Hbr - Target Corporation Capital Project Analysis
Essay by ComradePaul • April 8, 2017 • Essay • 943 Words (4 Pages) • 1,398 Views
Case Summary:
The Capital Executive Committee (CEC) of Target Corporation must choose which of 5 large construction projects to approve. More than 1 project can be implemented; however, the capital budget for the fiscal year in question cannot exceed $3.5B. This case is about force ranking the 5 Capital Project Requests for new construction from best opportunity to worst opportunity to aid the CFO, Doug Scovanner, in the upcoming CEC meeting where the final decision will be made. As stated on page of the case, “each investment decision would have long-term implications for Target: an underperform store would be a drag on earnings and difficult to turn around without significant investments of time and money, whereas a top-performing store would add value both financially and strategically for years to come.”
Capital Executive Committee Composition:
The decision makers for capital project requests consists of 5 of the 12 executive officers of Target, including the President and the Chairman / Chief Executive Officer. The other 3 members are the executive vice presidents of Property Development, Stores, and the Chief Financial Officer. The CEC has representation necessary to make effective decisions; however, given the importance of Research and Planning for the inputs to the Capital Project Request Process, as well as the impact of credit card services to the discounted cash flow analysis, Target should consider including the EVP of Marketing and the President of Target Financial Services to this committee.
Capital Review Process:
The capital review process for Target is consistent with the overarching strategic objective of growth by adding about 100 stores a year while maintaining a positive brand image. Financial performance targets of Net Present Value and Internal Rate of Return based on discounted cash flow analysis over a 60 year period have been established. The discounted cash flows account for store generated cash flows and credit card generated cash flows. The review process includes market demographics analysis that considers population growth forecasts, median household income, and education levels. It also assesses progress of existing company plans for the areas and how new developments will impact sales at other Target locations. A specific consideration by the CEC is duration of project. The desire is for projects to complete within the fiscal year the capital is approved to minimize risk of cost overruns that may require additional debt financing and “raise questions from equity analysist as to the increase risk to the shareholders as well as to the ability of management to accurately project the company’s funding needs.” (p4). Other criteria considered by the CEC include, but are not limited to, total investment size, project profit, and impact to earnings-per-share.
Analysis and Ranking:
After evaluating the information provided in the Capital Project Request forms with the stated strategic goals for Target and the evaluation criteria used by the CEC, the following forced ranking of the 5 projects was calculated:
Rank | Project | Decision |
1 | The Barn $13MM | ACCEPT. This project previously made it through CEC, but it stopped because of disagreement regarding co-tenancy rights with the original developer. This location is expected to achieve NPS at sales levels 18.1% below the revised Research and Planning forecast (R&P). The Moose Land market is a new market for Target. The next two nearest Target locations are 80 and 90 miles away. |
2 | Stadium Remodel $17MM | ACCEPT. This location was originally built in 1972, so it is 34 years into the 60 year life. It has undergone 2 remodels to date, so it is due for another remodel per the planning standard of remodel every 10 years. In addition to risk of market share because of declining sales, there is also a risk to brand image because of deteriorating facilities. Target currently operates 8 stores in the Boardwalk market. The CEC may want to review the accuracy original R&P forecasts for market demographics before accepting the CPR. |
3 | Whalen Court $119.3MM | ACCEPT. Buildback would be a new market as well as a new store model for Target. Market size for the served area is very large (632,000). This CPR provides the greatest P&L impact by year 5 of all CPRs. Additional information that would be helpful to the decision is expected impact to advertising budget, including cost avoidance, as well as market research about preferences of Millennial generation. The opportunity for this location will expire after this CEC meeting. |
4 | Gopher Place $23MM | HOLD. This is a defensive store plant to prevent potential market share loss, specifically to Wal-Mart; however, 19% of sales of the proposed new store are expected to come from the other 5 existing Target stores already in the market. Before approval, the CEC should request an assessment of the impact of upgrading one or more of the other Target locations to the SuperTarget format. |
5 | Goldie’s Square $23.9MM | HOLD. This CBR has the lowest NPV in this review period. CEC should request that the market analysis be updated and rebalanced. The original market plan estimated a need for 24 stores. There are currently 12 stores open and 7 active/near term opportunities. Transfer of sales from existing or in-progress stores are 25% from 2 nearby stores, and 4% from another. |
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