Target Capital Budgeting

Analysis
FIN470 – Fall2020
Youssef El Yazidi
Outline
1. Moments in the history of Target.
2. Industry Analysis.
3. Target’s Business Model.
4. Performance of Target.
5. Capital Budgeting Techniques .
6. Target’s Capital Budgeting Process.
7. Questions.
8. Sources.
History of Target:
• Founded in 1962 out of the department store Dayton’s, Target
was a discount retailer but was also known as a destination for
trendy items.
• Through 1970s and 1980s, it aggressively added more stores
across the US to compete with grossers and big box chains like
Walmart, Kmart, and Kroger’s.
• Early 1990s shoppers were opting to go to target for its low
priced fashion forward merchandise.
• Target was all about ‘Cheap Chic’, by partnering with fashion
designers to offer exclusive lines for home goods and clothing .

 When the great recession occurred, Target pulled back on its designs and
became more conservative. It chose to focus more on essentials instead of
fashion.
Industry Analysis: Retail

• Companies in this sector sell a wide range

of products to consumers and businesses,
from food and apparel to hardware,
household goods, and office supplies.

• Major companies include Wal-Mart, Home

Depot, Kroger, Costco, and Target.
 Industry Analysis:
Retail

Market Size of
Retailer Stores in
the US
(2010-2020)

Data Source: ibisworld.com

Industry Analysis: Retail
Top grocery retailers by Sales 2020
Industry Analysis: Retail

Market share of the

leading department
stores in the United
States in 2018
Target’s Business Model:
 Target’s merchandise is limited when compared to Walmart and Costco but it
mixes national brands that the customers in the US already know with the
private label and company-owned brands.

 The company also partners with designers and brands from time to time to
launch an exclusive range for Target’s customers. While this helps the company
increase its demand, it also works as a promotional method.

 Target focuses on the shopping experience instead of only on the price. By

treating its customers as “guests” and tailoring its products to the higher end
shoppers with an average household income of $64000.

 Apart from offering its employees career growth through continuous training and
the use of development programs, the company also offers several financial and
health benefits.

 Target has established a large network of company-owned stores throughout the

United States. It operates its business throughout the 50 states of the country.
According to Target, more than 75% of the nation’s population lives within close
proximity of a Target store.
Performance of Target:
Revenue of Target in North America from 2005 to 2019
Performance of Target:
Revenue of Target in North America from 2005 to 2019
Performance of Target:
Revenue of Target in North America from 2005 to 2019
Performance of Target:
Performance of Target:
P/share change in % of TGT compared to WMT and S&P500 (2016-2020)
Capital Budgeting techniques:

• There are multiple methods to evaluate projects :

• Payback Period (PBP)
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Profitability Index (PI)
1- Payback Period:

• PBP is the period of time required for the cumulative expected cash flows from an
investment project to equal the initial cash outflow.
• A project is accepted if its PBP is less or equal than the maximum allowable
payback period (usually set by the managers).

𝑈𝑛𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑐𝑜𝑠𝑡
𝑎𝑡 𝑡h𝑒 𝑠𝑡𝑟𝑎𝑡 𝑜𝑓 𝑡h𝑒 𝑦𝑒𝑎𝑟
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑=𝑌𝑒𝑎𝑟𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐹𝑢𝑙𝑙 𝑟𝑒𝑐𝑜𝑣𝑟𝑦 +
𝐶𝑎𝑠h 𝑓𝑙𝑜𝑤 𝑑𝑢𝑟𝑖𝑛𝑔
𝑡h𝑒 𝑦𝑒𝑎𝑟
1- PBP Strengths and Weaknesses:

Strengths: Weaknesses:
 Easy to use and  Does not account
understand for TVM
 Can be used as a  Does not consider
measure of cash flows beyond the
liquidity PBP
 Easier to forecast ST  Cutoff period is
than LT flows subjective
2- Net Present Value:

• NPV is the present value of an investment project’s net cash flows minus the project’s
initial cash outflow.
• A project is accepted if its NPV is positive. (An NPV<0 destroys shareholder’s wealth).

++…+
2- NPV Strengths and Weaknesses:
Strengths: Weaknesses:
 Cash flows  May not include
assumed to be managerial
reinvested at the options embedded
hurdle rate. in the project.
 Accounts for TVM.
 Considers all
cash flows.
3- Internal Rate of Return:

• IRR is the discount rate that equates the present value of the future net cash flows
from an investment project with the project’s initial cash outflow.
• A project is accepted if its IRR > Hurdle Rate.

++…+
3- IRR Strengths and Weaknesses:

Strengths: Weaknesses:
 Accounts for  Assumes all cash
TVM flows reinvested at the
 Considers all IRR
cash flows  Difficulties with
 Less project rankings and
subjectivity Multiple IRRs
4- Profitability Index :

• PI is the ratio of the present value of a project’s future net cash flows to the project’s
initial cash outflow.
• A project is accepted if its PI > 1.

𝑃𝐼 =
[
𝐶𝐹 1
(1+ 𝑅𝑅𝑅)
1
+ 
𝐶𝐹 2
(1+ 𝑅𝑅𝑅)
2
+ … +  
𝐶𝐹𝑛
(1+ 𝑅𝑅𝑅)
𝑛
÷ ICO
]
4- PI Strengths and Weaknesses:
Strengths: Weaknesses:
 Same as NPV  Same as NPV
 Allows  Provides only
comparison of relative profitability
different scale  Potential Ranking
projects Problems
Target Capital Budgeting Process:

• The Capital Expenditures Committee is composed of a team of top executives that

meet monthly to review all Capital Project Requests (CPRs) in excess of $100,000.
• If the CPR is larger than $50 million it need to be approved by the board of directors.
• CPRs are reviewed at a lower level first to reject those with questionable economics.
• Approvals or denials had potential to set precedents for future CPRs.
• If the Committee couldn’t reach a consensus decision, the CEO will have the final call.
Target Capital Budgeting Process: (Cont.)

• Projects typically require 12 to 24 months of development before being presented to

the CEC.
• In the case of new store proposals, a real-estate manager will be assigned to the CPR
from its inception to its presentation to the CEC.
• The pre-CPR work requires expenditures that cannot be recovered if the project is
rejected. Additionally, there are “emotional sunk costs” where a manager feels
significant disappointment if his project was not approved.

 The over all goal is to meet the 100 store openings per year as well as
maintain brand image.
Do you believe that the dashboards contain all relevant information
needed to make the right capital decisions?
Which projects did you choose and why?:

Project 1: Gopher Place

• Medium initial investment ($23 million).
• Good IRR (12.3% > 9% RRR) and good NPV.
• Low population but high population increase (27%)
• High Median income but low % adults 4+yrs college.
 Project has good growth potential.
• Wal-Mart is projected to open two more stores in this location. [dashboard]
 Project will allow direct competition.
Which projects did you choose and why?:

Project 2: Whalen Court

• Big Investment (has to be sent to the board of directors for approval)
• Mediocre IRR (9.8% > 9% RRR) and mediocre NPV compared to investment size.
• High risk if sales decline ($16 million loss).
• High population but low population increase.
• Medium Median income but High % adults 4+yrs college.
 Project is sub-par given the investment size.
Which projects did you choose and why?:

Project 3: The Barn

• Very low investment compared to other projects.
• Good IRR (16.4% > 9% RRR) and good NPV (keep in mind that IRR favors small
projects).
• Very low population and population increase.
• Very low Median income and % adults 4+yrs college.
 Project conflicts with the target demographic for a Target store.
Which projects did you choose and why?:

Project 4: Goldie’s Square

• Medium investment.
• High risk (10% sales decline will put the project at a negative NPV).
• Very Low IRR (8.1% < 9% RRR) and NPV ($300 thousands) especially considering that
it is a SuperTarget.
 Project does not meet the RRR and will not be a good investment.
Which projects did you choose and why?:

Project 4: Stadium Remodel

• Low investment.
• Medium risk ($7 million loss if sales decline).
• Low IRR given that it is a small project (10.8% > 9% RRR) and medium NPV.
• The stadium is in a perfect location for a Target store ( very high median income and
very high % adults 4+yrs college).
 Good investment since Target has already established its brand in the location,
and a remodel will help increase the store’s sales and potential growth.
Sources
• https://seekingalpha.com/article/4052428-wal-mart-vs-target-which-is-better-invest
ment
• https://corporate.walmart.com/newsroom/2010/10/13/walmart-announces-capital
-strategy-to-drive-global-growth-next-years-capital-spending-to-increase-slower-tha
n-sales
• https://brainmass.com/business/foreign-direct-investment/capital-budgeting-of-wal
-mart-300827
• https://investor.costco.com/node/18876/html
• https://finance.yahoo.com/quote/TGT/key-statistics?p=TGT
• https://corporate.walmart.com/newsroom/2010/10/13/walmart-announces-capital
-strategy-to-drive-global-growth-next-years-capital-spending-to-increase-slower-tha
n-sales
• https://www.businessinsider.com/how-target-gets-you-to-spend-more-money-in-st
ore-2018-4
• https://www.forbes.com/