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

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.

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

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. 17.63 median)

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

Target: 9% annualized digital sales growth

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%

DCF Analysis – Base Case

DCF Analysis – Bear Case

DCF Analysis – Bull Case

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