Target Corporation Case Study Solution
To: Doug Scovanner, CFO, Target Corporation
From: ABC, Financial Analyst
Date: 27 March 2017
Subject Matter:Analysis of Five CPRs of Target Corp. for CEC
Executive Summary
The CFO of Target Corporation needs to analyze the five capital projects and make recommendations, to the CEC at the next meeting. The pros and cons of each project have been considered, in analyzing the projects and we have analyzed them based on a number of metric such as NPV, IRR, size of the project, growth of the market, cannibalization of the other store sales, store sensitivities, variance to prototype, customer demographics and the brand awareness impact of the projects. Among the five CPRs, we have ranked four CPRs that should be invested by Target Corporation. These four projects are The Barn, Whalen Court, Gopher Place and Stadium Remodel. This will result in a total capital investment of $ 172.3 million. If there is a capital constraint of $ 120 million, then investment should only be made in The Barn, Gopher Place and Stadium Remodel.Based on their respective profitability index values of each of these projects. The above four projects have been ranked in terms of their high NPV, low to average capital investment, sustainability of the company growth and brand awareness. After investing in all the projects, management would still have more capital, to utilize in advertising and other areas.
Introduction
Target Corporations is about to analyze and determine the pros and cons of 10 Capital Project Requests (CPRs) for the year 2007. Five of these ten projects would be approved easily.Greater attention needed to be given to the remaining five projects worth an investment of $ 200 million in total. The CFO of Target Corporation needs to make a final decision, and present the findings before the Capital Expenditure Committee (CEC).
The analysis, acceptance and rejection of the projects would depend on a number of factors. Such as the financial returns like NPV and IRR, the investment amount, the overarching objective of adding 100 stores per year to maintain the growth trajectory, sensitivities of the financial returns to sales variations and other considerations included real estate incentives, tax incentives and area demographics.
Each CPR has a dashboard, which summarized the data about the type of investment and inputs for generating the financial models, customer demographic information, location and size and sensitivity of the financial returns. Target Corporation has experienced a lackluster year in 2006, as the stock price of the company had been flat. Therefore, important decisions need to be made, to maintain the growth trajectory of the company and enhance its value.
Analysis & Recommendations
We begin the analysis of the case, by comparing the business model of Target Corporation with its close competitors.
Business Model of Target (Q1)
The business model of target emphasizes on retailer selling and the retail segment of the company, includes all the merchandising operations of Target Corporation. It includes the fully integrated online business and food discount, and large format general merchandise stores across United States. The company has been growing domestically over the pasts several years. The business model strategy of Target Corporation was, to capture the customer’s shopping experience as a whole. The business model of Target Corporation is based on the slogan, expect more Pay Less.
On the other hand, the business model of Walmart emphasizes on, low prices for its consumers and much of the success is attributable to the EDLP strategy of the company, in all of its domestic and international markets. The store format of Walmart was similar to that of Target. Lastly, the business model of Costco emphasized on discount pricing for its members, in exchange for membership fees. There was less overall between Target Corporation and Costco with respect to merchandising assortment and trade area.
Target’s Capital Budgeting Process (Q2)
The capital budgeting process of Target was a rigorous process, for approving or rejecting the CPRs of the company. The CEC used to analyze the pros and cons of each project request, by examining a range of different factors as stated previously. However, the committee reviewed only those projects that, required an investment of higher than $ 100,000. This means that, all the lower investment projects were rejected, without a careful analysis of these projects.
Secondly, the approval or the rejection of the CPRs created precedents that, were followed for all the new CPRs received in next year. This is not a good method for rejecting or approving projects. Each project has different objectives and rejecting them based on a set precedent might create room for rejecting valuable projects. Thirdly, a real estate manager was usually assigned, which was responsible for the entire proposal from inception to completion and for reviewing and presenting the proposal details........................
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