Pro-Forma and Business Cycle Research Paper

PRO-FORMA AND BUSINESS CYCLE RESEARCH PAPER 7

Pro-Formaand Business Cycle Research Paper

InstitutionAffiliation

Pro-Formaand Business Cycle Research Paper

Whenviewed from a collective perspective, the retailing industry is awide generalization of various businesses that sell goods andservices to customers. This umbrella term is comprised of severalsubgroups including departmental stores, specialty stores, wholesaleclubs, warehouse stores, and discounting retailing merchandisersamong others. Target and Wal-Mart fall under discount retailingindustry where they are the largest stores in the world. Retailingindustry is the second largest industry in the world in terms ofnumber of employees and number of establishments (Golberg et al,2013). Target Corporation and Wal-Mart are key competitors in thediscount retailing industry with both having long and establishedhistories (). Target was incorporated in Minneapolis in Minnesota in1902 (US Securities and Exchange Commission, 2013), whereasWal-Mart’s first store was opened in 1962 in Rogers, Arkansas.Currently, Wal-Mart operates stores in more than 27 countries inthree major segments, that is, Walmart US, Sam’s Club, and WalmartInternational. The company’s business includes retailstores, warehouse clubs, superstores, restaurants, and e-commerce viawalmart.com. Success at Walmart is driven by the store`s management`sfocus on leveraging Everyday Low Price (EDLP) as the cornerstone ofits competitive strategy. Walmart is able to outdo its competitors byintegrating its EDLP strategy into a wide assortment of product andservice categories (Etheridge, 2013). Like Walmart, Target alsooperates as three portable segments, that is, U.S. Retail, U.S.Credit Card, and Canada. Target offers its customers everydayessentials and fashionable differentiated merchandise all atdiscounted prices. The company has great ability to deliver acustomer-preferred shopping experience. The store’s success is inlarge contributed to by a strong supply chain and technologicalinfrastructure, discipline in managing current business while makingfuture investments, and devolution to innovation. Purchases fromTarget can be made through physical stores, online, or through mobiledevices (USSecurities and Exchange Commission, 2013).

Ratio Analysis

2014

2013

2012

2011

Walmart

Target

Walmart

Target

Walmart

Target

Walmart

Target

Gross Margin Percent of Revenue, %

24.82%

29.53%

24.83%

29.73 %

25.02%

30.10 %

25.34%

30.49 %

Operating Income Percent of Revenue

5.68%

5.83%

5.96%

7.46%

5.98%

7.77%

6.10%

7.98%

Net Income Percent of Revenue

3.39%

2.72%

3.65%

4.17%

3.54%

4.28%

3.91%

4.44%

BothTarget and Walmart have well-established markets in the US andCanada. They offer excellent customer care experience and care thatthey have become a popular choice for most consumers. Looking at thetable above, Target has had its gross margin drop by 0.96% between2011 and 2014. Walmart also experienced a drop in its gross margin of0.52% between 2011 and 2014. A look at changes in operating incomeindicates that Target has seen a deterioration of its operatingincome of 2.15% while Walmart’s deterioration within the sametimeframe was 0.42%. Similarly, the two companies have had their netincome as a percentage of revenue dropping by 1.72% and 0.52% fortarget and Walmart respectively (Stock Analysis on Net (a) StockAnalysis on Net (b), 2015). The observed decrease in gross marginbetween 2011 and 2012 for Target Corp is attributed to expensesrelated to store closures and impacts of currency exchange rates inCanada (Haider, 2014).

Ratiosand Margin Comparison

Target`sasset turnover in 2014 averaged at 1.57 in 2014, while that ofWalmart averaged at 2.34. Similarly, Return on assets and return onequity stood at 7.86 and 21.00 respectively for Target and at 4.25%and 12.02% respectively for Walmart in 2014. From the figures, it isclear that both companies registered a decline in ROE and ROA between2013-2014 and 2014-2015. Wal-Mart registered 8.37% return on investedcapital while Wal-Mart registered 13.36% in 2014. Interest coveragein 2014 for Walmart was 11.56 and 3.76 for Target. Total liabilitiescontrolled by Target Corp declined between 2013 and 2015 and so didthat of Wal-Mart. Target’s P/E current, P/E Ratio, Price to SalesRatio, and price to book ratio stand at -33.08, -38.58, 0.65, and3.37 respectively while those of Wal-Mart are 14.53, 14.77, 0.57, and3.37 respectively.

KeyFinancial Comparison

TargetCorp has registered an increase in its gross revenue since 2012. In2012, the company made a profit of US$69 Billion and in 2013, theprofit increased by US$3.436 billion to 73.3 billion. However, thecompany’s revenue declined in 2014 to US$72.6 billion. On the otherhand, Walmart profits of US$446.950 billion in 2012. The profitincreased by about US$20 billion in 2013 to US$469.2 billion. Theprofit has continued to rise through 2014 and 2015. Walmart’soperating income rose between 2012 and 2013 from US$26.6 billion toUS$27.8 billion. However, it declined in 2014 by US$1 billion andagain rose to US$ 27.1 billion in 2015. Operating income of TargetCorp declined between 2012 and 2013 to US$ 5.4 billion and rose toUS$4.2 billion in 2014. A further increase has been observed in 2015,which has put the operating income at US$4.5 billion.

TargetCorp’s Profitability Ratios

Year

2015

2014

2013

2012

Gross Margin

29%

30%

31%

31%

Operating Margin

6%

7%

8%

8%

Pre-Tax Margin

5%

6%

7%

6%

Profit Margin

2%

3%

4%

4%

Pre-Tax ROe

26%

25%

31%

28%

After Tax ROE

12%

12%

18%

19%

Wal-Mart’sProfitability Ratios

Year

2015

2014

2013

2012

Gross Margin

25%

25%

25%

25%

Operating Margin

6%

6%

6%

6%

Pre-Tax Margin

5%

5%

5%

5%

Profit Margin

3%

3%

4%

4%

Pre-Tax ROE

30%

32%

34%

34%

After Tax ROE

20%

21%

22%

22%

References

Etheridge,M. (2013). Retrieved 19/7/15 from Wal-Mart Financial Analysis. Athttp://www.academia.edu/7879977/Walmart_Financial_Analysis_and_Valuation

Golberg,K., Mareck, N., Hardy, C., Hoeft, T., and Noetzel, J. (2005).walmartand target: strategic industry analysis. Retrieved19/7/15 fromhttp://www.d.umn.edu/~ggbell/mgts4481/Sample%20papers/Walmart%20n%20Tgt.pdf

Haider,Zain. 2014. Target Corporation Market Analysis. Retrieved 19/7/15fromhttp://www.slideshare.net/ZainHaider6/target-power-point-31127384StosckAnalysis on net (a). 2015. TargetCorp. (TGT).Retrieved 19/7/15 fromhttps://www.stock-analysis-on.net/NYSE/Company/Target-Corp/Ratios/ProfitabilityStosckAnalysis on net (b). 2015. Wal-MartStores Inc. (WMT)Retrieved 19/7/15 fromhttps://www.stock-analysis-on.net/NYSE/Company/Wal-Mart-Stores-Inc/Ratios/Profitability#Ratios-Summary

USSecurities and Exchange Commission. (2013). Target Corporation. athttp://www.zonebourse.com/TARGET-CORPORATION-12291/pdf/355717/Target%20Corporation_SEC-Filing-10K.pdf