Bob Moug, Reba Burton, Jacob Torres

ACCOUNTING 202 Financial ratios

TARGET/COSTCO FINANCIAL ANALYSIS

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TABLE OF CONTENTS

Target Co. and Costco wholesale Co ............................................................................................................. 1

1.1 Overview (Target versus Costco financial summary)..................................................................... 1

1.2 Financial Graphics .......................................................................................................................... 7

1.3 Financial Statements...................................................................................................................... 9

1.4 Financial ratios ............................................................................................................................. 16

1.5 Ratio detailed Analysis ................................................................................................................. 17

1.5.1 Liquidity and Efficiency ........................................................................................................ 17

1.5.2 Solvency ............................................................................................................................... 19

1.5.3 Profitability .......................................................................................................................... 20

1.5.4 Market Prospects ................................................................................................................. 22

1.6 Conclusion .................................................................................................................................... 23

Bibliography ................................................................................................................................................. 28

Financial Analysis

TARGET CO. AND COSTCO WHOLESALE CO

1.1 OVERVIEW (TARGET VERSUS COSTCO FINANCIAL SUMMARY)

Our financial analysis will cover two Fortune 500 companies Target Corporation and

Costco. We will start out this analysis by giving a brief history of both companies and

comparing both companies against each other using five ratios; current, quick, debt-to-equity

and dividend yield. A visual graphic representation of these five ratios will be at the end of the

comparison narrative. Then we will have an overview of 12 additional ratios relevant to the

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liquidity, solvency, profitability and market prospects of each company and how they compare

against each other and the industry. Finally we will conclude this analysis with our opinion of

which company is more favorable to invest in.

“Target Corporation was incorporated in Minnesota in 1902.” (TGT Annual Report pg. 2)

Target likes to refer to their customers as “guests” and take pride in offering their guests a wide

range of options for buying their products.

“Their general merchandise stores offer an edited food assortment, including

perishables, dry grocery, dairy and frozen items while their Super Stores offer a full line

of food items comparable to traditional supermarkets. Their new urban format stores,

City Target and TargetExpress, offer edited general merchandise and food assortments.

Their digital channels include a wide assortment of general merchandise, including many

items you can find in their stores, along with a complimentary assortment such as

additional sizes and colors only sold online” (TGT Annual Report pg. 2).

In 2013 the Target Corporation suffered a massive data breach. “Up to 40 million

shoppers had their credit card data stolen during the breach, while up to 70 million had

personal information such as addresses and phone numbers stolen.” (Washington Post)

However, in Target’s 2014 Annual report they state that, “Until the Data Breach in the fourth

quarter of 2013, all incidents we experienced were insignificant. The Data Breach we

experienced was significant and went undetected for several weeks. Both we and our vendors

have experienced data security incidents other than the Data Breach; however, to date these

other incidents have not been material to our consolidated financial statements.” (TGT Annual

Report pg. 7) In spite of the aforementioned data breach the Target Corporation has continued

to grow and improve in their market and giving their guests the safe experience they deserve

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both in their stores and online by creating a new position in their company, a Chief Information

Security Officer.

Prior to January 2015 Target exited their Canadian Segment. Target’s annual report also

boats that “Virtually all of their revenues from continuing operations are generated within the

United States and the vast majority of their long lived assets re located within the United

States.” (TGT Annual Report pg. 4) Target owns and operates a total of 1,790 U.S stores as of

their January 31, 2015 Annual report. Of those stores 1,536 of those are owned by Target, 99

are leased and 155 are owned buildings on leased land.

“Costco Wholesale Corporation and its subsidiaries began operations in 1983 in Seattle

Washington. In October 1993, Costco merged with the Price Company, which had

pioneered the membership warehouse concept, to form Price/Costco, Inc. a Delaware

Corporation. In January 1997, after the spin-off of most of its non-warehouse assets to

Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On

August 30, 1999, the Company reincorporated from Delaware to Washington and

changed its name to Costco Wholesale Corporation.

As of December 2014, the Company operated a chain of 671 warehouses in 43 states,

Washington, D.C., and Puerto Rico (474) locations, nine Canadian Provinces (88)

locations. Mexico (34 locations), the United Kingdom (26) locations, Japan (20

locations), Korea (11 locations), Taiwan (10 locations through a 55%-owned subsidiary),

Australia (seven locations) and Spain (one location). The Company’s online business

operates websites in the U.S., Canada, U.K. and Mexico.” (COST Annual Report under

the Company)

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Now that we have commenced with a brief overview of each company how do they

compare to each other. We will begin this company comparison with five ratios; current, quick,

debt-to-equity and their dividend yield. There will be a visual representation of these figures

after the narrative. After calculating and reviewing the current ratio analysis of both Target and

Costco we see that Targets ratio is 1.2 to 1 while Costco has a ratio of .99 to 1. Even though

Costco’s ratio is smaller it appears that both companies have enough working capital to meet

their current obligations. The current ratio however, is not the only way to determine whether

Target or Costco can payback their current obligations. When you look at the quick ratio, also

known as the acid test ratio, which measures immediate liquidity of both companies; Target’s

ratio is 0.19 while Costco has a ratio of .48. Meaning that Costco for instance has $0.48 of

liquid assets to cover each $1 of current liabilities and Target has $0.19 of liquid assets to cover

each $1 of current liabilities. By looking at just these two ratios Costco seems more able to

meet their short term obligations. Both of these ratios attest to the liquidity of each company.

Now liquidity is not the only important factor when analyzing a company we must also look at

the solvency of each company. We must measure their ability to generate future revenues and

meet long-term obligations. Here, we turn to the debt-to-equity ratio this ratio measures the

financial leverage of Target and Costco by indicating what portion of debt and equity they are

using to finance their assets. Target’s debt-to-equity ratio is 1.96 while Costco’s is 2.22.

Target’s lower number suggests that there is a low risked for creditors and strong, long-term,

financial security for the company. However, Costco’s 2.22 debt-to-equity ratio while hire than

Target shows a solid performance in this area for the company as well. So far both companies

seem to be comparing evenly with each other. Another factor that should be considered in a

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comparative financial analysis of companies is their profitability. How can you compare Target

and Costco’s ability to provide financial rewards sufficient to attract and retain financing? We

can look at their return on total assets ratio (ROTA). We have conducted the ROTA to find that

Target’s ratio is 2.8% and Costco’s ROTA is 3.34%. These percentages tell us that Costco was

able manage their assets more efficiently and produce a profit over the analyzed period. “A

higher ratio is more favorable to investors because it shows that the company is more

effectively managing its assets to produce greater amounts of net income. A positive ROTA

ratio usually indicates an upward profit trend as well.” (Myaccountingcourse.com ROTA) Our

final analysis for the beginning comparisons for this report will cover each company’s market

prospects by “measuring the amount of cash dividends distributed to common shareholders

relative to the market value per share” using the dividend yield ratio for Target and Costco. “A

company with a high dividend yield pays its investors a large dividend compared to the fair

market value of the stock. This means the investors are getting highly compensated for their

investments compared with lower dividend yielding stocks. A high or low dividend yield is

relative to the industry of the company; so even a small dividend might produce a high dividend

yield ratio. (Myaccountingcourse.com DYR). Target’s dividend yield is 0.65% while Costco’s

dividend yield is 0.22%.

According to Target’s 2014 Annual report they have “paid dividends every quarter since

their 1967 initial public offering, and it is their intent to continue to do so in the future. In this

analyzed period Target paid dividends totaling $1,205 million and declared dividends totaling

$1,271 million for 2014.” (TGT Annual Report pg. 22)

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When we take a look at Costco’s annual report they state that “their Board of Directors

increased their quarterly cash dividend from $0.31 to $0.335 per share. Their cash dividends

paid out in 2014 totaled $584 million. They also presently expect to pay dividends on a

quarterly basis.” (COST Annual Report pgs. 2, 22 and 32)

Below you will find the visual graphics of the ratios previously discussed.

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1.2 FINANCIAL GRAPHICS Target Graphics

8

Costco Graphic

9

1.3 FINANCIAL STATEMENTS

Target financial statements

10

11

12

Costco Wholesale financial statements

13

14

15

16

1.4 FINANCIAL RATIOS Target Costco Wholesale

Liquidity Ratios 2015 2015

Current ratio 1.20 0.99

Quick ratio 0.19 0.48

Accounts receivable turnover 47.78 33.60

Inventory turnover 6.01 5.56

Days’ Sales in Inventory 60.75 65.67

Total asset turnover 1.69 1.60

Solvency

Debt ratio 0.66 0.69

Equity ratio 0.34 0.31

Debt to equity ratio 1.96 2.22

Times Interest Earned 4.14 31.11

Profitability

Profit Margin after tax 1.66% 2.09%

Gross margin 29% 13%

Return on total assets 2.80% 3.34%

Return on common stockholders’ equity 8% 10%

Book Value per common share 21.86 23.32

Market Prospects

Price-earnings ratio 121.27 134.67

Dividend yield 0.65% 0.22%

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1.5 RATIO DETAILED ANALYSIS

1.5.1 Liquidity and Efficiency

Detailed Ratio Analysis

Activity Ratios

Activity ratios delivers a useful gauge of a company’s operations by determining the average number of

days it takes to collect on customers’ accounts and the average number of days to pay vendors.

Accounts receivable turnover

Credit sales for the year/ the average accounts receivable during the year

This ratio measures the number of times receivables turn over in a year and reveals how

successful a company is in collecting its outstanding receivables. A higher number is good for

the company because it indicates a shorter time between sales and cash collection.

The accounts receivable turnover for Target 38.83, which

compared to Costco of 33.60. Suggest that Target takes

38.83 times collecting cash from sales through the year and

Costco take 33.6 times it takes to collect cash from sale.

Both companies have an efficiency in collecting its

receivables

Inventory Turnover

Cost of goods sold for the year/ the average inventory during the year

This ratio measure the cost in inventory to the cost of goods sold and compare the quantity of

each item in inventory with the recent sales of each item. The higher the inventory turnover

ratio, the better, because it means that a company is able to fill customers’ orders on time.

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The inventory turnover for Target is 6.01 times, which

compared to Costco of 5.56 times. Suggests that Target is

able to turnover inventory with a small investments than

Costco. Also, the average Discount Variety Industry inventory

turnover is 3.3. Therefore both companies could either have

strong sales or ineffective buying

Days’ Sales in Inventory

365 days/ the inventory ratio

This ratio measures the average number of days that it took to sell the average amount of inventory

held during the specified one-year period. In other words, how many days it takes to sell the

merchandise held in inventory.

The days’ sales in inventory ratio for Target is 60 and 3/4 days,

which compared to Costco of 65 and 1/3 days. This indicates

that Target have less time to turn inventory into sales than

Costco. The Discount Variety store average is 75 days, this

indicates that both companies are doing fairly well among

competitors

Total Asset Turnover

Total revenues for the year / the average total assets during the year

This ratio measures the relationship of net sales for a specific year to the average amount of total assets

during the current 12 months. Meaning, how efficient is the company using its asset to generate sales or

income to the company. The higher the ratio is ideal since it means the company is generating more

revenues per dollar of assets.

Costco

Target

50.00

60.00

70.00

65.67

60.75

RA

TIO

SC

OR

E

Days' Sales in Inventory

Costco Target

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The total asset turnover for Target is 1.69, which compared to

Costco 1.60. Indicates that Target is operating efficiently than

Costco. The average Discount Variety Industry ratio is 1.3.This

indicates that both companies is favorable among other

competitors of operating efficiently.

1.5.2 Solvency

Solvency ratios

Solvency ratios measure a company’s ability to cover long-term obligations and the company

long-run financial viability. In other words, can both companies be able to continue in business

in the long run to meet its long-term obligations?

Debt Ratio

Total liabilities/ total assets

This ratio measures the company’s ability to pay of its liabilities with its total assets. In other

words, how many assets the company must sell in order to pay off all of its liabilities. Any ratio

under 1 is consider to be often low risk for lenders. A favorable debt ratio will be 0.5 since it

means the company has twice as many assets as liabilities.

The debt ratio for Target is 0.66 which compared to Costco

of 0.69. Suggests that both companies are consider to be

less risky for lenders and to continue to meet liabilities as

Target low ratio 0.66 is more favorable than Costco ratio

of 0.69.

Equity Ratio

Total Owners equity/ Total assets

This ratio measures the amount of assets that are supported by owners’ investments,

comparing the total equity in the company to the total assets. The equity ratio shows if the

company can have remaining assets after liabilities is paid off and how leveraged the company

Costco

Target

1.40

1.60

1.80

1.60

1.69

RA

TIO

SC

OR

E

Total asset turnover

Costco Target

Costco

Target

0.60

0.65

0.70

0.69

0.66

RA

TIO

SC

OR

E

Debt Ratio

Costco Target

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is with debt. A high equity ratio is great for the company since its shows potential growth for

shareholders that the company is worth investing and tell creditors that the company is more

sustainable and less risky for future loans

The Equity ratio for Target is 34 percent, which

compared to Costco of 31 percent. This ratio indicates

that the both companies is funding less assets and more

debt. Target is the more favorable company since 34

percent of assets are earned by shareholders and only

31 percent of Costco assets are owned by shareholders.

Times Interest Earned

Earnings before Interest and Taxes/Interest Expense

This ratio measures the company’s ability to meet interest payments. A higher number is

preferred suggesting a company can easily meet interest obligations and can take on additional

debt. A ratio less than 1 means the company is likely to have problems paying interest on its

borrowings.

The times interest earned ratio for Target is 4.14 times,

which compared to Costco of 31.11times. Indicates that

the both companies is sufficient on paying interest on its

borrowings. Costco has a high ratio which may result of

the fact the company lack of debt is paying too much of

its earnings on debt that could have been spend on

other projects.

1.5.3 Profitability

Profitability ratios

Profitability ratios measure a company’s ability to use its assets efficiently to produce profits. In

other words, can both companies Target and Costco Wholesale be able to generate an

acceptable return on invested capital?

Costco

Target

0.250.300.35

1

0.31

0.34

RA

TIO

SC

OR

E

Equity Ratio

Costco Target

Costco

Target

0.00

50.00

31.114.14

RA

TIO

SC

OR

E

Times Interest Earned

Costco Target

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Profit Margin

Net income / net sales

This ratio is a percentage that measures how much out of every dollar of sales a company

actually keeps in its earnings. A high profit margin indicates the company is more profitable and

has better control over its costs compared to its competitors.

The profit margin of Target is 3.37%, which

compared to Costco of 2.09%. Suggest that Target

is more profitable and compared the Industry

average of 2.7%. Target ha better control over its

costs compared to other competitors

Gross Margin

Gross profit/Net sales

This ratio measures the percent of sales revenues that the company retains incuring the cost of goods

and services sold by a company. A high percentage is ideal for a company, since it will increase the dollar

of sales to service its other costs and obligations.Also a high ratio indicates the company has more

money to pay operating expenses like wages, utlities and rent

The gross margin of Target is 29%, which compared to Costco

of 13% . Indicates that Target has a stronger ratio than the

average discount variety Industry of 24.8%.Target is more

effiecient in selling its inventory and Costco is unfavorable

compared to its competitors.

Return on common stockholders’ equity

Net income after taxes for the year / the average stockholders’ equity during the year

This ratio measures the success of a company in generating income for the common stockholders

equity.A high ratio indicates high proitability and strong financial postion of the company and can

convert potential investors into acutal common stockholders

Costco

Target

0%

50%

13%29%

RA

TIO

SC

OR

E

Gross Margin

Costco Target

Costco

Target

0.00%

5.00%2.09%

3.37%

RA

TIO

SC

OR

E

Profit Margin

Costco Target

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The return on equity of Target is 8%, which compared to Costco of

10%. Indicates that both companies is a not really using investor

money effectively comared to avergae industry ratio return on

equity of 24%.Costco is look more favorable than target but an

average of 5 to 10 years gives a better prospective of the growth of

the company.

Book value per common share

Amount of stockholders’ equity / the number of shares of common stock outstanding

This ratio measures investors evel of safety associated with each individual share after all debts are paid

accordingly or in other words liquidating assets.

Target book value per common share is 21.86, which compared to

Costco 23.32. Indicates that Targets is overvalued from the market

share of 88 to 21.86. Costco is consider overvalued of 138.32 to

23.32. Investors is expected to received the book value when the

companies liquidate their assets.

1.5.4 Market Prospects

Market Prospects

Market measure are useful for analyzing corporations with publicly traded stock .In other

words, can both companies Target and Costco Wholesale be able to continue to provide

positive return to stockholders?

Price-earnings ratio

Market price per common share / earnings per share

This ratio is a valuation of a company’s current share price compared to its share earnings. A high ratio

around 20 indicates the company is making money for investors. A low ratio of 15 or less is the company

is losing money. (MyaccountingCourse)

CostcoTarget

20.00

25.00

23.32

21.86

RA

TIO

SC

OR

E

Book value per common share

Costco Target

CostcoTarget

0%

10%

10%8%

RA

TIO

SC

OR

E

Return on stockholders' equity

Costco Target

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Target valuation is 121.27, which compared to Costco of

134.67.This ratio indicates both companies are valuate as

profitable making money for investors. Costco is the most

favorable of its valuation as a higher growth in the future is

expected.

1.6 CONCLUSION

Summary of Financial Performance for Target versus Costco

Both Target and Costco have financial statistics that show why they are still large competitors

in the retail store industry. Although their retail stores differ in some ways, Target keeps a

larger variety of inventory in store immediately available for purchase, Costco is more of a

warehouse type retailer with a lot of product available online and select inventory at the retail

locations. The financial statements for 2014 show very similar patterns in many areas. After

reviewing both companies’ financial statements and comparing performance, the following will

summarize the key points.

Costco

Target

100.00

150.00

134.67

121.27

RA

TIO

SC

OR

E

Price-earning ratio

Costco Target

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Liquidity

Current ratio and acid test ratio

Average current ratio for Target was 1.2 and acid test ratio was 0.19. These averages are

larger in the current ratio aspect but not as large in the acid test ratio in comparison with

Costco current ratio of 0.99 and acid ratio test was 0.48, which reflects Targets ability to pay

short term debt a little better than Costco but in the immediate short term debt paying ability,

Costco had a larger average. A current ratio score of less than one is not a preferred current

ratio score; however, Costco had a gross income increase of 8% between 2013 and 2014 which

should not raise concern about the lower ratio for Costco.

Collection

Target has a better ability to collect customer payments with a ratio of 47.78% in

comparison to Costco who holds a 33.6% ratio for accounts receivable turnover. This higher

percentage for Target reduces the liability for risky accounts receivable. With the faster

turnover, this allows Target to pay for its inventory outright and keep their short term debt

amounts minimal in comparison to Costco who takes longer to collect on their accounts and in

turn holds short term debt longer costing them additional interest fees and decreasing their

working capital.

Days to sell Inventory

Costco’s inventory holding period was 5 days longer than Target which is not substantial, but

if that inventory is financed there can be fees that come with the retention. Moving inventory

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efficiently and effectively reduces the possibility of increased capital financing, again allowing

Target to have more working capital.

Solvency

Debt to Equity Ratio

Costco held a higher ratio of debt to equity at 2.22% in comparison to Target who has an

average ratio of 1.96%. This shows that both companies have equal debt financing. Having debt

from creditors can be harmful to a company in many ways, liability of debt being the largest

factor, interest accrual being another, with an average ratio that these two companies have,

there may be reason to hold a certain amount of debt to creditors, but if equity financing is

involved in lieu of creditor financing, there would become more shareholders thereby

decreasing earnings per share of the shareholders currently in the system.

Profitability

Profit margin ratio

Target holds a smaller profit margin after tax ratio of 1.66 than that of Costco which is at

2.09. The larger profit margin ratio by Costco shows how the company gets the most profit

possible from its total revenue. One of the most important ratio aspects is return on assets.

This reflects a better ability of a company to efficiently use its assets and create higher earnings

from products sold per company asset. The return on total assets for Target is 2.8% which is

smaller than Costco which has a return ratio of 3.34%, reflecting more efficiency in utilizing

their assets and creating higher earnings.

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Return on equity and assets

Return on equity is an important ratio for potential investors as this reflects the return

investors will receive on their investment. Target currently has an 8% return on equity and

although this is a good return, Costco currently has a 10% return rate which will be more

attractive to investors due to the larger return. The larger return on Costco equity is a reflection

of a more efficient operation by management and the employees which creates increases in

revenue.

Market Measures

Price to earnings ratio and dividend yield

The price to earnings ratio for Target is 121.27 which shows that the investors are less

interest in of their stock, compared to Costco earnings ratio of 134.67 which reflects investors

having higher expectations of the company performance levels and are willing to pay higher

prices for their stocks for an expected increase in their return on equity.

Dividend yield ratios are different between the two companies with a larger yield for Target

who currently has a 0.65% yield and Costco holds a 0.22%. This ratio represents the amount of

earnings generated for every dollar invested.

Summary of Financial Performance

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After reviewing both companies’ financial statements and discussing their performance with

my team members, there are some areas where Target shows better ratios than Costco in

financial management, but in further review the decision to recommend Costco for investment

purposes is a better choice due to higher return on Equity rates to stockholders and less overall

liability. Review of both company’s assets has revealed Target has several discontinued stores

in their inventory, which is not a sign of strength in sales. Costco on the other hand has shown

nothing but growth and stability during the same timeline, which would be an indicator the

market, was there for customers. Costco continues to show marked improvement in sales with

an uprising trend continuously over the past five years. My recommendation to Target would

be to operate more efficiently and effectively, paying close attention to product inventory and

demand markets to provide the best possible service to consumers available. Increasing their

security system to keep customers personal information protected should be a huge concern

for them considering they have had a few breaches in their system which reflects on their

financial reports as consumers lost confidence and trust in their security, gaining the customers

trust may help sales for Target.

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