Target Corporation

Target Corporation  

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Target Corporation

Target Corporation (Target) has displayed robust financial health in the retailing industry in the United States. The expansion of its online shop, as well as its store remodeling strategy, have yielded growth in sales. Similarly, investment in technology has improved operational efficiency and enhanced the customers’ shopping experience. Therefore, Target’s growth strategy is pegged on its ambitious investment program that focuses on repositioning its brand in a highly-competitive retail industry. Specifically, the reinvention of Target’s supply chain, enhancement of its fulfillment capabilities, and the reimagining of its stores yielded traffic growth. This increased the company’s comparable sales at an industry-leading proportion of 5 % in 2018 (Target, 2018). Besides, investments in technology delivered a 36-percent growth in digital sales by bringing in revenues of over 5 billion dollars in the same year. Without departing from its business model of being a discount retail outlet, Target seeks incremental improvements through the incorporation of technology to deliver sustainable profitability. The ensuing analysis delves into the organizational strategy, operational plan and significant financial events that are backed by an analysis of its financial statements since 2017. Future projects are also provided.         

Background

Target Corporation is a retailing giant in the United States that specializes in selling discounted merchandise and groceries. Since its foundation in 1902, it has grown to become the eighth largest retailing chain in the United States in the highly-competitive retail industry. Target’s extensive supply chain, continuous innovation, a variety of fulfillment options and incorporation of technology have enabled it to provide its guests, as it refers to its customers, with an exciting shopping experience. Target reaches its guest through 1,844 stores and an online platform, which are supported by 40 distribution centers strewn all over the country and nearly 360,000 employees (Security and Exchange Commission, 2019). Besides, the company dedicates 5 % of its profits to society as part of its corporate social responsibility (Target, 2018).  

Organizational vision, mission and financial goals

Target’s vision statement is, ‘Guided commitments to great value, the community, diversity, and the environment’. From its vision, Target prioritizes all-inclusive impacts and guided commitment to its brand. Itsmission statement is, ‘To make Target the preferred shopping destination for our guests by delivering outstanding value, continuous innovation and exceptional guest experience by consistently fulfilling our Expect More- Pay Less brand promise’. As such, Target, focuses on pricing its merchandise reasonably, offering convenience to its customers and exceeding expectations. Financial goals include remaining sustainably profitable while investing sufficiently to maintain and expand its market share. By investing heavily to remodel existing stores, open new small-format stores and expand its online outlet, Target expects to increase its revenues over time and maintain robust financial health (Target, 2018).   

Organizational structure

Target has a hierarchical organizational structure. However, it combines the functional and geographical structures by having 11 executive departmental vice presidents and regional managers under its chairperson and CEO, Brian Cornell, who reports to a board of directors. The functional organizational structure is evident in the top management of the company, while the regional and store managers are evidence of the geographical structure down the management rank. The functions captured in this structure include human resources, marketing, and digital, legal and risk, food and beverage, information, operations, strategy and innovation, stores, finance, merchandising, and external engagement (Target, 2018).

In its geographical structure, the country is divided into four regions, namely Northwest, West, Southeast and East, which are headed by senior vice presidents who report to the executive vice president in charge of store operations as the chief stores officer. Each senior vice president is in charge of all the stores and distribution centers in their region. Senior vice president also oversees the group directors who are in charge of the stores in their groups within a region. This hierarchy trickles down to store managers and employees, also called team members at the company. Altogether, while the hierarchical structure at Target provides a central command for the entire retail chain, it also allows regional autonomy, which makes stores responsive to the unique characteristics of their location (Target, 2018).  

Although no significant changes in the company’s leadership occurred in 2018, 2019 saw the reassignment of senior managers and the creation of new positions to drive efficiencies and accelerate progress. For instance, the chief human resource officer, Stephanie Lundquist, was reassigned as the president of food and beverage. Similarly, the senior vice presidents of human resources, Mellissa Kremer, and communications, Katie Boylan, were promoted to the chief human resource officer and the chief communications officer, respectively. Similarly, new positions were created. For instance, enterprise data analytics and business intelligence were added to technology services under the chief information officer, Mike McNamara. The digital portfolio was added to marketing, to be headed by the chief marketing officer, Rick Gomez, who became the chief marketing and digital officer (Hulbert & Boylan, 2019). The inclusion of technology into the information and marketing dockets illustrated the company’s prioritization of technology in its business and growth strategies.         

Strategy

Target’s business strategy is to refresh its brand continuously by modernizing its brick-and-mortar stores while expanding its online shop to enhance the customers’ shopping convenience and experience. As such, the company seeks incremental growth by leveraging innovation and technology to make it more responsive to the ever-changing customer preferences (Target, 2018). To this end, Target Corporation remodeled over 400 existing stores and looks forward to refurbishing another 600 by the close of 2020. Additionally, the company opened over 24 small-format stores, with plans to add another 30. The new additions are located on college campuses and urban locations that have a high customer traffic. Moreover, Target now offers Drive Up and same-day fulfillment of orders across the entire United States, making it the first retailer to do so in the country (Target, 2018). This was after it acquired Shipt, a same-day online delivery company, for 550 million dollars (Dignan, 2017). Besides, the company raised the minimum wage of its employees to an hourly rate of 12 dollars in 2018 and 13 dollars in 2019, and plans to increase this to 15 dollars per hour by 2020.  

Another strategy is to grow digital sales by over 25 % annually. In keeping up with the technology use strategy, the company acquired Grand Junction, a transportation technology company, to improve its supply chain and delivery services (Dignan, 2017). In addition, Target has a social media presence through Facebook, Twitter, YouTube, Instagram, Pinterest, Linked-In, and rss-feeds to drive traffic to its webpage and online shop (target.com). Besides, the company was using technology to link its stores to the online shop. Specifically, items bought online could be collected from a target store within an hour (Target, 2018). With these efforts, the company expects to continue surpassing the 25-percent digital growth rate in the future, and subsequently sustain its financial growth as well.  

Financial analysis

Horizontal analysis

Target exhibited financial growth, as indicated in the 3.63-percent-increase in its total revenue between 2017 and 2018. Similarly, Target’s total assets grew by 4.1 % while it invested 65.5 % more in the refurbishment of its existing stores. Consequently, the net profits grew by 0.8 % while the earning per share increased by 4.3 % in the same period as illustrated in figure 1.  

Table 1. Selected data from 2018 and 2017

Item	2018 (million US$)	2017 (million US$)	Change (million US$)	Change (%)
Sales	74,433	71,786	2,647	3.69
Total revenue	75,356	72,714	2,642	3.63
Total assets	40,303	38, 724	1,579	4.1
Capital expenditure on existing stores	2,699	1,631	1,068	65.5
Net profits	2,937	2,914	23	0.8
Net earnings per share	5.55	5.32	0.23	4.3

Source: Target (2018)

The 36 % growth in digital sales contributed significantly to the revenue growth in 2018, continuing the over 25-percent growth trend for the last five years. This can be attributed partly to the 65.5 percent increase in refurbishment expenses, which have included linking the stores to the online outlet. 

Vertical analysis

In the vertical analysis, two or more items in Target’s financial statement of 2018 have been compared to inform about the financial health of the company. Table 2 presents the data that has been used alongside that in table 1 to measure, liquidity, profitability, leverage, and management efficiency. Specifically, the current ratio, net profit margin,  return on assets, debt ratio, debt to equity ratio, inventory turnover and asset turnover are calculated and interpreted.

Table 2. Selected data from the 2018 financial report

Item	2018 (million US$)
Sales	74,433
Current assets	12,540
Total assets	40,303
Current liabilities	13,052
Total liabilities	28,652
Inventory	8,597
Cost of sales	53,299
Total shareholders’ investment (equity)	11,651
Net income	2,937

Source: Target (2018)

Financial ratios

1. Liquidity ratio

Current ratio    = current assets / current liabilities.

                        = 12,540 / 13,052

                        = 0.96

• Performance ratios

Net profit margin        = net income / sales

                                    = 2,937 / 74,433

                                    = 0.04

The net profit margin measures the profitability of a company.

Return on assets          = net income / total assets

                                    = 2,937 / 40,303

                                    = 0.07

Evaluates the efficiently of management in using the company assets to generate revenue.

• Leverage ratios

Debt ratio        = Total liabilities / Total assets

                        = 28,652 / 40,303

                        = 0.71

Debt to equity ratio     = total liabilities / Total shareholders’ investment

                                    = 28,652 / 11,651

                                    = 2.46

This indicates that Target relies on debt to finance its growth. Indeed, the company has been engaged in an ambitious initiative of remodeling more than 400 stores and opening over 24 small-format stores, which required debt financing.

• Activity ratios

Inventory turnover      = cost of sales / inventory

                                    = 53,299 / 8,597

                                    = 6.2

Asset turnover             = sales / total assets

                                    = 74,433 / 40,303

                                    = 1.85

Interpretation of the financial ratios

Since the current ratio 0.96, which is very close to 1, Target has no problem repaying its liabilities because it has sufficient liquidity. The net profit margin was 4 % compared with the industry average of 1.33 % (CSI Market, 2019). However, the low margin is consistent with that of discount stores, which focus more on sale volumes rather than large profit margins. In addition, the return on assets (ROA) was 7 % compared to the industry average of 3.9 % (CSI Market, 2019). This is indicative of efficient management at the company, considering that the company still relies heavily on its capital-intensive brick-and-mortar store model.   

The company’s debt ratio was 0.71, which is higher than the recommended value of 0.4. Moreover, the company’s debt to equity ratio was 2.46, which was higher than the average of online shops (0.52) and retail apparel (0.61) but lower than that of the entire retail industry of 8 % (CSI Market, 2019). This implies that although the company was heavily indebted due to its huge investments in its ambitious modernization strategy, it could service its debt comfortably if the investments yielded positive results rapidly.

From the asset turnover ratio, Target generated $ 1.85 from every dollar worth of assets. However, the company had an inventory ratio of 6.2, which means that it can sell its merchandise entirely and replace it 6.2 times every year. Although this value is indicative of fast-flowing merchandise, it is high enough to present the risk of running out of stock if products are sold out. Although this value was higher than the average in the department and discount retail industry of 6.59, it remained lower than the grocery industry average of 10.6, according to CSI Market (2019). Nonetheless, these values are indicative of the high reliance on inventory rather than company assets to generate revenues, which is consistent with the retail industry.

Future projections

The company CEO, Brian Cornell, informed shareholders and investors in 2017 that the company had earmarked 7 billion dollars, including 1 billion dollars of its annual profits, to grow its sales, increase its market share and respond to the changing preferences of customers in the next three years (Target Brands, 2019). Moreover, the company will continue leveraging technologies such as artificial intelligence, augmented reality, virtual reality, voice and data analytics to enhance customer targeting, engagement and personalization. Already, the application of new technologies had cost down the costs of fulfillment by 20 %, thus having the potential to improve the operational efficiency of the company and sustain its profitability in the future (Gagliordi, 2019). Besides, digital sales had grown by over 25 %, which was expected to be sustained by investments in technology. 

Already, the company was engaging startup accelerators, specifically, the Metro Target Retail Accelerator and the Target Incubator, to reinforce its in-house data capabilities. From this initiative, the company would use the lessons learned to create new tools that would improve customer connection between the online and physical stores while providing real-time product personalization and recommendations (Milnes, 2019). In addition, the startup program was instrumental in creating new and innovative products that can be added to the company brand going forward. This program is expected to supply the company with new products and operational innovations in the future, to sustain its profitability and growth.    

Conclusion

Target has continued to post a good performance as a significant player in the retail industry in the United States. Besides, its strong financial health and good reputation have enabled it to access internal and external financial resources to fund its ambitious improvement program. Considering that Target operates in a highly competitive retail environment, responsiveness to the changing customer preferences is essential. Therefore, the company has directed much of its capital towards the refurbishment of its existing stores, opening new stores with a small format, and using technology innovatively. Already, investments in technology are yielding significant growth in traffic and revenues. This has contributed to the financial health that was illustrated by the financial analysis. With the injection of 7 billion dollars into the improvement program, the company is focusing on improving its operational efficiency while increasing customer engagement, personalization, and shopping experience. As such, technology is expected to play a major role in driving the profitability and performance of Target in the future.   

References  

CSI Market (2019). Screening. Retrieved from https://csimarket.com/screening/index.php?s=it&pageI=5&fis=#tableind.

Dignan, L. (2017). Target buys Shipt for $550m, will offer same-day delivery on most stores by holiday 2018. CBS Interactive. Retrieved from https://www.zdnet.com/article/target-buys-shipt-for-550-million-will-offer-same-day-deliver-in-most-stores-by-holiday-2018/.

Gagliordi, N. (2019). Target’s digital efforts drove $5 billion in sales for 2018. CBS Interactive. Retrieved from https://www.zdnet.com/article/targets-digital-efforts-drove-5-billion-in-sales-for-2018/.

Hulbert, J. & Boylan, K. (2019). Target reports November/December sales, maintains full-year sales and EPS guidance – press release. Target Brands. Retrieved from https://corporate.target.com/press/releases/2019/01/target-reports-november-december-sales-maintains.

Milnes, H. (2019). How Target uses its startup accelerators to strengthen its in-house data capabilities. Digiday. Retrieved from https://digiday.com/retail/target-uses-startup-accelerators-strengthen-house-data-capabilities/.

Security and Exchange Commission (2019). Form 10-K: Target corporation. Retrieved from https://www.sec.gov/Archives/edgar/data/27419/000002741919000006/tgt-20190202x10k.htm.

Target (2018). 2018 annual report. Target Corporation. Retrieved from https://corporate.target.com/annual-reports/2018.

Target Brands (2019). Investing to grow: Target commits more that $7 billion to adapt to rapidly evolving quest preferences. Retrieved from https://corporate.target.com/article/2017/02/financial-community-meeting.