Target Corporation and Wal-Mart Stores, Inc. The Term Paper

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Target Corporation and Wal-Mart Stores, Inc.

The companies being analyzed are Target Corporation and Wal-Mart Stores, Inc. They are general merchandise retailers. They compete in the large-store general merchandise market, especially in the discount store segment and the U.S. geographic market.

Target Corporation's Store Brands in multiple formats are Target, Super Target, Mervyn's, Marshall Field's, Target Direct and Target Visa. Target operates 1409 stores in 47 states in the United States and is currently the No.3 discount retailer in the U.S. market.

Wal-Mart Stores, Inc. has several Store Brands: Wal-Mart currently operates 2295 Wal-Mart Discount Stores; 1521 Supercenters; 564 Sam's Clubs and 34 Neighbourhood Markets in 9 countries outside the U.S. - Argentina; Brazil; Canada; China; Germany; South Korea; Mexico; Puerto Rico; United Kingdom. Wal-Mart is today the world's largest retailer (and company measured by revenue) and occupies the No.1 position in the U.S. General Merchandise Retail Market.

In regard to investment decisions:

Wal-Mart Stores, Inc. is a better investment than Target Corporation. The reasons for this judgement comprise of a mix of financial and qualitative criteria. The judgement has also been arrived at by taking several of the criteria used in conjunction with each other.

Financial criteria that assumed significance in the judgement are: Company Performances in relation to each other, the Industry and the S&P Index; Management Effectiveness as measured by the Return on Equity, Return on Assets and Return on Investment; Debt Equity Ratio; Segment Performance and Inventory Turnover.

Qualitative judgement has been applied through an understanding of market position; factoring in of a strategic viewpoint on market expansion; and assessing the current strategic direction announced by both companies.

Compared to the S&P 500, Target Corporation is a good investment. This judgement has been arrived at by using the following criteria:

Comparing performance against the S&P 500 Index using measures such as Market Capitalization; Price/Volume; Total Returns; Financials and Valuation Criteria. It is important to mention here that a judgement has been arrived at from a long-term position and therefore any current volatility in share price relative to the S&P 500 index has been ignored.

Qualitative judgement was applied by referring back to the overall analysis conducted to answer the question of which company is a better investment.

Compared to the S&P 500, Wal-Mart is also a good investment. This judgement has been arrived using the same criteria and approach as described in 2.2 above.

In regard to lending decisions

Wal-Mart is a better borrower than Target Corporation, using the following reasons:

An assessment of financial criteria that directly affect a company's ability to service debt such as Times Interest Earned Ratio; Cash Flow; Debt Equity Ratio; Financial Leverage and Price/Cash Flow.

Market perception as reflected in Ratings by institutions such as S&

Compared to the S&P 500, Target Corporation is a good borrower. The criteria used to arrive at this conclusion are:

Comparison with S&P on criteria such as Price/Cash Flow, Investment Grade Ratings, Debt Equity Ratio

Compared to the S&P 500, Wal-Mart is also a good borrower and has excellent ratings. This is indicated by using the same measures as described above.

I would lend Target Corporation $1 billion at 2-3% higher than prevailing market rates of interest under the following conditions

Secured Loan

Option to exercise part conversion to equity

Premium of 1% on Loan balance in case of defaults would lend Wal-Mart $10 billion at prevailing market rates under the same conditions as above.

In regard to decisions as a place where I would be employed, I would choose Wal-Mart over Target Corporation. The reasons based on which I arrived at this decision are as follows:

Reputation as employer

Career Prospects

Overview of Target Corporation and Wal-Mart Stores, Inc.

Target Corporation's Store Brands in multiple formats are Target, Super Target, Mervyn's, Marshall Field's, Target Direct and Target Visa.

Target operates 1409 stores in 47 states in the United States and is currently the No.3 discount retailer in the U.S. market.

Target Corporation has in the last 5-6 years successfully pursued an aggressive growth strategy leading to increased penetration in existing territory through the opening of more stores as well as expansion into new markets.

Target has been following a conscious strategy of positioning itself as a premium discount brand (cheap chic) and focusing heavily on driving its value added service businesses such as the Target Visa and online arm branded Target Direct. The company has entered into a tie-up with Amazon.com with the objective of expanding its online presence and growing its ecommerce.

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Target aims at straddling different consumer segments through positioning Target as premium discount and Mervyn's and Marshall's as moderate price to full service department stores. The company is also placing a great deal of emphasis on its Super Target Stores (competing head on with Wal-Mart's Supercenters) but since the performance of these large format grocery stores is not reported separately by the company, it is difficult to gauge the contribution of this line of business within the ambit of Target Store performance.

Target has also achieved impressive growth in market share, revenues and net income accounting for the stock having come into such limelight on the bourses.

Wal-Mart Stores, Inc. has several Store Brands: Wal-Mart currently operates 2295 Wal-Mart Discount Stores; 1521 Supercenters; 564 Sam's Clubs and 34 Neighbourhood Markets in 9 countries outside the U.S.

Wal-Mart's markets include Argentina; Brazil; Canada; China; Germany; South Korea; Mexico; Puerto Rico; United Kingdom and the United States.

Wal-Mart is today the world's largest retailer (and company measured by revenue) and occupies the No.1 position in the U.S. General Merchandise Retail Market.

Wal-Mart's revenue for FY 2002 was $218 billion. Wal-Mart has, since its inception, built its entire business on one simple principle and that is to offer the lowest prices. Today, the company has extended that tried and tested principle to all kinds of merchandise including consumer electronics and household appliances to groceries stocked by Wal-Mart Stores, Supercenters, Sam's Club and neighbourhood markets. Furthermore, the company is following the same philosophy in its international markets.

Wal-Mart has also been very consistent in managing its business well, which reflects on the shareholder value it has delivered down the years and its current position in the stock markets. Little wonder then that Wal-Mart features so frequently in the top 10 among Fortune's Most Admired Companies in America.

Investment Decisions

Wal-Mart Stores, Inc. is a better investment than Target Corporation. The reasons for this judgement comprise of a mix of financial and qualitative criteria. The judgement has also been arrived at by taking several of the criteria used in conjunction with each other.

Criteria # 1: Comparison of Performance vs. Industry

This criterion is valid for comparing these two companies because it effectively measures performance of each against an overall industry background.

It is important to assess whether a company's performance is better than or at least in line with industry growth, in order to get a measure of how well the companies are being able to gauge consumer trends, spot opportunities, manage resources to maximize potential and profits.

In this connection, it is important to note that while both Wal-Mart and Target are clearly growing share (Wal-Mart's market share has increased to approximately 13% of the overall U.S. market), Target's heavy focus on the grocery segment (Super Target) will take it head on into Wal-Mart territory where it may not be able to effectively match Wal-Mart prices. Although it is true that currently Target is being able to generate higher margins through it's mid-price and premium discount strategy, this may not hold true with larger contribution to sales coming from Super Target Stores. Currently around 80% of company revenue is from the main Target brand. Whereas Wal-Mart Stores constitute 63.8% of overall sales. Wal-Mart is also growing its business through increased same-store sales of 6% in 2002 as compared to Target's same-store sales increase of 2.7%. Clearly, measuring relative performance to Industry and each other, Wal-Mart comes through as the better performer since it is gaining share from competition.

Criteria # 2: Comparison of stock performance to the industry and the S&P 500.

This will also be a valuable input into assessing investment prospects, as it will reveal how good the performance is against capital market performance norms.

Such an assessment will help determine which company is the better investment since the S&P 500 Index comprises of the economy's best performing stocks and therefore this will serve as an effective benchmark

The Price/Volume graph comparing Wal-Mart and Target stock to the S&P 500 clearly shows that while both stocks are at a higher level than the S&P Index, the Wal-Mart stock is the more heavily traded, an indication of higher investor confidence.

Data on the same graph sheet also shows that both Wal-Mart and Target outperformed the S&P Index and Industry in the area of Total Returns over a 5-year period. It must be remembered that FY 2000 was a bad year for the retail industry on the whole, when looking at….....

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