Target Corporation

58 USD

(TGT) $

Joe Greiner and Anthony Tori 22-November-2005

Value Proposition
• Target is an upscale discounter that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest friendly store. In addition, Target operates an online business, Target.com • Expect more. Pay less.
– Expect more of everything. More great design, more choices, more convenience, more service and more clothes, housewares, and designer created items that you will not find anywhere else.

• 5% of pretax profits designated for

Management
• Utilizes a regimented and centralized management structure
– Add uniformity to the chain by systematizing departments, decor and fixtures – All stores will look the same, across all markets, with all decisions originating in Minneapolis

• Commitment to growth and its expectation that growth would be measured and orderly with a strong emphasis on filling in existing markets. • Extremely well positioned to benefit in both a soft economy and the hope for an

Board of Directors
• Robert J. Ulrich Chairman and Chief Executive Officer, Target • Richard M. Kovacevich Chairman and Chief Executive Officer, Wells Fargo & Co. • Mary E. Minnick Executive Vice President, President, Marketing, Strategy & Innovation, The Coca-Cola Company • Anne M. Mulcahy Chairman and Chief Executive Officer, Xerox Corporation • Stephen W. Sanger Chairman and Chief Executive Officer, General Mills, Inc. • Warren  R. Staley Chairman and Chief Executive Officer, Cargill, Inc. • Solomon D. Trujillo Chief Executive Officer, Telstra Corp

Customers
• The median Target shopper is 41 years old, which is the youngest of all major discount retailers that Target competes directly against. • The median household income of Target's customer base is roughly $58,000 USD. • Roughly eighty percent of Target customers are female, and about 43 percent have children at home. • About eighty percent have attended college and 43 percent have completed college. • Target stores tend to attract younger and more educated and affluent customers

Suppliers/ Vendors
• Associated Merchandising Corp (AMC), a subsidiary of Target Corporation, is a leading global sourcing organization and works with global sourcing companies that source garments and other goods. AMC employs 1,200 people in 27 full-service offices, 48 quality-control offices and seven commissionaires worldwide. • Petters Consumer Brands is a portfolio company of Petters Group Worldwide. With its customer-centric business model, Petters Consumer Brands offers a wide range of value-added products and services. Its relationships with progressive retailers, superior manufacturers, and leading global technology providers, allow for customized development of products and brand extensions.  Areas of expertise include the development of consumer electronics and appliances, for distribution through retail, Internet, catalog, and specialty channels. • Archway Marketing Services is the industry leading outsourcing provider of marketing services. Receive every one of your marketing services from a single source. Archway has the most comprehensive suite of marketing solutions available... from rebates to fulfillment to

Strategic Units
• Target Commercial Interiors
– – – – Planning Building Financing Managing

• Target.com • Target Financial Services
– Redcard

• Target Sourcing Services

Mergers & Acquisitions
• In August 2004, an investment consortium including Sun Capital Partners Inc., Cerberus Capital Management L.P. and LubertAdler/Klaff and Partners L.P. paid $1.65 billion in cash for Mervyn's 257 stores and four distributions centers. • In June 2004, the company sold its Marshall Field's department store unit to May for $3.24 billion.

Competitors
• Wal-Mart
– It operates in two segments, Wal-Mart Stores and SAM’S CLUB. The Wal-Mart Stores segment comprises super centers, discount stores, and neighborhood markets, as well as an online retail format, Wal-mart.com. – Market Cap: $205.83B – #2 on fortune 500 – Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada. – Market Cap: $26.92 B – Costco Wholesale Corporation operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills and self-service warehouse facilities – Market Cap: $24.19 B – #28 on fortune 500

• Sears Holding

• Costco

Industry
• SIC: 5331
– This category includes establishments primarily engaged in the retail sale of a variety of merchandise in the low and popular price ranges. Sales usually are made on a cash-and-carry basis, with the open-selling method of display and customer selection of merchandise. These stores generally do not carry a complete line of merchandise, do not carry their own charge service, and do not deliver merchandise.

News
• Oct 19th Target matched Wal-Marts $4 generic prescriptions drug program • Oct 4th Coach filed a lawsuit against Target for $1 M for selling knock off purses • Oct 9th Might reduce DVD shelf space and marketing efforts if online services get better deals. • Oct 9th Announcement of the opening of 59 new Target Stores • Large cities are raising the minimum wage requirements for big box retailers • September 14 Issues Regular Quarterly Dividend

Capital Structure
• Debt Ratings:
Moody's Standard & Poors Fitch

Long Term Debt

A2

A+

A+

Commercial Paper

P-1

A-1

F1

Securitized Receivables

Aaa

AAA

n/a

• Debt/Equity Ratio: .65 • Financials:

– $1.6 B 5 year revolving credit facility obtained through a group of banks in early June 2005 – Company expectation that operation cash flow coupled with long-term financing activities, and short debt will be sufficient to fund planned capital expenditures including share repurchase, receivable growth, debt maturities, cash requirements, and seasonal inventory buildup

Earnings
• Sales Growth:
– 04-05: 12.34% – 03-04: 11.46% – 02-03: 12.34%

• COGS Growth:
– 04-05: 11.07% – 03-04: 10.76% – 02-03: 11.34%

• Interest Expense Growth:
– 04-05: -18.77% – 03-04: 2.52% – 02-03: -4.79%

Cash Flow
• OCF: $4,451 M • Capital Expenditures: $3,388 M • Free Cash Flow: $1,284 M • Significant Developments:
– Oct 5 Third quarter earnings per share expected to be above $.53 per share – Sep 14 Declaration of quarterly dividend

Balance Sheet
• • • • • • Short Term Assets: $14,405 M Long Term Assets: $20,590 M Short Term Debt: $9,588 M Long Term Debt: $11,202 M Cash: $1,648 M Significant Items:
– Account Receivables are recorded as net allowance for expected losses – Inventory recorded using LIFO method – Property and equipment recorded at cost less accumulated depreciation – No long term debt was issued in 2004 and the company called/repurchased $542 M of long-term debt

Performance Metrics
• • • • • ROA: 7.20% (WMT: 8.98%) ROE: 17.70% (WMT: 22.12%) ROI: 10.70% Cash to Cash: 34.7 Days Inventory Turnover: 6.2247
– Days 58.63 – Days 38.21 – Days 62.14

• Receivable Turnover: 9.5521 • Payable Turnover: 5.8738 • Profit Margin: 4.60% • Competitive Comparison

– Relative to its competitors Target maintains a gross margin of 32.37% which is significantly higher than Costco and Wal-mart at 12.31% and 23.22% respectively. – Target also maintains a profit margin of 4.60% which is significantly higher than Costco and Wal-mart at 1.83% and 3.23% respectively.

Liquidity
• • • • • • Current Ratio: 1.407 Quick Ratio: .8935 Cash Ratio: .1719 Debt Ratio: .5941 Working Capital: $4,817 M Competitive Comparison:
– Target Corporation has a significant advantage by balancing the proportion of liquid assets to short term debt obligations. The company has cash reserves to cover a little over 17% of short term debt obligations.

Chart

• In 2004, all retailers suffered significant hardship due to macro-economic factors • Target Corporation has historically proven sustainable growth

Discounted Cash Flow
• Valuation:
– Based on our DCF model we concluded that the current share price is undervalued at $58.56 USD and should be selling at the price of $65.43 USD

• Assumptions:
– Corporate Tax Rate: 35% – Risk Free Rate equivalent to Federal Reserve Target Rate – Cost of Debt equivalent to Prime – Growth rates include future expected inflation – Historical dividend: Dividend paid for 2005

Target 10Q Outlook
• For the fiscal year 2006, a 53-week year, Target believes it will deliver a mid-teen percentage increase in earnings per share, in line with longterm growth objectives. They do not expect the 53rd week to have a material impact on full year earnings results, though it is expected to have a marginally adverse impact on gross margin rate and interest expense and a marginally favorable impact on sales growth and expense leverage, compared with a 52-week year. • For the remainder of 2006, Target expects to continue to generate a double-digit percentage increase in sales due to the contribution of our new store expansion and our continued growth in same-store sales.

Recommendation
• Based on the results of our DCF model and the strong future outlook of Target Corporations financial situation, we rate this stock a Buy. • All data provided originated from the Target Corporation 10K 2005, 10Q, Yahoo.com, and Bloomberg.com