Introduction to Target Corporation and Wal-Mart Stores Incorporated
History of the Companies under Review
In the United States, Wal-Mart operates many hypermarkets, grocery stores and discount stores. Its headquarter is located in Bentonville, Arkansas. This chain of retail stores was founded in 1962 and operates more than 11,500 stores in twenty seven countries such as Mexico, Japan, China, Germany and Chile etc. After Wal-Mart, Target Corporation is ranked as the second largest discount retailer all across the United States of America and it’s headquarter is located in Minneapolis, Minnesota. The very first store was opened in 1962 and today, Target Corporation is operating in eighteen hundred locations.
Products and Services offered
Both the publicly traded companies market general merchandise in their stores as discount retailers. They offer similar products and services such as electronic items, clothing, furniture and fixtures, home appliances, health and beauty products, entertainment products (such as sports goods) and footwear etc.
Major Customers
As Target Corporation and Wal-Mart Stores Incorporated are in the same business and offer similar products/services, their target market tends to be the same. This includes men, women and kids. However, there is a difference that Target Corporation sells at higher prices whereas Wal-Mart Stores Incorporated implements Everyday Low Prices (EDLP) model in all of its stores.
Wal-Mart Stores Incorporated provides low cost products to everyone who wants to save money on retail purchases but Target Corporation does not. Target Corporation serves the boundaries of United States only whereas Wal-Mart Stores Incorporated operates on a larger scale serving the worldwide market arena.
Investors for Whom Comparative Financial Examination is Carried Out
In this research, the financial performance of Target Corporation and Wal-Mart Stores Incorporated is compared for investor base known as short-term and long-term creditors. They could either be trade creditors or suppliers/vendors who delay their payments from these two companies by providing them with relaxed credit terms against credit sales.
Similarly, these creditors also include those banking and financial institutions that provide short and longer term financial assistance (loans) to both the Target Corporation and Wal-Mart Stores Incorporated. This comparative research is carried out to examine whether Target Corporation and Wal-Mart Stores Incorporated are capable enough to repay their creditors by managing their liquidity and debt in the capital structure.
Analysis of Three Ratios from Creditors’ Perspective
Under this section, the financial ratios are calculated and examined from creditors’ perspective over a three year period from 2013 to 2015. This is done to measure and compare the financial performance of Target Corporation and Wal-Mart Stores Incorporated. Three different financial ratios considered for analysis include liquidity (current plus quick ratio) as well as debt management ratios (such as debt-to-equity and interest coverage). All such comparative financial assessment is performed in the following manner:
Analysis of Liquidity Management Ratios
These ratios gauge the liquidity strength of both the Target Corporation and Wal-Mart Stores Incorporated to repay their obligation of up to one year or short-term liabilities. In other words, liquidity ratios highlight if these two companies are going through financial distress or not . Such an assessment is carried out by considering the following calculated ratios:
Current Ratio
Analysis reveals that Target Corporation has been outperforming Wal-Mart Stores Incorporated by a slight margin since 2013. It becomes apparent that Target Corporation exercises strict liquidity management practices compared to Wal-Mart Stores Incorporated from 2012 to 2013. For instance, by the end of 2014, Target Corporation had $0.91 in current assets to cover each dollar of short-term liabilities. In contrast, Wal-Mart Stores Incorporated had $0.88 ($0.03 less than Target Corporation) at end of 2014.
For both the companies, Target Corporation and Wal-Mart Stores Incorporated, the liquidity strength improved at end of 2015 where Target Corporation reserved $1.2 in its current assets to repay creditors whereas Wal-Mart Stores Incorporated had $0.97 ($0.23 less in comparison to Target Corporation) to cover its obligations of up to one year or less. Not only the liquidity management practices improved for Target Corporation and Wal-Mart Stores Incorporated but the gap in strength increased from $0.03 to $0.23 by 2015.
Quick Ratio
For more deep financial analysis, quick ratio is analyzed in line with current ratio. This is because quick ratio exercises acidity test to examine liquidity strength or weakness of Target Corporation and Wal-Mart Stores Incorporated. Quick ratio includes only the highly liquid assets in the equation of current assets. Inventories and prepayments are disregarded by quick ratio as they can never be converted to cash quickly without diminution in their financial worth. In other words, inventories and prepayments are quickly cash convertible but only at Forced Sales Value (FSV) or declined value.
Analysis makes it clear that, from 2013 to 2015, Target Corporation and Wal-Mart Stores Incorporated are having more portions of their current assets locked into unsold ending inventories and prepayments. Comparatively, Target Corporation carries less inventories and prepaid expenses on its balance sheet compared to Wal-Mart Stores Incorporated. This is probably true because Target Corporation serves a limited market of the United States whereas Wal-Mart Stores Incorporated is carrying out business operations to address needs of worldwide market.
In all three years from 2013 to 2015, Target Corporation has been outperforming Wal-Mart Stores Incorporated when it comes to liquidity management practices. This is particularly due to the fact that the former company serves only the U.S. market while Wal-Mart Stores Incorporated serves the worldwide area. Therefore, the accurate comparison considering this parameter is difficult due to concentration of business operations.
Analysis of Debt Management from 2013 to 2015
Here, the extent to which Target Corporation and Wal-Mart Stores Incorporated utilize debt and equity stake into their capital structure is examined. Additionally, the debt servicing capacity of these two companies is also assessed by measuring their ability to repay fixed interest payments on regular intervals. This examination is performed by considering the following tabular representation:
Debt-to-Equity Ratio
This ratio measures the extent to which management of Target Corporation and Wal-Mart Stores Incorporated is employing debt level in capital structure of these two companies. From a detailed analysis of calculated financial ratio, it is observed that since 2012, Target Corporation has been employing more debt in its capital structure compared to Wal-Mart Stores Incorporated. In other words, the former relies heavily on debt capital than common equity.
Debt levels for Wal-Mart Stores Incorporated displays a shaky trend over a three year period from 2013 to 2015 whereas Target Corporation kept employing more debt except in 2014. This makes it apparent that the interest rate risk of Target Corporation is very high compared to Wal-Mart Stores Incorporated since 2013. Because of employing more debt in the capital structure, the financial flexibility of Target Corporation has declined sharply from 2013 to 2015. Target Corporation will find it difficult, in the future, to raise further debt in the market and will be offered financial assistance only at higher interest rate.
Interest Coverage Ratio
This ratio is also known as Times Interest Earned (TIE) and is calculated by the ratio between cost of goods sold and interest expense . Because Target Corporation has been using more debt and decline in its financial flexibility, its ability to cover fixed interest payments is greatly harmed. Comparatively, Wal-Mart Stores Incorporated is in better financial position to repay its lenders/creditors on regular intervals. Therefore, one can say that Target Corporation is at the verge of going bankrupt at any time as its interest rate volatility and risk of default is really very high compared to Wal-Mart Stores Incorporated over a three year period from 2013 to 2015.
News Events after 2012 that affected Stakeholders of Target Corporation and Wal-Mart Stores Incorporated
Under this section, two news events, reported after 2012, are highlighted that affected different stakeholders of Target Corporation and Wal-Mart Stores Incorporated as follows:
Target Corporation
The very first news event concerns the failure of Target Corporation and its withdrawal from Canadian market by closing down 133 retail stores. After two years of business operations in Canada, Target Corporation closed down its business in 2013 due to heavy losses. Numerous reasons behind such a failure include inability to consider local market dynamics, poor presentations of shelves (as customers complained about empty shelves), higher product prices compared to those offered by competitors (such as Wal-Mart’s low cost model) and lack of online presence etc. .
Because of this business failure, the credibility of Target Corporation was greatly harmed in the financial markets. Investors holding equity stock of this company, in Canada, started to suffer from capital losses on their investments. Due to heavy losses, Target Corporation’s ability to repay its creditors and lenders damaged substantially resulting in loss of positive corporate image. More than seventeen thousand employees lost their jobs instantly within the total of 681 days of operations in Canada.
Wal-Mart Stores Incorporated
In 2016, Wal-Mart Stores Incorporated has announced that it will close 269 poor performing stores in 154 locations all across the United States. Due to this, more than 16,000 employees will be laid off. This is all driven by poor financial performance of 269 stores due to which per share price of Wal-Mart Stores Incorporated declined by more than thirty percent since 2015 . Because of this expected closure, the stakeholders’ interests are greatly harmed; therefore, Wal-Mart Stores Incorporated has also made an announcement to open 700 new stores by the end of 2017.
Income Statement Analysis for Two Years (2014 and 2015)
For analysis under this section, horizontal analysis is performed for both the companies considering income statements for 2014 and 2015 in the following manner:
Overall, Wal-Mart Stores Incorporated seems to be in a much better financial position compared to Target Corporation over a two year period from 2014 to 2015. The difference between these two is that the former has managed to exercise effective internal control systems to minimize waste and control expenses as well as business costs. Target Corporation must examine all of its business processes for correction of this deficiency. It will help Target Corporation to identify sources of non-productive expenses and costs while reducing them to a controlled level.
Balance Sheet Analysis for Target Corporation and Wal-Mart Stores Incorporated
For analysis in this section, vertical examination is performed for Target Corporation and Wal-Mart Stores Incorporated for the year 2015. Here, net/total assets as well as total liabilities and stockholder’s equity are considered as base accounts for performing vertical analysis in the following manner:
Conclusion and Investment Appraisal
After a careful comparative analysis of Target Corporation and Wal-Mart Stores Incorporated over a three year period from 2013 to 2015 by analyzing financial ratios, it is found that Target Corporation is suffering from financial distress and higher risk of default. This is so because Target Corporation underperforms its competitor and provides fewer margin of safety to its creditors. Any slight decline in the value of its current assets will greatly harm Target Corporation’s ability to cover short-term obligations and repay its creditors as well as trade suppliers. Target Corporation also employs more debt (though it operates in the U.S. only) due to which the company’s ability to service its interest payments on regular intervals. In other words, the capacity of Target Corporation to repay its lenders is also low due to declined financial flexibility.
Comparatively, Wal-Mart Stores Incorporated is in better position when it comes to liquidity management as well as debt servicing capacity. This company depends more on equity capital instead of short and long term debt. Though Wal-Mart Stores Incorporated operates at global level and is in the same business as Target Corporation, yet it is much capable to manage its financial performance in a very well manner than its business rival, Target Corporation.
References
Baker, H. K., & Powell, G. (2009). Understanding Financial Management: A Practical Guide. John Wiley & Sons.
Goldman, D. (2016, January 15). Walmart will close 269 stores this year, affecting 16,000 workers . Retrieved March 10, 2016, from CNNMoney: http://money.cnn.com/2016/01/15/news/companies/walmart-store-closings/
Graham, J., & Smart, S. B. (2012). Introduction to Corporate Finance: What Companies Do. Cengage Learning.
McMahon, T. (2015, January 15). Missing the mark: Five reasons why Target failed in Canada . Retrieved March 10, 2016, from The Globe and Mail Newspaper: http://www.theglobeandmail.com/report-on-business/missing-the-mark-5-reasons-why-target-failed-in-canad/article22459819/
