Target Corporation - Simple Operating Model

($ in Millions Except Per Share and Per Unit Data)

General Assumptions:

Company Name: Target Corporation

Ticker: TGT
Last Historical Year: 2020-01-31

Historical Projected
Financial Statement Drivers: Units: FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Income Statement:
Total Revenue Growth: % 4.0% 3.6% 3.7% 3.5% 3.5% 3.0% 3.0% 2.5%

Gross Margin: % 30.0% 29.6% 30.1% 29.9% 29.9% 29.9% 29.9% 29.9%
SG&A % Revenue: % 20.8% 20.9% 20.8% 20.8% 20.8% 20.8% 20.8% 20.8%
D&A % Revenue: % 3.4% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%

Effective Interest Rate on Debt: % 4.0% 4.2% 4.3% 4.4% 4.5% 4.5% 4.5%
Other Income / Expense: $M 59 27 9 32 32 32 32 32

Effective Tax Rate: % 19.9% 20.3% 22.0% 20.7% 20.7% 20.7% 20.7% 20.7%

Balance Sheet:
Inventory % Cost of Sales: % 16.9% 17.9% 16.5% 17.1% 17.1% 17.1% 17.1% 17.1%
Other Current Assets % Revenue: % 1.8% 1.9% 1.7% 1.8% 1.8% 1.8% 1.8% 1.8%

Operating Lease Assets % SG&A: % 12.4% 12.5% 13.8% 14.0% 14.1% 14.2% 14.3% 14.4%
Change in Op. Lease Assets/Liabilities: $M 81 271 121 100 92 95 85

Accounts Payable % Cost of Sales: % 17.1% 18.4% 18.2% 17.9% 17.9% 17.9% 17.9% 17.9%
Accrued Liabilities % SG&A: % 27.0% 26.7% 27.1% 27.0% 27.0% 27.0% 27.0% 27.0%
Cash Flow Statement:

Other Items % Revenue: % 0.6% 0.1% 0.1% 0.3% 0.3% 0.3% 0.3% 0.3%
Deferred Taxes % Book Taxes: % (26.0%) 43.2% 19.3% 15.0% 12.5% 10.0% 10.0% 10.0%
Stock-Based Compensation % SG&A: % 0.7% 0.8% 0.9% 0.8% 0.8% 0.8% 0.8% 0.8%

Capital Expenditures: $M 2,533 3,516 3,027 3,159 3,269 2,900 2,987 2,564
% Change in Revenue: % 103.7% 133.1% 109.8% 115.5% 115.5% 115.5% 115.5% 115.5%

Proceeds from PP&E Disposals: $M 31 85 63 60 60 60 60 60

Acquisitions and Other Investments: $M (573) 15 20 (50) (70) (90) (100) (100)

Debt Issuances: $M 739 - 1,739 425 - 125 150 -

Debt Repayments: $M (2,192) (281) (2,069) (1,550) (625) (1,500) (1,250) (750)

Dividends % Net Income: % 46.0% 45.6% 40.7% 40.0% 39.5% 39.0% 38.5% 38.0%
Stock Repurchases: $M (1,046) (2,124) (1,565) (1,578) (1,578) (1,578) (1,578) (1,578)

Stock Option Exercises: $M 108 96 73 92 92 92 92 92

 Historical Projected
Income Statement: Units: FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Total Revenue: $M $ 72,714 $ 75,356 $ 78,112 $ 80,846 $ 83,676 $ 86,186 $ 88,771 $ 90,991
Revenue Growth: % N/A 3.6% 3.7% 3.5% 3.5% 3.0% 3.0% 2.5%

Cost of Sales: $M 50,874 53,049 54,617 56,669 58,652 60,412 62,224 63,780

Gross Profit: $M 21,840 22,307 23,495 24,177 25,024 25,774 26,547 27,211

Operating Expenses:
Selling, General & Administrative: $M 15,140 15,723 16,233 16,834 17,423 17,946 18,485 18,947
Depreciation & Amortization: $M 2,476 2,474 2,604 2,701 2,795 2,879 2,966 3,040
Total Operating Expenses: $M 17,616 18,197 18,837 19,535 20,219 20,825 21,450 21,986

Operating Income: $M 4,224 4,110 4,658 4,642 4,805 4,949 5,097 5,225
Operating Margin: % 5.8% 5.5% 6.0% 5.7% 5.7% 5.7% 5.7% 5.7%

Other Income / (Expense):

(-) Net Interest Expense: $M (653) (461) (477) (494) (456) (439) (377) (327)
(+) Other Income / (-) Expense: $M 59 27 9 32 32 32 32 32
Total Other Income / (Expense): $M (594) (434) (468) (463) (425) (407) (345) (296)

Pre-Tax Income: $M 3,630 3,676 4,190 4,179 4,380 4,542 4,752 4,929
(-) Provision For Income Taxes: $M (722) (746) (921) (866) (908) (941) (985) (1,021)
Net Income: $M $ 2,908 $ 2,930 $ 3,269 $ 3,313 $ 3,472 $ 3,601 $ 3,767 $ 3,908
 Historical Projected
Balance Sheet: Units: FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
ASSETS:
Current Assets:
Cash & Equivalents: $M $ 2,643 $ 1,556 $ 2,577 $ 1,498 $ 1,596 $ 1,450 $ 1,708 $ 2,917
Inventory: $M 8,597 9,497 8,992 9,684 10,023 10,323 10,633 10,899
Other Current Assets: $M 1,300 1,466 1,333 1,466 1,517 1,563 1,610 1,650
Total Current Assets: $M 12,540 12,519 12,902 12,647 13,136 13,337 13,951 15,465

Non-Current Assets:
Net PP&E: $M 24,536 25,533 26,283 26,681 27,095 27,057 27,019 26,483
Operating Lease Assets: $M 1,884 1,965 2,236 2,357 2,457 2,548 2,643 2,728
Other Long-Term Assets: $M 1,343 1,273 1,358 1,408 1,478 1,568 1,668 1,768
Total Non-Current Assets: $M 27,763 28,771 29,877 30,446 31,030 31,173 31,330 30,980

Total Assets: $M $ 40,303 $ 41,290 $ 42,779 $ 43,093 $ 44,166 $ 44,510 $ 45,281 $ 46,445

LIABILITIES AND EQUITY:

Current Liabilities:
Accounts Payable: $M $ 8,677 $ 9,761 $ 9,920 $ 10,128 $ 10,483 $ 10,797 $ 11,121 $ 11,399
Accrued Liabilities: $M 4,094 4,201 4,406 4,540 4,699 4,840 4,985 5,109
Total Current Liabilities: $M 12,771 13,962 14,326 14,668 15,181 15,637 16,106 16,509

Non-Current Liabilities:
Total Debt: $M 11,398 11,275 11,499 10,374 9,749 8,374 7,274 6,524
Operating Lease Liabilities: $M 1,924 2,004 2,275 2,396 2,496 2,587 2,682 2,767
Deferred Tax Liabilities: $M 693 972 1,122 1,252 1,365 1,459 1,558 1,660
Other Long-Term Liabilities: $M 1,866 1,780 1,724 1,929 2,141 2,359 2,584 2,815
Total Non-Current Liabilities: $M 15,881 16,031 16,620 15,951 15,751 14,780 14,098 13,766

Total Liabilities: $M $ 28,652 $ 29,993 $ 30,946 $ 30,619 $ 30,932 $ 30,417 $ 30,204 $ 30,275

Common Shareholders' Equity: $M $ 11,651 $ 11,297 $ 11,833 $ 12,474 $ 13,234 $ 14,093 $ 15,077 $ 16,171

Total Liabilities & Equity: $M $ 40,303 $ 41,290 $ 42,779 $ 43,093 $ 44,166 $ 44,510 $ 45,281 $ 46,445

Balance Check: OK! OK! OK! OK! OK! OK! OK! OK!
 Historical Projected
Cash Flow Statement: Units: FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income: $M $ 2,908 $ 2,930 $ 3,269 $ 3,313 $ 3,472 $ 3,601 $ 3,767 $ 3,908
Adjustments for Non-Cash Charges:
(+) Depreciation & Amortization: $M 2,476 2,474 2,604 2,701 2,795 2,879 2,966 3,040
(+) Stock-Based Compensation: $M 112 132 147 139 144 149 153 157
(+/-) Deferred Taxes: $M (188) 322 178 130 113 94 98 102
(+/-) Other Items: $M 405 98 57 205 212 218 225 231
(+/-) Change in Op. Lease Assets: $M (121) (100) (92) (95) (85)
(+/-) Change in Op. Lease Liabilities: $M 121 100 92 95 85
Changes in Operating Assets and Liabilities:
Inventory: $M (348) (900) 505 (692) (339) (301) (310) (266)
Other Current Assets: $M (156) (299) 18 (133) (51) (46) (47) (40)
Accounts Payable: $M 1,307 1,127 140 208 354 314 324 278
Accrued Liabilities: $M 419 89 199 134 159 141 145 125
Net Cash Provided by Operating Activities: $M 6,935 5,973 7,117 6,006 6,861 7,050 7,322 7,534

CASH FLOWS FROM INVESTING ACTIVITIES:

(-) Capital Expenditures: $M (2,533) (3,516) (3,027) (3,159) (3,269) (2,900) (2,987) (2,564)
(+) Proceeds from PP&E Disposals: $M 31 85 63 60 60 60 60 60
(+/-) Acquisitions and Other Investments: $M (573) 15 20 (50) (70) (90) (100) (100)
Net Cash Used in Investing Activities: $M (3,075) (3,416) (2,944) (3,149) (3,279) (2,931) (3,028) (2,604)

CASH FLOWS FROM FINANCING ACTIVITIES:

(+) Debt Issuances: $M 739 - 1,739 425 - 125 150 -
(-) Debt Repayments: $M (2,192) (281) (2,069) (1,550) (625) (1,500) (1,250) (750)
(-) Dividends Paid: $M (1,338) (1,335) (1,330) (1,325) (1,372) (1,404) (1,450) (1,485)
(-) Stock Repurchases: $M (1,046) (2,124) (1,565) (1,578) (1,578) (1,578) (1,578) (1,578)
(+) Stock Option Exercises: $M 108 96 73 92 92 92 92 92
Net Cash Provided by Financing Activities: $M (3,729) (3,644) (3,152) (3,936) (3,483) (4,265) (4,036) (3,721)

Change in Cash & Cash Equivalents: $M 131 (1,087) 1,021 (1,079) 99 (146) 258 1,208
Beginning Cash: $M 2,512 2,643 1,556 2,577 1,498 1,596 1,450 1,708
Ending Cash: $M $ 2,643 $ 1,556 $ 2,577 $ 1,498 $ 1,596 $ 1,450 $ 1,708 $ 2,917
What Does Free Cash Flow Mean? Best Buy vs. Zendesk
($ in Million Except Per Share Data)

Best Buy - Free Cash Flow and Working Capital: Zendesk - Free Cash Flow and Working Capital:

Free Cash Flow Calculation: Year 1 Year 2 Year 3 Free Cash Flow Calculation: Year 1 Year 2 Year 3
Cash Flow from Operations: $ 2,557 $ 2,141 $ 2,408 $ 2,565 Cash Flow from Operations: $ 25 $ 42 $ 79 $ 89
(-) Capital Expenditures: (580) (688) (819) (743) (-) Capital Expenditures: (21) (16) (35) (39)
Free Cash Flow: 1,977 1,453 1,589 1,822 Free Cash Flow: 4 26 43 50

Changes in Operating Assets & Liabilities: Year 1 Year 2 Year 3 Changes In Operating Assets & Liabilities: Year 1 Year 2 Year 3
Accounts Receivable: 315 28 (131) Accounts Receivable: (21) (30) (50)
Inventories: (335) (194) 237 Prepaid Expenses: (5) (11) (8)
Other Assets: (21) (34) 16 Deferred Costs: (23) (41) (50)
Accounts Payable: (196) 432 47 Op. Lease Assets: - - 19
Income Taxes: 290 22 (132) Other Assets and Liabilities: (6) 7 (1)
Other Liabilities: 117 (234) (100) Accounts Payable: 2 8 22
Net Change: 170 20 (63) Accrued Liabilities: 7 4 3
Accrued Compensation: 7 15 11
Annual Revenue: $ 39,403 $ 42,151 $ 42,879 $ 43,638 Deferred Revenue: 52 73 78
Op. Lease Liabilities: - - (19)
Net Change as a % of Change in Revenue: 6.2% 2.7% (8.3%) Net Change: 13 25 5
Net Change as a % of Revenue: 0.4% 0.0% (0.1%)
Annual Revenue: $ 313 $ 430 $ 599 $ 816
CapEx % Cash Flow from Operations: 32.1% 34.0% 29.0%
Change in WC % Cash Flow from Ops: 7.9% 0.8% (2.5%) Net Change as a % of Change in Revenue: 11.0% 14.6% 2.5%
Net Change as a % of Revenue: 3.0% 4.1% 0.7%
Revenue Growth Rate: 7.0% 1.7% 1.8%
Free Cash Flow Growth Rate: (26.5%) 9.4% 14.7% CapEx % Cash Flow from Operations: 38.8% 44.9% 43.8%
Change in WC % Cash Flow from Ops: 30.4% 31.2% 6.1%
Interpretation: FCF is always positive and mostly growing, which is good, and the
company doesn't seem to be "playing games" with fluctuating CapEx levels or WC; Revenue Growth Rate: 37.5% 39.2% 36.4%
in fact, the Change in WC actually becomes more negative in Year 3, but FCF still grows Free Cash Flow Growth Rate: 560.2% 67.6% 15.8%
at a faster rate.
Interpretation: FCF is also positive and growing here, though at very different rates
Revenue is also growing at the same time, so it seems like Best Buy has a fairly healthy compared to the company's Revenue Growth.
business here whose FCF is growing based on business fundamentals and not
manipulation of spending. May want to check its margins, though. It looks like one major reason why is Working Capital - it's much lower in Year 3, which
means FCF gets less of a boost.

Zendesk's Net Income is very negative, but these results show us that the company is
doing decently for a high-growth software firm - at the very least, it's not dependent on
outside capital to stay alive, and it's not "playing games" to boost its FCF.