1 Masterminds

Victoria Whitford
Jordan Ahid
Bradley Bertuccio
Gerald Dooley
Beatriz Jimenez
Denise Wijesooriya
December 10, 2014
Financial Statement Analysis

Intro and background information

Way back in 1881, a local New Yorker George D. Dayton wanted to explore the growing
Midwest markets. After several years, he decided Minneapolis had the strongest opportunities for
growth. Dayton purchased land on Nicollet Avenue next to a burned down church. He built a six
story building and convinced Reuben Simon Goodfellow Company to move its store into
Daytons brand new building. In 1902, Goodfellow retired and sold his store to Dayton. After he
took control, he changed the name to Dayton Dry Goods Company in 1903. After almost ten
years of rapid growth, the company was renamed as The Dayton Company to better reflect its
wide assortment of goods and services.
In the 1920s, The Dayton Company was a multi-million-dollar business that filled the
entire six story building. Also around that time Daytons oldest son David died so his other son
George Nelson filled in Davids shoes. By 1938, George D. Dayton had passed away and his son
George N. Dayton is named president of The Dayton Company. George Nelson Dayton
maintained his fathers Presbyterian guidelines and management style. The main focus of
Presbyterian guidelines were no alcohol sales.
Following the death of George Nelson Dayton in 1950, Donald C. Dayton, grandson of
the company founder, becomes president of The Dayton Company. Eventually, of all the
founders grandsons- Wallace, George II, Kenneth, Donald, Bruce, and Douglas, take leadership

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positions within the company. Donald ditched the guidelines his dad and grandpa used to run the
store and started selling alcohol and working on Sundays. It was a much more aggressive,
innovative, and costly management style. It acquired the Portland, Oregon based Lipmans
department store company during the 1950s and operated it as a separate division.
The companys first expansion outside Minneapolis takes place in 1954 when Daytons is
established in Rochester, Minnesota. In 1956, they expanded to the suburbs when they were
opening the first fully enclosed shopping center called the Southdale Mall. This was a huge
advantage because there was only about 113 good shopping days in Minnesota.
During the 1960s, The Dayton Company looked for new ways to strengthen relationships
with guest. The company leadership wanted to develop and introduce a new kind of mass-market
discount store that caters to value-oriented shoppers seeking a higher quality experience. On May
9, 1961, the Dayton Company announced they plan to form a new discount chain store. In 1962,
a guy named Stewart K. Widdess came up with the name Target and bulls-eye logo. The first
ever Target was opened on May1, 1962 in Roseville, Minnesota. Target stores lost money in its
initial years but reported its first gain in 1965. By 1966 Target opened its first store outside of
Minnesota in Denver.
In 1969, Dayton Corporation joined forces with J.L. Hudson Company to create DaytonHudson Corporation. By 1975, Target Stores become the number 1 revenue producer of the
Dayton-Hudson Corporation. Seeing the need for superior managerial talent to keep succeeding
in a competitive retail environment, they put advancement and success as top priority. So
Donald, Wallace, and Douglas Dayton retired by 1978 and in 1983, Bruce and Kenneth Dayton
retire from Dayton-Hudson Board of Directors, ending eighty years of direct family involvement
with the company.

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In January 2000, Dayton-Hudson Corporation changed its name to Target Corporation

because with the four chains Dayton-Hudson owned, Target was producing almost 80% of the
sales. Target continued succeeding and is going 52 years strong since the opening in 1962 and
112 years since the Daytons Dry Goods Company.
Liquidity
In order to determine whether or not Target is a reliable company that is able to pay off
their liabilities, their liquidity must be assessed. This determines whether the company can afford
to pay their liabilities or if they can convert their assets into cash to supplement the needs of the
company. The ratios that measure liquidity and efficiency are the current ratio, quick ratio,
accounts receivable turnover, inventory turnover, and total asset turnover. By determining the
answers to these ratios, it is easy to evaluate how well the company can control maintain their
liabilities in comparison to their assets.
Typically, the higher the current ratio, the better a company is doing. However,
sometimes the current ratio can be a bit misleading because it is not necessarily better when it is
higher, and it is not necessarily bad when it is lower either. Depending on the underlying factors
of the company and the amount of days that they allow to collect their payments can greatly
affect the current ratio. A good ratio can range from about 0.5 to 2. It is measured by dividing
current assets by current liabilities. Targets current ratio for 2013 was 1.17 and 2014 is 0.91
which are very promising outcomes for each year. The small drop from year to year could have
been due to their recent hacking causing them to lose assets. Compared to their close competitor
Walmart, whose averages for 2013 were 0.83 and 2014 is 0.88, Target is more successful at
paying off their short term liabilities with their short term assets still in the long run.

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The quick ratio, sometimes referred to as the acid test ratio, is a more accurate ratio of
measuring liquidity than the current ratio because it excludes inventory and other current assets
that are harder to turn into cash. The higher the ratio the better, meaning that the company has
more liquidity to pay off their debts with more realistic assets than shown in the current ratio.
Targets 2013 quick ratio was 0.4 and 2014 is 0.5. In order to put this in a better perspective,
Walmarts quick ratio for 2013 and 2014 was 0.2. For this type of industry, the quick ratio is very
sustainable and safe market to trust and invest in.
With receivables turnover, while higher is usually better, to determine whether a certain
ratio is high or low you must compare it with industry standards and past years within the
company. The A/R turnover for Target in 2014 was 24.86 as opposed to 12.46 in 2013, Target is
actually seeing an increased rate of average time between purchases and account collections of
almost double from last year to this year. If you compare Targets A/R turnover to Wal-Marts it
actually looks like Wal-Mart is doing better with a significantly higher turnover of 70.85 in 2014,
however this can be attributed to the companys lower prices and more inventory on the shelves.
Furthermore, Wal-Marts accounts receivable turnover in 2013 was actually higher than in 2014
at 73.77 which shows that Target might actually be in a better position than Wal-Mart.
Inventory Turnover, much like receivables turnover, should be compared against industry
averages. The formula is inventory turnover equals cost of goods sold divided by average
inventory balance and this tells us the efficiency a company has in turning its inventory into
sales. A low inventory turnover is a signal of inefficiency while a high inventory turnover is
either a good thing, because it implies strong sales, or a bad thing, because it implies ineffective
buying. Targets inventory turnover stays pretty consistent from 2013 to 2014, only decreasing
from 6.39 to 6.14.

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In the total asset turnover ratio, usually the higher it is, the better, because its implying
the company is generating more revenue per dollar of assets. However, as it was with the other
two turnover ratios, it varies widely from one industry to the next, so comparisons are more
meaningful when made between companies in the same sector. The ratio can be misleading
though. For example, if you compare Target and Wal-Mart, Wal-Marts total asset turnover is
higher for 2014 as it has a ratio of 2.34 whereas Target has a ratio of 1.57. This does not mean
that Wal-Mart is better off than Target in the big picture. As was previously discussed, WalMarts lower prices and smaller isles, which make for more shelf space for products, can account
for the difference in the ratio.
Solvency
Two major ratios which help measure a companys solvency are the times interest earned
ratio and the debt to equity ratio. These ratios determine whether a company can pay off its debts
and remain in business while its existing debt, both short term and long term, is outstanding.
In the case of our financial analysis, the times interest earned ratio measures Targets
ability to meet current year interest payments using current year earnings. So to calculate this
ratio, we add net income, interest expense, and income tax expense, dividing the sum by the
interest expense for the year. The way we interpret the ratio is the greater the number, the better
the company will be able to pay off its current interest payments. In the year 2013, Target had a
times interest earned ratio of 7.05:1, which decreased in the year 2014 to 3.76:1. In terms of
2013, a ratio of 7.05:1 means that for every $1 of current interest payment, Target had $7.05 of
current year earnings to cover it. This is good; Target has more than sufficient funds to cover its
current interest payments. And even though the ratio fell in 2014 to 3.76:1, it still means that
Target has $3.76 of current year earnings to pay off every $1 of current interest payment. But if

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we compare Target to Walmart, the company isnt looking so good anymore. In 2013, Walmarts
time interest earned ratio is 12.41:1, about three times higher than Targets ratio in 2014. And
although Walmarts ratio does decrease in 2014 as well, to 11.56:1, its still higher than both of
Targets ratios.
Within our financial analysis we have also calculated the debt to equity ratio, which
measures Targets amount of equity being financed by borrowing. To solve for this ratio, we take
total liabilities and divide it by total stockholders equity. The key is to have a low debt to equity
ratio, meaning Target is capable of paying off its debts as they come due. In 2013, Target had a
debt to equity ratio of 1.91:1, which means Target has $1.91 of debt for every $1 of equity. In
2014, their debt to equity ratio decreased to 1.74:1, which means Target has $1.74 of debt for
every $1 of equity it has. Both numbers arent too bad; theyre fairly low and close to one dollar.
But once again, if we compare Targets debt to equity ratio to Walmart, Target has poorer debt
control. In 2013, Walmart has a debt to equity ratio of 1.65:1, which is lower than Targets of that
year. In 2014, Walmart has a debt to equity ratio of 1.67:1, and though it rose for Walmart, its
still lower than that of Targets. However, the differences arent so big that there is a substantial
difference in the amount of debt both companies finance by borrowing.
In terms of solvency, Walmart is better than Target, in both times interest earned and debt
to equity ratio. But this doesnt mean Target is in bad shape; given the ratios it has for the years
2013 and 2014, I would say this company is doing well in terms of its debt management and
paying off its interest. Target would be a stable and reliable company to invest in.
Profitability
In terms of the companys profitability, Targets profit margin ratio for 2014 was
calculated to be 0.03 and 2013 had a ratio of 0.04, which in percentages are 3% and 4%

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respectively. Coincidentally, these were the exact same numbers for Walmart. Also, the gross
margin ratio in 2014 for Target was 29.53%, while for 2013 it was 31.01%. Walmarts ratios are
both significantly lower at 25%.
The profit margin ratio is the dividend of the net income by the net sales. This numbers
gives anyone attempting to understand this number an idea of how well the company is doing in
regards to sales. For example, the numbers stated above, 0.03 and 0.04, is a measure of how
much the company is actually profiting and gets to keep out of every dollar of sales. Target and
Walmarts ratio for the profit margin are exactly the same percentages for both years.
Although the percentages may be the same for both of the companies for both years, there
are major differences as to how they were obtained. To find the profit margin, one must divide
the net income by net sales. Target, for example, had net income of 1,971,000 and net sales of
72,596,000. Walmart had net income of 16,022,000 and net sales of 476,294,000. This elaborates
on the idea that although Walmarts income is a lot larger than Targets, they profit the exact
same amount as Target because once they are divided by net sales; they are both profiting the
same amount.
In comparison to each other, the companies are performing relatively the same. But when
compared to each other in 2014 and 2013, there is a small decline in the profit margin ratio. The
company is not controlling its expenses as well as it had been the previous year. This means
there is a decrease in the earnings from 2013 to 2014. This can be due to competing companies
performing better or a lack in marketing in Targets behalf.
The gross margin ratio for Target 2014 is 29.53% and 2013 is 31.01%. On the other side,
Walmart has a gross margin percentage of 25% for both years. Since the gross margin is a
percentage of total sales revenue that the company is able to keep after experiencing the direct

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costs associated with producing the goods and services sold by a company, Target is able to keep
more of the sales revenue than Target. Also, Walmart has not been able to increase this
percentage in both years. This can mean than although the advancement of Walmart may be
increasing, the amount the company makes in its sales is not increasing.
Cost of goods sold can also be a factor that is not allowing Walmart to increase its sale
revenues. If the materials have increased or they cannot get them at a lower price, then it might
be difficult to increase sales revenue without first cutting costs in another part of the company.
This can range in anywhere from salaries to benefits, that the employees hardly receive now.
Targets cost of goods sold can be a variable also as to why their sales revenue has been
increasing from one year to another. For example, they can be getting materials at a lower price,
or discounts can help lower these costs as well.
Each dollar of revenue generated can be used towards paying off or selling expenses,
every day and administrative expenses, interest expenses and distributions to shareholders. The
money earned can help them keep running the company as long as it is profitable. For example,
sales revenue can help the company run without requiring investments from outside investors.
The decisions the company shareholders/board have made in relation to how they operate have
allowed them to increase sales while they minimize expenses.
Return on Assets is an indicator that helps determine how profitable assets are in
generating more money. This ratio shows how many dollars of earnings are acquired from each
dollar of assets that the company owns. Return on Total Assets is a profitability ratio that is
usually expressed as a percentage, but should only be compared with similar companies. ROA is
calculated by dividing Net Income by Average Total Assets, and then you multiply it by 100 to
get a percentage. Generally a company wants a higher value to show that they are using the

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companys assets efficiently. In 2013 target had a net income of $2,999,000 and had $47,396500
average total assets, which resulted in a 6.33% return on assets. In 2014 Targets net income and
average total assets dropped, which drastically reduced the total return on assets. They had
$1,971,000 in net income and $46,358,000 in average total assets, making the return drop down
to 4.25%.
Return on Stockholders Equity shows how much money is returned in earnings from each
dollar of equity. To calculate Return on Equity we divide Net Income by the average
stockholders equity, and then multiply it by 100 in order to make it a percentage. This value is
usually expressed as a percentage to help shareholders see how effectively their money is being
used within the company. This ratio varies across different industries because they may require
less capital investment, which drastically change the final ROE. Generally ROE ratios are in the
15-20% range, which is considered a good level to invest in. Targets return on equity was about
12% in 2014 and 19% in 2013. There was a large drop due to Target selling off some of their
assets, but their return on net worth is starting to pick up again. Target has a lot of inventory that
can eventually be sold off, so having a higher return on equity shows that they are able to be a
very profitable company. Companies with high return on equity and low assets will have more
competition because it is easier for businesses to start in those industries.
Conclusion
The first Target opened up in 1962 and never looked back. They continued to expand
every year and now are located in three different countries; Canada, India, and the U.S. They are
one of Americas largest retailers. Our liquidity ratios are a little flawed because of Targets
accounts receivables. Targets credit card system was hacked so they ended up selling their credit
line to a bank. Even though theyre going to lose out on some money, Target is still sitting good.

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As for their solvency ratios, they arent bad. The debt to equity ratio improved over the two
years. As for times-interest-earned, the company made a huge decline. Creditors will not want to
lend money to them if it continues to decline in the future years. Even though all of Targets
profitability ratios decreased, it wasnt by much. They remained very steady.
For that, we believe Target is a good company to invest in. A businesss job is to make
money and Target knows how to do just that. Their numbers have stayed steady throughout the
years. Areas they could improve on is to get their credit line back. They need to figure out this
cyber attack they faced and fix it. They also need to be alert about the latest trends. Failure to
accurately predict constantly changing consumer preferences could result in lost sales. Overall
we believe Target is a great company and will continue to expand.