Target Corporation (TGT) $ 58 USD

1
Target Corporation (TGT) 58 USD

• Joe Greiner and Anthony Tori
• 22-November-2005

2
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 community
  initiatives

3
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 upturn.

4
Board of Directors

• Robert J. UlrichChairman and Chief Executive
  Officer, Target
• Richard M. KovacevichChairman and Chief
  Executive Officer, Wells Fargo Co.
• Mary E. MinnickExecutive Vice President,
  President, Marketing, Strategy Innovation, The
  Coca-Cola Company
• Anne M. MulcahyChairman and Chief Executive
  Officer, Xerox Corporation
• Stephen W. SangerChairman and Chief Executive
  Officer, General Mills, Inc.
• Warren  R. StaleyChairman and Chief Executive
  Officer, Cargill, Inc.
• Solomon D. TrujilloChief Executive Officer,
  Telstra Corp

5
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 than its
  competitors.

6
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
  interactive gaming.

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Strategic Units

• Target Commercial Interiors
• Planning
• Building
• Financing
• Managing
• Target.com
• Target Financial Services
• Redcard
• Target Sourcing Services

8
Mergers Acquisitions

• In August 2004, an investment consortium
  including Sun Capital Partners Inc., Cerberus
  Capital Management L.P. and Lubert-Adler/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.

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Competitors

• Wal-Mart
• It operates in two segments, Wal-Mart Stores and
  SAMS 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 Holding
• 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
• 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

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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.

11
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

12
Capital Structure

• Debt Ratings
• 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

Moody's Standard Poors Fitch
Long Term Debt A2 A A
Commercial Paper P-1 A-1 F1
Securitized Receivables Aaa AAA n/a
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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

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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

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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

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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
• Receivable Turnover 9.5521
• Days 38.21
• Payable Turnover 5.8738
• Days 62.14
• 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.

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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.

18
Chart

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

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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

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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
  long-term 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.

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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