financial statement analysis Abbott Laboratories and Target

financial statement analysis Abbott Laboratories and Target

Table of Contents

Part I: Abbott Laboratories……… 3

Executive Summary 4

I Introduction of the company .5

II Performance analysis 6

III Financial position 7

IV Critique 8

V External perception of the company 12

VI Conclusions and recommendations 13

Part II: Target 16

Executive Summary 17

I Introduction of the company 18

II Performance analysis 18

III Financial position 20

IV Critique 22

V External perception of the company: 24

VI Conclusions and recommendations 26

Appendix A - Abbott Competition 28

Appendix B- Target Competition 30

Appendix C- Customer Perceptions- Target 31

Appendix D-Common Size Income Statement- Abbott 32

Appendix E- Common Size Balance Sheet- Abbott 34

Appendix F- Common Size Balance Sheet- Target 38

Appendix G- Common Size Income Statement- Target 40

Appendix H- Key Financial Ratios- Target 41

Appendix I- Key Financial Ratios- Abbott 42

Appendix J- Target’s Annual Report –Fiscal year 2009 43

Appendix K- Abbott Laboratories’ Annual Report -Fiscal Year 2009 135

Works Cited 214

Part I:

products Abbott has still proven to be a viable competitor in its market Sales increased from 2008 to

2009 Also, the market price per each share of common stock was maintained This shows that this corporation can perform and will continue to do so

With the passage of healthcare reform bill there is uncertainty about what the future holds The nursing shortage, drug costs, and soaring health care plan premiums will rekindle fears of medical inflation A considerable portion of Abbott Laboratories‘ market is that of healthcare related products Abbott‘s sales have been impacted significantly over the last three years with the purchase of several

pharmaceutical products and joint ventures along with the loss of patent protections Abbott has done well weathering the economic downturn with an increase in net sales and gross profit for the 2nd, 3rd and 4th quarters of 2009 as compared to 2008 and 2007 After creating and reviewing the common size income statement for Abbott Laboratories, we see that the numbers are strongly consistent from year to year

In order to compete, Abbott is actively buying and selling companies and divisions This has helped them increase their growth in emerging markets

We recommend investing in Abbott, but conservatively With health care reform looming over head, change is coming All is not clear on how it will directly affect Abbott‘s performance, but they have proven before that they are a formidable competitor

I Introduction of the company.

Abbott Laboratories is involved in the sale of a largely diversified line of healthcare products Abbott operates four segments: Pharmaceutical, Diagnostic Products, Nutritional, and Vascular Products Its Pharmaceutical Products include adult and pediatric pharmaceuticals Its Diagnostic Products include diagnostic systems and tests that are sold to blood banks, hospitals, commercial laboratories, clinics, physicians' offices, alternate-care testing sites and plasma protein therapeutic companies The

Company's Nutritional Products include a line of pediatric and adult nutritional products sold worldwide Its Vascular Products include coronary, endovascular, and vessel closure devices for the treatment of vascular disease

Since Abbott is involved four different segments, they have different competition and competition

strategies for each segment For Pharmaceutical products, the competition is from other

pharmaceutical companies Searching for innovative products is the biggest part of the competition Changes in medical practices and product releases from competitors can quickly result in changes in their business They must also consider their product price, as many substitute generic drugs

The Diagnostic Product division faces the same types of competition in innovation and price However,

it must also consider product performance, contracts and productivity Several products they have in this segment are subject to regulatory changes

Nutritional Products generally have competition from other consumer and health care manufacturers They consider advertising, packaging, price and availability A large part of competition in this area is ingredient innovations New products by competitors and generic substitutes are an issue

The Vascular Products are facing many of the same challenges as above They are highly competitive

in product innovation, price and convenience Many of the segments face the possibility of product obsolescence due to new product offerings by competitors, changes in medical practices, and

government regulation

II Performance analysis

In reviewing the 2009 annual report of Abbott Laboratories, the strengths and weaknesses of the

company‘s performance were analyzed This company has diversified itself in the areas of

pharmaceutical, diagnostic, nutritional, and vascular products, which has benefited its ability to remain financially stable The sale of these types of products is not seasonal; therefore we expect their sales numbers to remain constant throughout the year

The business of healthcare and pharmaceuticals has many downfalls or weaknesses Because Abbott depends heavily on its creation of new products and the research done, the risk of a product failing and resulting in a financial loss is high However, when a product is successful, the financial benefits are great With the creation of new products, it is the responsibility of Abbott to obtain patents on the

creation and distribution When these patents are held, Abbott becomes the only distributor of the product, therefore controlling the price Patents only last for a certain length of time, causing a decrease

in revenue and operating income once a patent expires Legal expenses can also occur if there is a patent infringement claim by another company These legal expenses can potentially affect cash flow; therefore budget allowances must be allowed

The creation and success of new products relies heavily on the amount of research performed The more research a company performs, the more money they will spend The research is done so a

product will meet government regulations, along with hopefully preventing legal issues that can arise from a dangerous product Abbott products are sold worldwide, so they must submit to the government regulations for each country where their products are sold Even with the amount of research that is done, the corporation is still subject to product liability claims and safety concerns If it is found that a product puts someone at risk, potential legal expenses may occur

In the healthcare industry, specifically pharmaceuticals, competition is fierce Each company tries to be

on the cutting edge of technology with their drugs and other miscellaneous products Products that are

being researched are kept top secret until the research is mostly complete Each company is kept in the dark until this time, making competition hard to predict

In spite of these weaknesses, Abbott has still proven to be a viable competitor in its market Sales increased from 2008 to 2009 Also, the market price per each share of common stock was maintained This shows that this corporation can perform and will continue to do so

III Financial position

Analyzing the strengths and weakness for Abbott Laboratories is tricky In late 2009, when Abbott Laboratories acquired a unit of Solvay of Belgium for $6.6 billion, the large merger was praised as a signal for restored confidence (Sorkin, 2009) However, less than a year later, the Pharmaceutical giant announced that they would be cutting 3,000 jobs, or 3 percent of its work force (Reuters, 2010) As an investor, the declaration a company is downsizing 3 percent of its work force is not a comforting sign to reinvest However, this downsizing came almost entirely from the Solvay positions Probably, the

downsizing which was found mainly in research and development, and commercial and manufacturing was planned for during the acquisition and prior to the merger being announced

In May 2010, Abbott Laboratories announced they would purchase the Indian drug maker Piramal Healthcare for $3.7 billion Abbott stated even though paying $2.12 billion in cash upfront for Piramal, and then $400 million annually over the next four years, this purchase will add immediately to Abbott‘s earnings (Timmons, 2010) PricewaterhouseCoopers estimates that emerging markets will account for

30 – 40 percent of pharmaceutical sales growth in the next 10 years (Timmons, 2010) Pharmaceutical business in emerging markets is drastically different from the West Consumers in emerging markets typically pay directly for their prescriptions, while those in the West typically rely on insurance and government care As Abbott Labs and Piramal expand into India, the company will become the largest drug company in India with 7 percent of the market

Abbott Laboratories has also had their share of bumps in the road Facing competition from the generic drugs, sales of Humira, mostly used for treatment of Rheumatoid Arthritis, have been decreasing Another casualty to the generic competition is the drug Depakote, typically used as an anti-seizure medicine In 2009, sales of Depakote tumbled 75 percent, after losing exclusivity in 2008 (Bloomberg News, 2009) There are two polar views on the drug Meridia, an anti-obesity drug In January 2010, European Medicines Agency advised doctors and pharmacists to stop prescribing and dispensing Meridia and equivalents of Meridia (Singer and Pollack, 2010) The Food and Drug Administration, looking at the same data asked Abbott Laboratories to put a stronger warning on its label The key ingredient, sibutramine, is at the crux of this decision The question is if this ingredient when given to a patient diagnosed with uncontrolled high blood pressure is at a higher risk of a heart attack or stroke

Most recently, in September 2010, Abbott Laboratories had to recall millions of containers of its

bestselling Similac infant formula due to the possibility of being contaminated with insect parts, such as small beetles or larvae This recall affected 5 million containers of formula Abbott announced that they expected a $100 million dollar loss in connection with this recall With this announcement, shares of Abbott Laboratories fell 16 cents (Perrone, 2010)

IV Critique

Healthcare as we know it is about to change With the passage of healthcare reform bill there is

uncertainty about what the future holds The nursing shortage, drug costs, and soaring health care plan premiums will rekindle fears of medical inflation A considerable portion of Abbott Laboratories‘ market

is that of healthcare related products Abbott operates in numerous countries and employs both internal and external tax professionals to minimize audit adjustment amounts where possible Changes in foreign reimbursement, political and economic stability will also significantly impact their bottom line Their operation in international markets is 50 percent of consolidated net sales for Abbott Laboratories Their gross profit margin in 2008 was higher due, in part, to favorable product mix and foreign

exchange However, there was a decline in their gross profit margins in 2009 due to the negative impact from lower sales of Depakote One other important and detrimental part of the business is patents and trademarks There are several legal proceedings that they are currently facing due to patent infringement both locally and internationally The estimated loss due to litigation is $170 million

to approximately $310 million

Abbott Laboratories‘ revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements Abbott‘s sales have been impacted significantly over the last three years with the purchase of several pharmaceutical products and joint ventures along with the loss of patent protections One main focus of Abbott is that of Humira which has increased sales

worldwide However, they have seen a significant decline in sales of Omnicef and Clarithromycin, with Omnicef being the greater of the two They are in a constant battle with products being produced in a generic form, which significantly affects the sales of their products

Abbott concludes that its 2009 long term debt is due to financing recent acquisitions Operating cash flows in excess of capital expenditures and cash dividends have partially funded these acquisitions As

of December 31, 2009, Abbott‘s long term debt rating was AA by standard and A1 by Moody‘s

Investor‘s Service

One significant impact of Abbott‘s bottom line is the sales rebates that they provide Approximately 50 percent of Abbott‘s consolidated gross revenues are subject to various forms of rebates and allowances which Abbott records as a reduction of revenue at the time of sale They also offer discounts to those that pay within 15 to 30 days One of the largest rebates that they provide are to the Women‘s Infant and Children‘s (WIC) division which they have a contract with in 24 states Indiana is not one of those states

Abbott has done well weathering the economic downturn with an increase in net sales and gross profit for the 2nd, 3rd and 4th quarters of 2009 as compared to 2008 and 2007 They record cash, cash

equivalents and investments with the cash equivalents consisting of time deposits and certificates of deposit They use FIFO as their inventory method Depreciation and amortization expenses are

calculated using a straight-line method over the estimated useful lives of the assets The estimated useful life as provided by the financial reports states that a building‘s useful life is 10 to 50 years and equipment is 3 to 20 years

They also noted internal controls and the external audit being completed by Deloitte and Touche out of Chicago Deloitte did report that the company adopted a new accounting standard related to business combinations in 2009 It states that research and development is accounted for as an indefinite-lived tangible asset until approval or discontinuation rather than as expense Acquisition costs are expensed rather than added to the cost of an acquisition and the fair value of contingent consideration at the date

of an acquisition is added to the cost of the acquisition

The report was very informative, as some of our group‘s members work in healthcare They have come

to realize the amount of money that is required to run a health care system This report helps us

understand why some costs get passed on to the consumers The companies pass the cost off to the hospitals which then pass it off to the consumer in order to effectively run a health care system The notes supplied information regarding accounting policies and areas in which estimates were used Among the many different products that Abbott develops, manufactures and sells the consolidated version of their statements made the report easier to read and understand Also included within the notes was supplemental financial information This involved discussion about their investment in Boston scientific and other expenses for 2009 related to long term liabilities and comprehensive

income Within the last 3 years Abbott has been involved in a joint venture with TAP pharmaceutical products and the selling of its spine business However, the spine business was not presented as discontinued operations in the report because the effects were not significant Abbott is involved in international markets and there are several tables within the notes that address foreign currency and foreign subsidiaries They also included in depth information about post employment benefits This

information is very interesting because with healthcare changing, companies are making changes to retirement benefits Currently 70 percent of Abbott‘s medical and dental plans‘ assets are invested in equity securities and 30 percent in fixed income securities Other notes included that of taxes on

earnings It was interesting to read that their federal income tax returns through 2005 were settled, however, tax returns after 2005 were still open They go on to describe the products they discover, develop, manufacture and sell within a geographic area The main report contained extensive

information regarding litigations of the company but also embedded within the notes there continues to

be information regarding litigations and environmental matters They currently are identified as a

potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico The cost of these area clean ups are not expected to exceed $15 million

Abbott also goes in to detail about incentive stock programs and debt and lines of credit with mention in the annual report that they have some open lines of credit There also is great detail about their

intangible assets and several companies that they have acquired along with goodwill Abbott

positioned themselves appropriately in 2008 as the economy was starting to take a downturn by

restructuring This restructuring plan included streamlining global operations, reducing overall costs, and improving efficiencies which is important in a struggling economy One last thing that they included

in their notes was quarterly results This seemed to be very helpful in regards to the breakdown of each quarter and how well the company did comparatively The notes would have been more helpful to be presented with each area that it represented One thing to remember is the length of these reports It

is understandable that the SEC requires such information to be included in the report but the length can

be very intimidating With all that Abbott is involved in, their report length was appropriate

V External perception of the company

Investors

Investors like Abbott They are a strong global company, and they give back to their investors in the form of dividends or share buybacks They are actively acquiring other pharmaceutical and healthcare companies to ensure growth in emerging markets and they are able to maintain a high ROE

Competitors

Competition in the healthcare and pharmaceutical industry is highly competitive Because of this, Abbott and their competitors are constantly trying to come up with the latest drug and get it patented before their competitor In these types of situations many companies will begin to acquire their

competitors so they don‘t have to compete with them anymore This is what Abbott has been doing with

of AMO, Visiogen, Evalve Inc and Solvay

Analysts

More than half of Abbott's revenue is generated by the pharmaceutical division With expiring patents and an extremely competitive generic drug market, Abbott's pharmaceutical revenue could experience

a decline in sales The acquisitions of AMO, Visiogen, Evalve Inc and Solvay in 2009 are considered to

be solid additions to the company‘s ophthalmic, drug, and medical devices portfolios Implementation of new healthcare reform is complex and creates uncertainty regarding the long-term financial impact on

the industry Still analysts say that Abbott is a strong company that has the resources, knowledge, and know how to succeed

VI Conclusions and recommendations

Common Size Statement Analysis

After creating and reviewing the common size income statement for Abbott Laboratories, we see that the numbers are strongly consistent from year to year When a large corporation such as Abbott is reporting in billions of dollars, a change of 1 percent, which could be a million dollars is still not that significant of a change to warrant large concerns or alarms for the investors There are trends,

governmental changes, and economics that all need to be considered when reviewing such a large company However, upon review of the common size income statement, we did not find too many critical values that caused great concern

On the positive side, one sizeable increase that is noteworthy is the increase in net earnings in 2007 from 13.92% to 2009 of 18.68% in 2 years Another significant number to follow is the continuing

operations In two years there was a significant increase from 2.31% to 3.69% This signals that the core of their business is on the upward climb

In regards to the balance sheet, we see that there is a net increase in cash of 10.62% between 2007 and 2009, as well as a rise in total current assets of 9.12% In the 4th quarter of 2008, Abbott sold its spine business for approximately $360 million in cash resulting in an after tax gain of approximately

$147 million dollars, which is presented as gain on sale of discontinued operations, net of taxes in their statement of income

Ratio Analysis

Based on the analysis of key financial ratios, many observations were made Abbott has improved their product turnover indicating there is more cash available for general operating expenses The inventory

turnover has decreased from previous years, but not significantly Overall, Abbott‘s debt ratio has not fluctuated much, which is good in the current economic state However, Abbott‘s primary product is pharmaceuticals, which is not always impacted by the economy The gross and net profit margins have stayed consistent The net earnings have increased at least 2% each year, showing the company has been able to maintain and control its expenses well The cash flow remains steady, which is positive in

an unstable economy Unfortunately their return on investments fluctuates, mainly because the nature

of Abbott‘s business It is expensive to fund research on new drugs and products The return on equity has decreased due to some product trials that have not gone well and ongoing litigation from one of Abbott‘s products

Industry and Competitor Comparison

Abbott Laboratories has competition among other pharmaceutical companies including Merck, Roche and Sanofi-Aventis In part, the above mentioned companies are responsible for employing 357,867 people As a whole the pharmaceutical industry generates $305.56 million in revenue with a gross margin of 73.14% Abbott‘s revenue in 2009 was $33.08 billion with a gross margin of 57.60% which is lower than others within the industry However, their quarterly revenue growth was higher than the industry with Merck being the only company having a larger revenue growth than Abbott The operating margin for Abbott is slightly below the industry at 21.25% It seems that they were responsible in

controlling costs with the economic turmoil that has been going on in recent years When comparing each of those companies, Abbott‘s net income is lower when compared to the competition Abbott‘s net income in 2009 was $5.31 billion as compared to Merck‘s net income of $10.93 billion, Roche had

$9.91 billion and Sanofi-Aventis had $8.10 billion However, their price to earnings ratio is higher than each of the above mentioned companies Many investors rely on this ratio due to the significant impact

on stock price changes The explanation may be that their net earnings are significantly higher with less outstanding stock compared to the other companies

Due to the above reasons we recommend investing in Abbott, but conservatively With health care reform looming over head, change is coming All is not clear on how it will directly affect Abbott‘s

performance, but they have proven before that they are a formidable competitor

Part II:

Executive Summary

Target‘s main lines of business are retail and credit card Target is well known for their operations in general merchandise and food items They owe their success to positive perceptions of the Target brand and they have built their reputation over many years of serving guests, team members,

community and shareholders The company has successfully associated its name with a younger, hipper, edgier, and more fun image than its competitors Target recently announced that their credit card holders will receive a 5% discount on all Target purchases This is expected to increase earnings.

Target‘s income depends greatly on the economy, so there were some effects noted There was a decrease in accounts receivable, showing that they are not receiving their money from customers as quickly There has also been a decrease in inventory turnover This can be attributed directly to the economic downfall and the seasonal nature of Target‘s business In spite of these decreases, Target‘s debt ratio has remained stable and it has also remained profitable The gross and net profit margins have increased from the previous year

One indicator that shows Target to be financially stable and have high performance results is in the

2007 Board of Directors decision to repurchase $10 billion worth of common stock Because of the economic downfall, this decision was suspended in 2008, only to be approved to resume in January

I Introduction of the company

Target‘s main lines of business are retail and credit card Target is known for their operations in general merchandise and food items Their general merchandise segment includes household essentials, electronics, apparel and accessories, and home furnishings and décor They have recently been

working to expand their dry, dairy and frozen food assortment They also operate Super Target stores with a deeper line of food items in addition to the general merchandise Their website, Target.com offers even more variety, styles, sizes and colors than are available in store

Target‘s main strategy on the retail side is to maintain their inventory effectively While this is true with most retail giants, Target is able to maintain its competitive advantage by having their core products in- stock and by sustaining established merchant relationships In addition, they do considerable planning for seasonal shopping to decrease any post season discounts

On the credit side, the Target credit card offers credit to Target ―guests.‖ Target believes that offering a separate store credit card strengthens the bond with their guests, drives sales and contributes to results

of operations (Annual Report, 2010) Target‘s main credit strategy is to entice customers to spend more with special discounts, reward programs, and coupons, while decreasing the amount of delinquencies and charge offs

II Performance analysis

After reviewing Target‘s annual report, there were several strengths found that contribute to the

performance of the company as a whole Target has strived to ―create attractive value‖ in their stores,

as well as in the merchandise they offer They want their customers to be satisfied in the quality of product they are purchasing By accomplishing this, Target hopes to retain their customers They pride themselves on maintaining a good reputation in each store location and feel that this reputation is built

on the trust their customers have with the company They hope this trust will not only remain between

the company and their current customers, but that new consumers will be attracted to the company based on their reputation

Target understands the economic conditions that have been facing the whole country, and although their financial status depends on the economy, they have strived to continue to provide quality brands and value Because of this, their sales have not been severely affected from the current economic state However, a downside to the poor economy has been the decrease in stock value in 2009 It is noted that by the end of the fiscal year in 2010, the stock value had almost recovered from the 2009 loss This can be attributed to the effective management within Target‘s corporation down to the

management in each individual store

Target is a strong leader in the retail market, but it is not without obstacles to overcome Because Target is a younger company, founded in 1902, and does have the same quantity of stores as some primary competitors, its prices are perceived as being higher The company attempts to overcome this weakness by depending on the good reputation it has with its consumers However, its success also must depend on its vendors and supply chain If there is a failure in production or delivery, Target will suffer It relies on the vendors and supply chain to follow through with merchandise, which will produce the income it needs to succeed It is stated in the annual report that the 3 states with the largest

quantity of stores are states prone to natural disasters – California is prone to earthquakes, while Texas and Florida are subject to hurricanes The corporation monitors any event that could inhibit distribution

or sales

One indicator that shows Target to be financially stable and have high performance results is in the

2007 Board of Directors decision to repurchase $10 billion worth of common stock Because of the economic downfall, this decision was suspended in 2008, only to be approved to resume in January

2010 Therefore, as it becomes available, Target is currently purchasing its own stock to reinvest back into the corporation

III Financial position

After reviewing many articles regarding Minneapolis-based Target Corporation, it appears that the retail Giant is following through on its‘ promises they claim in their mission statement Target states it is

‗committed to providing a fun and convenient shopping experience with access to unique and highly differentiated products at affordable prices‘ The key word in many of Target‘s strengths is ―technology‖ Just in time for the Christmas rush, Target announced that they would be offering the iPad at stores Nationwide on October 3rd SVP of Merchandising, Mark Schindele, believes technology products, such

as the iPad will be at the top of their guests‘ holiday shopping lists (Target offers, 2010) Another

technology addition to Target is a weekly online advertisement called, ―My TargetWeekly‖ This product offering allows guests to create customized shopping preferences, and allows the customer to be informed of specific deal alerts when their preferred items are on sale Target boasts that currently, they are the only retailer who offers this technology (Target unveils, 2010)

Keeping in line with the ‗technology theme‘, Target is also expanding their electronic services, including technical and mobile experience In August, Target announced 3 new consumer electronics services that will provide enhanced shopping experiences for their customers, both in-store and at home The first service, 1.877.myTGTtech is a no-charge technical support hotline for all Target store consumer electronic purchases as well as pre-purchase questions Guests will speak to a LIVE customer service representative for trouble shooting and technical support The second service, Target Mobile, allows guests to maximize their dollars and time with a convenient cell phone shopping experience both in- store and online Partnering with RadioShack, they are now providing in-store wireless shopping

stations that enable Target guests to purchase mobile phones and activate contracts from the nation‘s top carriers (Target launches, 2010) Target Mobile, will also be available online, allowing comfortable cell phone shopping in the customer‘s home Product offerings will be from Android-powered

smartphones, Motorola, Samsung, Nokia, LG and will have wireless plans from every major U S

service provider The third service, Target Electronics Trade-In encourages guests to be eco-friendly by trading in old electronics devices and in return guests will receive credit towards any Target purchase This program will launch in Northern California first and will rollout to additional stores in September and will be available in approximately 850 stores by year-end

To further expand on their direct marketing, Target has announced they will be the first retailer of

Facebook Credits Gift Cards This program will allow guests who play an active part in the gaming world of Facebook to enjoy free credits when purchasing gift cards at Target Facebook has games such as FarmVille, Mafia Wars, PopCap Games, Bejeweled Blitz and Playdom‘s City of Wonder When purchasing a gift card in the amount of $15, $25, or $50, the guest will also receive free credits for their specific Facebook game (Target stores to be, 2010)

In late September, Target announced that they would be partnering with Procter & Gamble (P&G) to raise money and awareness for breast cancer early detection Prior to Breast Cancer Awareness Month

in October, guests will have the opportunity to purchase limited edition P&G ―pink‖ products, using money saving coupons that will benefit the National Breast Cancer Foundation, Inc (Procter, 2010) These coupons will be included in newspapers delivered to over 57 million homes across the country P&G has pledged to honor every coupon redeemed from the booklet at a 2-cent donation The

uncapped donation from P&G will be solely based on the number of coupons redeemed starting

September 26, 2010 Brands included in this promotion are some of P&G‘s leading products, such as Tide, Downy, Iams, Crest, Oral-B, Pampers, Pantene, Gillette, Braun, Duracell and Head & Shoulders

Target has had to do some damage control recently Target has a well-earned reputation for hiring and advancing the rights of people who are gay, lesbian, bisexual and transgender (Voter, 2010) Recently, Target made a $150,000 political donation to an antigay Republican candidate for governor of

Minnesota, Tom Emmer Target quickly tried to explain their contributions to Mr Emmer‘s campaign,

solely for his pro-business views Many gay and lesbian groups have vowed to more closely monitor Target‘s donations as well as other retail giants

Given the drop in the economy and the high unemployment, it is no wonder retailers are aggressively competing for every dollar from every customer Reuters reports 2010 may be more about winning sales from competitors than tempting consumers to buy more (Reuters, 2010) With the holiday season nearing kick off, Target thinks that their customers want to see more sales, better bargains, and better product offerings Executives at Target cautioned investors that they did not expect a huge

improvement in sales trends this year while unemployment remained high

They too are aware of economic challenges and the effects that it has on the business One area that they have been managing costs is in the workforce In 2009 their retail segment had the highest EPIT

in Corporation history despite store sales being down 2.5 percent Also, despite sales being down they had an increase in cash flow and opened 76 new stores in 2009 They were also able to compensate their workers for better than expected performance One surprising thing within the report is that their credit card late fee charges were down despite the economic turmoil along with bad debt declining

Their future write offs are based on history, risk scores and aging trends with a write off period of 180 days They say they owe it to managing expenses and finance charge revenue increasing to their success In the receivables department they instituted tighter risk management that reduced available credit lines for high risk cardholders Their debt rating on Moody‘s was A2 and on Standard and Poor‘s A+ They also have access to an unsecured revolving credit of $2 billion dollars One other area they cut back in 2009 was that of Capital expenses in 2009 This does not seem too farfetched since many corporations did the same

They are currently involved with two violations The first one involves the State of California and

environmental matters It is alleged that hairspray contained levels of a volatile organic compound in excess of permissible levels This may involve potential monetary sanctions in excess of $100,000 The other is an ongoing EPA investigation for alleged violations of the Clean Air Act They anticipate

penalties that are likely to exceed $100,000 According to Target, each of these will not be material to their financial positions, results of operations or cash flows

The inventory method that they use is LIFO Depreciation is determined based on what product it is Buildings are depreciated at an 8-39 year life, equipment at 3-15 years, and computers at 4-7 years They use the Black-Scholes valuation model to estimate the fair value

In fiscal year 2010 they plan to adopt FASB No 166 ―Accounting for transfers of financial assets‖ which was an amendment to FASB No 140 which is not anticipated to affect the consolidated net earnings, cash flows or financial position Also in fiscal year 2010 they plan to adopt FASB statement

No 167 which amends the consolidated guidance applicable to variable interest entities They suspect this amendment will significantly affect the overall consolidation analysis but will not affect consolidated net earnings, cash flows, or financial position

Ernst and Young out of Minnesota were the external auditing agency and the report also discusses internal controls One important point made in the financial report was that of their gift card business

The revenue is not recognized until redemption and if those gift cards are not redeemed they are considered ―breakage‖ revenue One thing that seemed very helpful was that of a table that explained the position of the company, such as cash and cash equivalents and the valuation technique of each They also included a table that illustrated the primary costs of sales and selling, general and

administrative expenses associated with it

This report was easy to follow because the flow was appropriate The notes were included as you went which was very helpful Unlike the Abbott report, where the notes were at the end, this report seemed

to flow much better because the material that the notes were referring to where readily available.

V External perception of the company:

Investors

Due to the recent state of the economy, investors were skeptical about Target‘s ability to perform in

2009 Before November 2009, Target had 8 consecutive quarters with decreasing earnings (Investor Guide, 2010) During December 2009 the store saw overall sales increase 5% Target believes this is due to sales growth in different product areas and the continual addition of new brands to their

inventory Currently investors say to buy This isn‘t a huge surprise given that most stocks are low right now, but investors have hope for Target They recently announced that they will start their share

buyback program up again The program began in 2007, and ran for a year, but was suspended in

2008 due to the failing market By reinstating the program, Target is saying that its cash flow has improved They plan to buy back $5.1 billion in shares in the next two to three years This news

satisfied investors and they believe that Target is making positive changes

Competitors

Target‘s largest competitor is Wal-Mart They also compete in certain areas with Costco and Kohl‘s Wal-Mart views Target as being a more expensive, more fashionable competitor As a result, they recently picked up the Better Homes and Gardens brand as a way to compete in home goods Wal-

Mart‘s main focus is cost efficiency, while Target‘s key strategy is to differentiate itself by their product lines Target has been able to maintain a positive image by continually advertising the things they do to

give back to the community, while Wal-Mart struggles to maintain a favorable image

Customers

Target has set itself apart as being ―Cheap Chic.‖ The company has successfully associated its name with a younger, hipper, edgier, and more fun image than its competitors, namely Wal-Mart Target‘s customers are more affluent than those of Wal-Mart and shop at Target because of their differentiated product line They view Target as being more fashionable and as providing the full shopping experience and great value for the money They also prefer the cleanliness of Target stores and shorter waiting time to pay See Appendix C for customer perceptions

Analysts

Analysts believe that Target‘s recent decision to expand their food format will likely go over well with their customers and will increase store sales Target recently announced that their credit card holders will receive a 5% discount on all Target purchases This is expected to increase earnings as well As stated before, their well-differentiated stores give it an edge over Wal-Mart Analysts believe Target‘s cash flow and balance sheet remain strong The competitive pricing environment and increased

competition from Wal-Mart are likely to have an adverse effect on Target, especially during the

downtrodden economy The company has been losing focus on women's apparel, which represents over 10% of total sales, and analysts see this as a downfall Target's credit business increases their risk to any decline in consumer credit trends, such as higher default rates, which could affect the

company‘s success As with many companies, increasing healthcare costs may lead to an increase in selling, general & administrative expenses

VI Conclusions and recommendations

Common Size Statement Analysis

When reviewing the common size statements for Target, it appears that overall; Target has remained consistent and upward in their growth Target has reduced their expenses and taxes by a little over 1 percent and has kept their other expenses low as well There are no significant company or financial changes that would cause an investor great concern

In regards to the balance sheet, marketable securities increased by 3 percent The rise in Target‘s current liabilities was mainly due to the introduction of Target offering their own credit card to customers therefore increasing their receivables Unsecured debt was reduced by 4 percent as well during this time Finally, there was a shareholders‘ investment increase of over 2.5 percent during this time

Ratio Analysis

Analysis of key financial ratios of the Target Corporation has shown that it continues to be a stable company Because Target‘s income depends greatly on the current economy, there were some effects noted There was a decrease in accounts receivable, showing that they are not receiving their money from customers as quickly There has also been a decrease in inventory turnover This can be

attributed directly to the economic downfall and the seasonal nature of Target‘s business In spite of these decreases, Target‘s debt ratio has remained stable and it has also remained profitable in an unstable economy The gross and net profit margins have increased from the previous year The cash flow is up because of lower amounts of bad debt and an increase in sales The return on investment has risen and the return on equity has remained stable

Industry and Competitor Comparison

In regards to Target those direct competitors within the industry include that of Costco and Wal-Mart These three companies collectively are responsible for employing 2.5 million employees nationwide with Wal-Mart being the largest employer of the three With the economic downturn many people are

price surfing so that they can get the best ―bang for their buck.‖ In regards to revenue, Wal-Mart has done an exceptional job in leading the competition In 2009, their revenue was by far the largest at

$416.88 billion with Costco next at $76.20 billion and Target following behind at $66.58 billion

However, Target did well in gross margin They were able to control the cost of goods or perhaps sell more goods in order to maintain a higher gross margin than that of Wal-Mart Target is higher

compared to others within the industry regarding operating margin However, this may be due to the opening of new stores in 2009 Because of their higher operating margin they still were able to achieve

a net income of $2.72 billion dollars One other important component to look at is that of the P/E ratio Target‘s P/E ratio was higher than Wal-Mart but lower than that of Costco

Based on this analysis, we agree to invest in Target They have been able to outperform or recover from the market fluctuations It is obvious that they are making changes in order to perform and

compete Unlike most companies, Target doesn‘t want to be like their over-achieving competitor, they want to differentiate themselves and be on a completely different level

Appendix A - Abbott Competition

Operating Margin (tom): 21.25% 17.39% 31.58% 24.24% 27.58%

Net Income (tom): 5.31B 10.93B 9.91B 8.10B N/A

PEG (5 yr expected): 1.27 1.82 1.28 24.77 1.29

MRK = Merck & Co Inc

RHHBY.PK = Roche Holding AG

SNY = Sanofi-Aventis

Industry = Drug Manufacturers - Major

Drug makers Ranked By Sales

Abbott Laboratories ABT 51.94 0.66% 80.20B 15.22

Bristol-Myers Squibb Company BMY 27.62 -0.22% 47.36B 4.83

Appendix B- Target Competition

Industry = Discount, Variety Stores

Appendix C- Customer Perceptions- Target

Appendix D-Common Size Income Statement- Abbott

(Income) from the TAP Pharmaceutical Products Inc joint venture — -0.40% -1.92%

Average Number of Common Shares Outstanding Plus Dilutive Common Stock

Appendix E- Common Size Balance Sheet- Abbott

Consolidated Balance Sheet

(Common Size in percents)

2009 2008 2007

Investments, including $307,500 of investments measured at fair value at

Intangible Assets, net of amortization 12.00% 12.14% 14.40%

Obligation in connection with conclusion of the TAP Pharmaceutical Products

Commitments and Contingencies

Preferred shares, one dollar par value

Authorized — 1,000,000 shares, none issued

Common shares, without par value

Total Shareholders' Investment 43.69% 41.30% 44.88%

Appendix F- Common Size Balance Sheet- Target

Consolidated Statements of Financial Position

(millions, except footnotes)

Nonrecourse debt collateralized by credit card

Unsecured debt and other borrowings 23.90% 27.21%

Nonrecourse debt collateralized by credit card

Appendix G- Common Size Income Statement- Target

Consolidated Statements of Operation

(millions, except per share data)