Simple Analysis & parsimonious forecasting

1. Simple Analysis & parsimonious forecasting By jenniferkellner (Discount, Variety Stores Industry)

2. Objective: • To gather information that will be useful in forming expectations of future payoffs • Eventual cash flow, discounting to PV • What information? • Future EPAT & NEA • How? • Via RNEA (EPM*EATO)

3. Steps • Generate sales growth rate* • Via time-series evaluation of Target + Industry • Generate EPM from sales • Via time-series evaluation of Target + Industry • Generate EATO ratio • Via time-series evaluation of Target + Industry • Use assumptions from Step 2, 3 & 4 above to forecast Sales, EPAT & NEA into the future

4. Note: • RNEA = EPAT/AvgNEA (We use AvgNEA b/c we don’t know the actual timing of investments that occurred) • RNEA = EPAT/Sales x Sales/AvgNEA • RNEA = EPM x EATO • where EPM = Enterprise Profit Margin & • EATO = Enterprise Asset Turnover • EPM  Efficiency in cost control (What portion of sales revenue stays within the firm?) • EATO Efficiency in use of invested resources

5. Step 1: Generate sales (total rev) growth rate

6. Step 1: Generate sales (total rev) growth ratecontinued… • Sales growth (assume): 3.9% through 2014 and 4.6% years after • Note: Combine CC rev & sales, CC small percentage • Took average and adjusted • Security breach 2013 Q4 • But they are experiencing significant growth (U.S. & Canada) • More SuperTarget expansions (=grocery sales) • “Target typically opens about 20 locations in the United States per year.” -Startribune • Offset through 2014 (breach + sales growth) Source: http://www.startribune.com/business/229634181.html

7. Step 2: Generate epm percentage from sales • Note: We use EPAT from sales by removing one time items, not just EPAT • Why: Because for each one time line item the expectation is effectively zero. For example, foreign currency translation. We can’t make money off of the foreign exchange market. Average is 4.83%

8. Step 3: Generate eato *Has remained relatively stable

9. Step 5: forecast Sales, EPAT & NEA into the future Using:

10. … • Where does the 2013 sales number come from? • No 10-K released yet; an estimate • 2013 Sales through 3rd quarter = $51,081 • Add: 4th Quarter 2012 Sales multiplied by % increase from 2011 to 2012 • Increase further for seasonal sales, expansion • Target opened 32 stores in the third quarter – 23 in Canada and 9 in the U.S.; the Company remains on track to have 124 Canadian Target stores open by year end (2013) • However: "The company said its sales slumped following the initial announcement of the breach and, as a result, it lowered its fourth-quarter profit outlook by about 20 percent." • Add Credit Card Revenue (consistent w/ years past) http://www.startribune.com/business/239599471.html

11. Now? • Use these forecasts to calculate what Target is worth ?!

12. Questions?