financial statement analysis Abbott Laboratories and Target

Financial
Statement
Analysis
October 18
2010
Good Karma: Amanda Tryon, Kara Brown, Karen Allen, Melissa Masters
Abbott
Laboratories
and Target
Financial Statement Analysis
2010

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Table of Contents
Part I: Abbott Laboratories………………………………………………………………………………………………………………………………… 3
Executive Summary 4
I. Introduction of the company. 5
II. Performance analysis 6
III. Financial position 7
IV. Critique 8
V. External perception of the company 12
VI. Conclusions and recommendations 13
Part II: Target 16
Executive Summary 17
I. Introduction of the company 18
II. Performance analysis 18
III. Financial position 20
IV. Critique 22

V. External perception of the company: 24
VI. Conclusions and recommendations. 26
Appendix A - Abbott Competition 28
Appendix B- Target Competition 30
Appendix C- Customer Perceptions- Target 31
Appendix D-Common Size Income Statement- Abbott 32
Appendix E- Common Size Balance Sheet- Abbott 34
Appendix F- Common Size Balance Sheet- Target 38
Appendix G- Common Size Income Statement- Target 40
Appendix H- Key Financial Ratios- Target 41
Appendix I- Key Financial Ratios- Abbott 42
Appendix J- Target’s Annual Report –Fiscal year 2009 43
Appendix K- Abbott Laboratories’ Annual Report -Fiscal Year 2009 135
Works Cited 214

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Part I:

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Executive Summary
Abbott Laboratories is an international company based in Illinois. They are involved in the sale of a
largely diversified line of healthcare products. This company has diversified itself in the areas of

pharmaceutical, diagnostic, nutritional, and vascular products, which has benefited its ability to remain
financially stable. In the healthcare industry, specifically pharmaceuticals, competition is fierce. Each
company tries to be on the cutting edge of technology with their drugs and other miscellaneous
products. Abbott has still proven to be a viable competitor in its market. Sales increased from 2008 to
2009. Also, the market price per each share of common stock was maintained. This shows that this
corporation can perform and will continue to do so.
With the passage of healthcare reform bill there is uncertainty about what the future holds. The nursing
shortage, drug costs, and soaring health care plan premiums will rekindle fears of medical inflation. A
considerable portion of Abbott Laboratories‘ market is that of healthcare related products. Abbott‘s
sales have been impacted significantly over the last three years with the purchase of several
pharmaceutical products and joint ventures along with the loss of patent protections. Abbott has done
well weathering the economic downturn with an increase in net sales and gross profit for the 2
nd
, 3
rd
and
4th quarters of 2009 as compared to 2008 and 2007. After creating and reviewing the common size
income statement for Abbott Laboratories, we see that the numbers are strongly consistent from year to
year.
In order to compete, Abbott is actively buying and selling companies and divisions. This has helped
them increase their growth in emerging markets.
We recommend investing in Abbott, but conservatively. With health care reform looming over head,
change is coming. All is not clear on how it will directly affect Abbott‘s performance, but they have
proven before that they are a formidable competitor.

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I. Introduction of the company.
Abbott Laboratories is involved in the sale of a largely diversified line of healthcare products. Abbott
operates four segments: Pharmaceutical, Diagnostic Products, Nutritional, and Vascular Products. Its
Pharmaceutical Products include adult and pediatric pharmaceuticals. Its Diagnostic Products include
diagnostic systems and tests that are sold to blood banks, hospitals, commercial laboratories, clinics,
physicians' offices, alternate-care testing sites and plasma protein therapeutic companies. The
Company's Nutritional Products include a line of pediatric and adult nutritional products sold worldwide.
Its Vascular Products include coronary, endovascular, and vessel closure devices for the treatment of
vascular disease.
Since Abbott is involved four different segments, they have different competition and competition
strategies for each segment. For Pharmaceutical products, the competition is from other
pharmaceutical companies. Searching for innovative products is the biggest part of the competition.
Changes in medical practices and product releases from competitors can quickly result in changes in
their business. They must also consider their product price, as many substitute generic drugs.
The Diagnostic Product division faces the same types of competition in innovation and price. However,
it must also consider product performance, contracts and productivity. Several products they have in
this segment are subject to regulatory changes.
Nutritional Products generally have competition from other consumer and health care manufacturers.
They consider advertising, packaging, price and availability. A large part of competition in this area is
ingredient innovations. New products by competitors and generic substitutes are an issue.
The Vascular Products are facing many of the same challenges as above. They are highly competitive
in product innovation, price and convenience. Many of the segments face the possibility of product
obsolescence due to new product offerings by competitors, changes in medical practices, and
government regulation.
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II. Performance analysis

In reviewing the 2009 annual report of Abbott Laboratories, the strengths and weaknesses of the
company‘s performance were analyzed. This company has diversified itself in the areas of
pharmaceutical, diagnostic, nutritional, and vascular products, which has benefited its ability to remain
financially stable. The sale of these types of products is not seasonal; therefore we expect their sales
numbers to remain constant throughout the year.
The business of healthcare and pharmaceuticals has many downfalls or weaknesses. Because Abbott
depends heavily on its creation of new products and the research done, the risk of a product failing and
resulting in a financial loss is high. However, when a product is successful, the financial benefits are
great. With the creation of new products, it is the responsibility of Abbott to obtain patents on the
creation and distribution. When these patents are held, Abbott becomes the only distributor of the
product, therefore controlling the price. Patents only last for a certain length of time, causing a decrease
in revenue and operating income once a patent expires. Legal expenses can also occur if there is a
patent infringement claim by another company. These legal expenses can potentially affect cash flow;
therefore budget allowances must be allowed.
The creation and success of new products relies heavily on the amount of research performed. The
more research a company performs, the more money they will spend. The research is done so a
product will meet government regulations, along with hopefully preventing legal issues that can arise
from a dangerous product. Abbott products are sold worldwide, so they must submit to the government
regulations for each country where their products are sold. Even with the amount of research that is
done, the corporation is still subject to product liability claims and safety concerns. If it is found that a
product puts someone at risk, potential legal expenses may occur.
In the healthcare industry, specifically pharmaceuticals, competition is fierce. Each company tries to be
on the cutting edge of technology with their drugs and other miscellaneous products. Products that are
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being researched are kept top secret until the research is mostly complete. Each company is kept in the
dark until this time, making competition hard to predict.

In spite of these weaknesses, Abbott has still proven to be a viable competitor in its market. Sales
increased from 2008 to 2009. Also, the market price per each share of common stock was maintained.
This shows that this corporation can perform and will continue to do so.
III. Financial position
Analyzing the strengths and weakness for Abbott Laboratories is tricky. In late 2009, when Abbott
Laboratories acquired a unit of Solvay of Belgium for $6.6 billion, the large merger was praised as a
signal for restored confidence (Sorkin, 2009). However, less than a year later, the Pharmaceutical giant
announced that they would be cutting 3,000 jobs, or 3 percent of its work force (Reuters, 2010). As an
investor, the declaration a company is downsizing 3 percent of its work force is not a comforting sign to
reinvest. However, this downsizing came almost entirely from the Solvay positions. Probably, the
downsizing which was found mainly in research and development, and commercial and manufacturing
was planned for during the acquisition and prior to the merger being announced.
In May 2010, Abbott Laboratories announced they would purchase the Indian drug maker Piramal
Healthcare for $3.7 billion. Abbott stated even though paying $2.12 billion in cash upfront for Piramal,
and then $400 million annually over the next four years, this purchase will add immediately to Abbott‘s
earnings (Timmons, 2010). PricewaterhouseCoopers estimates that emerging markets will account for
30 – 40 percent of pharmaceutical sales growth in the next 10 years (Timmons, 2010). Pharmaceutical
business in emerging markets is drastically different from the West. Consumers in emerging markets
typically pay directly for their prescriptions, while those in the West typically rely on insurance and
government care. As Abbott Labs and Piramal expand into India, the company will become the largest
drug company in India with 7 percent of the market.
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Abbott Laboratories has also had their share of bumps in the road. Facing competition from the generic
drugs, sales of Humira, mostly used for treatment of Rheumatoid Arthritis, have been decreasing.
Another casualty to the generic competition is the drug Depakote, typically used as an anti-seizure
medicine. In 2009, sales of Depakote tumbled 75 percent, after losing exclusivity in 2008. (Bloomberg

News, 2009). There are two polar views on the drug Meridia, an anti-obesity drug. In January 2010,
European Medicines Agency advised doctors and pharmacists to stop prescribing and dispensing
Meridia and equivalents of Meridia (Singer and Pollack, 2010). The Food and Drug Administration,
looking at the same data asked Abbott Laboratories to put a stronger warning on its label. The key
ingredient, sibutramine, is at the crux of this decision. The question is if this ingredient when given to a
patient diagnosed with uncontrolled high blood pressure is at a higher risk of a heart attack or stroke.
Most recently, in September 2010, Abbott Laboratories had to recall millions of containers of its
bestselling Similac infant formula due to the possibility of being contaminated with insect parts, such as
small beetles or larvae. This recall affected 5 million containers of formula. Abbott announced that they
expected a $100 million dollar loss in connection with this recall. With this announcement, shares of
Abbott Laboratories fell 16 cents (Perrone, 2010).
IV. Critique
Healthcare as we know it is about to change. With the passage of healthcare reform bill there is
uncertainty about what the future holds. The nursing shortage, drug costs, and soaring health care plan
premiums will rekindle fears of medical inflation. A considerable portion of Abbott Laboratories‘ market
is that of healthcare related products. Abbott operates in numerous countries and employs both internal
and external tax professionals to minimize audit adjustment amounts where possible. Changes in
foreign reimbursement, political and economic stability will also significantly impact their bottom line.
Their operation in international markets is 50 percent of consolidated net sales for Abbott Laboratories.
Their gross profit margin in 2008 was higher due, in part, to favorable product mix and foreign
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exchange. However, there was a decline in their gross profit margins in 2009 due to the negative
impact from lower sales of Depakote. One other important and detrimental part of the business is
patents and trademarks. There are several legal proceedings that they are currently facing due to
patent infringement both locally and internationally. The estimated loss due to litigation is $170 million
to approximately $310 million.

Abbott Laboratories‘ revenues are derived primarily from the sale of a broad line of health care products
under short-term receivable arrangements. Abbott‘s sales have been impacted significantly over the
last three years with the purchase of several pharmaceutical products and joint ventures along with the
loss of patent protections. One main focus of Abbott is that of Humira which has increased sales
worldwide. However, they have seen a significant decline in sales of Omnicef and Clarithromycin, with
Omnicef being the greater of the two. They are in a constant battle with products being produced in a
generic form, which significantly affects the sales of their products.
Abbott concludes that its 2009 long term debt is due to financing recent acquisitions. Operating cash
flows in excess of capital expenditures and cash dividends have partially funded these acquisitions. As
of December 31, 2009, Abbott‘s long term debt rating was AA by standard and A1 by Moody‘s
Investor‘s Service.
One significant impact of Abbott‘s bottom line is the sales rebates that they provide. Approximately 50
percent of Abbott‘s consolidated gross revenues are subject to various forms of rebates and allowances
which Abbott records as a reduction of revenue at the time of sale. They also offer discounts to those
that pay within 15 to 30 days. One of the largest rebates that they provide are to the Women‘s Infant
and Children‘s (WIC) division which they have a contract with in 24 states. Indiana is not one of those
states.
Abbott has done well weathering the economic downturn with an increase in net sales and gross profit
for the 2
nd
, 3
rd
and 4th quarters of 2009 as compared to 2008 and 2007. They record cash, cash
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equivalents and investments with the cash equivalents consisting of time deposits and certificates of
deposit. They use FIFO as their inventory method. Depreciation and amortization expenses are

calculated using a straight-line method over the estimated useful lives of the assets. The estimated
useful life as provided by the financial reports states that a building‘s useful life is 10 to 50 years and
equipment is 3 to 20 years.
They also noted internal controls and the external audit being completed by Deloitte and Touche out of
Chicago. Deloitte did report that the company adopted a new accounting standard related to business
combinations in 2009. It states that research and development is accounted for as an indefinite-lived
tangible asset until approval or discontinuation rather than as expense. Acquisition costs are expensed
rather than added to the cost of an acquisition and the fair value of contingent consideration at the date
of an acquisition is added to the cost of the acquisition.
The report was very informative, as some of our group‘s members work in healthcare They have come
to realize the amount of money that is required to run a health care system. This report helps us
understand why some costs get passed on to the consumers. The companies pass the cost off to the
hospitals which then pass it off to the consumer in order to effectively run a health care system. The
notes supplied information regarding accounting policies and areas in which estimates were used.
Among the many different products that Abbott develops, manufactures and sells the consolidated
version of their statements made the report easier to read and understand. Also included within the
notes was supplemental financial information. This involved discussion about their investment in
Boston scientific and other expenses for 2009 related to long term liabilities and comprehensive
income. Within the last 3 years Abbott has been involved in a joint venture with TAP pharmaceutical
products and the selling of its spine business. However, the spine business was not presented as
discontinued operations in the report because the effects were not significant. Abbott is involved in
international markets and there are several tables within the notes that address foreign currency and
foreign subsidiaries. They also included in depth information about post employment benefits. This
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information is very interesting because with healthcare changing, companies are making changes to
retirement benefits. Currently 70 percent of Abbott‘s medical and dental plans‘ assets are invested in

equity securities and 30 percent in fixed income securities. Other notes included that of taxes on
earnings. It was interesting to read that their federal income tax returns through 2005 were settled,
however, tax returns after 2005 were still open. They go on to describe the products they discover,
develop, manufacture and sell within a geographic area. The main report contained extensive
information regarding litigations of the company but also embedded within the notes there continues to
be information regarding litigations and environmental matters. They currently are identified as a
potentially responsible party for investigation and cleanup costs at a number of locations in the United
States and Puerto Rico. The cost of these area clean ups are not expected to exceed $15 million.
Abbott also goes in to detail about incentive stock programs and debt and lines of credit with mention in
the annual report that they have some open lines of credit. There also is great detail about their
intangible assets and several companies that they have acquired along with goodwill. Abbott
positioned themselves appropriately in 2008 as the economy was starting to take a downturn by
restructuring. This restructuring plan included streamlining global operations, reducing overall costs,
and improving efficiencies which is important in a struggling economy. One last thing that they included
in their notes was quarterly results. This seemed to be very helpful in regards to the breakdown of each
quarter and how well the company did comparatively. The notes would have been more helpful to be
presented with each area that it represented. One thing to remember is the length of these reports. It
is understandable that the SEC requires such information to be included in the report but the length can
be very intimidating. With all that Abbott is involved in, their report length was appropriate.



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V. External perception of the company
Investors
Investors like Abbott. They are a strong global company, and they give back to their investors in the

form of dividends or share buybacks. They are actively acquiring other pharmaceutical and healthcare
companies to ensure growth in emerging markets and they are able to maintain a high ROE.
Competitors
Competition in the healthcare and pharmaceutical industry is highly competitive. Because of this,
Abbott and their competitors are constantly trying to come up with the latest drug and get it patented
before their competitor. In these types of situations many companies will begin to acquire their
competitors so they don‘t have to compete with them anymore. This is what Abbott has been doing with
of AMO, Visiogen, Evalve Inc. and Solvay.
Customers
Abbott‘s ―customer‖ is a wide variety of people and companies. Their different segments have different
customers, including blood banks, hospitals, commercial laboratories, clinics, physicians' offices,
alternate-care testing sites and plasma protein therapeutic companies. Abbott‘s recent Similac formula
recall affects the way both customers and competitors view Abbott. Customers lose a little bit of the
trust that they have in the brand whenever a recall is issued. I think in this case the consumers will view
the recall more as Similac, since it is a well known brand.
Analysts
More than half of Abbott's revenue is generated by the pharmaceutical division. With expiring patents
and an extremely competitive generic drug market, Abbott's pharmaceutical revenue could experience
a decline in sales. The acquisitions of AMO, Visiogen, Evalve Inc. and Solvay in 2009 are considered to
be solid additions to the company‘s ophthalmic, drug, and medical devices portfolios. Implementation of
new healthcare reform is complex and creates uncertainty regarding the long-term financial impact on
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the industry. Still analysts say that Abbott is a strong company that has the resources, knowledge, and
know how to succeed.
VI. Conclusions and recommendations
Common Size Statement Analysis

After creating and reviewing the common size income statement for Abbott Laboratories, we see that
the numbers are strongly consistent from year to year. When a large corporation such as Abbott is
reporting in billions of dollars, a change of 1 percent, which could be a million dollars is still not that
significant of a change to warrant large concerns or alarms for the investors. There are trends,
governmental changes, and economics that all need to be considered when reviewing such a large
company. However, upon review of the common size income statement, we did not find too many
critical values that caused great concern.

On the positive side, one sizeable increase that is noteworthy is the increase in net earnings in 2007
from 13.92% to 2009 of 18.68% in 2 years. Another significant number to follow is the continuing
operations. In two years there was a significant increase from 2.31% to 3.69%. This signals that the
core of their business is on the upward climb.

In regards to the balance sheet, we see that there is a net increase in cash of 10.62% between 2007
and 2009, as well as a rise in total current assets of 9.12%. In the 4th quarter of 2008, Abbott sold its
spine business for approximately $360 million in cash resulting in an after tax gain of approximately
$147 million dollars, which is presented as gain on sale of discontinued operations, net of taxes in their
statement of income.
Ratio Analysis
Based on the analysis of key financial ratios, many observations were made. Abbott has improved their
product turnover indicating there is more cash available for general operating expenses. The inventory
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turnover has decreased from previous years, but not significantly. Overall, Abbott‘s debt ratio has not
fluctuated much, which is good in the current economic state. However, Abbott‘s primary product is
pharmaceuticals, which is not always impacted by the economy. The gross and net profit margins have
stayed consistent. The net earnings have increased at least 2% each year, showing the company has

been able to maintain and control its expenses well. The cash flow remains steady, which is positive in
an unstable economy. Unfortunately their return on investments fluctuates, mainly because the nature
of Abbott‘s business. It is expensive to fund research on new drugs and products. The return on equity
has decreased due to some product trials that have not gone well and ongoing litigation from one of
Abbott‘s products.
Industry and Competitor Comparison
Abbott Laboratories has competition among other pharmaceutical companies including Merck, Roche
and Sanofi-Aventis. In part, the above mentioned companies are responsible for employing 357,867
people. As a whole the pharmaceutical industry generates $305.56 million in revenue with a gross
margin of 73.14%. Abbott‘s revenue in 2009 was $33.08 billion with a gross margin of 57.60% which is
lower than others within the industry. However, their quarterly revenue growth was higher than the
industry with Merck being the only company having a larger revenue growth than Abbott. The operating
margin for Abbott is slightly below the industry at 21.25%. It seems that they were responsible in
controlling costs with the economic turmoil that has been going on in recent years. When comparing
each of those companies, Abbott‘s net income is lower when compared to the competition. Abbott‘s net
income in 2009 was $5.31 billion as compared to Merck‘s net income of $10.93 billion, Roche had
$9.91 billion and Sanofi-Aventis had $8.10 billion. However, their price to earnings ratio is higher than
each of the above mentioned companies. Many investors rely on this ratio due to the significant impact
on stock price changes. The explanation may be that their net earnings are significantly higher with less
outstanding stock compared to the other companies.
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Due to the above reasons we recommend investing in Abbott, but conservatively. With health care
reform looming over head, change is coming. All is not clear on how it will directly affect Abbott‘s
performance, but they have proven before that they are a formidable competitor.

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Part II:




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Executive Summary
Target‘s main lines of business are retail and credit card. Target is well known for their operations in
general merchandise and food items. They owe their success to positive perceptions of the Target
brand and they have built their reputation over many years of serving guests, team members,
community and shareholders. The company has successfully associated its name with a younger,
hipper, edgier, and more fun image than its competitors. Target recently announced that their credit
card holders will receive a 5% discount on all Target purchases. This is expected to increase earnings.
Target‘s income depends greatly on the economy, so there were some effects noted. There was a
decrease in accounts receivable, showing that they are not receiving their money from customers as
quickly. There has also been a decrease in inventory turnover. This can be attributed directly to the
economic downfall and the seasonal nature of Target‘s business. In spite of these decreases, Target‘s
debt ratio has remained stable and it has also remained profitable. The gross and net profit margins
have increased from the previous year.
One indicator that shows Target to be financially stable and have high performance results is in the
2007 Board of Directors decision to repurchase $10 billion worth of common stock. Because of the

economic downfall, this decision was suspended in 2008, only to be approved to resume in January
2010.
Based on our analysis, we agree to invest in Target. They have been able to outperform or recover
from the market fluctuations. It is obvious that they are making changes in order to perform and
compete. Unlike most companies, Target doesn‘t want to be like their over-achieving competitor, they
want to differentiate themselves and be on a completely different level.

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I. Introduction of the company
Target‘s main lines of business are retail and credit card. Target is known for their operations in general
merchandise and food items. Their general merchandise segment includes household essentials,
electronics, apparel and accessories, and home furnishings and décor. They have recently been
working to expand their dry, dairy and frozen food assortment. They also operate Super Target stores
with a deeper line of food items in addition to the general merchandise. Their website, Target.com
offers even more variety, styles, sizes and colors than are available in store.
Target‘s main strategy on the retail side is to maintain their inventory effectively. While this is true with
most retail giants, Target is able to maintain its competitive advantage by having their core products in-
stock and by sustaining established merchant relationships. In addition, they do considerable planning
for seasonal shopping to decrease any post season discounts.
On the credit side, the Target credit card offers credit to Target ―guests.‖ Target believes that offering a
separate store credit card strengthens the bond with their guests, drives sales and contributes to results
of operations (Annual Report, 2010). Target‘s main credit strategy is to entice customers to spend more
with special discounts, reward programs, and coupons, while decreasing the amount of delinquencies
and charge offs.
II. Performance analysis
After reviewing Target‘s annual report, there were several strengths found that contribute to the

performance of the company as a whole. Target has strived to ―create attractive value‖ in their stores,
as well as in the merchandise they offer. They want their customers to be satisfied in the quality of
product they are purchasing. By accomplishing this, Target hopes to retain their customers. They pride
themselves on maintaining a good reputation in each store location and feel that this reputation is built
on the trust their customers have with the company. They hope this trust will not only remain between
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the company and their current customers, but that new consumers will be attracted to the company
based on their reputation.
Target understands the economic conditions that have been facing the whole country, and although
their financial status depends on the economy, they have strived to continue to provide quality brands
and value. Because of this, their sales have not been severely affected from the current economic
state. However, a downside to the poor economy has been the decrease in stock value in 2009. It is
noted that by the end of the fiscal year in 2010, the stock value had almost recovered from the 2009
loss. This can be attributed to the effective management within Target‘s corporation down to the
management in each individual store.
Target is a strong leader in the retail market, but it is not without obstacles to overcome. Because
Target is a younger company, founded in 1902, and does have the same quantity of stores as some
primary competitors, its prices are perceived as being higher. The company attempts to overcome this
weakness by depending on the good reputation it has with its consumers. However, its success also
must depend on its vendors and supply chain. If there is a failure in production or delivery, Target will
suffer. It relies on the vendors and supply chain to follow through with merchandise, which will produce
the income it needs to succeed. It is stated in the annual report that the 3 states with the largest
quantity of stores are states prone to natural disasters – California is prone to earthquakes, while Texas
and Florida are subject to hurricanes. The corporation monitors any event that could inhibit distribution
or sales.
One indicator that shows Target to be financially stable and have high performance results is in the

2007 Board of Directors decision to repurchase $10 billion worth of common stock. Because of the
economic downfall, this decision was suspended in 2008, only to be approved to resume in January
2010. Therefore, as it becomes available, Target is currently purchasing its own stock to reinvest back
into the corporation.
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III. Financial position
After reviewing many articles regarding Minneapolis-based Target Corporation, it appears that the retail
Giant is following through on its‘ promises they claim in their mission statement. Target states it is
‗committed to providing a fun and convenient shopping experience with access to unique and highly
differentiated products at affordable prices‘. The key word in many of Target‘s strengths is ―technology‖.
Just in time for the Christmas rush, Target announced that they would be offering the iPad at stores
Nationwide on October 3
rd.
SVP of Merchandising, Mark Schindele, believes technology products, such
as the iPad will be at the top of their guests‘ holiday shopping lists (Target offers, 2010). Another
technology addition to Target is a weekly online advertisement called, ―My TargetWeekly‖. This product
offering allows guests to create customized shopping preferences, and allows the customer to be
informed of specific deal alerts when their preferred items are on sale. Target boasts that currently, they
are the only retailer who offers this technology (Target unveils, 2010).
Keeping in line with the ‗technology theme‘, Target is also expanding their electronic services, including
technical and mobile experience. In August, Target announced 3 new consumer electronics services
that will provide enhanced shopping experiences for their customers, both in-store and at home. The
first service, 1.877.myTGTtech is a no-charge technical support hotline for all Target store consumer
electronic purchases as well as pre-purchase questions. Guests will speak to a LIVE customer service
representative for trouble shooting and technical support. The second service, Target Mobile, allows
guests to maximize their dollars and time with a convenient cell phone shopping experience both in-

store and online. Partnering with RadioShack, they are now providing in-store wireless shopping
stations that enable Target guests to purchase mobile phones and activate contracts from the nation‘s
top carriers (Target launches, 2010). Target Mobile, will also be available online, allowing comfortable
cell phone shopping in the customer‘s home. Product offerings will be from Android-powered
smartphones, Motorola, Samsung, Nokia, LG and will have wireless plans from every major U. S.
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service provider. The third service, Target Electronics Trade-In encourages guests to be eco-friendly by
trading in old electronics devices and in return guests will receive credit towards any Target purchase.
This program will launch in Northern California first and will rollout to additional stores in September
and will be available in approximately 850 stores by year-end.
To further expand on their direct marketing, Target has announced they will be the first retailer of
Facebook Credits Gift Cards. This program will allow guests who play an active part in the gaming
world of Facebook to enjoy free credits when purchasing gift cards at Target. Facebook has games
such as FarmVille, Mafia Wars, PopCap Games, Bejeweled Blitz and Playdom‘s City of Wonder. When
purchasing a gift card in the amount of $15, $25, or $50, the guest will also receive free credits for their
specific Facebook game (Target stores to be, 2010).
In late September, Target announced that they would be partnering with Procter & Gamble (P&G) to
raise money and awareness for breast cancer early detection. Prior to Breast Cancer Awareness Month
in October, guests will have the opportunity to purchase limited edition P&G ―pink‖ products, using
money saving coupons that will benefit the National Breast Cancer Foundation, Inc. (Procter, 2010).
These coupons will be included in newspapers delivered to over 57 million homes across the country.
P&G has pledged to honor every coupon redeemed from the booklet at a 2-cent donation. The
uncapped donation from P&G will be solely based on the number of coupons redeemed starting
September 26, 2010. Brands included in this promotion are some of P&G‘s leading products, such as
Tide, Downy, Iams, Crest, Oral-B, Pampers, Pantene, Gillette, Braun, Duracell and Head & Shoulders.
Target has had to do some damage control recently. Target has a well-earned reputation for hiring and

advancing the rights of people who are gay, lesbian, bisexual and transgender (Voter, 2010). Recently,
Target made a $150,000 political donation to an antigay Republican candidate for governor of
Minnesota, Tom Emmer. Target quickly tried to explain their contributions to Mr. Emmer‘s campaign,
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solely for his pro-business views. Many gay and lesbian groups have vowed to more closely monitor
Target‘s donations as well as other retail giants.
Given the drop in the economy and the high unemployment, it is no wonder retailers are aggressively
competing for every dollar from every customer. Reuters reports 2010 may be more about winning
sales from competitors than tempting consumers to buy more (Reuters, 2010). With the holiday season
nearing kick off, Target thinks that their customers want to see more sales, better bargains, and better
product offerings. Executives at Target cautioned investors that they did not expect a huge
improvement in sales trends this year while unemployment remained high.
IV. Critique
Target‘s annual report, despite its 119 pages, was very easy to follow. It was very helpful to have the
notes throughout the report because they were in the areas where the information was being referred
to. Target actually submitted two financial reports for fiscal year end January 31, 2010. The second
report was an addendum to the first report due to a correction in the number of shares of stock
outstanding. One important aspect of Target is that all the stores are located within the US so they do
not have involvement with foreign currency. Early on in the report they strive to positively differentiate
themselves because they acknowledge if they are not able to do this, then operations will be adversely
affected. They owe their success to positive perceptions of the Target brand and they have built their
reputation over many years of serving guests, team members, community and shareholders.
They too are aware of economic challenges and the effects that it has on the business. One area that
they have been managing costs is in the workforce. In 2009 their retail segment had the highest EPIT
in Corporation history despite store sales being down 2.5 percent. Also, despite sales being down they
had an increase in cash flow and opened 76 new stores in 2009. They were also able to compensate

their workers for better than expected performance. One surprising thing within the report is that their
credit card late fee charges were down despite the economic turmoil along with bad debt declining.
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Their future write offs are based on history, risk scores and aging trends with a write off period of 180
days. They say they owe it to managing expenses and finance charge revenue increasing to their
success. In the receivables department they instituted tighter risk management that reduced available
credit lines for high risk cardholders. Their debt rating on Moody‘s was A2 and on Standard and Poor‘s
A+. They also have access to an unsecured revolving credit of $2 billion dollars. One other area they
cut back in 2009 was that of Capital expenses in 2009. This does not seem too farfetched since many
corporations did the same.
They are currently involved with two violations. The first one involves the State of California and
environmental matters. It is alleged that hairspray contained levels of a volatile organic compound in
excess of permissible levels. This may involve potential monetary sanctions in excess of $100,000. The
other is an ongoing EPA investigation for alleged violations of the Clean Air Act. They anticipate
penalties that are likely to exceed $100,000. According to Target, each of these will not be material to
their financial positions, results of operations or cash flows.
The inventory method that they use is LIFO. Depreciation is determined based on what product it is.
Buildings are depreciated at an 8-39 year life, equipment at 3-15 years, and computers at 4-7 years.
They use the Black-Scholes valuation model to estimate the fair value.
In fiscal year 2010 they plan to adopt FASB No. 166 ―Accounting for transfers of financial assets‖
which was an amendment to FASB No. 140. which is not anticipated to affect the consolidated net
earnings, cash flows or financial position. Also in fiscal year 2010 they plan to adopt FASB statement
No. 167 which amends the consolidated guidance applicable to variable interest entities. They suspect
this amendment will significantly affect the overall consolidation analysis but will not affect consolidated
net earnings, cash flows, or financial position.
Ernst and Young out of Minnesota were the external auditing agency and the report also discusses

internal controls. One important point made in the financial report was that of their gift card business.
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The revenue is not recognized until redemption and if those gift cards are not redeemed they are
considered ―breakage‖ revenue. One thing that seemed very helpful was that of a table that explained
the position of the company, such as cash and cash equivalents and the valuation technique of each.
They also included a table that illustrated the primary costs of sales and selling, general and
administrative expenses associated with it.
This report was easy to follow because the flow was appropriate. The notes were included as you went
which was very helpful. Unlike the Abbott report, where the notes were at the end, this report seemed
to flow much better because the material that the notes were referring to where readily available.
V. External perception of the company:
Investors
Due to the recent state of the economy, investors were skeptical about Target‘s ability to perform in
2009. Before November 2009, Target had 8 consecutive quarters with decreasing earnings (Investor
Guide, 2010). During December 2009 the store saw overall sales increase 5%. Target believes this is
due to sales growth in different product areas and the continual addition of new brands to their
inventory. Currently investors say to buy. This isn‘t a huge surprise given that most stocks are low right
now, but investors have hope for Target. They recently announced that they will start their share
buyback program up again. The program began in 2007, and ran for a year, but was suspended in
2008 due to the failing market. By reinstating the program, Target is saying that its cash flow has
improved. They plan to buy back $5.1 billion in shares in the next two to three years. This news
satisfied investors and they believe that Target is making positive changes.
Competitors
Target‘s largest competitor is Wal-Mart. They also compete in certain areas with Costco and Kohl‘s.
Wal-Mart views Target as being a more expensive, more fashionable competitor. As a result, they
recently picked up the Better Homes and Gardens brand as a way to compete in home goods. Wal-

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Mart‘s main focus is cost efficiency, while Target‘s key strategy is to differentiate itself by their product
lines. Target has been able to maintain a positive image by continually advertising the things they do to
give back to the community, while Wal-Mart struggles to maintain a favorable image.
Customers
Target has set itself apart as being ―Cheap Chic.‖ The company has successfully associated its name
with a younger, hipper, edgier, and more fun image than its competitors, namely Wal-Mart. Target‘s
customers are more affluent than those of Wal-Mart and shop at Target because of their differentiated
product line. They view Target as being more fashionable and as providing the full shopping experience
and great value for the money. They also prefer the cleanliness of Target stores and shorter waiting
time to pay. See Appendix C for customer perceptions.
Analysts
Analysts believe that Target‘s recent decision to expand their food format will likely go over well with
their customers and will increase store sales. Target recently announced that their credit card holders
will receive a 5% discount on all Target purchases. This is expected to increase earnings as well. As
stated before, their well-differentiated stores give it an edge over Wal-Mart. Analysts believe Target‘s
cash flow and balance sheet remain strong. The competitive pricing environment and increased
competition from Wal-Mart are likely to have an adverse effect on Target, especially during the
downtrodden economy. The company has been losing focus on women's apparel, which represents
over 10% of total sales, and analysts see this as a downfall. Target's credit business increases their
risk to any decline in consumer credit trends, such as higher default rates, which could affect the
company‘s success. As with many companies, increasing healthcare costs may lead to an increase in
selling, general & administrative expenses.