Case study 20 target corporation

Target Corporation

Patrick Cunningham M03619570

Professor John Phelps, Ph.D.

February 6, 2014


Executive Summary:

This case study analyzed five different projects Target Corporation had to decide
on capital spent for which project created the most value and the most growth for the
company and its shareholders. By analyzing the financial statements and exhibits of
each project, I was able to determine the positives and negatives of each of these
alternatives. The alternatives were Gopher Place, Whalen Court, The Barn, Goldie’s
Square, or Stadium Remodel.

The recommendation provided for Target Corporation is choosing the Stadium
Remodel project. There were three main factors used for choosing this project. First, its
low initial investment that makes the risk for Target much lower. Second, by
implementing this project it continues the strong brand image Target has with its
customers. Lastly, the Stadium Remodel project uses only a small percentage of total
capital expenditures making it possible for Target to have more capital available for
future capital expenditures.


Table of Contents:
Executive Summary – Page 1
Situational Analysis – Page 4
Alternatives – Page 5

Recommendation – Page 10
Appendices – Page 13


Situational Analysis:

Target Corporation has become a strong performing company in the retail
industry in part because of its successful investment decisions and continued growth.
That is why when Dan Scovanner, CFO of Target, and the four other executives in the
CEC (Capital Expenditure Committee) meet it is of high importance. The approval or
denial of CPR’s (Capital Project Requests) has the potential to set precedents that
would affect possible decisions in the future. Every month the CEC meets to go over
new CPR’s that could have a lasting impact on the short-term and long-term profitability
of Target. For the month of November in 2006, there were five particular projects
Scovanner knew were going to be the most highly discussed and evaluated. These
projects involved four new store openings and one remodeling of an existing store. The
new openings were Gopher Place, Whalen Court, The Barn, and Goldie’s Square. The
remodeling of an existing store format into a SuperTarget was Stadium Remodel. To
come to a conclusion on whether to approve or deny projects the CEC uses a
“dashboard” that has many factors. These factors include total investment size, NPV,
IRR, population, population growth, and so on. The problem was whether capital was
better spent on one project or another to create the most value and the most growth for
the company and its shareholders.


Alternatives:

The first alternative for Target Corporation is the project Gopher Place. The
positives of this project are that it will have the highest population increase from 20002005 at 27%. This increase is much higher than any other project and that means more
possible customers and sales in the future. The market also has a favorable median

income at $56,400 and projected sales growth is higher than the prototype. In addition,
Gopher Place NPV Value is 18% higher (Appendix 1) than the prototype. Then, there
are the negatives of choosing this project. First, the investment size initially looks within
a typical investment level at $23 million. But, compared to the prototype this project is
actually over $5 million more or 31% higher (Appendix 1). Gopher Place has the lowest
population among the 5 projects given and has the smallest percentage of adults with
four plus years of college at 12%. This is important because Target focuses on creating
a shopping experience that attracts college-educated woman whom have children and
are more affluent than the standard Wal-Mart customer. Also, Target already has stores
within the area and the sales from this new project would derive 19% of its sales from
surrounding area. Lastly, within the next few years Wal-Mart is expected to add two new
supercenters, which would take up 76% of the market, compared to Targets 24% of the
market.

The second alternative for Target Corporation is the project Whalen Court. The
positives of this project are that it has the highest NPV, highest total R&P sales, highest
population, and highest percent of adults with four plus years of college. First, Whalen
Court not only has the highest NPV but they have the greatest opportunity. If sales


increase by 10% it would be over $16 million more than the prototype. Second, this
projects sales could be by far the greater than the prototypes of any other projects. The
1st and 5th year sales equivalents would be over $52 and $69 million respectively.
Compare this to the other projects and they are 10’s of millions more. Third, the Whalen
Court project has the highest population at 632,000, which means they have the largest
customer pool. Their population is almost three times greater than the second closest
project. Lastly, this project has the highest percentage of adults with four plus years of
college. This is very important because these are the customers Target is trying to
attract the most. Now, there are some negatives of this project as well. First, the
investment size is much greater than the typical prototype. It is actually 409% (Appendix

1) more than the prototype. The next closest project is only 31% more, which makes
this project very concerning. Next, is the building cost versus the prototype. The project
is for a lease of a building and the cost are very high compared to the other projects at
over $15 million more than the prototype. Add in the fact that Target usually owns their
store property and this project is already out of the ordinary. Finally, there is the IRR in
value and store sensitivities. The Whalen Court project has one the lower IRR’s and it
affects many things. Construction costs would have to decrease more than $41 million
to achieve prototype store IRR. This is an extremely large number compared to the
other projects. In addition, this projects IRR for sales is staggering. Sales would have to
increase over 31% to achieve prototype store IRR. This is much higher than any other
project.

The third alternative for Target Corporation is the project The Barn. The positives
for this project were small initial investment, good sales growth, high IRR and NPV


value, and a new market. First, this project had the lowest investment cost out of all the
projects at $13 million. The low investment allows for a larger return on investments for
Target. Furthermore, this was the only project that had a higher NPV than total net
investment. Second, The Barn had projected sales higher than the prototype. It’s total
R&P sales were projected to be over $2 million more than the prototype for the 1st and
5th year. Third, This project’s sales could decrease 18.1% and still achieve prototype
store NPV. In addition, sales could decrease 23.2% and still achieve prototype store
IRR. Therefore, the sales could not be as close to what was projected and still be
greater than the prototype. In addition, The Barn had the highest IRR at 16.4%, which is
what shareholders and investors want to see. Lastly, this project would have Target
enter a new market. The closest stores were 80 miles and 90 miles away. Now, the
negatives of The Barn project are its population increase, median income, percent of
adults with four plus years of college, and competition. First, this project location is only
supposed to have a 3% population increase from 2000-2005. This is the lowest out of

all the other projects. Second, the median income is the lowest amongst the five
projects at only $38,200. Third, the percent of adults with four plus years of college is
among the lowest of the projects at 17%. Therefore, this location isn’t exactly the
customers Target usually tries to attract. Lastly, the competition in this area is very
steep. Within a few years there will be a Wal-Mart Supercenter, Sam’s Club, and Kmart
taking 87% of the market. Thus, Target will only control 13% of the market.
The fourth alternative for Target Corporation is the project Goldie’s Square. The
positives of this project are lower investment size, lower building cost, affluent and
faster growing population. First, this project’s total net investment is $694,000 less than


the prototype. Second, it has a lower building cost than most of the other projects with
only $313,000 more than the prototype. Lastly, the location for Goldie’s Square has the
second largest population at 222,000 and it will increase by 16% from 2000 to 2005.
This means this location has potential growth for Target. Now, the negatives for Goldie’s
Square are the projects NPV and IRR, projected sales, and the market. First, the NPV
for this project are the lowest of any of the other projects by far. With only $317,000,
Goldie’s Square would 6,156% (Appendix 1) lower than the prototype. That percentage
is astronomically larger than any other project. In addition, it has the lowest IRR of all
the projects at 8.1%. Both this low NPV and IRR have a major affect on what the
projected sales need to be to achieve prototype. Sales would have to increase
respectively 45.1% and 47.2% to achieve prototype NPV and IRR. These are the most
of any other project and would be very difficult to achieve. Lastly, the market for this
project seems to be fairly saturated. There are already 12 Target store currently in this
market and could possibly go up to 24. In addition, a large portion of the sales (25%)
would be taken from the surrounding stores. Finally, in the next few years it is projected
the competition in this market will be high. Target is projected to only have 17% share of
the market.

The fifth alternative for Target Corporation is the project Stadium Remodel. This

is the only remodeling project and its positives are lower total net investment, projected
R&P sales, median income, percent of adults with four plus years of college, and
customer loyalty. First, the initial investment amount would 46% (Appendix 1) better
than the prototype which is the best of all the projects. In addition it is one of the lower
investment costs therefore it wouldn’t cost the company as much. Second, the projected


R&P sales are better than the prototype. The post-remodel sales projects a 17% sales
lift for this store. This remodeling could really boost sales at this store making it more
profitable in the long-term. Third, the median income for this market is the highest at
$65,931. In addition, this project has one of the highest percentage of adults with four
plus years of college at 42%. Both of these statistics fits Targets customer type very
well. Lastly, this Target store has been in the market since 1972 with loyal customers.
The support for this store is there it just needs to not hurt the brand image by not fixing
the deteriorating facilities. The negatives of this project are higher risk and completely
not fulfilling Target’s main objective. First, this project has the second highest sales risk
of the projects. If the sales decline by 10% then the store NPV would decline by $7.85
million. This is a higher risk then some of the other projects that have to be considered.
Lastly, the main objective of Target Corporation is to meet the goal of adding about 100
stores annually while maintaining a positive brand image. This project would help
maintain a positive brand image but it also would not be adding towards the goal of 100
stores a year.


Recommendation:

Based on the alternatives analyzed I believe the best alternative is the Stadium
Remodel. I came to this conclusion based on many different factors. First, I took
Target’s strategy into careful consideration. Target’s strategy was to consider the
shopping experience of the customer as a whole. The corporation refers to customers

as guest do there best to fulfill the slogan, “Expect more. Pay less.” Target focuses on
creating a shopping experience that attracts college-educated woman whom have
children and are more affluent than the standard Wal-Mart customer. Therefore, when I
saw the Stadium Remodeling project had the highest median income and second
highest percent of adults that had four plus years of college, I knew this was a project
Target would strongly want to consider. In addition, one of Target’s main objectives is
maintaining a positive brand image. This store was already successful at a strong longterm location serving an affluent family-oriented customer base. By remodeling this
store, Target is able to build the strong brand image among its loyal customers. In
addition to maintaining a strong brand image, Target won’t have to use much of its
budget for capital expenditure. In Appendix 2, it shows how the Stadium Remodel
project will only use .49% of the total capital expenditures budget. This is the second
lowest percentage among the five projects. Also, the low investment cost will make it
possible to build 205 more stores at this cost if they wanted to. Therefore, the lower cost
of this project will make it still possible for Target to keep its goal of trying to open 100
new stores annually. In conclusion, I believe this project would be the best chose based
on a low initial investment, maintaining strong brand image, and using only a small
percentage of total capital expenditures. If Target truly were about brand awareness


and building a loyal customer base then they would have no problem choosing the
Stadium Remodel project


Appendices


Appendices

Appendix 1:
Project Name

% Investment B/(P) than Prototype*

% NPV B/(P) than Prototype

Gopher Place

(31%)

18%

Whalen Court

(409%)

15%

The Barn

26%

37%

Goldie’s Square

3%

(6,156%)

Stadium Remodel

46%

______

*(Based on Capital Expenditures of growth strategy of 6-7% annually for the year 2006 which equaled $3.5 billion)

Appendix 2:
% of Target Total Capital

Possible Number of Stores at

Expenditures

Investment Price

Gopher Place

0.66%

152

Whalen Court

3.4%

29

The Barn

0.37%

269

Goldie’s Square

.68%

146

Stadium Remodel

.49%

205

Project Name