Target Case Writeup- Financial Reporting and Accounting

Executive Summary

Based on our analysis of Target’s financials as well as Ackman’s plan for the company, we believe that there are two fundamentally different questions being addressed. Target’s current financial troubles appear to be stemming from the depressed economy which is hurting its sales figures as consumers substitute their upscale purchases with low cost alternatives. Additionally, credit card expenses have doubled due to increased bad debt expenses and delayed payments. Operationally, the company appears to suffer from drawn out receivables and a slow cash conversion cycle compared to its primary competitor, Wal-Mart. Its business model of providing an upscale alternative to discount retailers has made it subject to economic cycles. While Ackman’s proposal does address the credit card issue, he makes a claim that the company’s strategy has become misguided, but primarily focuses on the capital structure of the company and does not offer any long term operational improvements. His plan for the sale and lease-back of property as well as the share buyback focus on changing the company’s capital structure and improving shareholder value. Ultimately, we do not believe that these recommendations fundamentally alter the financial performance of the company, though the changes in capital structure may ultimately affect share price.

Logic of Recommendations

Target has positioned itself as a provider of upscale retail items side by side with discount items in a department store environment. Its motto of “Expect More, Pay Less” clearly defines this position. Target is telling its customers that they can pay discount store prices yet get more than what they would expect to find at a store like Wal-Mart. The company has tied itself with numerous designers and exclusive products to support this unique position. This has also been reflected in its unique advertising methods. Ultimately, this has allowed the company to target more affluent...