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Financial Analysis - Target

Your parents have been left a substantial amount of money and want to invest in a company. Your father trusts you to make a recommendation, but also wants to see the reasoning behind your choice.

You have an idea of which company to choose and you decide to prepare three sets of documents for your parents to consider: business analysis, combined income and cash flow statement, and trend analysis.

Business analysis

Select a public company that trades on either the NYSE or the NASDAQ. Perform a business analysis (both external and internal) for your company using various sources of information. Possible sources include the following:
- Annual report and/or Form 10-K
- Magazine or newspaper articles
- Company website
- Government information
- Industry information
- Value Line, Standard & Poor's, Moody's, etc.
- Analyst reports
- Internet articles

Combined income and cash flow statement

Download the company's annual report from its website, or the company's Form 10-K from the U.S. Securities and Exchange Commission (SEC) website [www.sec.gov].

- Confirm that the firm's income, dividends, and other capital transactions explain the change in equity for the most recent year. (You may need to consult the statement of shareholders' equity.)
- Confirm that the firm's cash flow statement begins with the same net income amounts found in the income statement.
- Confirm that the firm's cash flow statement shows a change in cash that is equal to the difference between cash shown on the balance sheet at the beginning and end of the year. In Excel, construct a combined income statement and cash flow statement.
- Write a piece that answers the following: what would you do if you found there was a huge difference in the net income amounts and the reported cash flow amounts? How could technology limit the likelihood of this happening again?

Trend analysis

Finally, prepare a trend analysis of operating ratios for at least three years' worth of financial data. Prepare the analysis in Excel. You may wish to create a common-sized income statement first, but it isn't required.
If you adjusted for any nonrecurring items in step (1), explain the adjustments in a separate Word document. Use any other information in your company's annual report to explain the change in revenues, gross margin percentage, and operating margin percentage. Add this information to the Word document.

Solution Preview

Your parents have been left a substantial amount of money and want to invest in a company. Your father trusts you to make a recommendation, but also wants to see the reasoning behind your choice
You have an idea of which company to choose and you decide to prepare three sets of documents for your parents to consider: business analysis, combined income and cash flow statement, and trend analysis.
Business analysis
Select a public company that trades on either the NYSE or the NASDAQ. Perform a business analysis (both external and internal) for your company using various sources of information. Possible sources include the following:
• Annual report and/or Form 10-K
• Magazine or newspaper articles
• Company website
• Government information
• Industry information
• Value Line, Standard & Poor's, Moody's, etc.
• Analyst reports
• Internet articles
Your analysis should be approximately five pages long. Be sure to cite your sources using APA guidelines.

Business analysis
We have selected Target Corporation
Target Corporation was founded in Minnesota in 1902. It is the sixth largest retailer in the United States and is ranked 27th on the 2005 Fortune 500. Target is performing very well in the market place though its stock’s performance is subdued.
Target Corporation operates large-format general merchandise discount stores in the United States and sells online through its website www.target.com. Target Corporation operates large-store general merchandise formats, including discount stores, moderate-priced promotional and traditional department stores, as well as a direct mail and on-line business. Target offers both everyday essentials and fashionable, differentiated merchandise.
The company operates over 1,450 stores in 47 states in USA. It has following sub categories:
Target Stores
Target stores are generally 95,000 to 125,000 square feet (12,000 m²) and carry hardlines ("normal" products and goods), softlines (clothing), and a limited amount of groceries. They also carry seasonal merchandise such as patio furniture during the summer and Christmas decorations during November and December. Many stores also have one-hour photo processing, a portrait studio, an optical store, and a pharmacy.

Target Greatland
It is targeted as a place for fun and is much bigger than average target store. It averages about 150,000 square feet (14,000 m²) and carries a larger selection of general merchandise than basic Target stores. It is provided with an expanded snack bar.

Target.com
The company entered an agreement in 2001 to outsource its technology services, order fulfillment and customer service to Amazon.com. Apparently, the arrangement has worked out well for both parties. In August 2003, the companies signed an agreement to extend their original five-year contract by another two years.
(Wikipedia)

According to the articles referred, Target’s growth in April 2006 is expected to be more than 10% and the last year it has been 5.6% outperforming Wal Mart. (Shoppers Flock) This can be attributed to the target segment of Target. They are targeting more upper-class people as its target segment has higher income demographic. Thus its strategy is differentiated, as it is target is combining upscale trends with discounting and productivity. The designing of the Target stores is more attractive than Wal-Mart. Target stores do not sell firearms or tobacco. Target has many exclusive deals with various designers, including Isaac Mizrahi, Michael Graves, Mossimo, Fiorucci, Liz Lange, Luella, among others to attract the youth.

Moreover Recently, Sony created a line of electronics under the Sony LIV name geared towards women. The collection included a CD player that resembled a purse, and a CD player that was equipped to be mounted under the kitchen counter. Another example of this is Target having an exclusive deal with Food Network for selling DVD's of TV shows featuring popular chefs such as Rachel Ray, Alton Brown, and Paula Deen. (Wikipedia) All this will enhance its upscale image, which will help in better realizations. This will lead to higher return on investment and better value addition. (Shoppers Flock) Many financial analyst companies have rate the stock “overweight “ due to its well articulated and executed strategy. (Rating game) In addition to that the Target is better positioned to handle rising oil prices given its higher- income demographic.
Conclusion

Its segmentation is appropriate. Its strategy of attracting the young customers is appropriate. In future they will drive the growth. Moreover it should internationalize its operations to cater to the emerging markets like India and China. This is because there is limited growth in USA. US market is at maturity stage of Product life cycle as per the above discussion.

Combined income and cash flow statement

Financial statements are useful tools for evaluating both profitability and liquidity. Used separately, or in combination, the income statement and balance sheet help interested parties to measure a company’s current financial performance, and to forecast its profit and cash flow potential. Many different users have need for accounting information in order to make important decisions. These users include investors, creditors, management, governmental agencies, labor unions, and others. Because the primary role of accounting information is to provide useful information for decision-making purposes, it is sometimes referred to as a means to an end, with the end being the decision that is helped by the availability of ...

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