To:Bobby C. Vaught, Ph.D.Date:July 11, 2000
Subject:Target Corporation (Formerly Dayton Hudson)
The main issue facing Target Corporation is what it should do with its department store and Mervyn’s divisions. The company has considered closing or selling the divisions several times over the past few decades. Although both divisions continue to make a profit, the company could be better off focusing all of its attention on the Target stores.
On the other hand, maybe the company needs to take a different approach with the divisions and try to make them more successful to generate greater profits.
Target Corporation is going to have to sell its department store and Mervyn’s divisions if they do not show significant improvements in next year after the new strategy goes into affect. These two divisions are holding Target back and depleting some of its much-needed resources. In the short run the other two divisions are going to start conducting business in the same fashion as the Target stores. If after a year the new strategy, which is making the other two divisions more like the target division, has not produced more profit for the company, it will be time to either sell or close the companies. Target would much rather sell the companies, but that can only happen if another company is willing to buy.
The goal for the new change is that within a few months the change will be in full swing. After a year the companies should be making not only more revenue but also more profit. Unfortunately, if the changes do not work as planned, Target Corporation will not be able to keep the businesses.
Dayton Hudson Corporation changed its name to Target Corporation in January this year. The origins of the company date back to 1891 when Joseph Hudson opened a men’s clothing store in Detroit. In 1903 George Dayton opened Dayton Dry Goods Company, which changed its name to The Dayton Company in 1910. The Dayton Company entered the discount merchandise retail industry in 1962 when it opened its first Target store. The two companies merged and formed Dayton Hudson Corporation in 1969. The company continued to expand by purchasing Mervyn’s in 1978 and Marshall Field’s in 1990. By 1979 Target had become the corporation’s top revenue producer.
In the past three years the company has changed significantly. Besides changing its name, it has also attempted to diversify by acquiring two more companies. In 1998 it bought Rivertown Trading Company and The Associated Merchandising Corporation. The acquisition of Rivertown Trading Company showed that the company was willing to try something new by entering the major catalog market. The Associated Merchandising Corporation was already a supplier for many of the companies products, so it was very convenient for it to take over operations. As recently as 1999, the company launched its e-commerce capability with store brand web sites.
When the company claimed the Target Corporation name in January this year, it was acknowledging its dependency on the success of its Target stores. The Target stores and the e-commerce focus appear to hold the future of Target Corporation’s Success. The department store and Mervyn’s divisions still play a major role in generating revenue for the company, but the future of those divisions is less predictable.
Prospects for Volume and Profit – Industry Wide
Target Corporation is in the general merchandise retailing industry, sometimes called the discount retailing industry. Its store brands include Target, Dayton’s, Marshall Field’s, Hudson’s and Mervyn’s California. Selected information on the stores in the three divisions is given in Exhibit 1 through 4. The acquisition of Rivertown Trading Company marked Target Corporation’s first entry into a major catalog business. Rivertown and Target’s e-commerce team have combined to make one business called target.direct. This creation allows Target Corporation to strengthen its capabilities in the direct marketing retail channel and Internet retailing.
The general merchandise industry has experienced significant growth of 15.8% annually in the past five years due partly to the strong economy. The industry accounted for $346 billion dollars in 1998. Experts project that it will increase this year and next year by 19.6% and 18.8% respectively. The five-year projection for the industry shows an annual increase of 18%. Selected information on the industry is given in Exhibit 5 and 6. Target Corporation accounted for approximately 9.7% of the industry’s sales in 1999. However, its largest competitor, Wal-Mart, was responsible for about 47% of the sales. With the industry growing at such a rapid pace, each corporation will have to continue to increase sales to keep up with the competition.
Wal-Mart dominates the general merchandise retail industry and is the only major threat to Target Corporation. It is so far ahead that its competitors need to focus on competing rather than trying to keep up. Wal-Mart is a major threat to every other company in the industry. It continues to grow and introduce new ideas that make it more difficult for competitors. Wal-Mart’s Supercenter is growing in popularity and numbers and is dominating the market. There is no way to know if maybe one day in the future, Wal-Mart will be subject to monopolistic or antitrust charges. Benchmarking is very important in this industry because when one company does something that the customers respond to positively, its competitors can relatively easily imitate it. The economy has been very strong lately, however if the economy began to slow down and consumers had less disposable income, it could hurt the industry as a whole. Currently unemployment is unusually low, which can make it difficult to hire qualified employees. Quality employees are needed to ensure good customer service, so customer service could suffer due to low unemployment.
Technology is a major influence in the industry and the companies are trying to cash in on the e-business boom. Most of the companies in the industry allow customers to shop on the Internet. Suppliers for the general merchandise retail industry play a major role and could be an opportunity or a threat. Several stores in the industry use the same suppliers and have to compete to get low prices and keep costs low.
Target’s opportunities for domestic new store growth remain strong. During 1999, Target added a total of 74 new stores. SuperTarget provides Target with tremendous opportunities for future growth. SuperTarget combines general merchandise with high-quality grocery items to offer a convenient one-stop shopping experience for its consumers. Target envisions the Internet not only as a channel for selling merchandise, but also as an important communications tool to reach consumers and improve customer service. In 1999, Target devoted more resources to building the merchandising, marketing, fulfillment, and technology processes required to support Internet shopping. The growth of the Target credit card continues to increase in profit from credit.
Key Factors for Success in the Industry
There are a few key factors for success in the general merchandise retail industry. Companies in the industry have to deliver value in dramatic new ways to keep customers loyal and keep market share. Each company will have to offer well-designed merchandise at great prices, with powerful presentations in attractive stores. Companies need to try to offer more exclusive products, with a greater emphasis on design. The businesses in the industry need to plan for future growth and financial success with differentiated merchandise. Target Corporation has tried to meet these customer needs by expanding its target market and improving the quality of products it sells.
Customers want fast service with a respectful tone. That means getting in and out of the store quickly, finding merchandise in stock, and obtaining rapid and knowledgeable answers to questions. Consumers find service to be more important to them than any other part of their store experience, so companies in this industry need to focus on customer service. Target Corporation’s well-trained staff continues to give its customers excellent customer service.
Corporations in the general merchandise retail industry need to maintain cooperative relationships with the communities in which they do business. The commitment to be an active member of the communities where they operate is essential for success. The companies should work together with educational programs and provide financial support when possible. Successful businesses need to continue to look for innovative ways to partner with nonprofit agencies to build stronger communities. Target Corporation is probably the most active in the industry when it comes to community involvement. It has several programs that offer financial support and give back to the community.
Target Corporation is committed to growth and delivering superior returns to their shareholders. Some of its main objectives are providing better quality and prices compared to competitors, creating a fun and inviting variety of products, and developing guest-friendly, convenient stores. Target claims that it provides better quality than some of its competitors, but it is more difficult to compete on price. Within the last few years Target has created a fun and inviting atmosphere for its customers with the help of strategic planning and marketing. Target Corporation’s stores are convenient for its customers, but it needs to continue to focus on consumers changing wants and needs. The principle objective of the company, which is to deliver annual earnings per share growth of 15% or more over time, has stayed the same for years. Since the corporation became publicly held in 1967, Target Corporation has successfully distributed 129 consecutive dividends. It has been relatively successful in meeting its objectives in the last five years compared to the previous decade. Its mission statement is to be the retailer of choice in the discount, middle market, and department store retail segments. Target Corporation focuses on trend leadership, excellent guest service, exciting team member opportunities, and community outreach, to create long-term shareholder value. It plans to continue to reach multiple market segments with its many operating divisions. Each division is specifically geared toward American consumers with stores ranging from upscale discount, to full service department stores. Target tries to focus on specific markets with stores strategically located in regional malls, neighborhood shopping centers, or freestanding buildings. In some of its department stores and Mervyn’s, some clothing lines have unique styles and broader ranges of sizes available to attract a more upscale market. Its major store, Target, focuses on offering a wide variety of products at more affordable prices. Target Corporation works on getting customers in and out of the store quickly and makes sure merchandise is constantly in stock. Target Corporation also focuses on community outreach. Since 1962 they have joined nonprofit organizations to give back to the community through grants and special programs. In 1999 the corporation took an active part in communities nationwide by donating more than $67 million to nonprofit organizations. In 2000 these donations will exceed $80 million for medical patients, education grants, immediate clothing, shelter, food needs, and those on welfare.
Target Corporation’s net earnings were $1,144 million in 1999 for the fiscal year ending January of 2000. This compares to $935 million in 1998 and $751 million in 1997 showing a growth in net earnings of 24.5% from 1997-1998 and 22% from 1998-1999. Revenues in 1999 of $33,702 million are primarily generated through the three main segments of Target, Mervyn’s, and Department Stores. Of the three divisions, Target alone generated about 78% of the revenues with $26,080 million in sales. Mervyn’s produced about 12% while the department stores accounted for 9% with sales of $4,099 million and $3,074 million respectively. The revenues from Mervyn’s and the department stores have remained fairly consistent over the last five years with minimal increases from the department stores segment and minimal decreases from Mervyn’s. Inventory levels increased $323 million in 1999, but were fully funded by the $364 million increase in accounts payable over the same period. Basic earnings per share in 1999 were $2.56 resulting in $ .10 of dividends declared per share each quarter in 1999. It was an increase from $2.08 earnings per share in 1998 and a $ .09 dividend declared per quarter. The price of Target Corporation’s common stock ranged from $33.75 to $63.75 in 1998. The total return to shareholders over the past five years averages 43% annually. In 1999 the main expense areas were selling, general, and administrative, which accounted for $7,490 million or 22% of revenues. They increased relative to the 1995-1998 expenses that stayed constant around 16-17%. Capital expenditures are currently a minimal expense on average of 5.56% for the years 1995-1999. In 1999 capital expenditures were $1,918 million. Approximately 69% of the total expenditures were for new stores, expansions, and remodels. Strong cash flow helped reflect a retail debt ratio of 40%. This is separate from the credit operations debt ratio due to the different financial characteristics. The total debt ratio for 1999 is 49%. The price to cash flow ratio was 14.7 in 1999, and the price to revenue ratio was .89. The price to revenue ratio more than doubled since 1995 when it was only .23. Target Corporation has been very efficient, which reflects a return on equity of 20.2% in 1999 compared to 9.9% in 1996. Inventory turnover was relatively low at 6.3 in 1999. It is one of Target’s main areas of concentration. Profitability can be seen by comparing net profit after taxes to net sales resulting in a net profit margin of 3.5%. In 1999 Target Corporation also displayed a gross profit margin of 31.7%. The liquidity is displayed using the current ratio and the quick ratio. The current ratio of 1.1 has decreased since 1996 when it was more favorable at 1.4. The quick ratio also decreased by only one tenth of a point from .5 in 1996 to .4 in 1999. Additional ratios are presented in Appendix A
Target Corporation’s operational strategy is to offer high-quality fashionable merchandise at affordable prices. It plans to achieve a future of strong growth in revenues and earnings by looking toward new store growth in Target, the primary segment. One of its functional strategies is to reinvest $2.5 to $3 billion in the business with a combination of capital investment and share repurchase. It plans to open 80 new stores and expand its reach to consumers by entering two new markets in West Virginia and Connecticut. Another strategy is to increase capital expenditures to continue remodeling programs for the existing divisions of Target Corporation. Suppliers are crucial part of the product distribution process. One strategy Target plans to continue using to promote good relations with suppliers is acknowledging excellent performance from vendors. Another strategy for Target Corporation to compete with larger retail stores is to focus on a more upscale customer, which will create a unique capability in the retail sector. In its plan for the future, Target Corporation plans to focus efforts for success on the major division, Target. The smaller divisions will be used to provide cash flow to improve Target’s growth. Corporate strategy also includes anticipating new opportunities and acting promptly to adapt to change when the need arises. Target Corporation will have to continue to invest and use its resources efficiently to carry out its strategies.
Target Corporation’s core strength is its variety of retail stores, which provide exceptional value and variety to its customers. Among the value chain components, technological development has been a great asset to the company and employees. Target implemented an online business and professional skills training course program in 1999. The program is available nationwide to about 1,200 information technology personnel. Employees can be trained online in leadership, team building, workplace communication, sales, marketing, and finance. Technology has really improved marketing, sales, and customer service. E-commerce can improve the company’s customer relations in many ways. It will not only serve as another channel for selling merchandise, but has already increased guest services and can reach a wide range of consumers. Target’s recent alliance with AOL helps introduces new customers to the Target brand.
Target Corporation constantly works on enhancing the shopping experience for consumers in the stores. It is building stronger relationships and customer loyalty through more personalized selling and enhanced customer loyalty programs. It is committed to newness and fashion in the product assortments presented in an exciting store environment.
Target has recently expanded its customer relations with all of the credit programs it has to offer. The company has the second largest credit portfolio among retailers that issue store credit cards. Credit card numbers continue to rise and have already exceeded 30 million guest cards. Customer loyalty programs help build stronger relationships with consumers and increase patronage. Target uses its credit program to help promote community involvement by donating 1% of all purchases made on the cards to local communities.
Target Corporation currently does not have very many weaknesses. Its growing profits and earnings per share are spelling out success for the company, and its objectives are being met. Target stores are surging, but its department stores and Mervyn’s do not have the same appeal to customers. Marketing strategies for those two divisions are weak and the company will need to make them more appealing to consumers for them to continue to make profits.
Target Corporation is the fourth largest retailer after Wal-Mart, K-Mart, and Sears, so the company must make sure it is taking advantages of any opportunities to increase its market share. Target must also promptly address threats that may affect future earnings of the company. Although the company has began introducing new product lines and offering a wider variety of products, the company needs to focus on more customer loyalty and creating new ways to present its products to gain more of the market share.
The main issue facing Target Corporation is what it should do with its department store and Mervyn’s divisions. The company has considered closing or selling the divisions several times over the past few decades. Although both divisions continue to make a profit as shown in Exhibits 2 and 3, the company could be better off focusing all of its attention on the Target stores. On the other hand, maybe the company needs to take a different approach with the divisions and try to make them more successful to generate greater profits.
The main reason for the problem is that the divisions are too separated from one another and work as separate companies rather than one team. Target claims that the continued growth of its divisions are key contributors to its overall strategy. It actually has strategies for each division, all in somewhat different directions. Its department stores are trying to focus on stronger commitment to newness and fashion products in its assortments. One way it is reinventing the shopping experience is through events like the Paris Flea Market and our popular “Fash Bash” fashion shows. Marketing initiatives for our Department Stores will continue to reinforce the strong brand heritage of our stores. Some of these new changes are leading to increasing costs in merchandise and employee training. Over the last three years, Mervyn’s has added more than 125 national and market brands to the sales floor. In 1999, it made a more concentrated effort to let it customers know about its new brands. Again the company had increasing costs in attempt to meet the demanding needs of the customers. Target stores had still a different approach, but it had much more success. Its primary growth comes from new store expansion. Target continues to open stores in new U.S. markets; the more it opens, the more profit it generates. As stated earlier, of the three divisions, Target alone generated about 78% of the revenues with $26,080 million in sales. Mervyn’s produced about 12% while the department stores accounted for 9% with sales of $4,099 million and $3,074 million respectively. The revenues from Mervyn’s and the department stores have remained fairly consistent over the last five years with minimal increases from the department stores segment and minimal decreases from Mervyn’s. These two divisions are dragging target down. The amount of resources that could be added to Target if the company did not have to strive to keep the other two divisions profitable could really add to Target’s success. Target is easily the strongest part of the company and needs to receive the majority of research and development. Currently the other two divisions are receiving much of the R and possibly holding back Target’s growth.
Target Corporation is going to have to sell its department store and Mervyn’s divisions if they do not show significant improvements in next year after the new strategy goes into affect. These two divisions are holding Target back and depleting some of its much-needed resources. In the short run the other two divisions are going to start conducting business in the same fashion as the Target stores. They will use similar purchasing, inventory control, and marketing techniques. Target has been very successful using these practices so it is time to see if it will work for the other divisions. This new strategy should work better than what the company has been doing with its smaller divisions. The two divisions have been making a profit but not enough to justify all of the cost. If after a year the new strategy, which is making the other two divisions more like the target division, has not produced more profit for the company, it will be time to either sell or close the companies. Target would much rather sell the companies, but that can only happen if another company is willing to buy. This solution was derived from the fact that Target alone generated about 78% of the revenues while Mervyn’s generated only 12% and the department stores accounted for 9%. If it is found after a year that the smaller two divisions cannot generate more revenue, Target will begin receiving all of the resources that had been going to the other businesses and turn it in to greater profits.
The changes will be implemented immediately with a new advertising campaign to make the consumers aware of the changes. It will let consumers know that the department stores and Mervyn’s will not appear to change, but they will be run more efficiently. The actual changes in the business will not change much, and those employees will not need much training. The upper level management will have to make the changes to make their companies operate more like Target. These changes will generate more costs at first. The funding will come from internal sources and marginally increasing debt.
The goal for the new change is that within a few months the change will be in full swing. After a year the companies should be making not only more revenue but also more profit. Unfortunately, if the changes do not work as planned, Target Corporation will not be able to keep the businesses. The downside to that situation is that undoubtedly many jobs would be lost and it may take Target Corporation a few years to adapt to the changes. In the long run it would be better for the company. Obviously it would be far more beneficial for the company if it were to find a buyer for all or some of the companies rather than just closing them.
(dollars in millions)199919981997
Pre-tax Segment Profit$2,022$1,578$1,287
Retail Square Feet*102,94594,55387,158
* In thousands, reflects total square feet less office, warehouse and vacant space.
(dollars in millions)199919981997
Pre-tax Segment Profit$205$240$280
Retail Square Feet*21,63521,72921,810
* In thousands, reflects total square feet less office, warehouse and vacant space.
(dollars in millions)199919981997
Pre-tax Segment Profit$296$279$240
Retail Square Feet*14,06013,89014,090
* In thousands, reflects total square feet less office, warehouse and vacant space.
Last 5 YearsThis Year(Jan 01)Next Year(Jan 02)Next 5 YearsPrice/Earn(Jan 01)PEG Ratio(Jan 01)
Target CorpRETAIL-DISCOUNTS 50025.9 %15.8 %9.1 %16.3 %19.6 %14.0 %15.3 %18.8 %8.6 %15.1 %18.0 %12.8 %19.616.725.01.200.851.79
Valuation RatiosCompanyIndustrySectorS 500
P/E Ratio (TTM)22.3443.3035.4639.05
P/E High – Last 5 Yrs.34.4255.2351.9549.82
P/E Low – Last 5 Yrs.14.0216.0616.4316.88
Price to Sales (TTM)0.801.547.198.50
Price to Book (MRQ)4.498.806.3310.21
Price to Tangible Book (MRQ)4.4913.079.9113.86
Price to Cash Flow (TTM)13.1029.3421.7328.14
Price to Free Cash Flow (TTM)109.0314.0150.3547.26
% Owned InstitutionsNM47.7843.6357.86
Dividend Yield – 5 Year Avg.1.200.841.121.12
Dividend 5 Year Growth Rate7.3913.681.358.84
Payout Ratio (TTM)14.5914.8714.1923.12
Financial StrengthCompanyIndustrySectorS 500
Quick Ratio (MRQ)0.350.231.401.25
Current Ratio (MRQ)220.127.116.111.76
LT Debt to Equity (MRQ)0.870.640.830.55
Total Debt to Equity (MRQ)0.960.820.950.83
Interest Coverage (TTM)6.088.734.9510.48
Profitability Ratios (%)CompanyIndustrySectorS 500
Gross Margin (TTM)31.8124.3440.2050.31
Gross Margin – 5 Yr. Avg.29.2123.6238.0848.09
EBITD Margin (TTM)9.558.3218.3923.10
EBITD – 5 Yr. Avg.8.237.7514.8521.03
Operating Margin (TTM)5.865.888.8518.42
Operating Margin – 5 Yr. Avg.4.175.297.8817.13
Pre-Tax Margin (TTM)5.865.7910.1917.59
Pre-Tax Margin – 5 Yr. Avg.18.104.22.16816.80
Net Profit Margin (TTM)3.593.632.4713.38
Net Profit Margin – 5 Yr. Avg.2.553.230.7910.27
Effective Tax Rate (TTM)38.7537.1037.9534.63
Effective Tax Rate – 5 Yr. Avg.38.7737.5238.4035.54
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Cite this Target Corporation
Target Corporation. (2018, Jun 20). Retrieved from https://graduateway.com/target-corporation/