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U.S. Consumer Staple Market Presenters Industry: Jim Shi Target: Chris Yoo Wal-Mart:Doug Huxter Costco:Wendy Choi
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Consumer Staples Definition: –Include any company that manufactures and sells food/beverages, tobacco, prescription drugs and household products –Includes following industry Food & Drug Retailing Food & Beverage & Tobacco Household & Personal Products –E.g. Proctor & Gamble, Coca Cola, Wal-mart
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Types of Retailers Department stores –Wide variety of products –Ex. Sears Demographics –Stores aimed at certain segment –Ex. Gap Discounters –Membership club or low priced variety store –Ex. Costco Wal-mart
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Porter’s 5 Forces Low Threat of new entrants: –Large concentration of retail chain stores –Decreasing number of independent retailers –Barriers to entry Favorable supply contract: centralized buying power Favorable lease contract Requires large amounts of capital
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Porter’s 5 Forces (cont’) Suppliers’ power: limited power to negotiate relatively to large retail chain stores Buyers’ power: –Individuals with limited purchasing power –collectively, customers can demand high quality products at a bargain price;
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Porter’s 5 Forces (cont’) Substitute threat: high, products offered in one retail chain are available in others Rivalry: slow market growth leads to fierce price competition
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Historical Trend
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Chart Made Based on Data Collected from: Title: Retail and Food Services Series ID: RSAFSNA Source: U.S. Department of Commerce : Census Bureau Release: Advance Monthly Sales for Retail and Food Services Seasonal Adjustment: Not Seasonally adjuted Frequency: Monthly Units: Millions of Dollars Retrieved on Nov. 15/2006 at: http://www.forecasts.org/data/data/RSAFSNA.htm
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Seasonal Cycle
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Company Size by Revenues
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Retail Metrics Revenues, net income and profit margins Number of stores Same store sales Sales per square foot Target market
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Driving Force Overview Low priced goods Location Product line Market cycle (economy), Employment Consumer confidence level Natural disaster
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Low-priced Goods Efficient distribution network Constant search for low-cost goods –Import goods from countries with low cost labour Large volume discount Strategically located stores Flexible workforce –Part-time –Non-unionized vs. unionized
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Location Store density Urban vs. Suburban Land value of location
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Product Line Price vs. quality –High-end: Urban Fare, Nordstroms –Mixed: the Bay, Target –Low-end: Wal-Mart Variety of goods sold –Primarily grocery store (Top Food, Safeway) –Primarily hard products (Best Buy, Home Depot) –Primarily soft products (the Bay, the Brick)
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US Economy Indicator slowing economy –Cooling housing market slowing economy (housing starts) –High energy price –Stabilized interest rates –Household income
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Housing Starts
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Increasing Oil Price
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Interest Rates
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Industry Returns and Interest Rate 1 yr gain after the Fed stop raising rates Financials 24.7% Financials 24.7% Health Care 23.4% Health Care 23.4% Consumer staples 17.6% Consumer staples 17.6% S&P 500 9.9% S&P 500 9.9% Source: Citigroup NOTE: Based on average change in the 12 months after final rate increase, 1983- 2000
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Personal Income
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Unemployment Rate
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Consumer Expenditure
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Composition of Consumer Expenditure
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Consumer Confidence Index:
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Natural Disaster Hurricanes –Ex. 2005 August Hurricane Katrina Earthquake Rain –Ex. Rains increase the amount of turbidity level of tap water
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Target® Expect More. Pay Less. ®
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Company Overview Listed on New York Stock Exchange Part of the S&P 100, 500, and 1500 Super Comp. Russell 1000. Market Cap: 50.01B Stock Price 52 week range for 2006: 44.70- 60.34 Shares Outstanding: 874,040,000 Dividend Yield: 0.48 (0.80%) Price Earning Ratios: 19.51 EPS: 2.98
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Stock Price History
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Stock Price in 06
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Company M & A’s From 1960-80’s –Lechmere, J.L. Hudson Company, Mervyn’s, Ayr-Way, Fed Mart, Gemco, From 1990-00’s –Marshall Field’s, Fedco, Most recently: –June 9, 2004 Announced sale of Marshall Field’s Chain, and several Mervyn’s stores
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Company Profile Large-format general merchandise discount stores in the United States –Target & SuperTarget stores. Assortment of general merchandise and limited assortment of food items. –Target-general merchandise –SuperTarget-a line of food items along with general merchandise. The credit card operation represents an integral component of its core retail business. The company also operates Target.com, an online business.
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Company Profile The company now has more than 1,440 stores in 47 states, and employs more than 300,000 employees. Year ending 2005, Target reaches an important milestone; 50 billion dollars in sales in a single year. Target’s Customers –Median age of 41 –Median household income of approx. $58k –Approx. 43% have children at home –About 43% have completed college
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Management Robert J. Ulrich –University of Minnesota, BA, 1967 –Chairman and C.E.O for 12 years –With the company for 35 years –Held various positions –Annual compensation $10.1 million Gregg W. Steinhafel –President for 7 years –Annual compensation $2.7 million
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Key Figures Same-Store Sales Growth (“Comps”) Sales per Square Foot Inventory Turnover Gross Profit Margin Debt/Equity Ratio
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Same-Store Sales Growth
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Sales per Square Foot
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Inventory Turnover
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Gross Profit Margin
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Debt/Equity Ratio
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Driving Factors of Staple Industry Low COGS achieved through distribution and supply chain Image Location Product line
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Low COGS achieved through distribution and supply chain Significant investments in supply chain and in leading-edge technologies. Current distribution network includes 23 regional distribution centers and 3 import warehouses. –Plans to add 2 distribution centers and 3 import warehouses in the next 2 years Derive operating efficiencies through 6Sigma@Target and outsourcing a variety of business functions.
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Image Target’s store are: –Inviting and easy-to-shop, –Clean, bright, safe and accessible, and –Elaborately designed to excite their guests Corporate Responsibility
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Location Currently not pursuing international expansion, still considers potential continued growth in the U.S. By 2010, plans to reach approx. 2000 stores. Concentrate store growth in major metropolitan areas.
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Product line Assortment of general merchandise Exclusive brands that make Target a destination for high- quality Offers pharmaceutical products
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Firm Strategy Store Growth Nationally; complemented by innovative design and support Increase the mix of competitively priced consumables and commodities Expand food offerings in general merchandise stores Innovation is key to expansion and growth
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Store Growth Pattern In 2006, as of Oct 28 they built 75 more Target General Merchandise stores, and 19 more SuperTarget stores, totaling 1494 stores.
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Recent Selling of Shares From Within In 2006: Oct 9 th Gregg W. Steinhafel (President) sells shares totaling $6.2 million. Oct 17 & 18 th Robert Ulrich Jr. (C.E.O) sells approx 700,000 shares totaling $32.1 million. Nov 15 th Douglas A. Scovanner (Executive Vice President & C.F.O.) sells shares totaling $2.7 million.
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Recent Selling of Shares from Outsiders Buffett’s Berkshire Hathaway Inc. owns 745,700 shares of Target, compared with 5.5 million shares in June.
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Recommendation
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BUILDING SMILES
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WAL-MART OVERVIEW Listed on the NYSE Part of the Dow Jones Indust. Ticker: WMT Market Cap: $200 Billion Stock Price: $47.50 Dividend yield: 1.4% Shares Outstanding: 4.17 Billion P/E ratio: 18.17
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5 Yr. Wal-Mart Price
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WAL-MART vs. S&P
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Number of Shares
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Company Overview Largest Company in the world Employs over 1.8 million associate Sales of $312 billion in 2005 176 Million Shoppers visit Wal-Mart Every week
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WAL-MART History Founded in 1962 in Arkansas by Sam Walton Wal-Mart went public in 1970 By the end of the 1980’s WAL-MART had over 2,200 locations. Today WAL-MART has over 6100 stores –3856 In the USA –2290 International stores
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Lee Scott Became CEO in 2000 Has been with Wal-Mart since 1978 Serves on the board of directors Compensation $5 million in cash and $5 million in stock options Degree in Business from Pittsburg university Share value has dropped 22% since he has been running the company
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Chairman of the board Robert Walton Chairman of the board Son of the founder Only Walton family member still on the board of directors Owns over 2 million shares in the company Walton Family still has large stake in the company
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WAL-MARTS STRATEGY Improve company image –Improve relationship with associates and surrounding communities –Become a leading company in sustainability –Provide a diverse variety of products at a great price
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Improving Company Image Pays below average wages but creates over 250,000 new jobs a year Low cost health care coverage of $3 per month Created an employment advisory council to improve standards for minority groups Created job & opportunity zones where the company provides local business with additional training
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WAL-MART staying ahead of the curve To Be Supplied 100% By Renewable Energy To Create Zero Waste To Sell Products That Sustain Our Resources & Environment
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Product Line Mainly a general merchandise chain – Including electronics, clothing, auto parts, food, gift cards, financial services, pharmaceutical products Moving into food products within North America –Through SuperCenters and Neighborhood Markets
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WAL-MART’S growth Strategy Continue to diversify the product line offered at domestic locations
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Wal-Mart’s Divisions Discount centers –Sales general merchandise and food products Sam’s Club –A business to business operation International operations –Focuses is on South America and Asia
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WAL-MART Domestic Market Four Major Store types 1.Discount stores -1,209 – Sq. ft. 102,000 2.Supercenters – 1980 – Sq. ft. 187,000 3.Sam’s Club – 567 – Sq. ft. 129,000 4. Neighborhood Markets – 100 sq. ft. 42,000
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SALES BREAKDOWN 200620052004 Net Sales Percen t of total Percent Increase Net Sales Percent of total Percent Increase Net Sales Percent of total Wal-Mart Stores $ 209,91067%9% $191,82667%10% $174,22068% Sam's Club 39,79813%7% 37,11913%8% 34,53714% International 62,71920%11% 56,27720%18% 47,57219% Total $ 312,427100%10% $285,222100%11% $256,329100%
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Wal-Mart’s sales
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Same Store Sales
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Key Ratio
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Key Ratios
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WAL-MART
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WAL-MART International expansion Has had trouble – In the process of selling off store in Germany – Selling operations in Korea
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WAL-MART International expansion 2006 Has been very aggressive in South America & Asia –In 2004 Acquired Supermercados in Brazil adding another 118 stores –Bought a controlling share of Sonae in Brazil adding another 139 locations –Seiyu in Japan added 398 new locations
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WAL-MART Domestic Locations Traditionally located in small towns and in suburban areas Now trying to move into more urban areas and creating larger stores with a greater selection of products Experimenting with food only locations
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WAL-MART Supply Chain Over 60,000 suppliers Shares vital information with suppliers Owns the worlds largest privately held satellite system used to track inventory and store sales Most advanced distribution centers
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WAL-MART Supply Chain Highlights One of America’s Largest truck Fleet
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Suggestion Hold for long-term slow growth Reasons: Solid fundamentals Understands what needs to be changed Understands what needs to be changed Planning for the future by becoming more sustainable Planning for the future by becoming more sustainable
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Company Overview Listed on Nasdaq Part of the S&P 500, Russell 1000 Ticker Symbol: COST Industry: Discount Variety Store
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Company Overview Stock Price: $53.40 Day High: $53.62 Day Low: $52.88 52 Week High: $57.94 52 Week Low: $46 *as of November 17 th, 2006 EPS: 2.30 P/E: 23.25 Market Cap: 24.99B Dividend Yield: 1% Shares Outstanding: 467.97M
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Stock Price History
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Costco Stock Price vs S&P 500
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Company Overview No. 28 in Fortune 500 4 th largest retailer in USA 7 th largest in the world 82 fewer stores than Sam’s Club but generate $20 B more in sales
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Company History 1948: Sol Price opened Fed Mart 1976: Opened first store as Price Club in San Diego 1983: Founders James Sinegal and Jeffrey Brotman opened first warehouse in Seattle 1993: Costco and Price Club merged to PriceCostco 1994: Founders of Price Club left Costco 1997: Company name was changed to Costco Wholesaler
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James Sinegal, CEO & co-founder CEO from start of the company Earned $583,000 in salary and bonuses Business Administration graduate of San Diego State University Leads low-cost lifestyle Named one of 100 most influential people in Time Magazine
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Jeffrey Brotman co-founder & chairman Undergraduate degree in Political Science and law degree from University of Washington 3 rd generation of family participating in wholesaling and retail merchandising Former director of Starbucks and Sweet Factory
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Costco Today Aug 2006: 451 locations in North America Several locations in South Korea, Japan, Taiwan, UK Employs approximately 118,000 full- time and part-time staff
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Net Sales by Category
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Average P/E Ratio
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Sales per square foot (Annual) Company Target$307 Nordstrom$369 Home Depot $377 Wal-Mart*$438 BJ's$445 Sam's Club* $552 Costco$918 Best Buy $941
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Inventory Turnover
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Dividend Yield Per Share
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Debt to Equity Ratio
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Gross Profit Margin
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Driving factors 1) Low cost of goods achieved through achieved through distribution and distribution and supply chain supply chain 2) Image 3) Location 4) Product line
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Low cost of goods achieved through distribution and supply chain Volume purchasing Purchasing directly from manufacturers Pre-paying vendors to receive payment discounts Minimizing stocking fees
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Location No elaborate facilities and rent is lower since it is not in a prime location No lights on most days to save electricity.
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Image Known as the big box retailer that treats employees well Return policy –No deadlines
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Product line Limiting products to fast selling models, sizes and colours –Carry only 4000 items Rapid inventory turnover No-name products can be marked by more than 14%; private items 15%
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Employment Average pay is $17 per hour –42% higher than rivals –3rd lowest turnover rate in retail industry 92% of health care costs covered
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Low Shrinkage (under 0.20% for 2005) Entrances and Exits are controlled Membership format limits theft Good relations among employees limits internal theft
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Cost Minimizing Strategy Minimal advertising expenses Reduces costs by 2% per yearReduces costs by 2% per year Limited to advertising new warehouse openingsLimited to advertising new warehouse openings direct mail marketing to prospective new membersdirect mail marketing to prospective new members direct marketing programs to existing members promoting selected merchandise direct marketing programs to existing members promoting selected merchandise
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Cost Minimizing Strategy No Frills –No signs saying what's in what aisle. –No bags. –No Visas or MasterCards are accepted (avoiding service charges)
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Plans for the Future Opening 25-30 more stores across the USA in fiscal 2006 Opening 7 more stores in England and Mexico Expanding to several hundred more Kirkland Signature items in the next 5 years to include diapers, cosmetics, etc. Open Costco Home stores
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Current News Glass Ceiling for Women? –Suit filed in 2004 claims discrimination against women –Company discourages women from applying for mgmt positions and are not considered for promotion –Nov 15, 2006: class action suit filed to represent 700 women.
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Recommendation Hold large amounts of cash on hand Paying off a large portion of debt Dividends being paid out Shares being repurchased
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