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
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.
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 2000-2005 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.
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 long-term 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