1. Middlebury SIC – Retail October 3, 2017
Target: TGT Buy Pitch
Middlebury SIC – Retail
October 3, 2017

2. Investment Thesis
Thesis: Target’s plan to navigate retail will maximize shareholder value
Current price: $58.89
52-week price range: $48.56-$79.33
Price Target: $68.97
Implied upside: 16.89%
What‘s the source of the cash flow improvement? Not good if it cost cutting or spend less on cap ex. Should be real revenue.

3. Company Overview Massive merchandise and discount retailer
brick-and-mortar stores and digital distribution channels
1792 Target stores; sales account for 96.6% of revenue
Industry: provide convenience, low price, low margin at large scale
Problem: downward pressure on prices
Comparative advantage: better customer experience than Walmart, low-prices, exclusive brands, use of technology
CEO Brian Cornell plans to rehaul business to stay competitive; increased CapEx, new types of stores, expansion of grocery business
Best Buy‘s model was similar: good customer experience, smaller stores

4. Company Overview (Cont.)
“Some of its initiatives will likely cause considerable pain in the short run,” UBS Group AG analyst Michael Lasser
Market Cap: 30.9B
P/E: 11.4 (vs median)

6. SWOT Analysis Strengths [intrinsic business strength]
Loyal customer base; brand name
Strives for better customer experience
Higher industry turnover, efficient management
4x FCF growth over last 5 years despite flat revenue; good management
Opportunities [market catalysts]
$7B investment in 2017 and shrinking dividend
Associate training
New small store models
Acquisition of Grand Rapid, July 2017
Offer healthy foods and grocery
Exclusive brands
Growing online sales
Cut losses in exit from Canada
Weaknesses [intrinsic business weaknesses]
Weak revenue growth and EBITDA margins
Fierce competition with other retailers
Anticipate customer preferences
Threats [threats to the whole market]
Amazon
Hacks

7. Target: 9% annualized digital sales growth

8. Comparable Analysis Target Walmart Dollar General Costco EV $42.18B
EBITDA
$7.1B
$16.3B
$2.44B
$5.19B
Market Cap
$32B
$233.4B
$24B
$72B
P/E
11.9
18.7
16.31
28.52
Gross Margin
6.9%
4.6%
8.99%
3.12%
ROE
24.1%
7.91%
22.05%
23.1%

9. DCF Analysis – Base Case

10. DCF Analysis – Bear Case

11. DCF Analysis – Bull Case

12. Conclusion
Pros
Shareholder value prioritized
Higher margins, higher quality, high investment
High consumer confidence, economic indicators
Cons
Higher prices
Retail strength/headwinds
Recommendation: Buy at $58.59 with the expectation that TGT will reach $68.97 in 1 year