5. A profitability assessment of Target Corporation Inc.

A Financial Ratio Analysis of Target Corporation

A Profitability Assessment

Assume that you are a prospective business partner of Target Corporation (TGT), a retailer of everyday essentials and fashionable, differentiated merchandise at discounted prices, and are interested in the companys historical and current financial activities and performance. Use the following financial data for Target to complete and conduct your financial ratio analysis. Then answer the questions that follow. Remember, the results of a ratio analysis often identify issues requiring additional investigation.

Target Corporation

Selected Income Statement, Balance Sheet, and Related Data

Income Statement	2010	2009	2008
Sales	$65,786,000,000	$63,435,000,000	$62,884,000,000
Less: Cost of goods sold	45,725,000,000	44,062,000,000	44,157,000,000
Gross profit	20,061,000,000	19,373,000,000	18,727,000,000
Less: Selling, general, and administrative expenses	13,469,000,000	13,078,000,000	12,954,000,000
Less: Other expenses	860,000,000	1,521,000,000	1,609,000,000
Earnings before interest and taxes (EBIT)	5,252,000,000	4,673,000,000	4,402,000,000
Less: Interest expense	757,000,000	801,000,000	866,000,000
Earnings before taxes (EBT)	4,495,000,000	3,872,000,000	3,536,000,000
Less: Taxes	1,575,000,000	1,384,000,000	1,322,000,000
Net income	$2,920,000,000	$2,488,000,000	$2,214,000,000
Less: Common dividends paid	609,000,000	496,000,000	465,000,000
Dividends per share	$0.87	$0.67	$0.62
Balance Sheet Data
Assets:	2010	2009	2008
Cash and marketable securities	$1,712,000,000	$2,200,000,000	$864,000,000
Receivables	6,153,000,000	6,966,000,000	8,084,000,000
Inventory	7,596,000,000	7,179,000,000	6,705,000,000
Other current assets	1,752,000,000	2,079,000,000	1,835,000,000
Total current assets	17,213,000,000	18,424,000,000	17,488,000,000
Net fixed assets	25,493,000,000	25,280,000,000	25,756,000,000
Other long-term assets	999,000,000	829,000,000	862,000,000
Total assets	$43,705,000,000	$44,533,000,000	$44,106,000,000
Liabilities and Equity:
Accounts payable	$6,625,000,000	$6,511,000,000	$6,337,000,000
Accruals	3,326,000,000	3,120,000,000	2,913,000,000
Other current liabilities	119,000,000	1,696,000,000	1,262,000,000
Total current liabilities	10,070,000,000	11,327,000,000	10,512,000,000
Long-term liabilities	18,148,000,000	17,859,000,000	19,882,000,000
Total debt	28,218,000,000	29,186,000,000	30,394,000,000
Common stock	59,000,000	62,000,000	63,000,000
Additional paid-in capital	3,311,000,000	2,919,000,000	2,762,000,000
Retained earnings	12,117,000,000	12,366,000,000	10,887,000,000
Total equity	15,487,000,000	15,347,000,000	13,712,000,000
Total debt and equity	$43,705,000,000	$44,533,000,000	$44,106,000,000
Other Relevant Data
Common shares outstanding	704,038,218	744,644,454	752,712,464
Total dividends paid	609,000,000	496,000,000	465,000,000
Market price per share	$54.35	$51.27	$31.20

Source: Target Corporation Form 10-K. United States Securities and Exchange Commission, 29 Jan. 2011. Web. 20 Jan. 2012.

Now consider the effectiveness of Targets revenue-generating and cost-containing activities and its profitability ratios. That is, how well does the companys management oversee and employ its assets and contain its costs to generate returns to the firms shareholders? (Note: Round all intermediate and final calculations to two decimal places. The values you enter should be in percentage form.)

Target Corporation Profitability Ratios
Gross profit margin
2010	%
2009	%
2008	%
Operating profit margin
2010	%
2009	%
2008	%
Net profit margin
2010	%
2009	%
2008	%
ROA
2010	%
2009	%
2008	%
ROE
2010	%
2009	%
2008	%
BEP
2010	%
2009	%
2008	%

To answer these questions, focus primarily on income statement accounts and relate them selectively to either the firms asset holdings (total assets) or its sources of financing (such as its common equity). For example:

1. The return on assets (ROA) ratio relates the volume of after-tax earnings generated to each dollar of company assets. The trend of Targets ROA ratio, over the period of 2008 to 2010, indicates that management is becoming productive or effective in generating dollars.

In addition, the return on equity (ROE) ratio provides shareholders with a summary value that indicates the amount of net income generated by each dollar of stockholders equity. The trend of Targets ROE ratios indicates that management is in generating a growing return to Targets shareholders.

Which of the following statements are correct? Check all that apply.

The trend of Targets Net income account is consistent with the observed behavior of the ROA and ROE ratios.

An examination of the trend of the total asset account balances further supports the behavior of the ROA values.

The trend of the Net income account suggests that Target is doing a better job in managing its operating and debt-financing costs.

2. In contrast, the basic earnings power (BEP) ratio provides insights into the effectiveness of Targets management in generating profits using the firms total assetsbefore consideration of its . By excluding these expenses from the calculation, the ratio is useful for comparing companies that employ differing tax treatments and .

Which of the following statements are correct? Check all that apply.

The behavior of the Accounts receivable and Other long-term asset accounts contributed to the trend of Targets BEP ratio during 2008 to 2010.

The trend of Targets Cost of goods sold account provides a partial explanation for the pattern exhibited by its BEP ratio.

The behavior of Targets Accounts payable and Retained earnings accounts contributed to the trend of the BEP ratio during 2008 to 2010.

In general, it is reasonable to conclude that the trend of the BEP ratio reflects on managements performance during the 2008-to-2010 period.

The trend of the BEP ratio indicates that Targets management performance has been , which is with that of the ROA and ROE ratios.

3. The profit margin ratiosgross, operating, and netare useful to users of financial information interested in the companys ability to manage (but not necessarily minimize) its costs. Each ratio places a different income statement subtotal (gross profit, EBIT, and net income) in the numerator and uses as the its denominator.

The pattern of gross profit margins from year to year suggests that Targets costs of goods sold as a percentage of total sales are . This trend is verified by which of the following data?

Targets cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 30.49%, 30.54%, and 29.78%, respectively.

Targets cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 70.22%, 69.46%, and 69.51%, respectively.

Targets cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 29.78%, 30.54%, and 30.49%, respectively.

4. An examination of the income statement data suggests that the growth in the operating and net profit margins is mostly attributable to .

Is it reasonable to attribute changes in the net profit margin to changes in Targets tax rate? , because Target pays .