Target Corporation is in the market to deliver a higher quality product and experience to a more upscale consumer than its competitors. This allows Target to have very specific advantages in the competitive environment. The combination of these two things results in unique performance characteristics in financial performance. All of this is combined to make a forecast on the future of Target and a decision to buy Target shares as an investment. Competitive Environment
Rivalry among Competition: High
As a discount retailer, some close competitors of Target are Wal-Mart and Costco. Due to the three sellers’ broad product mix, they sell similar or identical items, which leads to intense rivalry in this industry. Threat of Entrants: Low
There is minimal threat of entry in discount retailing due to the high barriers. These include immense capital requirements, access to good locations, economies of scales and hard to imitate brand identity. Threat of Substitute Products: Medium to High
Target has many close substitute sellers due to its broad product assortment. However, many of these sellers are just a partial substitute for Target’s departments; for instance, groceries – Wal-Mart, pharmacy – Walgreens, apparel and home goods – Kohl’s. Other big-box retailers require a membership fee to shop at, such as Costco. Thus, no complete substitute can be defined for Target.
Bargaining Power of Suppliers: Low
Target has a variety of suppliers and not a single one accounts for a big fraction of its inputs. Target is also a large volume purchaser, which results in low bargaining power of suppliers. Bargaining Power of Buyers: Low
Since Target has many buyers and each one only makes up a small portion of the overall sales, it is difficult for any individual to influence the performance of Target. However, due to the availability of substitutes, consumers do have the power to shop elsewhere when need be. Summary of Present Performance
When performing ratio analysis, there are two ways to benchmark a company. The first method is against itself, comparing the company's current ratios to those of its past. The second is by comparing the ratios to similar companies (Wal-Mart and Costco in this case). The latter of the two is not as effected by macroeconomic trends but does not give the consistency of the former. Different companies may have differing strategies and accounting methods that would affect these ratios. Therefore, it is good to look into both of these benchmarks while doing ratio analysis. In the first category of ratios, the profitability ratios, Target is the best of the three companies for two of the four ratios and in the middle on the other two. It leads the pack in both return on sales and gross profit margin. In the return on sales ratio, both Target and Wal-Mart peaked in 2010 and have dropped off slightly while Costco has been lower, but more consistent. In gross profit margin all three companies reached a high in 2009, but Target has fallen slightly closer to the Wal-Mart since then. Target is leading these aspects due to their emphasis on quality (which provides for higher margins). Also, in the past Target has focused less on groceries (which have low profit margin) than the others. However, Target is beginning to sell more groceries in their stores, which may narrow the gap between them and Wal-Mart. In the other two profitability ratios, return on assets and equity, Target falls just below Wal-Mart. Wal-Mart and Target both drop slightly in these ratios from 2009 to 2010 after rising the previous two years. Costco, however had a much lower and steadier return on equity, and a return on assets that fluctuated around Target's but did not follow the trend. Again, while Target focuses on quality, Wal-Mart focuses on efficiency and cost. Being more efficient with their assets and equity causes Wal-Mart to take these categories. Target was generally the highest in cash health (or cash flow)...