PDF Target/COstco financial analysis - Humanities Commons

TARGET/COSTCO FINANCIAL ANALYSIS

Bob Moug, Reba Burton, Jacob Torres ACCOUNTING 202 Financial ratios

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TABLE OF CONTENTS

Target Co. and Costco wholesale Co .............................................................................................................1 1.1 Overview (Target versus Costco financial summary).....................................................................1 1.2 Financial Graphics ..........................................................................................................................7 1.3 Financial Statements......................................................................................................................9 1.4 Financial ratios .............................................................................................................................16 1.5 Ratio detailed Analysis.................................................................................................................17 1.5.1 Liquidity and Efficiency ........................................................................................................17 1.5.2 Solvency ...............................................................................................................................19 1.5.3 Profitability ..........................................................................................................................20 1.5.4 Market Prospects.................................................................................................................22 1.6 Conclusion....................................................................................................................................23

Bibliography .................................................................................................................................................28

Financial Analysis

TARGET CO. AND COSTCO WHOLESALE CO

1.1 OVERVIEW (TARGET VERSUS COSTCO FINANCIAL SUMMARY)

Our financial analysis will cover two Fortune 500 companies Target Corporation and Costco. We will start out this analysis by giving a brief history of both companies and comparing both companies against each other using five ratios; current, quick, debt-to-equity and dividend yield. A visual graphic representation of these five ratios will be at the end of the comparison narrative. Then we will have an overview of 12 additional ratios relevant to the

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liquidity, solvency, profitability and market prospects of each company and how they compare against each other and the industry. Finally we will conclude this analysis with our opinion of which company is more favorable to invest in.

"Target Corporation was incorporated in Minnesota in 1902." (TGT Annual Report pg. 2) Target likes to refer to their customers as "guests" and take pride in offering their guests a wide range of options for buying their products.

"Their general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items while their Super Stores offer a full line of food items comparable to traditional supermarkets. Their new urban format stores, City Target and TargetExpress, offer edited general merchandise and food assortments. Their digital channels include a wide assortment of general merchandise, including many items you can find in their stores, along with a complimentary assortment such as additional sizes and colors only sold online" (TGT Annual Report pg. 2). In 2013 the Target Corporation suffered a massive data breach. "Up to 40 million shoppers had their credit card data stolen during the breach, while up to 70 million had personal information such as addresses and phone numbers stolen." (Washington Post) However, in Target's 2014 Annual report they state that, "Until the Data Breach in the fourth quarter of 2013, all incidents we experienced were insignificant. The Data Breach we experienced was significant and went undetected for several weeks. Both we and our vendors have experienced data security incidents other than the Data Breach; however, to date these other incidents have not been material to our consolidated financial statements." (TGT Annual Report pg. 7) In spite of the aforementioned data breach the Target Corporation has continued to grow and improve in their market and giving their guests the safe experience they deserve

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both in their stores and online by creating a new position in their company, a Chief Information Security Officer.

Prior to January 2015 Target exited their Canadian Segment. Target's annual report also boats that "Virtually all of their revenues from continuing operations are generated within the United States and the vast majority of their long lived assets re located within the United States." (TGT Annual Report pg. 4) Target owns and operates a total of 1,790 U.S stores as of their January 31, 2015 Annual report. Of those stores 1,536 of those are owned by Target, 99 are leased and 155 are owned buildings on leased land.

"Costco Wholesale Corporation and its subsidiaries began operations in 1983 in Seattle Washington. In October 1993, Costco merged with the Price Company, which had pioneered the membership warehouse concept, to form Price/Costco, Inc. a Delaware Corporation. In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Wholesale Corporation. As of December 2014, the Company operated a chain of 671 warehouses in 43 states, Washington, D.C., and Puerto Rico (474) locations, nine Canadian Provinces (88) locations. Mexico (34 locations), the United Kingdom (26) locations, Japan (20 locations), Korea (11 locations), Taiwan (10 locations through a 55%-owned subsidiary), Australia (seven locations) and Spain (one location). The Company's online business operates websites in the U.S., Canada, U.K. and Mexico." (COST Annual Report under the Company)

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Now that we have commenced with a brief overview of each company how do they compare to each other. We will begin this company comparison with five ratios; current, quick, debt-to-equity and their dividend yield. There will be a visual representation of these figures after the narrative. After calculating and reviewing the current ratio analysis of both Target and Costco we see that Targets ratio is 1.2 to 1 while Costco has a ratio of .99 to 1. Even though Costco's ratio is smaller it appears that both companies have enough working capital to meet their current obligations. The current ratio however, is not the only way to determine whether Target or Costco can payback their current obligations. When you look at the quick ratio, also known as the acid test ratio, which measures immediate liquidity of both companies; Target's ratio is 0.19 while Costco has a ratio of .48. Meaning that Costco for instance has $0.48 of liquid assets to cover each $1 of current liabilities and Target has $0.19 of liquid assets to cover each $1 of current liabilities. By looking at just these two ratios Costco seems more able to meet their short term obligations. Both of these ratios attest to the liquidity of each company. Now liquidity is not the only important factor when analyzing a company we must also look at the solvency of each company. We must measure their ability to generate future revenues and meet long-term obligations. Here, we turn to the debt-to-equity ratio this ratio measures the financial leverage of Target and Costco by indicating what portion of debt and equity they are using to finance their assets. Target's debt-to-equity ratio is 1.96 while Costco's is 2.22. Target's lower number suggests that there is a low risked for creditors and strong, long-term, financial security for the company. However, Costco's 2.22 debt-to-equity ratio while hire than Target shows a solid performance in this area for the company as well. So far both companies seem to be comparing evenly with each other. Another factor that should be considered in a

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