Term Paper: Target Corporation and Wal-Mart Stores

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[. . .] However, when comparing the Total Returns of Wal-Mart to that of Target, it is apparent that Wal-Mart has delivered higher returns over 1997-2002.

FY2002 is likely to see both Wal-Mart and Target improve on their Total Returns performance against both Industry and the S&P 500 given the already announced improvements in Q1 earnings reports.

The market capitalization of both Wal-Mart (247,132.1) and Target (37519.1) are well above the S&P 500 average of 19,717.5.

On the parameter of Financials, both Target and Wal-Mart compare favorably with the S&P 500 Index. However, it is very clear that Wal-Mart is by far the stronger company as compared to both Target as well as the S&P 500 performance. Wal-Mart's Revenue Growth (% 3 years) stands at 16.5 as compared to Target at 9.2 and the S&P Index at 15.4. Target Corporation does outperform both Wal-Mart and the S&P 500 Index on EPS but suffers in comparison on all other scores such as Revenue Growth, Return on Equity and Debt Equity Ratio. Wal-Mart outperforms on both counts of Return on Equity (19.0) and Debt to Equity Ratio (0.5).

A look at the valuation ratios of Wal-Mart and Target, measured against S&P 500 performance also reveals the relative strength of Wal-Mart which has a higher PE of 37.3 vs. Target's 27.6 and a 5-year average PE of 40.1 against Target's 25.8. The Valuation Chart also reflects Wal-Mart's stronger PEG Ratio of 2.3, which meets the norm of 'excellent'. Target's PEG is 1.6 which is also good but shows relative weakness to Wal-Mart. Wal-Mart has also rewarded its shareholders through 21.4% Dividend growth over 5 years - far higher than Target's 7.5% and the S&P 500 average of 0.2%

The above comparisons helps in investment decisions since it is a clear indicator that the management of a company can accurately read and anticipate consumer trends, cater to emerging new tastes and thereby keep growing market share, revenue and income (through effective management of costs and inventory turnover). For it is this constant creation of wealth and thereby shareholder value that has an impact on stock prices and demand for company stock. A company's past performance is a good measure of its ability to continue to tap future growth opportunities.

Criteria # 3: Management Effectiveness

This criterion is valid for comparing these two companies because comparison of performance in the areas of Return on Equity, Return on Assets and Return on Investment indicates which company is better managed.

Criterion

Wal-Mart

Target

Management Effectiveness

Return on Equity (TTM)

Return on Assets (TTM)

Return on Investment (TTM)

Comparison of the above figures will reveal which company is better equipped to tap future potential and opportunities in a manner designed to maximize market share and profitability.

The figures in the table above show that the difference between Wal-Mart's figures and that of Target's is not dramatically different. In other words, Target is also a well managed company but the above figures lean towards Wal-Mart being the better investment

Criteria # 4: Long-Term Debt Equity Ratio

This criterion is valid for comparing these two companies because it is a company's Long-Term Debt Equity Ratio that measures the amount of assets being provided by creditors for each $ of assets being provided by owners.

The use of the LT Debt Equity Ratio helps in determining whether Wal-Mart or Target is the better investment because the higher a company's LT Debt Equity Ratio, the higher it is financially leveraged raising the need to question its ability to service debt, fund future growth plans and distribute earnings among its shareholders.

On this criterion, Wal-Mart is significantly better placed than Target with a LT Debt Equity Ratio (MRQ) of 0.53 as compared to Target's 1.03.

Criteria # 5: Segment Analysis

This criterion is valid for comparing the two companies because both operate in multiple retail formats and therefore it would be important to examine the health and future prospects of the various segments contributing to their business.

Segment Analysis helps to determine investment viability because weak segments or loss making segments can have a negative impact on the overall profitability of the company as well as affect ability to further invest in profitable growth areas.

This criteria shows that Wal-Mart is seeing healthy growth in each of its retail formats, be it Sam's Club or Supercenters or Neighbourhood Markets whereas an analysis of Target Corporation's sales and revenue growth from Mervyn's and Marshall Field's does raise some questions as to the future of these segments. FY 2002 saw each of Wal-Mart's business segments deliver year-on-year growth of net sales whereas both Mervyn's and Marshall Field's have actually seen a decline in net sales over FY2000. It is also significant that a little over 80% of Target Corporation's revenues comes from Target whereas Wal-Mart stores contribute around 63.80% to the total. Given that each of Wal-Mart's business segments are in better health and are showing good growth prospects, as compared to Target - on this criterion too Wal-Mart is the choice of investment.

Criteria # 6: Market Expansion

This criterion is valid for comparing the two companies because they are operating in a mature industry in a mature economy.

A look at the scope and nature of expansion plans will help in assessing future outlook and prospects.

In Target's case, given that its operations are only within the United States, it will primarily depend on market share gains from competition for growth whereas Wal-Mart has already made a presence in 9 countries outside the U.S. with plans to enter the tenth - Japan.

This indicates that Wal-Mart's prospects for growth are better: always providing that the Company manages to replicate its successful business model in the U.S. elsewhere in the world and a look at the performance of its International Division so far seems to indicate that it has done so.

Criteria # 7: Inventory Turnover

This is an important criterion especially when evaluating two large-scale players in an industry with known low margins.

The company's Inventory Turnover reflects its ability to efficiently manage its supply lines and equally move the inventory out of its stores as a sale.

In this area too, Wal-Mart scores with an impressive 7.79 (for its giant size) as against Target's 3.13. Wal-Mart's ability to move large amounts of merchandise is also reflected in its Average Sale Period of 46.85 as compared to Target's 116.61. The Inventory Turnover and Average Sale Period figures have been calculated from the last Annual Reports of the companies.

It must be mentioned though that Target is working towards improving its Inventory Turnover by investing in Information Technology to improve supply chain management on the one hand while introducing concepts like chip cards to customize promotions to individual customers on the other. But the results of these efforts have yet to accrue and reflect in measurable performance.

To conclude, though Target Corporation has put in an incredible performance in recent years, Wal-Mart is the better investment.

Compared to the S&P 500, Target Corporation is a good investment. The reasons for this judgement are:

Criteria: Comparison of all standard performance norms

The criteria are valid because they show the relative performance of Target stock vis-a-vis the S&P 500 Index.

The comparison will help answer the question of whether Target Corporation is a good investment since the S&P 500 Index serves as a benchmark for good performance.

Target's performance vis-a-vis the S&P 500 has already been established earlier in this paper (6.1.2). The only additional points to be made are: Currently Target's Beta is 1.15 indicating higher price volatility relative to the S&P. However, since it is the company's long-term prospects that are being evaluated here, this factor has been ignored.

Secondly, although Target's Year End Dividend Yield has been lower than the S&P 500 over the same 5-year period, it has to be viewed from the perspective that since the S&P 500 Index is made up of stocks across various sectors, dividend performance should be weighed against retail industry average especially considering that the discount segment of the retail industry works on thin margins.

Finally, it is important to consider that Target Stock Performance compares favorably to that of the S&P 500 Index though it may be trailing the index on certain parameters. Viewed from that angle, and the fact that the stock does outperform the S&P Index in areas like Total Returns and Dividend growth over a 5-year period, the conclusion is that Target Corporation is a good investment prospect. Having said that, as an investor, it would be key to keep a careful watch on the company's Debt Equity Ratio, which needs to be improved.

Compared to the S&P 500, Wal-Mart is a good investment. The reasons for this judgement are:

The reasons for the above judgement have already been comprehensively covered earlier in this paper under point 6.1.2. A point of additional interest though is the fact that Wal-Mart is among the top 10 weighted S&P 500 stocks.

In regard to lending decisions… [END OF PREVIEW]

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Target Corporation and Wal-Mart Stores.  (2002, May 27).  Retrieved July 17, 2019, from https://www.essaytown.com/subjects/paper/target-corporation-wal-mart-stores/9083339

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"Target Corporation and Wal-Mart Stores."  Essaytown.com.  May 27, 2002.  Accessed July 17, 2019.
https://www.essaytown.com/subjects/paper/target-corporation-wal-mart-stores/9083339.