Target Corporation

Apuada, Ma. Sophia

Arroyo, Kaira Nicole
Dolleno, Abbie Teh
Gonzaga, Aubrey Joy
Sysiangco, Ayber Claris
Vinson, Krisha Marie

February 15, 2018

 Executive Summary

The Dayton Company opened the doors of the first Target store in 1962, in Roseville

Minnesota. By 2005, Target had become a major retailing powerhouse with 52.6 billion dollars

in revenues from 1,397 stores in 47 states. Its slogan is “Expect More. Pay Less.” The main

competitors of Target in the retail industry are Wal-Mart and Costco. In contrast to Wal-Mart’s

focus on low prices. Target’s strategy was to consider the customer’s shopping experience as a

whole. The Capital Expenditure Committee was composed of a team of top executives that met

monthly to review all capital project requests (CPRs) in excess of 100,000 dollars. CPRs were

either approved by the CEC, or in the case of projects larger than 50 million dollars, required

approval from the board of directors. Project proposals varied widely and included remodeling,

relocating, rebuilding, and closing an existing store to building a new store. A typical meeting

involved the review of 10 to 15 CPRs. All of the proposals were considered economically

attractive as any CPRs with questionable economics were normally rejected at the lower levels of

review. In the rare case that a project with negative NPV reached the CEC the committee was

asked to consider the project in the light of its strategic importance to the company.

Doug Scovanner the CFO of Target upon reviewing the 10 CPRs during the end of 2006

believed that 5 of the projects representing about 200 million dollars in requested capital would

demand the greater part of the CEC meeting. These 5 CPRs have positive NPVs, four of which

included new store openings (Gopher Place, Whalen Court, The Barn and Goldie’s Suqare) and

one remodeling of an existing store into a SuperTarget format.

 Statement of the Problem

Which among the five proposed projects that have positive NPVs should the Capital

Expenditure Committee choose for Target’s future store growth and capital expenditure plans?

Areas of Consideration

Target has set a goal of opening at least 100 new stores every year. In order to achieve

this, the company needs to identify suitable locations which can provide steady cash flows. The

company has a team of real estate managers who are on a constant search mode to find the most

suitable and viable opportunities which, once captured, are presented for approval to the CEC.

These decisions are very crucial to the company because of their impact to its future growth and

cash flows. Hence, real estate managers’ incentives are also linked to the success of the approved

projects which can easily be tracked by reviewing actual versus forecast.

The people responsible in assessing and approving the proposed projects are the CFO,

President, and CEO, who comprise the Approval Committee. With the organization’s objective

and goal in mind, the committee meets every month to have sufficient time for evaluating project

proposals. In forming the decision, the committee should not only consider the projects’ Net

Present Value (NPV), but also their Internal Rate of Return (IRR), size of investment, store

sensitivity, customer demographics, and brand awareness impact. Through this tedious process

of assessment, it ensures that the CEO and CFO are on top of the proposals submitted and are

closely in track of performance of newly opened stores in order to achieve the objective of

opening 100 stores every year.

 Alternative Courses of Action and Analysis
Financial Analysis
Net Present Value and Internal Rate of Return
Net Present Value Internal Rate Return

Project Name NPV Ranking Project Name NPV Ranking

Gopher Place $ 16,800.00 3 Gopher Place 12.30% 2
Whalen Court 25,900.00 1 Whalen Court 9.80% 4
The Barn 20,500.00 2 The Barn 16.40% 1
Goldie's Square 300.00 5 Goldie's Square 8.10% 5
Stadium 15,700.00 4 Stadium Remodel 10.80% 3
Remodel

Sensitivity of Net Present Value to 10% Decline in Sales

Project Name NPV 10% Decline in NPV less % Change in Ranking
Sales Decline NPV
Gopher Place 16,800.00 (4,722.00) 12,078.00 -28.11% 2
Whalen Court 25,900.00 (16,611.00) 9,289.00 -64.14% 4
The Barn 20,500.00 (4,066.00) 16,434.00 -19.83% 1
Goldie's Square 300.00 (4,073.00) (3,773.00) -1357.67% 5
Stadium Remodel 15,700.00 (7,854.00) 7,846.00 -50.03% 3

Overall Ranking
Project Name NPV IRR Ranking % Change in Average Overall
Ranking NPV Ranking
Gopher Place 3 2 2 2.33 2
Whalen Court 1 4 4 3 3
The Barn 2 s1 1 1.33 1
Goldie’s Square 5 5 5 5 5
Stadium Remodel 4 3 3 3.33 4

Demographic Analysis
Project Name Population Ranking
Gopher Place 70,000 4
Whalen Court 632,000 1
The Barn 151,000 3
Goldie's Square 222,000 2
Stadium Remodel N/A 5

Project Name Population Increase Ranking

Gopher Place 27% 1
Whalen Court 3% 3
The Barn 3% 3
Goldie's Square 16% 2
Stadium Remodel N/A 5

Project Name Median Income Ranking

Gopher Place 56,400.00 2
Whalen Court 48,500.00 4
The Barn 38,200.00 5
Goldie's Square 56,000.00 3
Stadium Remodel 65,931.00 1

Project Name #HH +$50,000 (000's) Ranking

Gopher Place 11 4
Whalen Court 143 1
The Barn N/A 5
Goldie's Square 41 2
Stadium Remodel 29 3

Project Name % Adults 4+ Yrs. Ranking

College, 2005
Gopher Place 12% 5
Whalen Court 45% 1
The Barn 17% 4
Goldie's Square 24% 3
Stadium Remodel 42% 2
Overall Ranking

Project Name Population Population Median #HH % Adults Overall

Increase Income +$50,000 4+ Yrs. Rank
(000's) College,
2005
Gopher Place 4 1 2 4 5 3
Whalen Court 1 3 4 1 1 1
The Barn 3 3 5 5 4 5
Goldie’s 2 2 3 2 3 2
Square
Stadium 5 5 1 3 2 3
Remodel

Gopher Place

This project was a request for $23.0 million to build a P04 store scheduled to open in

October, 2007. The prototype NPV would be achieved with sales of 5.3% below the R&P

forecast level. As discussed earlier, the NPV and IRR are not the only attributes for coming to

decisions. Gopher has favorable Median Income and is in an important market area which is an

edge for them to market products. This project has the highest population increase from 2000 to

2005 at 27%. This means that the possibility of having more customers and sales in the future is

more foreseeable in this project. Target already has stores within the area and the sales from this

new project would derive 19% of its sales from surrounding area. Lastly, within the next few

years Wal-Mart is expected to add two new supercenters, which would take up 76% of the

market, compared to Targets 24% of the market.

Whalen Court

This project is for $119.3 million to build a unique single-level store scheduled to open in

October 2008. The prototype NPV could be achieved with sales of 1.9% above the R&P forecast

level. Whalen Court has the highest NPV, highest total R&P sales, highest population, and

highest percent of adults with four plus years of college. Whalen has a great opportunity to enter
to urban center because of its brand visibility to the public. It has a balanced capital investment

and advertising budget. Whalen court although expensive, but it is relatively less risky to achieve

financial results. Considering Target’s larger advertising budget, the request for more than $100

million of capital investment could be balanced against the brand awareness benefits it would

bring. Further, this opportunity was only available for a limited time. Unlike the majority of

Target stores, this store would have to be leased. The costs are very high compared to the other

projects at over $15 million more than the prototype. Target usually owns their store properties

so Whalen Court would already be something that is not ordinary for the company. Furthermore,

considering the IRR would also affect the project in massive ways. The Whalen Court project

has a lower IRR compared to the other projects. Construction costs would have to decrease more

than $41 million to achieve prototype store IRR and this is admittedly a very large number.

The Barn

For The Barn, the prototype NPV was achievable with sales of 18.1% below the R&P forecast

level. The Barn is not a new project, this is just a project that was resubmitted after initial

development efforts did not work out because of a disagreement with the developer. Compared to

Whalen Court, the small rural area was a great contrast. The Barn is the project that requires the

lowest investment. This low initial investment allows for a larger return on investments for Target

even if sales growth would not be as expected. Furthermore, this was the only project that had a

higher NPV than total net investment. This investment represented a new market for Target as the

two nearest Target stores were 80 and 90 miles away. Barn has the highest profitability index and

perceived to have high risk if a recession occurs due to unsatisfactory demographics which is not

a likelihood case. Also, the land available to target the value -added was too high to ignore and

reject the case.

Stadium Remodel

This project calls for a $17.0 million to remodel a SuperTarget store opening March

2007. Unlike the other projects presented, there was no prototype NPV comparison for this

project since it is only a remodel. This trade area had supported Target stores since 1972 and had

already been remodeled twice previously. Its NPV sensitivity to sales declined and thus, didn’t

help to the Company’s growth. Although Stadium Remodel increases the brand image of the

company, its financial contribution to the company would not helpful for the overall growth of

the company.

Goldie’s square

Goldie’s square’s positive NPV is greatly influenced by collections from credit cards. This

would entail greater risk of uncollectibility of customer credits. also, the NPV would only

improve if a store within the vicinity is closed (which is not a suitable consideration) since this

store would have high cannibalization; 54% of its sales would come from nearby stores. he

store’s NPV is also sensitive to the decrease in sales. It would decrease by 1357% if there is a

decline in sales of 10%.

 Decision and Conclusion

Investment NPV Profitability Index Decision

Gopher Place 23,000 16,800 0.73 Accepted
Whalen Court 119,300 25,900 0.22 Accepted
The Barn 13,000 20,500 1.58 Accepted
Goldie’s Square 23,900 300 0.01 Rejected
Stadium Remodel 17,000 15,700 0.92 Rejected

The decision for this case came after considering the analysis made and also taking into account

other considerations that might have been an influence because of the financial analysis. The five

(5) projects reviewed differs widely in their size and other attributes. The required investments

vary from $13 million to a whopping $119 million. With a sensitivity analysis of 10% decline in

sales, we notices that all projects would have a negative NPV. Based on the analysis made, it is

beneficial to accept Gopher Place, Whalen Court and The Barn. Although Whalen Court shows a

low IRR this could be justified that IRR is not comparable across projects sometimes. The IRR

of the project is used to determine a added value by checking if the IRR exceeds the cost of

capital.