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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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Presentation on theme: "U.S. Consumer Staple Market Presenters Industry: Jim Shi Target: Chris Yoo Wal-Mart:Doug Huxter Costco:Wendy Choi."— Presentation transcript:

1 U.S. Consumer Staple Market Presenters Industry: Jim Shi Target: Chris Yoo Wal-Mart:Doug Huxter Costco:Wendy Choi

2 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

3 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

4 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

5 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;

6 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

7 Historical Trend

8 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

9 Seasonal Cycle

10 Company Size by Revenues

11 Retail Metrics  Revenues, net income and profit margins  Number of stores  Same store sales  Sales per square foot  Target market

12 Driving Force Overview  Low priced goods  Location  Product line  Market cycle (economy), Employment  Consumer confidence level  Natural disaster

13 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

14 Location  Store density  Urban vs. Suburban  Land value of location

15 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)

16 US Economy  Indicator slowing economy –Cooling housing market slowing economy (housing starts) –High energy price –Stabilized interest rates –Household income

17 Housing Starts

18 Increasing Oil Price

19 Interest Rates

20 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

21 Personal Income

22 Unemployment Rate

23 Consumer Expenditure

24 Composition of Consumer Expenditure

25 Consumer Confidence Index:

26 Natural Disaster  Hurricanes –Ex. 2005 August Hurricane Katrina  Earthquake  Rain –Ex. Rains increase the amount of turbidity level of tap water

27 Target® Expect More. Pay Less. ®

28 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

29 Stock Price History

30 Stock Price in 06

31 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

32 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.

33 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

34 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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36

37 Key Figures Same-Store Sales Growth (“Comps”) Sales per Square Foot Inventory Turnover Gross Profit Margin Debt/Equity Ratio

38 Same-Store Sales Growth

39 Sales per Square Foot

40 Inventory Turnover

41 Gross Profit Margin

42 Debt/Equity Ratio

43 Driving Factors of Staple Industry Low COGS achieved through distribution and supply chain Image Location Product line

44 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.

45 Image Target’s store are: –Inviting and easy-to-shop, –Clean, bright, safe and accessible, and –Elaborately designed to excite their guests Corporate Responsibility

46 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.

47 Product line Assortment of general merchandise Exclusive brands that make Target a destination for high- quality Offers pharmaceutical products

48 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

49 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.

50 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.

51 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.

52 Recommendation

53 BUILDING SMILES

54 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

55 5 Yr. Wal-Mart Price

56 WAL-MART vs. S&P

57 Number of Shares

58

59 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

60 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

61 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

62 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

63 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

64 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

65 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

66 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

67 WAL-MART’S growth Strategy  Continue to diversify the product line offered at domestic locations

68 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

69

70 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

71 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%

72 Wal-Mart’s sales

73 Same Store Sales

74

75 Key Ratio

76 Key Ratios

77

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81 WAL-MART

82 WAL-MART International expansion  Has had trouble – In the process of selling off store in Germany – Selling operations in Korea

83 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

84 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

85 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

86 WAL-MART Supply Chain Highlights  One of America’s Largest truck Fleet

87 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

88

89 Company Overview  Listed on Nasdaq  Part of the S&P 500, Russell 1000  Ticker Symbol: COST  Industry: Discount Variety Store

90 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

91 Stock Price History

92 Costco Stock Price vs S&P 500

93 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

94 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

95 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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97 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

98 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

99

100 Net Sales by Category

101 Average P/E Ratio

102 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

103

104 Inventory Turnover

105 Dividend Yield Per Share

106 Debt to Equity Ratio

107 Gross Profit Margin

108 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

109 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

110 Location  No elaborate facilities and rent is lower since it is not in a prime location  No lights on most days to save electricity.

111 Image  Known as the big box retailer that treats employees well  Return policy –No deadlines

112 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%

113 Employment  Average pay is $17 per hour –42% higher than rivals –3rd lowest turnover rate in retail industry  92% of health care costs covered

114 Low Shrinkage  (under 0.20% for 2005)  Entrances and Exits are controlled  Membership format limits theft  Good relations among employees limits internal theft

115 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

116 Cost Minimizing Strategy  No Frills –No signs saying what's in what aisle. –No bags. –No Visas or MasterCards are accepted (avoiding service charges)

117 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

118 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.

119 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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