Company Comparison Project on Wal-Mart and Target Corporation

Published: 2021-07-19
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Middlebury College
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According to Fridson et al. (2011), financial analysis refers to the process of assessing the profitability, liquidity, stability, viability and efficacy of an organisation in management of its assets and capital. Financial analysis is undertaken by financial analysts who utilise information contained in accounting reports such as the income statement and the statement of financial position. The conduct of financial analysis is determined by the needs of the stakeholders in the organisation. For instance managers seek to leverage on the results of the analysis for decision making on such aspects as the continuation or discontinuation of an operation of the organisation as well as in making capital budgeting decisions. On the other hand, the stockholders of the organisations are more concerned on whether the management of the organisation are exercising their agency role in maximising their wealth as shareholders.

Shim and Siegel (2007) expound that the creditors and long-term lenders of the firm are more concerned on the liquidity and leverage position of the organisation to provide a clear picture on the capability of the firm in meeting its current and long-term obligations. Overall, to evaluate the financial performance of the firm; trend and cross-sectional analysis are performed. With regards to trend analysis, the performance of the firm is compared over a number of years. On the other hand, cross- sectional analysis involves the comparison of the performance of the firm with that of the competitor in the market over a period of time.

This report sought to evaluate the performance of Wal-Mart, the leading retail chain in the USA by comparing it with that of Target Corporation, the second biggest discount retailer in the USA.

Brief description of companies

Target Group

Headquartered in Minneapolis, Target Corporation was founded by George Dayton in 1902 (Clark, 2005). At the time the firm was founded, it was named GoodFellow Dry Goods before the name was changed to Dayton Company in the year 1910 and finally to Dayton Corporation in 1967. The Target Company opened the first store in Minnesota in 1962. However, the firm has seen tremendous growth in the number of stores in the United States with the firm operating 1,806 stores at the start of the year 2017 (Target Annual Report, 2016). The firm currently operates four under retail formats including; the discount store, hypermarket, Target Express and City Target that has renamed the flexible format (Pratt, 2012). Target Corporation is a publicly listed firm listed whose stocks are traded on the New York Stock Exchange as well as formulate the S&P 100 and S&P 500 component index. According to Target (2017) the firm employs 341,000 employees and netted revenues worth $69.495 Billion in the financial year 2016.


On the other hand, Wal-Mart is headquartered in Arkansas, USA. Unlike, Target Corporation that operates primarily in the USA, Wal-Mart is a multinational discount retailer with market presence in USA, Latin America, Canada, United Kingdom, Asia as well Africa. Wal-Mart is the biggest retailer in the USA (Ferrell et al., 2010). Founded by Sam Walton in the year 1962, Wal-Mart began when Sam Walton purchased a branch of Ben Franklin stores from his employer J.C Penney (Masengill, 2013). Remarkably, the firm has experienced tremendous growth across the world and currently operates 11,695 stores across the world. Like Target Corporation, Wal-Mart is listed on the New Stock market as well as the S&P 100 and S&P 500 component index. As of the end of the year 2016, the firm employed close to 2.3 Million employees across the world and posted revenues worth 485.87 Billion in the financial year 2016 (Morningstar, 2017).

Financial analysis of Wal-Mart and Target Corporation

Current ratio

According to Sinha (2012) current ratio is financial ratio that evaluates the capability of an enterprise top meet its short-term obligations as and when they fall due. The current ratio is computed by dividing the total current assets of the enterprise by the total current liabilities of the enterprise. Palepu (2007) proffers that for the purposes of optimality on the liquidity position of the firm a current ratio of 2:1 is preferred. However, the preferable current ratio varies from one industry to another. Table 1 below shows the computation of the current ratios of Wal-Mart and Target over a two year period (2016-2017)

Table 1: Wal-Mart and Target Corporation Current Ratio

Current ratio Wal-Mart Target Corporation

Particulars / year 2016 $M 2017 $M 2016 $M 2017$M

Current assets (a) 60,239 57,689 14,130 11,190

Current liabilities (b) 64,619 66,928 12,622 12,708

Current ratio 0.93 0.86 1.12 0.88

Source: Author (2017, computed from Wal-Mart and Target Corporation annual reports 2016-2017)

Based on the analysis above, Wal-Mart current ratio declined from 0.93 to 0.86 in 2016 and 2017 respectively. This is compared to Target Corporation current ratio which also decreased from 1.12 to 0.86 in the same period. A cross- sectional analysis on the current ratio of both firms shows that the liquidity position of both firms has declined over the past year. This espouses that their ability to meet its current liabilities has waned over the past year. However, Wal-Mart fared better than Target whose current ratio declined by 0.24 as compared to Wal-Marts decline of 0.07 over the past one year. Based on Wal-Mart (2017) annual report, the decline in current ratio was largely caused decline in cash from .8.705 Billion in 2016 to $6.867 Billion. On the other hand, Target Corporation cash assets declined from $4.046 Billion to $2.512 Billion in 2016 and 2017 respectively.

As earlier espoused, a current ratio of 2:1 and above is considered as healthy. Nonetheless, Dunne et al.(2014) note that a current ratio of less than 1 is acceptable for retailers the trade cycle which includes transformation of stock and receivables into cash and payment of payables is very short. As such, both firms are operating within the expectations of the retail industry. Overall, despite the decline in the current ratio of both firms, Wal-Mart liquidity position is better than Targets in the current year.

Gross margin

According to Meggison et al. (2008), the gross margin ratio espouses the percentage of the revenues of an enterprise that is left after accounting for cost of goods sold by the enterprise. The gross margin is determined by dividing the gross profit of the organisation by the sales derived by the firm in a financial year. The gross margins of Wal-Mart and Target Corporation are computed as shown in table 2 below.

Table 2: Wal-Mart and Target Corporation Gross Margin Ratio

Current ratio Wal-Mart Target Corporation

Particulars / year 2016 $M 2017 $M 2016 $M 2017$M

Gross profit 121,416 125,617 21788 20,623

Revenues 482,130 485,873 73,785 69,495

Gross Margin 25.18% 27.36% 29.53% 29.68%

Source: Author (2017, computed from Wal-Mart and Target Corporation annual reports 2016-2017)

Based on the analysis above, it is evident that Target Corporation is more profitable than Wal-Mart with its gross margin increasing slightly from 29.53% in 2016 to 29.68%. On the other hand, the gross margin of Wal-Mart improved from 25.18% in 2016 to 27.36% in 2017. However, unlike Targets gross margin which largely improved due to reduction in the firm cost of goods sold, Wal-Marts profit improved due to increased revenues in the year 2017 as table 2 above shows. As such, the slightly higher gross margin ratio of Target does not mean that it is performing better than Wal-Mart. Rather, the decline in revenues could be indicative of inadequate marketing efforts of the firm in endearing the products of the firm to its customers. However, as table 2 above shows, both firms have relatively low gross margins. However, this can be explained by the fact that both firms are discount retailers that target the mass market by offering huge discounts to their customers thus the low gross margins.

Market capitalisation

According to Shim and Siegel (2007) market capitalisation refers to the valuation of the firm in the market. To determine the market capitalisation of an organisation, the total number of shares outstanding for the firm is multiplied by the market price of the firm. The market capitalisation of Target Corporation and Wal-Mart is computed as follows;

Market capitalisation=Total number of shares outstanding * Market share price

According to Wal-Mart Annual Report (2017), the number of outstanding shares in the firm was equal to 3.112 Billion. Meanwhile, based on Yahoo Finance (2017), the share price of the firm on 18th August was $79.31. As such, Wal-Mart market capitalisation is computed as

Wal-Mart Market value= 3.112 Billion shares * 79.31 = $246.81 Billion.

On the other hand, according to Yahoo Finance (2017) the number of shares outstanding for Target Corporation is 551.71 Million as with the share price being $55.65 by end of trading 18th August. As such, the market capitalisation of the firm is computed as follows;

Target Corporation market value= 551.71 million shares * $55.65 = $30.703 Billion.

Based on the above analysis, it is evident that Wal-Mart is has a higher market value ($246.81 Billion) as compared to Target ($30.703 Billion).

Hettinger and Dolan-Heitlinger (2011) alludes that a high market capitalisation is a good indicator since a higher market capitalisation means that the firm with a high market capitalisation has access to a large pool of assets, capital as well as sales as compared to those firms with lower market capitalisation. As such, investors are more likely to be attracted to larger-cap firms due to their stability as well as prospect of offering higher dividends than small-cap firms. As such, with regards to market capitalisation, Wal-Mart is more attractive to investors than Target Corporation.

Receivable Turnover

The receivable turnover ratio evaluates the efficacy of the management of any organisation in transforming its receivables to cash. For the purposes of liquidity, a shorter receivable turnover period is preferred by organisations (Gibson, 2012). The receivable turnover period is computed by dividing the credit sales of the organisation by the average of the receivables of the firm. The receivable turnover period for Wal-Mart and Target Corporation are computed as follows;

Wal-Mart receivable turnover ratio

Average Account receivables (2016) = $6,778 M + 5,624 M/2 =$6,201M

Average Account receivables (2017) = $5,624 M + $5,835 M= $5,729.50 M

Receivable turnover 2016 = $482,130 M /$6,201 M = 77.75 times

Receivable turnover 2017 = $485,873 M/ $5,729.50 M = 84.80 times

Target Corporation receivable turnover ratio

Average Account receivables (2016) = $1,122 M + $779 M/2= $950.50 M

Average Account receivables (2017) = $779 M+ $749 M/2 = $764 M

Receivable turnover 2016 = $73,785 M/ $950.50 M = 77.63 times

Receivable turnover 2017 = $69,495 M /$764 M = 90.96 times

Based on the above analysis, it is evident that Wal-Mart is turning its stock to sales faster than Target Corporation in the year 2016. Wal-Mart receivable turnover period rose from 77.75 times in 2016 to 84.80 times in 2017. On the other hand, Target Corporations receivable turnover period rose from 77.63 times in 2016 to 90.96 times in the year 2017. This means that the management of Target Corporation were more efficient in managing their receivables than Wal-Mart in the year 2017. For the purposes of liquidity, Target is faring better than Wal-Mart with regards to the management of receivables.

Recommendation and Conclusion

Based on the analysis above, it is evident that Wal-Mart has fared better with regards to liquidity as compared to Target with the latter registering a drastic decline in the current...

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