TARGET/COSTCO FINANCIAL ANALYSIS

Transcription

1 TARGET/COSTCO FINANCIAL ANALYSIS Bob Moug, Reba Burton, Jacob Torres ACCOUNTING 202 Financial ratios

2 1 TABLE OF CONTENTS Co. and wholesale Co Overview ( versus financial summary) Financial Graphics Financial Statements Financial ratios Ratio detailed Analysis Liquidity and Efficiency Solvency Profitability Market Prospects Conclusion Bibliography 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 Corporation and. 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

3 2 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. Corporation was incorporated in Minnesota in (TGT Annual Report pg. 2) 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 and Express, 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 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 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 Corporation has continued to grow and improve in their market and giving their guests the safe experience they deserve

4 3 both in their stores and online by creating a new position in their company, a Chief Information Security Officer. Prior to January 2015 exited their Canadian Segment. 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) 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, 99 are leased and 155 are owned buildings on leased land. Wholesale Corporation and its subsidiaries began operations in 1983 in Seattle Washington. In October 1993, merged with the Price Company, which had pioneered the membership warehouse concept, to form Price/, 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 Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to 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)

5 4 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 and we see that s ratio is 1.2 to 1 while has a ratio of.99 to 1. Even though 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 or 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; s ratio is 0.19 while has a ratio of.48. Meaning that for instance has $0.48 of liquid assets to cover each $1 of current liabilities and has $0.19 of liquid assets to cover each $1 of current liabilities. By looking at just these two ratios 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 and by indicating what portion of debt and equity they are using to finance their assets. s debt-to-equity ratio is 1.96 while s is s lower number suggests that there is a low risked for creditors and strong, long-term, financial security for the company. However, s 2.22 debt-to-equity ratio while hire than 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

6 5 comparative financial analysis of companies is their profitability. How can you compare and s ability to provide financial rewards sufficient to attract and retain financing? We can look at their return on total assets ratio (ROTA). We have conducted the ROTA to find that s ratio is 2.8% and s ROTA is 3.34%. These percentages tell us that was able manage their assets more efficiently and produce a profit over the analyzed period. A higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROTA ratio usually indicates an upward profit trend as well. (Myaccountingcourse.com ROTA) Our final analysis for the beginning comparisons for this report will cover each company s market prospects by measuring the amount of cash dividends distributed to common shareholders relative to the market value per share using the dividend yield ratio for and. A company with a high dividend yield pays its investors a large dividend compared to the fair market value of the stock. This means the investors are getting highly compensated for their investments compared with lower dividend yielding stocks. A high or low dividend yield is relative to the industry of the company; so even a small dividend might produce a high dividend yield ratio. (Myaccountingcourse.com DYR). s dividend yield is 0.65% while s dividend yield is 0.22%. According to s 2014 Annual report they have paid dividends every quarter since their 1967 initial public offering, and it is their intent to continue to do so in the future. In this analyzed period paid dividends totaling $1,205 million and declared dividends totaling $1,271 million for (TGT Annual Report pg. 22)

7 6 When we take a look at s annual report they state that their Board of Directors increased their quarterly cash dividend from $0.31 to $0.335 per share. Their cash dividends paid out in 2014 totaled $584 million. They also presently expect to pay dividends on a quarterly basis. (COST Annual Report pgs. 2, 22 and 32) Below you will find the visual graphics of the ratios previously discussed.

8 1.2 FINANCIAL GRAPHICS Graphics 7

9 Graphic 8

10 9 1.3 FINANCIAL STATEMENTS financial statements

11 10

12 11

13 Wholesale financial statements 12

14 13

15 14

16 15

17 FINANCIAL RATIOS Wholesale Liquidity Ratios Current ratio Quick ratio Accounts receivable turnover Inventory turnover Days Sales in Inventory Total asset turnover Solvency Debt ratio Equity ratio Debt to equity ratio Times Interest Earned Profitability Profit Margin after tax 1.66% 2.09% Gross margin 29% 13% Return on total assets 2.80% 3.34% Return on common stockholders equity 8% 10% Book Value per common share Market Prospects Price-earnings ratio Dividend yield 0.65% 0.22%

18 RATIO DETAILED ANALYSIS Liquidity and Efficiency Detailed Ratio Analysis Activity Ratios Activity ratios delivers a useful gauge of a company s operations by determining the average number of days it takes to collect on customers accounts and the average number of days to pay vendors. Accounts receivable turnover Credit sales for the year/ the average accounts receivable during the year This ratio measures the number of times receivables turn over in a year and reveals how successful a company is in collecting its outstanding receivables. A higher number is good for the company because it indicates a shorter time between sales and cash collection. The accounts receivable turnover for 38.83, which compared to of Suggest that takes times collecting cash from sales through the year and take 33.6 times it takes to collect cash from sale. Both companies have an efficiency in collecting its receivables Inventory Turnover Cost of goods sold for the year/ the average inventory during the year This ratio measure the cost in inventory to the cost of goods sold and compare the quantity of each item in inventory with the recent sales of each item. The higher the inventory turnover ratio, the better, because it means that a company is able to fill customers orders on time.

19 RATIO SCORE 18 The inventory turnover for is 6.01 times, which compared to of 5.56 times. Suggests that is able to turnover inventory with a small investments than. Also, the average Discount Variety Industry inventory turnover is 3.3. Therefore both companies could either have strong sales or ineffective buying Days Sales in Inventory 365 days/ the inventory ratio This ratio measures the average number of days that it took to sell the average amount of inventory held during the specified one-year period. In other words, how many days it takes to sell the merchandise held in inventory. The days sales in inventory ratio for is 60 and 3/4 days, which compared to of 65 and 1/3 days. This indicates that have less time to turn inventory into sales than. The Discount Variety store average is 75 days, this indicates that both companies are doing fairly well among competitors Days' Sales in Inventory Total Asset Turnover Total revenues for the year / the average total assets during the year This ratio measures the relationship of net sales for a specific year to the average amount of total assets during the current 12 months. Meaning, how efficient is the company using its asset to generate sales or income to the company. The higher the ratio is ideal since it means the company is generating more revenues per dollar of assets.

20 RATIO SCORE RATIO SCORE 19 The total asset turnover for is 1.69, which compared to Indicates that is operating efficiently than. The average Discount Variety Industry ratio is 1.3.This indicates that both companies is favorable among other competitors of operating efficiently. Total asset turnover Solvency Solvency ratios Solvency ratios measure a company s ability to cover long-term obligations and the company long-run financial viability. In other words, can both companies be able to continue in business in the long run to meet its long-term obligations? Debt Ratio Total liabilities/ total assets This ratio measures the company s ability to pay of its liabilities with its total assets. In other words, how many assets the company must sell in order to pay off all of its liabilities. Any ratio under 1 is consider to be often low risk for lenders. A favorable debt ratio will be 0.5 since it means the company has twice as many assets as liabilities. The debt ratio for is 0.66 which compared to of Suggests that both companies are consider to be less risky for lenders and to continue to meet liabilities as low ratio 0.66 is more favorable than ratio of Debt Ratio Equity Ratio Total Owners equity/ Total assets This ratio measures the amount of assets that are supported by owners investments, comparing the total equity in the company to the total assets. The equity ratio shows if the company can have remaining assets after liabilities is paid off and how leveraged the company

21 RATIO SCORE RATIO SCORE 20 is with debt. A high equity ratio is great for the company since its shows potential growth for shareholders that the company is worth investing and tell creditors that the company is more sustainable and less risky for future loans The Equity ratio for is 34 percent, which compared to of 31 percent. This ratio indicates that the both companies is funding less assets and more debt. is the more favorable company since 34 percent of assets are earned by shareholders and only 31 percent of assets are owned by shareholders Equity Ratio Times Interest Earned Earnings before Interest and Taxes/Interest Expense This ratio measures the company s ability to meet interest payments. A higher number is preferred suggesting a company can easily meet interest obligations and can take on additional debt. A ratio less than 1 means the company is likely to have problems paying interest on its borrowings. The times interest earned ratio for is 4.14 times, which compared to of 31.11times. Indicates that the both companies is sufficient on paying interest on its borrowings. has a high ratio which may result of the fact the company lack of debt is paying too much of its earnings on debt that could have been spend on other projects. Times Interest Earned Profitability Profitability ratios Profitability ratios measure a company s ability to use its assets efficiently to produce profits. In other words, can both companies and Wholesale be able to generate an acceptable return on invested capital?

22 RATIO SCORE RATIO SCORE 21 Profit Margin Net income / net sales This ratio is a percentage that measures how much out of every dollar of sales a company actually keeps in its earnings. A high profit margin indicates the company is more profitable and has better control over its costs compared to its competitors. The profit margin of is 3.37%, which compared to of 2.09%. Suggest that is more profitable and compared the Industry average of 2.7%. ha better control over its costs compared to other competitors 5.00% 0.00% Profit Margin 2.09% 3.37% Gross Margin Gross profit/net sales This ratio measures the percent of sales revenues that the company retains incuring the cost of goods and services sold by a company. A high percentage is ideal for a company, since it will increase the dollar of sales to service its other costs and obligations.also a high ratio indicates the company has more money to pay operating expenses like wages, utlities and rent The gross margin of is 29%, which compared to of 13%. Indicates that has a stronger ratio than the average discount variety Industry of 24.8%. is more effiecient in selling its inventory and is unfavorable compared to its competitors. 50% 0% Gross Margin 13% 29% Return on common stockholders equity Net income after taxes for the year / the average stockholders equity during the year This ratio measures the success of a company in generating income for the common stockholders equity.a high ratio indicates high proitability and strong financial postion of the company and can convert potential investors into acutal common stockholders

23 RATIO SCORE RATIO SCORE 22 The return on equity of is 8%, which compared to of 10%. Indicates that both companies is a not really using investor money effectively comared to avergae industry ratio return on equity of 24%. is look more favorable than target but an average of 5 to 10 years gives a better prospective of the growth of the company. Return on stockholders' equity 10% 0% 10% 8% Book value per common share Amount of stockholders equity / the number of shares of common stock outstanding This ratio measures investors evel of safety associated with each individual share after all debts are paid accordingly or in other words liquidating assets. book value per common share is 21.86, which compared to Indicates that s is overvalued from the market share of 88 to is consider overvalued of to Investors is expected to received the book value when the companies liquidate their assets. Book value per common share Market Prospects Market Prospects Market measure are useful for analyzing corporations with publicly traded stock.in other words, can both companies and Wholesale be able to continue to provide positive return to stockholders? Price-earnings ratio Market price per common share / earnings per share This ratio is a valuation of a company s current share price compared to its share earnings. A high ratio around 20 indicates the company is making money for investors. A low ratio of 15 or less is the company is losing money. (MyaccountingCourse)

24 RATIO SCORE 23 valuation is , which compared to of This ratio indicates both companies are valuate as profitable making money for investors. is the most favorable of its valuation as a higher growth in the future is expected. Price-earning ratio CONCLUSION Summary of Financial Performance for versus Both and have financial statistics that show why they are still large competitors in the retail store industry. Although their retail stores differ in some ways, keeps a larger variety of inventory in store immediately available for purchase, is more of a warehouse type retailer with a lot of product available online and select inventory at the retail locations. The financial statements for 2014 show very similar patterns in many areas. After reviewing both companies financial statements and comparing performance, the following will summarize the key points.

25 24 Liquidity Current ratio and acid test ratio Average current ratio for was 1.2 and acid test ratio was These averages are larger in the current ratio aspect but not as large in the acid test ratio in comparison with current ratio of 0.99 and acid ratio test was 0.48, which reflects s ability to pay short term debt a little better than but in the immediate short term debt paying ability, had a larger average. A current ratio score of less than one is not a preferred current ratio score; however, had a gross income increase of 8% between 2013 and 2014 which should not raise concern about the lower ratio for. Collection has a better ability to collect customer payments with a ratio of 47.78% in comparison to who holds a 33.6% ratio for accounts receivable turnover. This higher percentage for reduces the liability for risky accounts receivable. With the faster turnover, this allows to pay for its inventory outright and keep their short term debt amounts minimal in comparison to who takes longer to collect on their accounts and in turn holds short term debt longer costing them additional interest fees and decreasing their working capital. Days to sell Inventory s inventory holding period was 5 days longer than which is not substantial, but if that inventory is financed there can be fees that come with the retention. Moving inventory

26 25 efficiently and effectively reduces the possibility of increased capital financing, again allowing to have more working capital. Solvency Debt to Equity Ratio held a higher ratio of debt to equity at 2.22% in comparison to who has an average ratio of 1.96%. This shows that both companies have equal debt financing. Having debt from creditors can be harmful to a company in many ways, liability of debt being the largest factor, interest accrual being another, with an average ratio that these two companies have, there may be reason to hold a certain amount of debt to creditors, but if equity financing is involved in lieu of creditor financing, there would become more shareholders thereby decreasing earnings per share of the shareholders currently in the system. Profitability Profit margin ratio holds a smaller profit margin after tax ratio of 1.66 than that of which is at The larger profit margin ratio by shows how the company gets the most profit possible from its total revenue. One of the most important ratio aspects is return on assets. This reflects a better ability of a company to efficiently use its assets and create higher earnings from products sold per company asset. The return on total assets for is 2.8% which is smaller than which has a return ratio of 3.34%, reflecting more efficiency in utilizing their assets and creating higher earnings.

27 26 Return on equity and assets Return on equity is an important ratio for potential investors as this reflects the return investors will receive on their investment. currently has an 8% return on equity and although this is a good return, currently has a 10% return rate which will be more attractive to investors due to the larger return. The larger return on equity is a reflection of a more efficient operation by management and the employees which creates increases in revenue. Market Measures Price to earnings ratio and dividend yield The price to earnings ratio for is which shows that the investors are less interest in of their stock, compared to earnings ratio of which reflects investors having higher expectations of the company performance levels and are willing to pay higher prices for their stocks for an expected increase in their return on equity. Dividend yield ratios are different between the two companies with a larger yield for who currently has a 0.65% yield and holds a 0.22%. This ratio represents the amount of earnings generated for every dollar invested. Summary of Financial Performance

28 27 After reviewing both companies financial statements and discussing their performance with my team members, there are some areas where shows better ratios than in financial management, but in further review the decision to recommend for investment purposes is a better choice due to higher return on Equity rates to stockholders and less overall liability. Review of both company s assets has revealed has several discontinued stores in their inventory, which is not a sign of strength in sales. on the other hand has shown nothing but growth and stability during the same timeline, which would be an indicator the market, was there for customers. continues to show marked improvement in sales with an uprising trend continuously over the past five years. My recommendation to would be to operate more efficiently and effectively, paying close attention to product inventory and demand markets to provide the best possible service to consumers available. Increasing their security system to keep customers personal information protected should be a huge concern for them considering they have had a few breaches in their system which reflects on their financial reports as consumers lost confidence and trust in their security, gaining the customers trust may help sales for.

29 28 BIBLIOGRAPHY AccountingCoach, LLC. (2015, May 28). Dictionary of Accounting Terms. Retrieved from AccountingCoach: AccountingTools. (2015, June 1). Financial Ratios. Retrieved from Accounting Tools: Halzack, S. (2015, March 19). Retrieved from data breach victims could get up to $10,000 each from court settlement: Investopedia, LLC. (2015, June 2). Dictionary. Retrieved from Investopedia: Morningstar, inc, Capital IQ, StarMine Corp. (2015, June 2). Indusry Center. Retrieved from Yahoo Finance: MyAccountingCourse.com. (2015, June 1). Financial Ratio Analysis. Retrieved from My Accounting Course: Nasdaq.com. (2015, June 4). U.S. Stock Quotes, Charts, and Research. Retrieved from Nasdaq: The Ratail Owners Institute and Outcalt and Johnson. (2015, June 2). General Merchandise Store Sector. Retrieved from The Retail Owners Institute: Merchandise-Stores

30 29 U.S. Securities and Exchange Commission. (2015, June 2). Wholesale Corp (filer). Retrieved from View Filing Dataq: U.S. Securities and Exchange Commission. (2015, June 2). Corp (filer). Retrieved from View Filing Data: