Target from expect more to pay less case study answers

UV1057 Rev. Mar. 22, 2016

This case was prepared by David Ding (MBA ’08) and Saul Yeaton (MBA ’08) under the supervision of Kenneth Eades, Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

Target Corporation

On November 14, 2006, Doug Scovanner, CFO of Target Corporation, was preparing for the November meeting of the Capital Expenditure Committee (CEC). Scovanner was one of five executive officers who were members of the CEC (Exhibit 1). On tap for the 8:00 a.m. meeting the next morning were 10 projects representing nearly $300 million in capital-expenditure requests. With the fiscal year’s end approaching in January, there was a need to determine which projects best fit Target’s future store growth and capital- expenditure plans, with the knowledge that those plans would be shared early in 2007, with both the board and investment community. In reviewing the 10 projects coming before the committee, it was clear to Scovanner that five of the projects, representing about $200 million in requested capital, would demand the greater part of the committee’s attention and discussion time during the meeting.

The CEC was keenly aware that Target had been a strong performing company in part because of its successful investment decisions and continued growth. Moreover, Target management was committed to continuing the company’s growth strategy of opening approximately 100 new stores a year. Each investment decision would have long-term implications for Target: an underperforming store would be a drag on earnings and difficult to turn around without significant investments of time and money, whereas a top- performing store would add value both financially and strategically for years to come.

Retail Industry

The retail industry included a myriad of different companies offering similar product lines (Exhibit 2). For example, Sears and JCPenney had extensive networks of stores that offered a broad line of products, many of which were similar to Target’s product lines. Because each retailer had a different strategy and a different customer base, truly comparable stores were difficult to identify. Many investment analysts, however, focused on Wal-Mart and Costco as important competitors for Target, although for different reasons. Wal-Mart operated store formats similar to Target, and most Target stores operated in trade areas where one or more Wal-Mart stores were located. Wal-Mart and Target also carried merchandising assortments, which overlapped on many of the same items in such areas as food, commodities, electronics, toys, and sporting goods.

Costco, on the other hand, attracted a customer base that overlapped closely with Target’s core customers, but there was less often overlap between Costco and Target with respect to trade area and merchandising assortment. Costco also differed from Target in that it used a membership-fee format.1 Most of the sales of these companies were in the broad categories of general merchandise and food. General

1 Sam’s Club, which was owned by Wal-Mart, also employed a membership-fee format and represented 13% of Wal-Mart revenues.

For the exclusive use of Y. Zou, 2017.

This document is authorized for use only by Yonghuan Zou in Intermediate Corporate Finance Fall 2017 Cases taught by Cheng Jiang, Temple University from August 2017 to February 2018.

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merchandise included electronics, entertainment, sporting goods, toys, apparel, accessories, home furnishing, and décor, and food items included consumables ranging from apples to zucchini.

Wal-Mart had become the dominant player in the industry with operations located in the United States, Argentina, Brazil, Canada, Puerto Rico, the United Kingdom, Central America, Japan, and Mexico. Much of Wal-Mart’s success was attributed to its “everyday low price” pricing strategy that was greeted with delight by consumers but created severe challenges for local independent retailers who needed to remain competitive. Wal-Mart sales had reached $309 billion for 2005 for 6,141 stores and a market capitalization of $200 billion, compared with sales of $178 billion and 4,189 stores in 2000. In addition to growing its top line, Wal-Mart had been successful in creating efficiency within the company and branching into product lines that offered higher margins than many of its commodity type of products.