 


 

39.06

 


 

41.08

 


 

Debt to capital

 


 

0.66

 


 

0.65

 


 

Debt to equity

 


 

1.95

 


 

1.82

 


 

Times interest earned (earnings

 

coverage)

 


 

3.38

 


 

3.86

 


 

Cash flow adequacy

 


 

1.06

 


 

1.93

 


 

2012

 


 

2011

 


 

Return on equity

 


 

20.7%

 


 

23.0%

 


 

Return on total assets

 


 

13.7%

 


 

14.1%

 


 

Operating profit margin

 


 

3.5%

 


 

3.9%

 


 

Asset turnover

 


 

2.31

 


 

2.34

 


 

Working capital

 


 

(7,325)

 


 

(6,591)

 


 

Current (working capital) ratio

 


 

0.882

 


 

0.887

 


 

Inventory turnover

 


 

8.23

 


 

8.68

 


 

Days in inventory

 


 

44.3

 


 

42.0

 


 

Accounts receivable turnover

 


 

75.3

 


 

82.9

 


 

Days in accounts receivable

 


 

4.85

 


 

4.40

 


 

Operating cycle

 


 

49.19

 


 

46.45

 


 

Accounts payable turnover

 


 

9.15

 


 

9.40

 


 

Days in accounts payable

 


 

39.87

 


 

38.85

 


 

Net cash conversion cycle

 


 

9.32

 


 

7.60

 


 

Debt to capital

 


 

0.61

 


 

0.61

 


 

Debt to equity

 


 

1.55

 


 

1.54

 


 

Times interest earned (earnings

 

coverage)

 


 

7.27

 


 

8.18

 


 

Wal-Mart Stores

 


 

2014

 


 

2013

 


 

Cash flow adequacy

 


 

1.31

 


 

1.38

 


 

Required: (2) Decide whether Target should retain or fire its chief executive officer. Write your

 

rationale for the recommendation that you will read to Target?s Board of Directors.

 


 

 







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