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W&M-M-196 ________________________________________________________________

Target 2009-2016: Strategic Challenges

1

Target continued to struggle as the worst U.S. recession in decades extended through 2008-2010.2 (Financial results are shown in Table 1; retail productivity metrics are shown in Table 2. Comparable Walmart data is shown in Table 3.) The company had hoped to ride out the recession and bet that the economy would soon be back on track. Target opened 91 new stores in 2008, and an additional 58 stores in 2009. This increase in store count produced record 2008 revenues of $62.9 billion in 2008, and $63.4 billion in 2009. However, same-store sales fell by 2.9% in 2008 and another 2.5% in 2009. Sales density fell from $318 per square foot in 2007 to $287 in 2009. Operating profit fell by $870 million (-16.5%) in 2008 to $4.4 billion. Net income declined $361 million from 2007-2009. Target’s credit business was especially hard hit, as defaults grew and credit income dropped from $1.1 billion in 2007 to $400 million in 2009. Bad debt expense had reached 14.2 percent of average credit card receivables, much higher than other retailers. About one-fifth of total Target sales were on the REDcard, and credit income represented twenty percent of total operating income in 2007.3 As a result of this continued decline, Target CEO Gregg Steinhafel announced “A Fresh Approach” (which appeared on the cover of Target’s 2009 Annual Report).4 The approach was focused on four key actions: 1. Extending the PFresh store design to an additional 350 stores, bringing an expanded food assortment in the mainline Target stores. 2. Leverage and extend own brands by repositioning many of them at the entry or value price point, while introducing additional house brands as new, high-quality assortments to compete with national and global brands.

1 This case was written by John S. Strong, CSX Professor of Finance, Raymond A. Mason School of

Business, College of William & Mary (USA). Copyright, 2016, by the Mason School of Business, College

of William and Mary (USA). 2 For a discussion of Target prior to the recession, see L. Ring, “Target in 2006”, William & Mary case M-

159, 2007. For Target’s early responses to the recession, see R. Gulati, R. Lal, and C. Ross, “Target:

Responding to the Recession,” Harvard Business School case 9-510-016, March 12, 2010. 3 Calculations form Target annual reports, various years. Available at https://corporate.target.com/annual-

reports/ 4 Target annual report 2009, http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsannual

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3. Work to reduce the price and value perception gap through a “Low Price Promise” (price matching identical items in local markets) and reinforcing pricing policies through more promotions, in-store signage, and advertising.5 4. Control expenses and reduce capital expenditures, while returning cash to shareholders through dividends and share repurchases. In presenting these initiatives, Steinhafel noted that Target’s results “…clearly demonstrate the resilience of our strategy, the effectiveness of our operating model, and the power of strong execution by our team.” Target’s performance improved as the economy began to improve in 2010. (See Tables 1 and 2. Comparable data for Walmart is shown in Table 3.) Target only opened 10 new stores, a radical shift from the average of 84 new stores in prior three years. Instead, the company remodeled 341 stores – about one-fifth of the total network. Sales increased to $65.8 billion, driven by comp store sales increase of 2.1%. Net income of $2.9 billion was the company’s highest ever. Target also spurred growth through its revised REDcard Rewards Program, which now offered an additional five percent discount when customers used the Target credit or debit card. The company also made a major commitment to its online business, with new mobile applications and a revamped target.com site. Target also launched small store initiatives in urban centers (CityTarget) and small format Target Express shops. Target also sought to gain ground online and in multichannel retail. Target had originally outsourced its retail website to Amazon in 2001. Despite the fact that Amazon had become a principal competitor soon after and throughout the 2000s, Target did not plan to build its own website until 2009, and only took over its digital operations from Amazon in August, 2011. Shortly thereafter, Target suffered a highly publicized failure when its website crashed as customers tried to buy a collection of goods designed by Missoni, an Italian fashion house. Many orders were delayed or canceled, resulting in angry customers. The result was a digital retreat by Target, so that by 2013 online sales were only 2.2% of total sales. But the biggest news in the 2010 fiscal year was the announcement in January 2011 that Target would enter Canada through the purchase of Zeller’s store leases and operations for $1.6 billion. In his letter to shareholders, Steinhafel stated “These are very exciting times for Target, and our outlook has never been brighter.”

5 In 2009, a price basket study showed Target prices were 1% - 3% higher than Walmart. For about a third

of the items, Walmart’s prices were more than 10% better than Target. Target’s prices on some items were

lower if store coupons and sale items were included. www.kantarretailiq.com

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The Canada Decision6 Target had previously expressed its intent to expand into Canada, but had put plans on hold due to the economic downturn. But the closure of Canadian discounter Zeller’s opened a new opportunity to acquire 220 store leases in one swoop. After nonrenewals of some leases and sales to third parties, the company paid $1.6 billion for 135 sites, 3 distribution centers, and 17,600 employees. As many of the leases required Target to resume operations within one year, Target quickly set about rebranding the Zeller’s stores, investing $10-$11 million per store.7 Total capital and IT expenditures for Canada were $1.9 billion in 2011 – an amount that was 75 percent of the total capital expenditures for the 1750 US store network. While Canada’s proximity made it seem the most likely growth opportunity for Target, there were important differences in the markets.8 Compared to Americans, Canadian shoppers spent less on total retail purchases and especially on discretionary and fashion items. One study indicated that prices in Canada were on average 14 percent higher than in the United States. But there was a high degree of cross-border shopping, and Canadians were well aware of the Target brand and business. Many analysts believed that Target had an opportunity to introduce a broad assortment of low-priced merchandise to Canadian shoppers. Tony Fisher, a 15 year Target veteran seen as a rising star in the company, was appointed as head of Canadian operations, reporting directly to Gregg Steinhafel. Internally, Target expected Canada sales of $1 billion in the first year and $6 billion by 2017. Target Canada struggled from the outset. While it exceeded its initial sales goal by achieving $1.3 billion in revenues, it only did so with massive discounting. The result was an operating loss of $1 billion and a net loss of $723 million, far worse than forecast. Canadian gross margins were 14.9 percent, only half that of the United States stores. Target had decided not to use the parent company’s systems, but rather adopted an untried Canadian system along with outsourcing of distribution center management and logistics. Merchandise was stuck in the distribution centers with huge problems in order receiving and stock flow to stores.

6 For a detailed discussion, see T. Menezes and D. Wood, “Target Corporation: The Canadian Decision,”

Ivey case W15334, July 31, 2015.

7 T. Menezes and D. Wood, “Target Corporation: The Canadian Decision,” Ivey case

W15334, July 31, 2015.

8 See the extended discussion of the Canadian market in T. Menezes and D. Wood, “Target Corporation:

The Canadian Decision,” Ivey case W15334, July 31, 2015.

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Customers complained about empty shelves and prices that were too high, so that when merchandise did arrive, it could only be sold at steep discounts. Customers also had expected prices that matched those in the US, but instead Target Canada charged higher prices in Canada for the same items. In fact, Target Canada’s prices were higher on many key items than Walmart Canada, Canadian Tire, and Loblaws/Shoppers Drug Mart – all of whom had launched aggressive pricing policies in the wake of Target’s entry. Shoppers also noted that the rebranding seemed slapdash, so that the stores still had the look and feel of the old Zellers chain. Within a year, Target replaced Tony Fisher with Mark Schindele, formerly senior VP of merchandise operations in the US. Schindele’s turnaround strategy involved dropping prices to match Walmart Canada, accelerating store delivery schedules, and pushing more Canadian brands. These changes made little commercial difference, however. In 2014, sales were $1.9 billion, but the operating loss of $869 million was only slightly less than the year before, despite almost 50 percent more sales. Analysts became highly critical of the northward expansion, and Target was under increasing pressure to fix the business. Troubles at Home The improvement in Target’s US operations in 2010 proved short-lived. While 2011 sales increased four percent to a record $68.5 billion, net income was flat, and record EPS was achieved only through a massive share repurchase program. In spite of this softness, Steinhafel noted that 1961 was Target’s 50th year, and announced goals of $100 billion in revenue and a near doubling of earnings per share to $8.00 by 2017. The $100 billion sales goal would require annualized compound sales growth of 6.5 percent annually. Target’s business in 2012 had similar results – higher sales but flat profits. (See Tables 1 and 2; comparable Walmart financial data is shown in Table 3.) Softness was once again returning to the credit business, with rising bad debt expense. The REDcard presented new challenges. While the 5 percent discount did drive sales, more than 20 percent of total sales were now discounted. Also, a growing majority of REDcards were now debit, thus offering no opportunity for credit income. As a result, Target announced an agreement to sell its $6 billion US credit card business to TD Bank Group, recording a gain of $391 million. (TD Bank would continue to run the REDcard and associated businesses for Target.) Despite the sale of the credit card business in March 2013, Target’s issues with payment cards were just beginning. On Black Friday weekend (the start of holiday shopping in the US after the Thanksgiving holiday), Target suffered the biggest retail data breach in history when hackers installed malware to steal

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every credit card used in the company’s 1,797 US stores.9 In total, information related to 40 million credit and debit cards was stolen, including PINs and email and physical addresses. In addition, personal data of 70 million customers was breached. Both customers and banks were outraged, when a security professional, not the company, revealed the breach. Moreover, information revealed that Target’s own security systems had identified the malware but the company had not taken action to stop it. More than 90 lawsuits were filed and Target agreed to pay card-issuing financial institutions up to $68 million to cover liabilities and reissuance. Customers were furious and many refused to shop at Target. The peak fourth quarter 2013 performance was a disaster – sales fell $854 million (4 percent) and net income was cut in half to $520 million. The tone in Target’s 2013 annual report was somber and sobering. Steinhafel’s letter discussed lagging omnichannel results, disappointing Canadian performance, and the issues raised by the credit business and the credit breach. He stated that these events had “sharpened our resolve” to uphold the Target brand promise of “Expect More. Pay Less.” The financial results were a shock, even against the flat profitability of the prior three years. Sales in 2013 were $71.3 billion, down 2.8 percent, while net profit fell $1 billion from $2,999 million to $1,971 million. This was the first full year sales decline in company history. Comparable-store sales again turned negative, and sales per square foot declined. Inventories ballooned and stock turn fell from 6.4x to 5.7x. (See Table 2.) Target’s stock returns lagged well behind the overall market and a peer group of competitors, as shown in Table 5. Steinhafel’s recommitment to his $100 billion sales goal now seemed far-fetched. Internal dissension in the executive began to publicly surface.10 Longtime CFO Doug Scovanner announced plans to retire. Michael Francis, the chief marketing officer who had been with Target for 25 years, left to join JC Penney. Kathee Tesija, head of merchandising, stopped speaking to Steinhafel after a disagreement over supplier relations, especially with Procter and Gamble. Despite a tradition of retired executives as advisers, Steinhafel had severed ties with Robert Ulrich, his predecessor, mentor, and architect of Target’s earlier, successful strategy. This dissension spilled over to a May 2014 letter from a group of senior executives to the board, saying that that if Steinhafel did not leave the company immediately, many other key executives would. The board,

9 See M. Riley, B. Elgin, D. Lawrence, and C. Matlack, “Missed Alarms and 40 Million Stolen Credit Card

Numbers: How Target Blew It,” Bloomberg News, March 17, 2014,

http://www.bloomberg.com/news/articles/2014-03-13/target-missed-warnings-in-epic-hack-of-credit-card-

data

10

See P. Ziobro and S. Ng, “Retailer Target Lost Its Way Under Ousted CEO Gregg Steinhafel,” The Wall

Street Journal, June 23, 2014, at http://www.wsj.com/articles/retailer-target-lost-its-way-under-ousted-ceo-

gregg-steinhafel-1403577233

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which had been increasingly unhappy with the seemingly unending series of problems, asked for Steinhafel’s resignation, which was given. After a brilliant career in merchandising, Steinhafel’s tenure as CEO had come to be marked by extreme caution, stifling bureaucracy, and retailing errors that were due in large part to flawed execution. Target had completely changed from its internal motto of “fast, fun, and friendly”. The years of “cheap chic” at Tar-zhay seemed far in the past. Succession Target immediately launched an external search for a new CEO. In August 2014, the company announced that Brian Cornell would be the first outsider to become CEO of Target. Cornell had started his career at Tropicana, and then its subsequent owner, PepsiCo. He left to join Safeway as head of marketing from 2004-2007, then served as CEO of Michael’s Stores and then as CEO of Sam’s Club from 2009-2012, when he returned to PepsiCo as head of American operations for Frito-Lay. Cornell said that he felt “Target was a dream job.”11 Cornell sought to change the atmosphere at Target. He relaxed the dress code, ate regularly in the company cafeteria, opened the fall management meeting to the press, and set up a lounge on the executive floors for new merchandise that is in the pipeline. Cornell’s initial days were spent making unannounced visits to stores, where he spent most of his time talking to customers. He learned that customers felt products were unimaginative and behind the times, especially in colors and styling. Suppliers reported that buyers were solely focused on cutting costs, and were unwilling to take risks on new, unique items. Target increasingly relied on giving prime shelf space to the highest bidders. Despite the increased space and expansion of food departments, Target never had been able to get these categories to be more than 20 percent of sales, while Walmart had more than half of its sales in food. (See Table 4.) Much of the offer was house brand, and produce, meat, and dairy were seen as inferior to that offered by other discount retailers, including Aldi, Food Lion, and even Walmart. The lack of organic food was a problem for younger customers. At the same time, prices were seen as higher than Walmart, TJMaxx, or other competitors.12 Brand and shopping data gave support to these ideas. According to Kantar Retail, in 2007 53 percent of Americans had shopped Target or target.com in the

11

P. Wahba, “Target Has a New CEO: Will He Re-Energize the Retailer?”, Fortune, March 1, 2015, at

http://fortune.com/target-new-ceo/ 12

In March 2014, Kantar Retail found that Walmart retained an overall 3.8% price advantage over Target

in a price basket study. The price differential was even greater for grocery and health and beauty products.

Only with the REDcard 5% discount was Target able to beat Walmart on prices. A similar 2015 study

showed Target prices 3.5% higher than Walmart. Source: www.kantarretail.com/walmart-leads-the-one-

stop-basket-assessment-kantar-retail-basket-pricing-study-confirms/

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prior month; by 2014 this was down to 37 percent. The number of customer transactions had fallen for six straight quarters from the end of 2012. Big Decisions Target Canada continued to be a major disappointment through 2014. After many meetings and reviews, Cornell went by himself to Target’s Montreal-area stores the Saturday before Christmas – the biggest shopping day of the year in Canada. Seeing empty aisles, poor merchandising, and much better competition, Cornell decided that it would take too long and too much money and effort to fix Target Canada, and that it would take at least until 2021 to make a profit. On January 15, 2015, Target announced it would close all Canadian operations, lay off 17,000 employees, and take a $5.4 billion loss on exit.13 In less than two years, Target had invested more than $6 billion. The other major decision involved the sale of the pharmacy operations in 1,672 Target main stores to CVS Health, in a landmark deal for both companies.14 Target had operated the tenth largest pharmacy business in the United States, with only Walmart and Kroger having more locations among retailers not primarily drugstores. But Target was being challenged by market leaders CVS and Walgreens, each of whom had extensive drug distribution networks. Target also was faced with the changing economics of pharmacy, with expanded generics, the rise of complicated new drugs, and the challenge of recruiting and retaining pharmacy staff. CVS Health paid $1.9 billion for the in-store pharmacies, which provided Target with more than $1 billion of net cash to reinvest elsewhere, as well as providing some of the funds for the company’s $5 billion expenditure on dividends and share buybacks. CVS Health will operate the pharmacies under a perpetual operating agreement, with annual lease payments to Target. Walmart announced it had no intention of exiting the pharmacy business. Analysts wondered if the pharmacy-in-store transaction was the beginning of Target moving toward a hybrid shop-in-shop strategy, and whether that would be good for the company. Social Issues Target also ran into controversy on social issues. After Walmart announced that it would raise minimum wages for its employees to $10 per hour in late 2014,

13

S. Ho, “In Surprise Move, Target Exits Canada and Takes $5.4 Billion Loss,” Reuters Business News,

January 15, 2015, at http://www.reuters.com/article/us-target-canada-idUSKBN0KO1HR20150115

See also “Brian Cornell Addresses Questions about Exiting Canada,” January 15, 2015, at A Bullseye View,

https://corporate.target.com/article/2015/01/qa-brian-cornell-target-exits-canada 14

D. Howard, “Why Target Sold Out to CVS”, Retail Dive, February 11, 2016, at

http://www.retaildive.com/news/why-target-sold-out-to-cvs/413432/

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Target was slow to respond and only followed after much public pressure. For a company that had taken pride in being a good and rewarding place to work, Target’s inaction was disappointing to many employees and customers. Insiders joked that the company’s true slogan was “Expect More (Work). Get (Paid) Less.”15 Then in 2015, Target announced that its bathroom facilities would be open to transgender customers and employees, in choosing the facility with their self-identified gender. This decision led to a huge public outcry from customers who were concerned about sexual predators and public safety.16 A petition to reverse the policy gathered 1.3 million signatures in two months, and conservative social groups urged a boycott of Target. Although Target initially defended the policy, it announced in early 2016 that it would spend $20 million to install separate facilities for transgender customers and employees. Regardless of perspective, it was one more issue with which Target had to contend. 2015 Results After all of the restructuring issues that clouded financial results in Cornell’s first year, the 2015 results showed a slight gain in revenue, renewed same-store sales growth, and better profitability. (See Tables 1 and 2).17 Cornell had clearly been able to cut costs and to pay down debt, but a soft economy caused Target to lower its forecasts, once again raising questions about the company’s strategy for the next five years. Returns on Target stock still lagged both the market and its retail peer group (see Table 5). The Future Cornell wanted to bring Target back to its historical strengths. He pushed a renewed emphasis on “signature categories” – style, baby, kids, and wellness.18 This also meant less emphasis on food. Target added a “first impressions” area at the front of stores to highlight new and choice items, rather than the dollar area. The company reorganized home areas to present merchandise in kitchen or office settings. Cornell pledged a better omnichannel experience, emphasizing shopping on demand, localization and personalization, and more simplicity in everything from store layouts to web search results.

But an article in Fortune commented, “The CEO is a whirl of ideas and initiatives, but most of them appear incremental and one or another of its rivals has some

15

http://gawker.com/targets-unofficial-slogan-expect-more-work-get-p-1579127992 16

See http://fortune.com/2016/05/18/target-transgender-bathroom-2/

17

Paul LaMonica, Target Misses the Mark,” CNN Money, May 18, 2016, at

http://money.cnn.com/2016/05/18/investing/target-earnings-outlook-retail-consumer-spending/ 18

Target annual report 2015, https://corporate.target.com/annual-reports/2015

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version of most of them.”19 In reply, “…Cornell acknowledges that “there’s nothing we’re talking about where someone’s going to say, ‘Wow, I’ve never seen that before.’ ” But, he says, “from a Target standpoint, they’ve never seen us bundle these key initiatives.” And, he argues, “they will add up to a very bold change for the brand and the business … If we execute the plan over the next few years, you will say, ‘Boy, Target made a huge transformation.’ ” He’s giving himself and his team three years to deliver.”20

19

P. Wahba, “Target Has a New CEO: Will He Re-Energize the Retailer?”, Fortune, March 1, 2015, at

http://fortune.com/target-new-ceo/ 20

P. Wahba, “Target Has a New CEO: Will He Re-Energize the Retailer?”, Fortune, March 1, 2015, at

http://fortune.com/target-new-ceo/

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TABLE 1

TARGET OPERATING AND FINANCIAL SUMMARY 2009-2015

2009 2010 2011 2012 2013 2014 2015

FINANCIAL RESULTS (in millions)

Sales 63,435$ 65,786$ 68,466$ 71,960$ 71,279$ 72,618$ 73,785$

Credit Card Revenues 1,922$ 1,604$ 1,399$ 1,341$ -$ -$ -$

Total Revenues 65,357$ 67,390$ 69,865$ 73,301$ 71,279$ 72,618$ 73,785$

Cost of Sales 44,062$ 45,725$ 47,860$ 50,568$ 50,039$ 51,278$ 51,997$

Gross Margin (merchandise) 19,373$ 20,061$ 20,606$ 21,392$ 21,240$ 21,340$ 21,788$

Operating Expenses 13,078$ 13,469$ 14,106$ 14,914$ 14,465$ 14,676$ 14,665$

Credit Card Expenses 1,521$ 860$ 446$ 467$ -$ -$ -$

Depreciation 2,023$ 2,084$ 2,131$ 2,142$ 1,996$ 2,129$ 2,213$

Earnings before Interest & taxes 4,673$ 5,252$ 5,322$ 5,371$ 5,170$ 4,535$ 5,530$

Net Interest Expense 801$ 757$ 866$ 762$ 1,049$ 882$ 607$

Earnings before Taxes 3,872$ 4,495$ 4,456$ 4,609$ 4,121$ 3,653$ 4,923$

Taxes 1,384$ 1,575$ 1,527$ 1,610$ 1,427$ 1,204$ 1,602$

Net Income Continuing Operations 2,488$ 2,920$ 3,049$ 3,315$ 2,694$ 2,449$ 3,321$

Discontinued Operations (net of tax) -$ -$ (120)$ (316)$ (723)$ (4,085)$ 42$

Net Income 2,488$ 2,920$ 2,929$ 2,999$ 2,694$ (1,636)$ 3,363$

PER SHARE:

Basic Earnings per Share 3.31$ 4.03$ 4.31$ 4.57$ 3.10$ (2.58)$ 5.35$

Diluted Earnings per Share 3.30$ 4.00$ 4.28$ 4.52$ 3.07$ (2.56)$ 5.31$

Cash Dividends Declared 0.67$ 0.92$ 1.15$ 1.38$ 1.65$ 1.99$ 2.20$

FINANCIAL POSITION: (in millions)

Inventories 7,179$ 7,596$ 7,918$ 7,903$ 8,766$ 8,282$ 8,601$

Total Assets 44,533$ 43,705$ 46,630$ 48,163$ 44,325$ 41,172$ 40,262$

Capital Expenditures 1,729$ 2,129$ 4,368$ 3,277$ 1,886$ 1,786$ 1,438$

Long term Debt 16,814$ 15,726$ 17,483$ 17,648$ 12,494$ 12,725$ 12,760$

Total Equity 15,347$ 15,487$ 15,821$ 16,558$ 16,231$ 13,997$ 12,957$

Share Repurchases 423$ 2,452$ 1,842$ 1,875$ 1,461$ -$ 3,438$

Total Dividends 496$ 609$ 750$ 869$ 1,006$ 1,205$ 1,362$

FINANCIAL RATIOS:

Comparable-store Sales Growth (%) -2.5% 2.1% 3.0% 2.7% -0.4% 1.3% 2.1%

Gross Margin (% sales) 30.5% 30.5% 30.1% 29.7% 29.8% 29.4% 29.5%

Operating Expenses (% sales) 20.6% 20.5% 20.6% 20.7% 20.3% 20.2% 19.9%

EBIT Margin (% sales) 7.4% 8.0% 7.8% 7.5% 7.3% 6.2% 7.5%

Net Margin (% sales) 3.8% 4.3% 4.2% 4.1% 3.8% -2.3% 4.6%

OTHER:

Common Shares Outstanding (millions) 744.6 704 669.3 645.3 632.9 640.2 602.2

Cash Flow Operations 5,881$ 5,271$ 5,434$ 5,325$ 7,519$ 5,131$ 5,140$

Revenues per Square Foot 287$ 290$ 294$ 299$ 298$ 302$ 307$

Retail Square Feet (thousands) 231,952 233,618 235,721 237,847 240,054 239,963 239,539

Square Footage Growth 4.2% 0.7% 0.9% 0.9% 0.0% 0.9% -0.2%

Total Number Stores: 1,740 1,750 1,763 1,778 1,793 1,790 1,792

General merchandise 1,381 1,037 637 391 NA NA NA

Expanded Food Assortment 108 462 875 1,131 NA NA NA

SuperTarget 251 251 251 251 NA NA NA

CityTarget 5 NA NA NA

Number Distribution Centers 37 37 37 37 37 38 40

Total Employees 351,000 355,000 365,000 361,000 366,000 347,000 341,000

Source: Target annual reports and 10-Ks.

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TABLE 2

TARGET FINANCIAL AND PRODUCTIVITY RATIOS 2009-2015

Strategic Profit Model 2009 2010 2011 2012 2013 2014 2015

Return on Sales 3.8% 4.3% 4.2% 4.1% 3.8% -2.3% 4.6%

Asset Turnover 1.47 1.54 1.50 1.52 1.61 1.76 1.83

Return on Assets 5.6% 6.7% 6.3% 6.2% 6.1% -4.0% 8.4%

Leverage 2.90 2.82 2.95 2.91 2.73 2.94 3.11

Return on Equity 16.2% 18.9% 18.5% 18.1% 16.6% -11.7% 26.0%

Productivity Metrics:

Gross Margin % 30.5% 30.5% 30.1% 29.7% 29.8% 29.4% 29.5%

Sales per Square Foot 287$ 290$ 294$ 299$ 298$ 302$ 307$

Sales:Stock Ratio 8.84 8.66 8.65 9.11 8.13 8.77 8.58

Inventory Turnover 6.14 6.02 6.04 6.40 5.71 6.19 6.05

Merchandise Intensity 30.95$ 32.51$ 33.59$ 33.23$ 36.52$ 34.51$ 35.91$

Service Intensity 661 658 646 659 656 692 702

Sales per Employee 180,726$ 185,313$ 187,578$ 199,335$ 194,751$ 209,274$ 216,378$

GMROI 2.70$ 2.64$ 2.60$ 2.71$ 2.42$ 2.58$ 2.53$

GMROF 83.52$ 85.87$ 87.42$ 89.94$ 88.48$ 88.93$ 90.96$

GMROL 55,194$ 56,510$ 56,455$ 59,258$ 58,033$ 61,499$ 63,894$

OEOI 2.35$ 2.26$ 2.23$ 2.33$ 2.12$ 2.77$ 2.14$

OEOF 72.80$ 73.37$ 74.99$ 77.33$ 77.26$ 95.75$ 76.92$

OEOL 48,105$ 48,285$ 48,430$ 50,950$ 50,672$ 66,213$ 54,032$

NMROI 0.35$ 0.38$ 0.37$ 0.38$ 0.31$ (0.20)$ 0.39$

NMROF 10.73$ 12.50$ 12.43$ 12.61$ 11.22$ (6.82)$ 14.04$

NMROL 7,088$ 8,225$ 8,025$ 8,307$ 7,361$ (4,715)$ 9,862$

Source: Author calculations based on Target annual reports and 10-Ks.

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TABLE 3

WALMART OPERATING AND FINANCIAL SUMMARY 2009-2015

2009 2010 2011 2012 2013 2014 2015

FINANCIAL RESULTS (in millions)

Sales 405,132$ 418,952$ 446,509$ 468,651$ 476,294$ 485,651$ 482,130$

Cost of Sales 304,254$ 315,052$ 337,114$ 354,769$ 360,555$ 367,638$ 363,526$

Gross Margin 100,878$ 103,900$ 109,395$ 113,882$ 115,739$ 118,013$ 118,604$

Operating Expenses 79,811$ 81,277$ 85,730$ 89,044$ 91,925$ 94,216$ 97,872$

Depreciation 7,157$ 7,641$ 8,130$ 8,501$ 8,870$ 9,173$ 9,454$

Earnings before Interest & taxes 24,002$ 25,542$ 26,491$ 27,725$ 26,872$ 27,147$ 24,105$

Net Interest Expense 2,141$ 2,262$ 2,346$ 2,163$ 2,216$ 2,348$ 2,467$

Taxes 7,389$ 6,984$ 5,899$ 7,304$ 8,641$ 8,169$ 8,111$

Net Income 14,449$ 15,355$ 15,734$ 16,963$ 15,918$ 16,182$ 14,694$

PER SHARE:

Diluted Earnings per Share 3.73$ 4.18$ 4.53$ 5.01$ 4.85$ 4.99$ 4.57$

Cash Dividends Declared 1.09$ 1.21$ 1.46$ 1.59$ 1.88$ 1.92$ 1.96$

FINANCIAL POSITION: (in millions)

Inventories 32,713$ 36,437$ 40,714$ 43,803$ 44,858$ 45,141$ 44,469$

Total Assets 170,407$ 180,782$ 193,120$ 202,910$ 204,541$ 203,490$ 199,581$

Capital Expenditures 12,184$ 12,699$ 13,510$ 12,898$ 13,115$ 12,174$ 11,477$

Long term Debt 36,401$ 43,842$ 46,818$ 41,240$ 44,368$ 43,495$ 44,030$

Total Equity 70,468$ 68,542$ 71,315$ 76,343$ 76,255$ 81,394$ 80,546$

Share Repurchases 7,276$ 14,776$ 6,298$ 7,600$ 6,683$ 1,015$ 4,112$

Total Dividends 4,217$ 4,437$ 5,048$ 5,361$ 6,139$ 6,185$ 6,294$

FINANCIAL RATIOS:

Comparable-store Sales Growth US (%)* -0.8% -0.6% 0.2% 1.8% -0.6% 0.5% 1.2%

Gross Margin (% sales) 24.9% 24.8% 24.5% 24.3% 24.3% 24.3% 24.6%

Operating Expenses (% sales) 19.7% 19.4% 19.2% 19.0% 19.3% 19.4% 20.3%

Operating Profit Margin (% sales) 5.9% 6.1% 5.9% 5.9% 5.6% 5.6% 5.0%

Net Margin (% sales) 3.6% 3.7% 3.5% 3.6% 3.3% 3.3% 3.0%

OTHER:

Common Shares Outstanding (billions) 3,786 3,516 3,418 3,314 3,283 3,243 3,217

Cash Flow Operations 26,249$ 23,643$ 24,255$ 25,591$ 23,257$ 28,564$ 27,389$

US Sales (billions) 258.2$ 260.3$ 264.3$ 274.5$ 279.4$ 288.0$ 298.4$

Revenues per Square Foot (US) 426$ 422$ 422$ 428$ 424$ 423$ 433$

Retail Square Feet US (thousands) 605,852 617,067 626,686 640,733 659,132 680,112 689,647

Square Footage Growth (US) 2.3% 1.9% 1.6% 2.2% 2.9% 3.2% 1.4%

Total Number Stores: 8,459 8,970 9,766 10,408 10,942 11,453 11,528

Walmart US 3,755 3,804 3,868 4,005 4,203 4,516 4,574

Walmart International 4,099 4,557 5,287 5,783 6,107 6,290 6,299

Sam's Clubs 605 609 611 620 632 647 655

Total Employees (millions) 2.1 2.1 2.2 2.2 2.3 2.3 2.2

Source: Walmart annual reports and 10-Ks.

*Includes both Walmart and Sam's Clubs

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TABLE 4

TARGET SALES MIX BY PRODUCT CATEGORY

2009 2010 2011 2012 2013 2014 2015

Household Essentials 23% 24% 25% 25% 25% 25% 26%

Hardlines 22% 20% 19% 18% 18% 18% 17%

Apparel/Accessories 20% 20% 19% 19% 19% 19% 19%

Home Furnishings/Décor 19% 19% 18% 18% 21% 21% 17%

Food/Pet 16% 17% 19% 20% 17% 17% 21%

Source: Target annual reports and 10-Ks.

TABLE 5

COMPARISON OF FIVE YEAR TOTAL RETURN, 2011-2016

Jan 29 Jan 28 Feb 2 Feb 1 Jan 31 Jan 30

2011 2012 2013 2014 2015 2016

Target 100.00$ 94.08$ 117.57$ 111.51$ 149.56$ 151.35$

S&P 500 Index 100.00$ 105.33$ 123.87$ 149.02$ 170.22$ 169.09$

Peer Group* 100.00$ 111.14$ 141.62$ 171.29$ 212.31$ 231.19$

COMPARISON OF FIVE YEAR TOTAL RETURN, 2011-2016

*Peer Group is a market capitalizaton weighted index of 18 large and meaningful competitors of Target:

Amazon, Best Buy, Costco, CVS Health, Dollar General, Gap, Home Depot, Kohl's, Kroger, Lowe's,

Macy's, Publix, Rite Aid, Sears, Staples, TJX, Walgreens Boots Alliance, and Wal-Mart.

Source: Target Annual Report, 2015.

$-

$50.00

$100.00

$150.00

$200.00

$250.00

2011 2012 2013 2014 2015 2016

Target

S&P 500 Index

Peer Group*