Comparing two companies Target and Walmart

Target and Walmart are leading retail outlets in the U.S. Walmart is the market leader followed closely by Target which is the second largest store in the country. The two use different strategies in order to maintain their current market share as well as their leadership position. Both have been shifting their strategies in order to counter competitive pressure from companies like Amazon. Target and Walmart have physical stores and online platforms that enhance their ability to deliver products to their customers. Target Corporation was incorporated in Minnesota in 1902 and its main objective is to offer its customers preferred shopping experience using its supply chain and technology. The company operates as a single segment that enhances seamless purchase experience for the customers. The company uses stores and digital platform to reach its customers otherwise referred to as guests. The company engages in corporate social responsibility where 5% of its profits are given to the surrounding communities. Walmart Inc was incorporated in Delaware in 1969. The company is determined to help its global customers to save their money and live better. The company is the largest retailer in the U.S. and employs retail stores and e-commerce to reach its customers. According to the company's annual report, Walmart has 11,700 stores and e-commerce websites that enhance its ability to reach 270 million customers. The company's strategy is to lead on price, to be competitive on assortment, deliver a great experience and to invest to differentiate on access. Price leadership is core to the operations of Walmart. 

Ratio Analysis 

Liquidity Ratios 

According to the liquidity ratios, the two companies have slight differences. The current for Target is slightly higher compared to Walmart. However, according to the computed values, both companies have continued to report a decline in the current ratios over the four years. The two companies reported the highest values in 2015 but the figure has declined to the lowest reported in 2018. The quick ratio also indicates that Target has a better acid test compared to Walmart. Both companies however reported small values in the four years with 2018 recording the lowest figure and 2015 showing a slightly higher value. According to the current and quick ratio, Target is more liquid and therefore is likely to meet its obligations when they fall due. However, the times interest earned indicates that Walmart has more income to pay for its interest expenses. The operating cash flow margin indicates that Target has a slightly higher margin than Walmart. 

Activity Ratios 

According to the activity ratios, Walmart has a higher inventory turnover ratio compared to Target. It indicates that Walmart has stronger sales or insufficient inventory. It can also indicate that Target has weak sales or the company is overstocking. The inventory turnover ratio for the two companies indicates that both companies had insignificant changes in the four years under review. Receivables turnover ratio also did not change significantly over the four years. Target had a slightly higher ratio than Walmart. The ratio indicates that Walmart is slightly efficient in collecting its trade receivables. However, the difference between the two companies is very small. The Fixed assets turnover ratio shows that Walmart has a higher ratio compared to Target. The company has maintained a near constant ratio for the four years. Target has also reported an insignificant change in the fixed asset turn over in the past four years. Walmart is more efficient in managing fixed assets than Target. Total assets turnover also shows that Walmart has a higher ratio than Target indicating that the company is managing total assets more efficiently than Target. The activity ratios indicate that Walmart is more efficient than Target in the way it manages its inventory, receivables, and assets. 

Leverage or Solvency Ratio 

Leverage ratio indicates that Target has a slightly higher debt ratio than Walmart implying that the company has more debt and therefore exposed to higher risks. The debt to equity ratio also shows that Target finances its assets using debt. The company, in this case, uses less of its owner's equity to buy assets compared to debt. The company relies more on lenders to finance its assets which exposes it to more risk. However, the company does not have an increasing rate which could be alarming. Interest coverage also shows that Target has more debt burden compared to Walmart. The company, therefore, has a slightly higher chance to default compared to Walmart. 

Profitability Ratios 

Profitability ratios indicate that Target outperforms Walmart in most parameters. The gross profit margin has remained flat for four years at 29% which is slightly higher than Walmart average of 25.5%. The operating profits indicate that Target is doing better than Walmart. The company had an average of 6.5% in the four years compared to Walmart 5%. Target's profit margin for the last three years was higher but the company reported a loss in 2015. The return on assets for Target in the past three years was higher than its biggest competitor. However, the company reported a loss in 2015 affecting the value of the return in assets. The return on equity for Target in the past three years was higher than in Walmart. The profitability ratios indicate that the target is generating more income for its investors. 

Growth and Sustainability 

The financial statements for Target and Walmart indicate that the two companies continue to grow a trend that is likely to be enhanced by the adoption of new strategies and technological innovations. The two retailers have reported increased traffic from their e-commerce platform an area that was previously dominated by companies l.like Amazon. The financial statements indicate that the two posted strong earnings recently with the online platform reporting the highest growth. Target, for example, reported an increase in its revenues to $17.55 billion in the last quarter which was driven by a 41% increase in online sales and a 6.4% increase in traffic. Walmart, on the other hand, reported a 4.5% increase in same-store sales beating its revenue expectations. The company reported that e-commerce sales in the U.S. increased by 41% in the quarter. 

The two companies have continued to report increased growth driven by a favorable macro environment and increased online activities. Online sales have a high growth potential despite accounting for a fraction of the U.S. retail sales. The two companies have continued to rely on the dominant brick and mortar which accounts for a significant proportion of their sales. Target and Walmart continue to invest in stores an important source of their sales despite the rapidly growing e-commerce. Both companies want to take a share of the online market by investing heavily in this area to enhance their market share and to counter the activities of companies like Amazon. The two companies have realized that free and fast shipping will differentiate them from competition and offer their customers an alternative place to shop. 

Target seems all attractive business due to its growth and high-profit margins. The company realized increased sales from home goods and apparel. Walmart, however, focuses on items like groceries and has diversified its operations. The company has a huge operating cash flow that enhances its ability to invest in new markets and realize increased growth. The company can easily acquire other smaller companies thus expanding its operations to underserved markets. Walmart prides itself as a multichannel retailer that has positioned itself to exploit available opportunities for future growth. 

Opportunities and Risks 

Target Corporation continues to exploit the opportunities created by the internet to grow its online sales and to drive more customers to visit its stores. The company is revamping its stores throughout the country making them smaller and customized for the specific needs of the surrounding customers. The stores are also supporting online deliveries thus reducing the time taken for such deliveries. The new strategy enables cost saving since stock handling cost is reduced. The company only ships the required products to the outlet depending on the needs of the shoppers. The new changes taken by the company are improving the shopping experience of the customers otherwise referred to as guests. 

According to the annual report for Target Corporation, the company believes that its continued success will depend on a positive perception of the company. The management knows that it is critical to ensure that such perceptions are guarded and that they are not eroded otherwise the company and its relationship with the customers will be adversely affected. The company also identifies the risks of not differentiating from other retailers and its effect on operations and future growth prospects. 

Target understands that its survival depends on its ability to provide relevantly as well as reliable customer experience otherwise its operations are at risk. Another risk is the changing consumer taste and preference. The company is also likely to face investment risks if its efforts to modernize and change the business to reflect a changing environment do not generate adequate revenues to cater for the increased investment. Similarly, the company faces computer-related risks if it is unable to update and maintain its systems. The company faces legal, regulatory, global and other external risks. Other risks include data security and privacy risks, financial risks and supply chain and third-party risks. 

Walmart continues to benefit from the economies of scale. The company's cost leadership strategies give it an opportunity to compete with close rivals and are capable of selling its products at relatively low prices, therefore, creating value for its customers. Walmart uses every day low prices strategy and negotiates the purchase prices which are often offered at a discount due to the volume of business that the company will generate. 

Walmart faces several risks including strategic risks like the general and macroeconomic issues from the domestic and international market. Strong competition is also another major risk faced by the company. The company is also finding it hard to identify and respond to the taste and preference of the consumer as well as the changing trends. The company's failure to grow its online sales using its omnichannel could also adversely affect its operations. Some of the strategic alliances intended to enhance the international operation of the company could adversely affect the performance of Walmart if it fails to generate adequate sales. The company also faces operational risks which include natural disasters, geopolitical events, suppliers, the safety of the products, information system, security of information, changes in the financial performance and failure to attract qualified associates. Financial risks include foreign exchange fluctuations, changing market expectations for the financial performance of the company, legal, tax, reputational and compliance risks. 

Corporate governance 

Target and Walmart are expected to benefit from an upswing in retail sales which is likely to enhance their performance in the future. The two companies tie a portion of the long-term stock grants for its executives to ROIC. They try to compute the appropriate ROIC and also account for off-balance sheet debt from operating leases. Target capitalizes operating leases in addition to adding back the interest component for the leases. Walmart, on the other hand, uses pre-tax operating income that makes the ROIC less reliable. The two companies try to hold their executives accountable for the operation of the company which is directly aligned to creating value for the shareholders. Target has one of the bets executive compensation plan in America which acts as a gold standard. Target has a superior cash flow, ROIC and executive compensation making it a better company for the potential investors compared to Walmart.