Target Case Ananlysis

scratch Corporation Patrick Caine March 18, 2013 BUS428A Seminar in Financial Management - passport After cargonful review and analysis of the quint figures I would govern the retchs in the following order of invitingness 1) The b 2) Whalen Court 3) pouched rat redact 4) scene of action Remodel 5) Goldies unanimous. I came to this conclusion by taking into account the projects NPV and IRR given the size of the enthronization, opportunity market/ emergence, and with the general goal of adding 100 new put ins a year plot of land maintaining.The Barn was my first choice because it had the highest IRR and second highest NPV given a not so large coronation. Whalen Court has the highest NPV and offers estimationable market share opportunities and demographics. These first ii are considered good options to continue posteriors emersion. Gopher Place has attractive IRR and NPV parallel to the prototype, while giving Target market share. Also the population yield and media n income demographics are favorable.The next opportunity is in the mediocre category, Stadium remodel, with the 3rd highest IRR and 4th NPV, but has higher risks as the stemma is deteriorating and has gross sales declines, which could hurt brand characterisation. Also the stores have been remodeled twice already. This enthronisation susceptibility be a good idea to keep the store undirected or it might have to be closed. Finally Goldies Square has the lowest NPV and IRR of the projects, declining market share, and the impact of the project wont be seen till the third year. - BACKGROUNDIt is November 2006, and CFO Doug Scovanner has to review five projects along with new(prenominal) members of the Capital Expenditure Committee, after five projects have already been accepted. Targets trouble has an overarching goal to create 100 new stores a year while maintaining their strong brand image and reputation. The investment decisions should be ranked match to their value to Targ et, 1-5. The analysis should include review of P/L, NPV, IRR, demographics, market share, esthesia and variance to the prototype. - ANALYSE Industry Analysis T. M. Pricing Strategy get Experience Costs of Shopping Target Educated / savvy shopper judge more pay less Just the right shopping meagrely more Wal-mart Bargain hunter Everyday low price Barebones Low- determine Costco pot buyer Discounts on bulk buying Warehouse Membership tip off + low prices As the case states, the intense competition in the retail market and has led to prices being driven down to almost cost, vector suming in very small metes. This causes the companies to focus on every part of their business, including how they extremity to brand themselves to consumers.This chart above gives a brief look at that picture. Sales growth stem from creation of new stores and organic growth through brisk stores. Though new stores are expensive to build, they are rented to access new markets and represent profit po tential. Walmart Ope judge store formats interchangeable to Target, and most Target stores operate in areas where one of more Walmart store is located. Also, the merchandising assortment crossroads on many of the same items, such as food, commodities, electronics, toys and sporting goods.The success of Walmart is attributed to the every day low price pricing strategy, which excessively drove local independent retailers out of business. Costco Costco attracts a guest base that overlaps with Targets core customer. However, in that respect is less overlap with respect to trade area and merchandising between Costco and Target than Walmart and Target. Costco withal requires a membership to shop in the store, where Target and Walmart do not. Costco provides terminate pricing for its members who all buy in bulk for membership fees in return. In 2005 the fees equaled 2% of numerate revenue and 72. % of operating income. This shows how important those fees domiciliate be in a high c ompetition and low margin market. Target Target emphasizes the customer experience and has the slogan Expect more. gestate less. They have been promoting their brand awareness through large announce campaigns. The advertising expenses in 2005 were 2% of sales of 26. 6% of operating profits. Brand and store/product quality play a larger role for Target than Walmart. Target excessively offers a credit card, which accounted for 14. 8% of targets operating profit and is important in the evaluation of each project. PROJECT ANALYSIS AND compendium The Barn The project has the highest IRR, 16. 4% and the second highest NPV of $20,500. The NPV on this project is not highly sensitive. The location offers the incentive of have no nearby stores, creating a new market for Target. Additionally it requires the smallest investment amount out of the five projects. However, the market doesnt have the ideal target demographics with only 17% of adults have earned a college degree, slow general population growth and lower income individuals Whalen CourtThe project gives target the opportunity to move into an urban center, where it provide not have to compete directly with other Target stores, co-occurrent with managements goals . The project has the highest NPV at $25,900. The project has the second lowest IRR, of 9. 8% and inevitably 1. 9% more sales in order to reach the total store prototype. On the other hand this project requires the largest investment of $119M (which would need board approval). This cost would be offset by the brand image to an urban area with a lot of people. Finally the building would be leased instead of owned, which might have long tern consequences.Gopher Place The project has the second highest IRR of 12. 3% relative to all of the capital project requests. The NPV of the project is above the prototype and represents an investment of $23M. The demographics in this area are attractive with 27% population growth and a median household income of $56,000. canalize sales or cannibalization is estimated at 19% of sales from the proposed area, as there are other Target stores in the areas. There are likewise dickens new Walmart Super Stores in the area, which could pose as little terror to competition and prices.Additionally the effects of the project wouldnt be felt until the third year, where incremental sales would increase significantly. Stadium Remodel The store has been in place since 1972 and has a very affluent market, where the median income is $65,921. About 42% of the market have taken 4+ years of college, which is the second highest of the projects. The $17m investment would lift the lagging sales about 17% and potentially increase the brand image. On the other hand, the store has been remodel twice since 1972. The NPV is also very sensitive to sales decline, as can be seen in the sensitivity analysis graph.Goldies Square The area is considered a pick up strategic location for many retailers. Population growt h is moderate at 16% with a median income of $56,000 and a quarter of the people guardianship a college degree. The project also has a low NPV sensitivity. However, a 45. 1% increase in forecasted sales is required to meet the prototype. The project also has the lowest NPV and IRR of all the projects being considered. Additionally, there are 12 existing Target stores operating in the market, which could potentially lead to high cannibalization.Transfer sales or cannibalization is estimated at 19% of sales from the proposed area. As a result of this competition, low sales forecasts are projected. - SENSITIVITY ANALYSIS Gopher Place with sign investment $23m IRR NPV Total 12. 3% $16,755 10% Sales slide down 10. 5% $12,033 10% Sales Increase 13. 5% $21,376 Whalen Court with initial investment $119. 3m IRR NPV Total 9. 8% $25,875 10% Sales Decline 8. 8% $9,264 10% Sales Increase 10. 8% $42,522 The Barn with initial investment $13m IRR NPV Total 16. 4% $20,527 10% Sales Decline 14. 5% $16,461 10% Sales Increase 18. 3% $24,623 Goldies Square with initial investment $23. 9m IRR NPV Total 8. 1% $317 10% Sales Decline 7% $-3,765 10% Sales Increase 9. 2% $4,325 Stadium Remodel with initial investment $17m IRR NPV Total 10. 8% $15,739 10% Sales Decline 9% $7,854 10% Sales Increase 12. 3% $9,523 Given the table above for IRR and NPV sensitivity to changes in sales, Whalen Court seems to be the most affected with large superlative potential.Other than that, the projects seem to have to same negative and positive implications given a change in sales. - QUESTIONS 1) If all else equal, and you have to decide between two projects one with a higher IRR and the other with a higher NPV, which would you favor? 2) How have population growth, income, and college degrees impacted your analysis of the projects? 3) How would different discount rates for store and credit card CF affect your recommendations? 1 . Target Corp. Case 19 2 . Target Case