Target Corp - Risk Analysis

Executive Summary

If you have ever wondered if anyone can compete with Wal-Mart, the answer is Target, almost! Target, incorporated in Minnesota in 1902, consists of two reportable segments: Retail and Credit Card. The retail segment, which represents the majority of sales, is comprised of general merchandise and discount food; the credit card segment offers credit to qualified customers. With almost 1700 stores in 48 states, and new stores opening each year, they fall just behind corporate giant Wal-Mart. Target goes head to head with Wal-Mart and Costco every year with 64.95 billion dollars in revenues, generating 2.21 billion dollars in income. In 2008, they beat Wal-Mart with a 28.60% gross margin versus 24.52%. Although their profitable margins might be attractive in good times, in bad economic times Target faces a competitive risk from retailers with lower prices and margins. Despite their continued success, they are subject to a variety of risks that could adversely affect revenues generated by Target Company and subsequently the value for the shareholders. Some of these business risks include a down trending economy, product mix, and pricing strategy. Not only does general spending, or market size, shrink during a recession but Target’s market share will decrease since consumer behavior shifts to “use most, buy most” purchases. In 2008 about 65% of Target’s selection was comprised of general merchandise, a category highly susceptible to financial conditions and customer taste. Market risks are due the cyclicality of Target’s business and their high cost of debt. Target’s operation is also extremely sensitive to any changes in COGS and SG & A. A rise in credit card expenses also has a moderate effect on overall cash flows. Increases in any of these major expenses will therefore have a drastic effect on profitability, cash flows and overall value of Target. Thus, in response to the slowing economy, Target has chosen to expand its food selection....