You chair the Board of Directors at Target Corporation. After the firm released its 2014 financial statements, you are faced with an important decision. The first agenda item at the next board meeting is whether to retain or dismiss the companys chief executive officer. As head of the board, you will introduce this issue, state your position, and moderate the ensuing discussion. As you contemplate this important recommendation, you consider the following items about your company and its industry.

Target Corporation is a Minnesota company incorporated in 1902. Target described itself in its 2014 annual report by stating, We offer our customers everyday essentials and fashionable differentiated merchandise at discounted prices. Target is the second largest discount retailer in the United States behind Walmart when measured by sales revenues, total assets, and market capitalization.

Retailing is the economic sector that links the producer of products to end-use customers. It is the largest segment of the American economy. The totality of retail transactions constitutes about two-thirds of the gross domestic product (GDP) in the United States, according to U.S. Department of Commerce. Financial analysts view merchandising as a mature industry, defined by intense competition, low profit margins, and business consolidation.

Numerous economic factors affect retailers. Notable among them are real changes (inflation-adjusted) in GDP, levels of disposable income, and consumer confidence. In short, people shop when they have money, and they are confident that they will have it in the future. Consequently, retailers tend to thrive during economic expansions and suffer during economic contractions.

The 2007-2009 economic down turn hurt sales for all retailers. Sales have rebounded in the five years after the recession, but many analysts feel that industry performance remains sluggish. Marketers note the post-recession watchword for retail customers is value. Consumers, regardless of economic standing, want quality at a relatively low price.

A recent threat to traditional bricks and mortar retailers, such as Target, has been the rise of online retailing. Firms such as Amazon have taken sales and market share away from Target, Walmart and others who primarily sell their goods at fixed locations. In addition to this general industry threat, Target has faced numerous company issues. The primary ones are an ill-fated attempt to launch stores in Canada, an extensive data breach to its customers information, and the erratic performance of its Target credit card business. More importantly, some analysts have criticized Target from losing sight of its objective as the upscale discounter; a purveyor of cheap chic, which differentiated the firm from its competitors.

You turn your attention to Targets four most recent income statements, balance sheets, and statements of cash flows excerpts:

Target Corporation

Income Statements (in millions of dollars)

2014

2013

2012

2011

Total revenues

$72,596

$73,301

$69,865

$ 67,390

Costs of sales

51,160

50,568

47,860

45,725

Gross profit

21,436

22,733

22,005

21,665

Operating expenses

17,207

17,362

16,683

16,413

Operating income

4,229

5,371

5,322

5,252

Net interest cost

1,126

762

866

757

Income before income taxes

3,103

4,609

4,456

4,495

Income tax expense

1,132

1,610

1,527

1,575

Net income

$1,971

$2,999

$2,929

$2,920

Target Corporation

Balance Sheets (in millions of dollars)

2014

2013

2012

2011

Assets:

Cash

$695

$784

$794

$1,712

Accounts receivable

-

5,841

5,927

6,153

Inventories

8,766

7,903

7,918

7,596

Prepaid expenses and other

2,112

1,860

1,810

1,752

Total current assets

11,573

16,388

16,449

17,213

Property, plant, & equipment, net

31,378

31,663

29,149

25,493

Other assets

1,602

1,122

1,032

999

Total assets

$44,553

$48,163

$46,630

$ 43,705

Liabilities and Shareholders' Equity:

Current liabilities:

Accounts payable

$7,683

$7,056

$6,857

$6,625

Other current liabilities

5,094

6,975

7,430

3,445

Total current liabilities

12,777

14,031

14,287

10,070

Long-term liabilities

15,545

17,574

16,522

18,148

Total liabilities

28,322

31,605

30,809

28,218

Shareholders' Equity:

Contributed capital

4,523

3,979

3,543

3,370

Retained earnings

12,599

13,155

12,959

12,698

Other shareholders' equity

(891)

(576)

(681)

(581)

Total shareholders' equity

16,231

16,558

15,821

15,487

Total liabilities & shareholders' equity

$44,553

$48,163

$46,630

$ 43,705

Cash Flow Data

2014

2013

2012

2011

Cash flow from operations

$6,520

$5,325

$5,434

$5,271

Fixed asset purchases

3,453

3,277

4,368

2,129

Cash dividends

1,006

869

750

609

As a competitive benchmark, you also gather the last four years financial statements for Walmart:

Wal-Mart Stores

Income Statements (in millions of dollars)

2014

2013

2012

2011

Total revenues

$476,295

$468,651

$446,950

$421,849

Costs of sales

358,069

352,297

335,127

315,287

Gross profit

118,225

116,354

111,823

106,562

Operating expenses

91,353

88,629

85,265

81,020

Operating income

26,872

27,725

26,558

25,542

Net interest cost

2,216

2,063

2,160

2,004

Income before income taxes

24,656

25,662

24,398

23,538

Income tax expense

8,634

8,663

8,699

8,663

Net income

$16,022

$16,999

$15,699

$16,389

Wal-Mart Stores

Balance Sheets (in millions of dollars)

2014

2013

2012

2011

Assets:

Cash

$7,281

$7,781

$6,550

$7,395

Accounts receivable

6,677

6,768

5,937

5,089

Inventories

1,909

1,551

40,714

36,318

Prepaid expenses and other

460

37

1,774

3,091

Total current assets

61,185

59,940

54,975

51,893

Property, plant, & equipment, net

115,364

113,929

109,603

105,098

Other assets

28,202

29,236

28,828

23,672

Total assets

$204,751

$203,105

$193,406

$180,663

Liabilities and Shareholders' Equity:

Current liabilities:

Accounts payable

$37,415

$38,080

$36,608

$33,557

Other current liabilities

31,930

33,738

25,692

24,927

Total current liabilities

69,345

71,818

62,300

58,484

Long-term liabilities

54,067

49,549

55,345

50,932

Total liabilities

123,412

121,367

117,645

109,416

Shareholders' Equity:

Contributed capital

2,685

3,952

4,034

3,929

Retained earnings

76,566

72,798

68,691

63,967

Other shareholders' equity

2,088

4,808

3,036

3,351

Total shareholders' equity

81,339

81,738

75,761

71,247

Total liabilities & shareholders' equity

$204,751

$203,105

$193,406

$180,663

Cash Flow Data

2014

2013

2012

2011

Cash flow from operations

$23,257

$25,591

$24,255

$23,643

Fixed asset purchases

13,115

12,898

13,510

12,699

Cash dividends

6,139

5,361

5,048

4,437

You make a few final mental notes about the financial statements. First, Target did not report any accounts receivable in 2014. That is because Target sold its credit card business to TD Bank at the end of 2013. Second, the fiscal year end for Target and Walmart differ. Like most retailers, Target and Walmart end their fiscal years at the end of January, after the holiday selling and return season ends. In its annual reports, Target refers to its fiscal year in which the 11-month majority took place. For example, Targets 2013 annual report referred to the year started on February 1, 2013 and ended on January 31, 2014 as 2013. Walmart, on the other hand called that same fiscal year 2014. To avoid confusion in your analysis, you have recast Targets financial statements on a comparably-dated basis as those of Walmart.

Required: (1) Complete the following tables by computing the required 2013 and 2014 ratios for Target and Walmart.

Target Corporation

2014

2013

2012

2011

Return on equity

18.5%

18.9%

Return on total assets

11.4%

12.0%

Operating profit margin

4.2%

4.3%

Asset turnover

1.50

1.54

Working capital

2,162

7,143

Current (working capital) ratio

1.151

1.709

Inventory turnover

6.04

6.02

Days in inventory

60.4

60.6

Accounts receivable turnover

11.8

11.0

Days in accounts receivable

30.96

33.33

Operating cycle

91.35

93.96

Accounts payable turnover

6.98

6.90

Days in accounts payable

52.29

52.88

Net cash conversion cycle

39.06

41.08

Debt to capital

0.66

0.65

Debt to equity

1.95

1.82

Times interest earned (earnings coverage)

3.38

3.86

Cash flow adequacy

1.06

1.93

Wal-Mart Stores

2014

2013

2012

2011

Return on equity

20.7%

23.0%

Return on total assets

13.7%

14.1%

Operating profit margin

3.5%

3.9%

Asset turnover

2.31

2.34

Working capital

(7,325)

(6,591)

Current (working capital) ratio

0.882

0.887

Inventory turnover

8.23

8.68

Days in inventory

44.3

42.0

Accounts receivable turnover

75.3

82.9

Days in accounts receivable

4.85

4.40

Operating cycle

49.19

46.45

Accounts payable turnover

9.15

9.40

Days in accounts payable

39.87

38.85

Net cash conversion cycle

9.32

7.60

Debt to capital

0.61

0.61

Debt to equity

1.55

1.54

Times interest earned (earnings coverage)

7.27

8.18

Cash flow adequacy

1.31

1.38

Required: (2) Decide whether Target should retain or fire its chief executive officer. Write your rationale for the recommendation that you will read to Targets Board of Directors.