Running Head: FINANCIAL ANALYSIS OF TARGET AND WAL-MART 1

Financial Analysis of Target and Wal-Mart

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FINANCIAL ANALYSIS OF TARGET AND WAL-MART 2

Financial Analysis of Target and Wal-Mart

Introduction

The choice of making an investment is a decision made by the investor. The most important

aspect to consider in this respect is the overall performance of the company in relation to the

economic condition of the market. However, sometimes an investor may be in a dilemma deciding

which company to invest in. In such a scenario, it is advisable for the investor to perform a

complete comparative analysis of firms under question then make a decisive conclusion over the

firm that will benefit the investment plan.

In the given case, it is a dilemma for the investor to choose between Wal-Mart Stores and

Target Corporation. Both firms happen to be in the retail industry, one of the booming sectors in the

world. They have good financial records with a brand image that attracts any investment plan.

However, identifying an ideal firm for the investment requires detailed comparative analysis for the

two firms regarding their financial position, strengths, weaknesses, competitors, and future

prospects.

History and Description of the Company

Wal-Mart Stores, Inc.

Wal-Mart stores, Inc. is a multinational retail store founded by Sam Walton in 1962. The

American corporation runs a chain of large departmental and warehouse stores that retail a diverse

range of products varying from groceries, automotive accessories to household goods. According to

Fortune Global 500 list, Wal-Mart Stores, Inc. is considered the largest retail company measured by

revenue in 2014 globally. The same list positions the corporation as the biggest private employer

with over two million workers (Walmart Stores, Inc., 2014). Despite its ownership by the Walton

family, most investors admire the company due to its financial stability. With unique strategic plan,

the firm has expanded their investment to major cities in the world with the largest being the Wal-

Mart Stores in America. Under retail sector, business is always flourishing as clients are
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 3

everywhere. Being in the retail industry, Wal-Mart draws most of its clients from America.

Target Corporation

Target Corporation, an American-based retail firm, was established as Goodfellow Dry

Goods, in 1902. After its establishment, the firm made changes in the company name until the year

2000 when the management finally named the company Target Corporation. The company holds the

record of being the second largest discount retailer within the U.S. region dealing with a wide range

of household goods, sporting equipment, and entertainment gadgets. According to Fortune 500 lists,

Target Corporation is the 36th largest company in the world measured by revenue. The customer

base of the company is within America where it operates over 1900 stores. However, after

discovering the potential of the retail industry, the management decided to expand the venture of the

company to Canada (Target Brands, Inc. , 2014).

Financial Analysis

10-Y Financials for Wal-Mart Stores

Annual Rates (per share) 10 yrs.* 5 yrs.* 12 months*

Revenue Growth (%) 9.00 8.60 4.30
EBITDA Growth (%) 9.20 8.00 -0.40
EBIT Growth (%) 8.60 7.50 -2.20
Free Cash Flow Growth (%) 22.90 -0.90 2.30
Book Value Growth (%) 8.20 6.60 9.80
Source: gurufocus.com (http://www.gurufocus.com/financials.php?symbol=WMT)

10-Y Financials for Target Corporation

Annual Rates (per share) 10 yrs.* 5 yrs.* 12 months*

Revenue Growth (%) 9.00 7.40 1.90
EBITDA Growth (%) 7.70 3.70 -23.30
EBIT Growth (%) 6.30 2.50 -36.90
Free Cash Flow Growth (%) 0.00 -6.00 -59.40
Book Value Growth (%) 6.50 5.50 2.20
Source: gurufocus.com (http://www.gurufocus.com/financials.php?symbol=tgt)

The above tables show the 10-year financials for Wal-Mart Stores and Target Corporation.

Analysis shows that Wal-Mart Stores is performing well for the 10-, 5-, and 1-year financials.

However, the financial analysis of Target Corporation shows some decline especially in the 12-
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 4

months financials for growth. The decline is attributed to the breach in information that happened in

2013, which made more investors losing trust in their investment safety. The company discovered a

data breach where an intruder stole some payment cards among other guest information from their

network. The expenses accrued after data breach amounted to $61 million (United States Securities

and Exchange Commission Target Corporation, 2014).

Appendix I and II show the financial statements for Wal-Mart Stores and Target Corporation

respectively from their Annual Reports and 10Ks. The revenue per share for Wal-Mart Stores seems

to perform well for the past four years compared to Target Corporation (United States Securities and

Exchange Commission Target Corporation, 2014). In terms of dividends per share, Wal-Mart Stores

yielded high dividends per share for the past four years. However, the trend on the growth of

dividend shows that Target Corporation is more stable as compared to that of Wal-Mart Stores. The

returns on capital for Wal-Mart are also high compared to that of Target Corporation. In terms of

profitability, Target Corporation seems to outdo Wal-Mart Stores. The average Net Margin for Wal-

Mart is 3.6% while that of Target Corporation is 4.1% (United States Securities and Exchange

Commission Wal-Mart Stores, 2014).

Strengths and Weaknesses

Strengths of Wal-Mart Stores

 The stock price for the company appreciates a reflection of a good performance of the

company together with an increase in confidence of the investor.

 The company implements appropriate business strategies that respond positively to the

alternating external environment forces. The strategies also assist the firm in gaining a

recommendable return on investment.

 From the financial institutions, the company gets low interest rates making the borrowing cost

low, which makes the repayment schedule easy.

 Wal-Mart Stores, Inc. is a firm dealing with high-risk business evident from the high interest it
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 5

gains. With the presence of insurance policies, the company is not afraid of doing business of

any kind, despite the risk.

 For the four-year period, Wal-Mart has shown a sustained growth, a move that attracts funding

from investors and lenders.

Weaknesses of Wal-Mart Stores

 Despite the stock appreciation, the stock price fluctuates, a reflection that the company has

not met capital market of stakeholders.

 Financial trends keep on fluctuating, which increases interest rates that upsurge the

corresponding risk of lending and repayment.

 High risks for the company investment plan require redistribution of risks, which increases

the insurance cost. High costs reduce the investment returns for the company.

Strengths of Target Corporation

 The stock price of the corporation appreciates a reflection of a recommendable performance

of the company. The stock price appreciation attracts investors.

 Target Corporation business strategies help in sustaining the corporation through hard

economic times. A business that survives throughout the business cycle attracts high returns

on investment as it shows how active and profitable the organization is in the market.

 Most financial institutions that extend loan facilities to the firm have low interest, a move

that reduces the cost of borrowing. Low cost of borrowing transforms extra expenses to

profits.

 Retail industry has high risks, which translate to high interest rates. Target Corporation takes

advantage of the high risks by purchasing insurance policies that cover any loss.

 Analysis of the four reports shows that Target Corporation maintains its growth rate, which

attracts funding from both lenders and investors.

Weaknesses of Target Corporation

FINANCIAL ANALYSIS OF TARGET AND WAL-MART 6

 Economic conditions affect the price of stocks leading to instability. With price instability,

the capital market of Target Corporation stakeholders may not be accomplished.

 Market forces might affect interest rate for borrowing. High interest rate increases

repayment risk.

 The retail industry has many risks involved. The situation forces the corporation to spread

the risks through purchase of insurance policies from various companies. Purchases of

insurance policies increase the cost, which in the long run affects the investment plan.

Competitors

Wal-Mart Stores faces competition from two major stores: Costco and Kroger. Costco

Wholesale Corporation is an organization within the retail industry running more than 500

warehouses in 38 states. The company has extended its venture to six other countries: Japan,

Canada, Taiwan, Mexico, the UK, and Korea. The competitive advantage of the company relies

mainly on the limited products produced but with high sales and inventory turnover, as well as low

prices due to discount offered and store located in strategic places. Kroger is yet another competitor

operating more than 2400 warehouses. The company competes with Wal-Mart in the category of

supermarkets and multi-department stores. The company offers products alternative to those

produced by Wal-Mart. Both Costco and Kroger use the same strategies as Wal-Mart. These include

the discounting factor, the use of a niche market in marketing approach, and the distribution

channel. However, the major difference is low prices offered by the competitors (Yahoo Inc. Wal-

Mart Stores Inc. (WMT): Competitors, 2014).

Target Corporation also faces competition from Amazon.com, Inc. and Sears Holdings

Corporation. Sears Holdings Corporation is a retail multinational that operates both in the US and

Canada. The company operates stores dealing with merchandise similar to that of Target

Corporation such as household goods. The company seems to perform well in New York Stock

Exchange. Amazon.com, Inc. is yet another competitor for Target Corporation. The company
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 7

operates as an online retailer with market demand majorly from North America. The company uses

two websites to sell their merchandise: amazon.com and amazon.ca. Apart from the way they sell

their products, the company offers programs to sellers enabling them to extend their selling services

to company’s websites. Strategies used by these two competitors are quite different to those used by

Target Corporation. The service offered by Amazon.com, Inc., different from Target Corporation, is

the free shipping of items (Yahoo Inc. Target Corp. (TGT): Competitors, 2014).

Trends in the Industry

Both Wal-Mart and Target Corporation are in the retail industry. Currently, the retail industry

seems to be a booming business line in the world with most organizations establishing themselves

as distributors of merchandise. Presently, the retailing industry follows a unique trend in line with

technology. Most firms have discovered the importance of technology in the distribution process of

their merchandise. Some of the common trends in retailing market are discussed below.

Fast Movement of Customers

Most retailing firms work an extra mile to discover the purchasing behavior of clients. In

addition, they find it hard to predict what consumers might require next. However, consumers are

not that easy to sustain as they spend their time window-shopping both in stores and online. Their

expectation is high quality goods and services irrespective of the channel they use. That means that

retailers might require implementing an omni-channel commerce strategy. Retail firms should

connect with different users of their products from multiple channels simultaneously or

interchangeably (Vend Limited, 2014). In 2014, most retailing firms were giving their consumers

abilities to communicate and complete transactions online without going to the stores making trade

in business easy for both the client and the company.

Rise in the Use of Mobile Wallets

Prior the use of mobile wallets was the use of cash and credit cards, which dominated the

payment links for most companies. However, financial institutions have designed mobile wallet
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 8

where a client can pay the bill using a cell phone. With the changing trend in ways of payment,

most retail firms are installing the mobile wallet services in their system to easy transaction process.

PayPal, Google Wallet, Dwolla, and Square Wallet provide common mobile wallet services among

others (Vend Limited, 2014).

Shoppers Adopting of Personalized In-Store Experiences

Currently, most retailers are implementing solutions gearing towards personalization of the

experience of individual consumers. The service was common in e-commerce sites where the

companies involved did via tailored landing pages and recommendations. Bluetooth Low Energy is

a single technology that enables Bluetooth 4.0 device to communicate with smartphones. Use of

such technology will enable retail firms to send a tailored notification to the device of the consumer.

Re-invention of Loyalty Programs

2013 was the year when most consumers enrolled in 7.4 loyalty programs. However, 53% of

the enrolled members withdraw their participation annually in at least a single loyalty program,

citing the irrelevant reward system as the main barrier. As a trend discovered in consumers, retail

firms should invest more in their loyalty efforts to ensure they satisfy consumer’s demand (Vend

Limited, 2014).

Future of the Company

From the financial analysis, it is evident that Wal-Mart is performing exemplary well as

compared to Target Corporation. The major reason behind the performance relates to the popularity

of the firm and the price of their products. However, Target has high profit margins compared to

Wal-Mart Stores. The high profit margin is attributed to the highly priced products that the firm

deals with. The complete analysis of the retail industry shows that consumers have a dynamic

purchasing behavior regardless of the price offered. Most clients consider quality rather than price

making it ideal for Target Corporation to take advantage of the consumer’s considerations (United

States Securities and Exchange Commission Target Corporation, 2014).

FINANCIAL ANALYSIS OF TARGET AND WAL-MART 9

Bearing in mind the strengths and weaknesses of the two firms, Wal-Mart is a well-

established company with fluctuating growth and high dividend yield. However, the rate at which

the company makes money is moderate. A closer view of its stock also looks over-priced. The

current stock price of Wal-Mart is $74.10; yet the fair price of stock based on Graham intrinsic

value is $45.84. Target Corporation, on the other hand, is a stable company that yields high

dividends. However, the economic trend of the firm has many booms and troughs. Just like Wal-

Mart, the stock price of the company looks overvalued. The current stock price for the company is

$59.07 yet the fair price of stock based on Graham intrinsic value is $47.01 (United States

Securities and Exchange Commission Wal-Mart Stores, 2014).

Yearly Earnings Forecasts

Company 2015 2016 2017 2018

Wal-Mart Stores 5.01 5.36 5.76 6.33
Target Corporation 3.2 3.81 4.5 5.16
Source: (Zacks Investment Research, 2014)

The table above shows the forecast of earnings per share for the two companies. Seemingly,

Wal-Mart Stores shows higher earnings per share as compared to Target Corporation.

WACC

The weighted average cost of capital (WACC) for Wal-Mart Stores In., is 6.05%. The value

means that the cost of capital for Wal-Mart Stores is 6.05%. The WACC for Target Corporation is

10.22%, a value higher than that of Wal-Mart. From these data, it is clear that Target Corporation is

on the forefront in terms of cost of capital.

Recommendations

The decision on whether to choose Wal-Mart or Target remains up to the investor. However,

numbers do not lie. The analysis of the two firms puts Target Corporation on the front line based on

the growth potential of the firm. For the past decade, revenue for Wal-Mart grew at an annual rate

of 9.7% with that of Target growing at 10%. The EPS for Wal-Mart has grown at an annual rate of

9.6%, while that of Target 8.4% on average. Both firms are exceptional dividend growers. Financial
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 10

information shows that both companies have been performing similarly for the past ten years;

however, investment is dependable on the future of the company.

Target Corporation is big in terms of strategies, but Wal-Mart is huge in numbers. Wal-Mart

has already established its base limiting their growth potential. Target, on the other hand, is growing

as it is still exploring new markets with new strategies. My recommendation as a business

consultant is for the investor to go for Target Corporation.

FINANCIAL ANALYSIS OF TARGET AND WAL-MART 11

References

Target Brands, Inc. (2014). Target Brands. Retrieved October 19, 2014, from Target Brands:

http://www.target.com/

United States Securities and Exchange Commission. (2014). Target Corporation. Retrieved October

16, 2014, from FORM 10-K:

http://www.sec.gov/Archives/edgar/data/27419/000002741914000014/tgt-

20140201x10k.htm#sE95E2160C81354BBE9B6B8F76EB667A3

United States Securities and Exchange Commission. (2014). Wal-Mart stores, Inc. Retrieved

October 16, 2014, from FORM 10-K:

http://www.sec.gov/Archives/edgar/data/104169/000010416914000019/wmtform10-

kx13114.htm

Vend Limited. (2014). Retail trends and predictions 2014. Retrieved October 16, 2014, from Vend:

http://www.vendhq.com/retail-trends-and-predictions

Walmart Stores, Inc. (2014). Walmart. Retrieved October 19, 2014, from Walmart Stores:

http://www.walmart.com/

Yahoo Inc,. (2014). Target Corp. (TGT): Competitors. Retrieved October 16, 2014, from Yahoo!

Finance: http://finance.yahoo.com/q/co?s=TGT+Competitors

Yahoo Inc,. (2014). Wal-Mart Stores Inc. (WMT): Competitors. Retrieved October 16, 2014, from

Yahoo! Finance: http://finance.yahoo.com/q/co?s=WMT+Competitors

Zacks Investment Research. (2014). Target Corporation earnings forecast. Retrieved October 16,

2014, from Nasdaq: http://www.nasdaq.com/symbol/tgt/earnings-forecast

Zacks Investment Research. (2014). Wal-Mart stores, Inc. earnings forecast. Retrieved October 16,

2014, from Nasdaq: http://www.nasdaq.com/symbol/wmt/earnings-forecast

FINANCIAL ANALYSIS OF TARGET AND WAL-MART 12

Appendix 1

Wal-Mart Stores Financials

Per Share Data

Fiscal Period Jan11 Jan12 Jan13 Jan14 TTM
Revenue per Share ($) 114.95 128.66 138.29 145.08 147.69
EBITDA per Share ($) 9.10 10.03 10.74 10.92 10.96
EBIT per Share ($) 6.96 7.64 8.18 8.19 8.18
Earnings per Share (diluted) ($) 4.47 4.52 5.02 4.88 4.87
eps without NRI ($) 4.18 4.54 5.01 4.85 4.78
Free Cashflow per Share ($) 2.98 3.09 3.75 3.09 3.62
Dividends Per Share 1.21 1.46 1.59 1.88 2.38
Book Value Per Share ($) 19.49 20.86 23.04 23.59 24.09
Tangible Book per share ($) 14.73 14.82 16.85 17.55 17.97
Month End Stock Price ($) 56.07 61.36 69.95 74.68 74.10
Ratios
Fiscal Period Jan11 Jan12 Jan13 Jan14 TTM
Return on Equity % 23.58 22.45 23.02 21.00 21.30
Return on Assets % 9.34 8.39 8.57 7.86 7.75
Return on Capital - Joel Greenblatt 24.30 24.12 24.21 22.91 22.63
%
Gross Margin % 25.34 25.02 24.83 24.82 24.79
Operating Margin % 6.05 5.94 5.92 5.64 5.53
Net Margin % 3.89 3.51 3.63 3.36 3.30
Total Equity to Total Asset 0.38 0.37 0.38 0.37 0.38
Income Statement
Fiscal Period Jan11 Jan12 Jan13 Jan14 TTM
Revenue 421,849 446,950 468,651 476,294 480,479
Gross Margin % 25.34 25.02 24.83 24.82 24.79
Net Margin % 3.89 3.51 3.63 3.36 3.30
Balance Sheet
Fiscal Period Jan11 Jan12 Jan13 Jan14 Latest Q.
Total Assets 180,663 193,406 203,105 204,751 203,985
Total Current Liabilities 58,484 62,300 71,818 69,345 67,152
Total Liabilities 112,121 122,091 126,762 128,496 126,239
Total Equity 68,542 71,315 76,343 76,255 77,746
Total Equity to Total Asset 0.38 0.37 0.38 0.37 0.38
Cashflow Statement
Fiscal Period Jan11 Jan12 Jan13 Jan14 TTM
Net Income 16,993 16,387 17,756 16,695 16,620
Cash Flow from Investing -12,193 -16,609 -12,611 -12,298 -10,601
Cash Flow from Financing -12,028 -8,458 -11,972 -11,017 -15,896
Net Change in Cash -512 -845 1,231 -500 -2,832
Capital Expenditure -12,699 -13,510 -12,898 -13,115 -12,162
Free Cash Flow 10,944 10,745 12,693 10,142 11,744
FINANCIAL ANALYSIS OF TARGET AND WAL-MART 13

Appendix 2

Target Corporation Financials

Per Share Data

Fiscal Period Jan10 Jan11 Jan12 Jan13 TTM
Revenue per Share ($) 86.59 92.39 102.16 110.51 114.78
EBITDA per Share ($) 8.88 10.06 10.90 11.33 8.86
EBIT per Share ($) 6.19 7.20 7.78 8.10 5.19
Earnings per Share (diluted) ($) 3.30 4.00 4.28 4.52 2.39
eps without NRI ($) 3.30 4.00 4.28 4.52 2.36
Free Cashflow per Share ($) 5.50 4.31 1.56 3.09 2.10
Dividends Per Share 0.66 0.84 1.10 1.32 1.72
Book Value Per Share ($) 20.61 22.00 23.64 24.96 25.93
Tangible Book per share ($) 20.61 22.00 23.64 24.63 25.93
Month End Stock Price ($) 51.27 54.83 50.81 60.41 59.07
Ratios
Fiscal Period Jan10 Jan11 Jan12 Jan13 TTM
Return on Equity % 17.12 18.94 18.71 18.52 9.30
Return on Assets % 5.61 6.62 6.48 6.33 3.38
Return on Capital - Joel Greenblatt 14.38 16.70 16.29 15.45 10.56
%
Gross Margin % 30.26 30.87 30.86 31.01 28.88
Operating Margin % 7.15 7.79 7.62 7.33 4.53
Net Margin % 3.81 4.33 4.19 4.09 2.07
Total Equity to Total Asset 0.35 0.35 0.34 0.34 0.37
Income Statement
Fiscal Period Jan10 Jan11 Jan12 Jan13 TTM
Revenue 65,357 67,390 69,865 73,301 73,229
Gross Margin % 30.26 30.87 30.86 31.01 28.88
Net Margin % 3.81 4.33 4.19 4.09 2.07
Balance Sheet
Fiscal Period Jan10 Jan11 Jan12 Jan13 Latest Q.
Total Current Assets 18,424 17,213 16,449 16,388 11,554
Total Assets 44,533 43,705 46,630 48,163 44,455
Total Current Liabilities 11,327 10,070 14,287 14,031 11,336
Total Liabilities 29,186 28,218 30,809 31,605 28,022
Total Equity 15,347 15,487 15,821 16,558 16,433
Total Equity to Total Asset 0.35 0.35 0.34 0.34 0.37
Cashflow Statement
Fiscal Period Jan10 Jan11 Jan12 Jan13 TTM
Net Income 2,488 2,920 2,929 2,999 1,514
Cash Flow from Investing -1,703 -1,744 -4,180 -2,855 -2,522
Cash Flow from Financing -2,842 -4,015 -2,140 -2,488 -1,643
Net Change in Cash 1,336 -488 -918 -10 -215
Capital Expenditure -1,729 -2,129 -4,368 -3,277 -2,588
Free Cash Flow 4,152 3,142 1,066 2,048 1,337