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Reformulation

Reformulation. Target Corporation By Jennifer Kellner. Industry: Discount variety stores. Target Dollar General Wal-Mart Costco. Introduction. Reformulation is the first step toward analysis, forecasting, and valuation Enterprise operations The business/production activities

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Reformulation

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  1. Reformulation Target Corporation By Jennifer Kellner

  2. Industry: Discount variety stores Target Dollar General Wal-Mart Costco

  3. Introduction • Reformulation is the first step toward analysis, forecasting, and valuation • Enterprise operations • The business/production activities • For Target: retail (selling products), Credit card operations • Financing activities • Borrowing or lending activities (not part of core business)

  4. Process • Original f/s for years 2012, 2011, 2010, 2009 • Line item by line item • Balance Sheet • Original • EAELNEA • FAFLNFL • CHECK: NEA – NFL = Common s/h equity (on b/s) • (amounts were not changed, common s/h should remain the same) • Income Statement • Original • EPAT • FEAT • CHECK: EPAT – FEAT = Comprehensive income (on i/s)

  5. Step 1-Original Balance Sheet • Target sold CC portfolio; explains zeros to the right and left • ST debt considerably low in 2010; further investigation

  6. Step 2: EAELNEA • ENTERPRISE ASSETS • Target holds less than 2% of sales in cash in 2011 and 2012. • I use all cash as part of EA in these years. • Target sits on a good deal of lot of short term investments (Note 10) that are highly liquid making it less necessary to hold on to a significant amount of cash. • Target is also a prominent retailer and therefore has a very favorable cash collection policy. It maintains no accounts receivable because they collect cash from third-party financial institutions like Visa, Mastercard, etc. "in less than 5 days," according to Note 10. Furthermore, others in the industry like Dollar General carry less than 2% of sales in cash. • During 2009 and 2010, I use the 2% of sales rule because Target held considerably more cash in these years (see 2% tab), presumably they were influenced by the economic recession and wanted to keep more cash on hand as a safety net if needed to fund operations (sales were presumably less). • Credit cards is one of their reportable segments, despite that it is sold off in 2013 it remains a part of their business model in previous years and is therefore included in EA. • Other current assets is made up of "Vendor income receivables, Other receivables including pharmacy receivables, prepaid expenses, deferred taxes and other," most of which can be considered part of enterprise operations. • Construction-in-progress we assume is part of enterprise operations. I make the assumption that they are building more stores which is part of their current growth and expansion strategy (nothing mentioned in notes with regards to construction as far as I can see). • Other noncurrent assets is included in EA as it includes goodwill and intangible assets. However, see note 15; much is made up of "Company-owned life insurance investments" which calls into question whether this entire amount should be included as EA's. • Less cash on hand to support operations • ST investments, quick collection • All cash in 2012 & 2011, 2% rule 2010 & 2009 • Economic recession

  7. ENTERPRISE LIABILITES • Accruedand other current liabilities is made up in large part of "Wages and benefits, Real estate, sales and other taxes payable, Gift card liability ,and Project cost accrual" which are enterprise operations. While other components of this line item may not originate from enterprise activities, I assume they are all included for now until further knowledge is acquired. • For now I include all of Deferred income taxes in EL assuming that it is a combination of items resulting from both enterprise and financing activities; to be refined in later modules. • Other noncurrent liabilities relates mainly to "Workers' compensation and general liabilities and "Deferred Compensation," according to Note 24. Each of these are related to the enterprise.

  8. Step 3: FAFLNFL The amount of cash in excess of that which is required to fund normal enterprise operations.

  9. Step 4: CHECK: NEA – NFL = Common s/h equity (on b/s) These numbers balance, and rightfully so. The amount of s/h equity should not have changed, and it doesn't (we are merely rearranging not changing amounts).

  10. Step 1: Original Income Statement • Currency translation – merchandize from international vendors (primarily China) • Cash flow hedges – LT bonds • Hedge against market rate fluctuations • To fund unqualified benefit plans • We consider items in OCI because they may be a key part of profitability for Target

  11. Step 2: EPAT • Pension and other benefit liabilities I assume relates mostly to employees, which are a core part of the enterprise. Therefore, I include them in EPAT. • Assumptions/Judgments • - I include "Credit card expenses" as an enterprise activity because the Credit Card is one of Target's operating segments. • Depreciation – buildings, machines related to operations • "Gain on receivables" of (161) in 2012 from selling their credit card receivables portfolio. Include this because their credit card operation is a clear part of their business operations. • I also use the effective tax rate in Note 23; 34.9%, 34.3%, 35.1%, and for 2012 through 2009, respectively.

  12. Step 2 cont… • For currency translation and cash flow hedges: I include the whole amount • However: it appears that cash flow hedges is more of a financing activity while currency translation is tied to enterprise • The 10-K notes, "...a large portion of our merchandise is sourced, directly or indirectly, from outside the United States, with China as our single largest source [vendor]." I assume this is the primary source of currency fluctuation. • Cash flow hedges arise from unqualified benefit plans Target gives to employees. They hedge against fluctuating market rates to fund these benefit obligations. • The 10-k says, "We economically hedge a portion of our exposure to these interest rate changes by entering into interest rate forward contracts that partially mitigate the effects of interest rate changes.” I presume this is a financing activity. • Since they are combined in one line item and I cannot right now find the amount related to each, I include the whole amount as enterprise profit contribution.

  13. Step 3: FEAT • Net Interest Expense: interest paid on debt; financing activity • Tax shield (effective tax rate x Net interest expense)

  14. Step 4: CHECK: EPAT – FEAT = Comprehensive income (on i/s) No change in amount, so CI should remain the same 2 years are not in balance

  15. Further Clarification… • Gain on receivables held for sale? • Depreciation? • Reason for imbalance: due to different tax rates used?

  16. Questions?

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