Target Corporation Capital Projects - Case 20

Suraj Nayak

Advanced Finance

Target Corporation

Introduction

Target, founded as Daytona Dry Goods Company in 1902 is one of the world's largest retail company. The Daytona Hudson Company opened its first target store in 1962 in Minneapolis, Minnesota. The company started expanding out of state from 1962 onwards. In 2004, Target Corporation, formerly known as the Daytona-Hudson Company, made the decision to sell of all other subsidiaries, and focus all of their resources on the Target stores chain. There were currently 1888 Target stores spread across the US and Canada making them the second largest retailers in the world.
        Target’s main competitors are Wal-Mart, and Costco. Target and Walmart are more similar to each other in comparison to Costco. Both Walmart and Target are widespread across the US, offer similar products, caters to wide variety of customers. The main difference in strategy between Target and Walmart is that Target aims to provide a better shopping experience than its competitors, yet still provide discounted prices. Target wants to be the main shopping destination for well educated college adults. Costco is a membership based store, which accounts for over 70% of their net operating income. Costco offers their customers value in buying discounted products in bulk.
Summary

Target Corp. has a Capital Expenditure Committee (CEC) in place made up of Target’s senior executives. The CEC considers all the pros and cons of every major Capital Project Request (CPR). Each CPR has a "dashboard" that summarizes the critical inputs used to compute the net present value (NPV) and internal rate of return (IRR) as well as data about the type of investment (new store or remodel), market size, location, customer-demographic information, as well as the sensitivity of NPV and IRR. The dashboard also contains variability information that indicates difference between the cost of a typical prototype store vs. the cost of store in that location. In other words, the dashboard is a quick screenshot of a CPR’s financial, and statistical economic findings. All the preliminary research is done by Target’s financial, and economic analysts. The CEC have announced their commitment to opening of 100+ new stores that would create the most value, and highest growth for Target Corporation and its shareholders. In November 2006, Doug Scovanner, the CFO of Target Corporation, along with the CEC were to analyze 5 major CPRs representing $200 million in proposed capital investments, viz. Gopher Place, Whalen Court, The Barn, Goldie’s Square, and Stadium Remodel. NPV calculations used a 9% discount rate for cash flows related to the store cash flows, 4% discount rate for credit-card cash flows. As per the hurdle rate of 9%, CEC should consider to fund all the major CPRs except for Goldie’s Square due to an unacceptable IRR, and the lowest NPV.