_Target Corporation _
By: John Schindele
MEMO To: Bobby C. Vaught, Ph.D. Date: July 11, 2000 Professor of Management
From: John Schindele Subject: Target Corporation (Formerly Dayton Hudson) The
main issue facing Target Corporation is what it should do with its department
store and Mervyns divisions. The company has considered closing or selling
the divisions several times over the past few decades. Although both divisions
continue to make a profit, the company could be better off focusing all of its
attention on the Target stores. On the other hand, maybe the company needs to
take a different approach with the divisions and try to make them more
successful to generate greater profitsTarget Corporation is going to have
to sell its department store and Mervyns divisions if they do not show
significant improvements in next year after the new strategy goes into affect.
These two divisions are holding Target back and depleting some of its
much-needed resources. In the short run the other two divisions are going to
start conducting business in the same fashion as the Target stores. If after a
year the new strategy, which is making the other two divisions more like the
target division, has not produced more profit for the company, it will be time
to either sell or close the companies. Target would much rather sell the
companies, but that can only happen if another company is willing to buy The
goal for the new change is that within a few months the change will be in full
swing. After a year the companies should be making not only more revenue but
also more profit. Unfortunately, if the changes do not work as planned, Target
Corporation will not be able to keep the businesses. Background Dayton Hudson
Corporation changed its name to Target Corporation in January this year. The
origins of the company date back to 1891 when Joseph Hudson opened a mens
clothing store in Detroit. In 1903 George Dayton opened Dayton Dry Goods
Company, which changed its name to The Dayton Company in 1910. The Dayton
Company entered the discount merchandise retail industry in 1962 when it
opened its first Target store. The two companies merged and formed Dayton
Hudson Corporation in 1969. The company continued to expand by purchasing
Mervyns in 1978 and Marshall Fields in 1990. By 1979 Target had become the
corporations top revenue producer In the past three years the company has
changed significantly. Besides changing its name, it has also attempted to
diversify by acquiring two more companies. In 1998 it bought Rivertown Trading
Company and The Associated Merchandising Corporation. The acquisition of
Rivertown Trading Company showed that the company was willing to try something
new by entering the major catalog market. The Associated Merchandising
Corporation was already a supplier for many of the companies products, so it
was very convenient for it to take over operations. As recently as 1999, the
company launched its e-commerce capability with store brand web sites. When
the company claimed the Target Corporation name in January this year, it was
acknowledging its dependency on the success of its Target stores. The Target
stores and the e-commerce focus appear to hold the future of Target
Corporations Success. The department store and Mervyns divisions still play
a major role in generating revenue for the company, but the future of those
divisions is less predictable. SWOT Situation Analysis External Industry
Analysis Prospects for Volume and Profit Industry Wide Target Corporation is
in the general merchandise retailing industry, sometimes called the discount
retailing industry. Its store brands include Target, Daytons, Marshall
Fields, Hudsons and Mervyn's California. Selected information on the stores
in the three divisions is given in Exhibit 1 through 4. The acquisition of
Rivertown Trading Company marked Target Corporations first entry into a major
catalog business. Rivertown and Targets e-commerce team have combined to make
one business called target.direct. This creation allows Target Corporation to
strengthen its capabilities in the direct marketing retail channel and
Internet retailing. The general merchandise industry has experienced
significant growth of 15.8% annually in the past five years due partly to the
strong economy. The industry accounted for $346 billion dollars in 1998.
Experts project that it will increase this year and next year by 19.6% and
18.8% respectively. The five-year projection for the industry shows an annual
increase of 18%. Selected information on the industry is given in Exhibit 5
and 6. Target Corporation accounted for approximately 9.7% of the industrys
sales in 1999. However, its largest competitor, Wal-Mart, was responsible for
about 47% of the sales. With the industry growing at such a rapid pace, each
corporation will have to continue to increase sales to keep up with the
competition. Threats and Opportunities Wal-Mart dominates the general
merchandise retail industry and is the only major threat to Target
Corporation. It is so far ahead that its competitors need to focus on
competing rather than trying to keep up. Wal-Mart is a major threat to every
other company in the industry. It continues to grow and introduce new ideas
that make it more difficult for competitors. Wal-Marts Supercenter is growing
in popularity and numbers and is dominating the market. There is no way to
know if maybe one day in the future, Wal-Mart will be subject to monopolistic
or antitrust charges. Benchmarking is very important in this industry because
when one company does something that the customers respond to positively, its
competitors can relatively easily imitate it. The economy has been very strong
lately, however if the economy began to slow down and consumers had less
disposable income, it could hurt the industry as a whole. Currently
unemployment is unusually low, which can make it difficult to hire qualified
employees. Quality employees are needed to ensure good customer service, so
customer service could suffer due to low unemployment. Technology is a major
influence in the industry and the companies are trying to cash in on the
e-business boom. Most of the companies in the industry allow customers to shop
on the Internet. Suppliers for the general merchandise retail industry play a
major role and could be an opportunity or a threat. Several stores in the
industry use the same suppliers and have to compete to get low prices and keep
costs low. Target's opportunities for domestic new store growth remain strong.
During 1999, Target added a total of 74 new stores. SuperTarget provides
Target with tremendous opportunities for future growth. SuperTarget combines
general merchandise with high-quality grocery items to offer a convenient
one-stop shopping experience for its consumers. Target envisions the Internet
not only as a channel for selling merchandise, but also as an important
communications tool to reach consumers and improve customer service. In 1999,
Target devoted more resources to building the merchandising, marketing,
fulfillment, and technology processes required to support Internet shopping.
The growth of the Target credit card continues to increase in profit from
credit. Key Factors for Success in the Industry There are a few key factors
for success in the general merchandise retail industry. Companies in the
industry have to deliver value in dramatic new ways to keep customers loyal
and keep market share. Each company will have to offer well-designed
merchandise at great prices, with powerful presentations in attractive stores.
Companies need to try to offer more exclusive products, with a greater
emphasis on design. The businesses in the industry need to plan for future
growth and financial success with differentiated merchandise. Target
Corporation has tried to meet these customer needs by expanding its target
market and improving the quality of products it sells. Customers want fast
service with a respectful tone. That means getting in and out of the store
quickly, finding merchandise in stock, and obtaining rapid and knowledgeable
answers to questions. Consumers find service to be more important to them than
any other part of their store experience, so companies in this industry need
to focus on customer service. Target Corporations well-trained staff
continues to give its customers excellent customer service. Corporations in
the general merchandise retail industry need to maintain cooperative
relationships with the communities in which they do business. The commitment
to be an active member of the communities where they operate is essential for
success. The companies should work together with educational programs and
provide financial support when possible. Successful businesses need to
continue to look for innovative ways to partner with nonprofit agencies to
build stronger communities. Target Corporation is probably the most active in
the industry when it comes to community involvement. It has several programs
that offer financial support and give back to the community. Internal Firm
Analysis Current Objectives Target Corporation is committed to growth and
delivering superior returns to their shareholders. Some of its main objectives
are providing better quality and prices compared to competitors, creating a
fun and inviting variety of products, and developing guest-friendly,
convenient stores. Target claims that it provides better quality than some of
its competitors, but it is more difficult to compete on price. Within the last
few years Target has created a fun and inviting atmosphere for its customers
with the help of strategic planning and marketing. Target Corporations stores
are convenient for its customers, but it needs to continue to focus on
consumers changing wants and needs. The principle objective of the company,
which is to deliver annual earnings per share growth of 15% or more over time,
has stayed the same for years. Since the corporation became publicly held in
1967, Target Corporation has successfully distributed 129 consecutive
dividends. It has been relatively successful in meeting its objectives in the
last five years compared to the previous decade. Its mission statement is to
be the retailer of choice in the discount, middle market, and department store
retail segments. Target Corporation focuses on trend leadership, excellent
guest service, exciting team member opportunities, and community outreach, to
create long-term shareholder value. It plans to continue to reach multiple
market segments with its many operating divisions. Each division is
specifically geared toward American consumers with stores ranging from upscale
discount, to full service department stores. Target tries to focus on specific
markets with stores strategically located in regional malls, neighborhood
shopping centers, or freestanding buildings. In some of its department stores
and Mervyns, some clothing lines have unique styles and broader ranges of
sizes available to attract a more upscale market. Its major store, Target,
focuses on offering a wide variety of products at more affordable prices.
Target Corporation works on getting customers in and out of the store quickly
and makes sure merchandise is constantly in stock. Target Corporation also
focuses on community outreach. Since 1962 they have joined nonprofit
organizations to give back to the community through grants and special
programs. In 1999 the corporation took an active part in communities
nationwide by donating more than $67 million to nonprofit organizations. In
2000 these donations will exceed $80 million for medical patients, education
grants, immediate clothing, shelter, food needs, and those on welfare.
Financial Analysis Target Corporations net earnings were $1,144 million in
1999 for the fiscal year ending January of 2000. This compares to $935 million
in 1998 and $751 million in 1997 showing a growth in net earnings of 24.5%
from 1997-1998 and 22% from 1998-1999. Revenues in 1999 of $33,702 million are
primarily generated through the three main segments of Target, Mervyns, and
Department Stores. Of the three divisions, Target alone generated about 78% of
the revenues with $26,080 million in sales. Mervyns produced about 12% while
the department stores accounted for 9% with sales of $4,099 million and $3,074
million respectively. The revenues from Mervyns and the department stores
have remained fairly consistent over the last five years with minimal
increases from the department stores segment and minimal decreases from
Mervyns. Inventory levels increased $323 million in 1999, but were fully
funded by the $364 million increase in accounts payable over the same period.
Basic earnings per share in 1999 were $2.56 resulting in $ .10 of dividends
declared per share each quarter in 1999. It was an increase from $2.08
earnings per share in 1998 and a $ .09 dividend declared per quarter. The
price of Target Corporations common stock ranged from $33.75 to $63.75 in
1998. The total return to shareholders over the past five years averages 43%
annually. In 1999 the main expense areas were selling, general, and
administrative, which accounted for $7,490 million or 22% of revenues. They
increased relative to the 1995-1998 expenses that stayed constant around
16-17%. Capital expenditures are currently a minimal expense on average of
5.56% for the years 1995-1999. In 1999 capital expenditures were $1,918
million. Approximately 69% of the total expenditures were for new stores,
expansions, and remodels. Strong cash flow helped reflect a retail debt ratio
of 40%. This is separate from the credit operations debt ratio due to the
different financial characteristics. The total debt ratio for 1999 is 49%. The
price to cash flow ratio was 14.7 in 1999, and the price to revenue ratio was
.89. The price to revenue ratio more than doubled since 1995 when it was only
.23. Target Corporation has been very efficient, which reflects a return on
equity of 20.2% in 1999 compared to 9.9% in 1996. Inventory turnover was
relatively low at 6.3 in 1999. It is one of Targets main areas of
concentration. Profitability can be seen by comparing net profit after taxes
to net sales resulting in a net profit margin of 3.5%. In 1999 Target
Corporation also displayed a gross profit margin of 31.7%. The liquidity is
displayed using the current ratio and the quick ratio. The current ratio of
1.1 has decreased since 1996 when it was more favorable at 1.4. The quick
ratio also decreased by only one tenth of a point from .5 in 1996 to .4 in
1999. Additional ratios are presented in Appendix A Current Strategies
Analysis Target Corporations operational strategy is to offer high-quality
fashionable merchandise at affordable prices. It plans to achieve a future of
strong growth in revenues and earnings by looking toward new store growth in
Target, the primary segment. One of its functional strategies is to reinvest
$2.5 to $3 billion in the business with a combination of capital investment
and share repurchase. It plans to open 80 new stores and expand its reach to
consumers by entering two new markets in West Virginia and Connecticut.
Another strategy is to increase capital expenditures to continue remodeling
programs for the existing divisions of Target Corporation. Suppliers are
crucial part of the product distribution process. One strategy Target plans to
continue using to promote good relations with suppliers is acknowledging
excellent performance from vendors. Another strategy for Target Corporation to
compete with larger retail stores is to focus on a more upscale customer,
which will create a unique capability in the retail sector. In its plan for
the future, Target Corporation plans to focus efforts for success on the major
division, Target. The smaller divisions will be used to provide cash flow to
improve Targets growth. Corporate strategy also includes anticipating new
opportunities and acting promptly to adapt to change when the need arises.
Target Corporation will have to continue to invest and use its resources
efficiently to carry out its strategies. Strengths and Weaknesses Target
Corporations core strength is its variety of retail stores, which provide
exceptional value and variety to its customers. Among the value chain
components, technological development has been a great asset to the company
and employees. Target implemented an online business and professional skills
training course program in 1999. The program is available nationwide to about
1,200 information technology personnel. Employees can be trained online in
leadership, team building, workplace communication, sales, marketing, and
finance. Technology has really improved marketing, sales, and customer
service. E-commerce can improve the companys customer relations in many ways.
It will not only serve as another channel for selling merchandise, but has
already increased guest services and can reach a wide range of consumers.
Targets recent alliance with AOL helps introduces new customers to the Target
brand. Target Corporation constantly works on enhancing the shopping
experience for consumers in the stores. It is building stronger relationships
and customer loyalty through more personalized selling and enhanced customer
loyalty programs. It is committed to newness and fashion in the product
assortments presented in an exciting store environment. Target has recently
expanded its customer relations with all of the credit programs it has to
offer. The company has the second largest credit portfolio among retailers
that issue store credit cards. Credit card numbers continue to rise and have
already exceeded 30 million guest cards. Customer loyalty programs help build
stronger relationships with consumers and increase patronage. Target uses its
credit program to help promote community involvement by donating 1% of all
purchases made on the cards to local communities. Target Corporation currently
does not have very many weaknesses. Its growing profits and earnings per share
are spelling out success for the company, and its objectives are being met.
Target stores are surging, but its department stores and Mervyns do not have
the same appeal to customers. Marketing strategies for those two divisions are
weak and the company will need to make them more appealing to consumers for
them to continue to make profits. Competitive Position of the Firm Target
Corporation is the fourth largest retailer after Wal-Mart, K-Mart, and Sears,
so the company must make sure it is taking advantages of any opportunities to
increase its market share. Target must also promptly address threats that may
affect future earnings of the company. Although the company has began
introducing new product lines and offering a wider variety of products, the
company needs to focus on more customer loyalty and creating new ways to
present its products to gain more of the market share. Statement of Problem
The main issue facing Target Corporation is what it should do with its
department store and Mervyns divisions. The company has considered closing or
selling the divisions several times over the past few decades. Although both
divisions continue to make a profit as shown in Exhibits 2 and 3, the company
could be better off focusing all of its attention on the Target stores. On the
other hand, maybe the company needs to take a different approach with the
divisions and try to make them more successful to generate greater profits.
The main reason for the problem is that the divisions are too separated from
one another and work as separate companies rather than one team. Target claims
that the continued growth of its divisions are key contributors to its overall
strategy. It actually has strategies for each division, all in somewhat
different directions. Its department stores are trying to focus on stronger
commitment to newness and fashion products in its assortments. One way it is
reinventing the shopping experience is through events like the Paris Flea
Market and our popular "Fash Bash" fashion shows. Marketing initiatives for
our Department Stores will continue to reinforce the strong brand heritage of
our stores. Some of these new changes are leading to increasing costs in
merchandise and employee training. Over the last three years, Mervyn's has
added more than 125 national and market brands to the sales floor. In 1999, it
made a more concentrated effort to let it customers know about its new brands.
Again the company had increasing costs in attempt to meet the demanding needs
of the customers. Target stores had still a different approach, but it had
much more success. Its primary growth comes from new store expansion. Target
continues to open stores in new U.S. markets; the more it opens, the more
profit it generates. As stated earlier, of the three divisions, Target alone
generated about 78% of the revenues with $26,080 million in sales. Mervyns
produced about 12% while the department stores accounted for 9% with sales of
$4,099 million and $3,074 million respectively. The revenues from Mervyns and
the department stores have remained fairly consistent over the last five years
with minimal increases from the department stores segment and minimal
decreases from Mervyns. These two divisions are dragging target down. The
amount of resources that could be added to Target if the company did not have
to strive to keep the other two divisions profitable could really add to
Targets success. Target is easily the strongest part of the company and needs
to receive the majority of research and development. Currently the other two
divisions are receiving much of the R and possibly holding back Targets
growth. Recommendation Target Corporation is going to have to sell its
department store and Mervyns divisions if they do not show significant
improvements in next year after the new strategy goes into affect. These two
divisions are holding Target back and depleting some of its much-needed
resources. In the short run the other two divisions are going to start
conducting business in the same fashion as the Target stores. They will use
similar purchasing, inventory control, and marketing techniques. Target has
been very successful using these practices so it is time to see if it will
work for the other divisions. This new strategy should work better than what
the company has been doing with its smaller divisions. The two divisions have
been making a profit but not enough to justify all of the cost. If after a
year the new strategy, which is making the other two divisions more like the
target division, has not produced more profit for the company, it will be time
to either sell or close the companies. Target would much rather sell the
companies, but that can only happen if another company is willing to buy. This
solution was derived from the fact that Target alone generated about 78% of
the revenues while Mervyns generated only 12% and the department stores
accounted for 9%. If it is found after a year that the smaller two divisions
cannot generate more revenue, Target will begin receiving all of the resources
that had been going to the other businesses and turn it in to greater profits.
The changes will be implemented immediately with a new advertising campaign
to make the consumers aware of the changes. It will let consumers know that
the department stores and Mervyns will not appear to change, but they will be
run more efficiently. The actual changes in the business will not change much,
and those employees will not need much training. The upper level management
will have to make the changes to make their companies operate more like
Target. These changes will generate more costs at first. The funding will come
from internal sources and marginally increasing debt The goal for the new
change is that within a few months the change will be in full swing. After
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