Applied Portfolio ManagementSaint Louis UniversityNovember 15, 2013Watch Stock: TGTJean Richard MBELE

Table of Contents

Recommendation Macroeconomic Environment Analysis Brief Industry Overview

o Business Cycle Analysiso External Factors Analysiso Internal Factor Analysis

Business Analysiso Initial Stock Pickingo TJ Maxxo Home Depoto Targeto Gap Inc.o Lowe’s

Financial Analysiso Revenue Growth, Free Cash Flowo Earnings Quality Analysis, Inventory Turnovero DuPont Analysis of Return on Equityo ROE vs. Cost of Capital

Valuation Analysiso Discounted Cash Flows

Sensitivity Analysiso Damodaran’s Regression and Multiples Valuation

Sensitivity Analysis Recommendation Overview End Notes

*All data for the year 2013 is trailing twelve months.

1. Recommendation

I recommend that the Saint Louis University Applied Portfolio Management class sell the

current shares it holds from Target. Target was bought on November 19th 2012 for $63.04 and is

currently trading for $65.11 which is the last closing price on November the 9th. During the

holding period the stock price went up as high as $73 before falling back. Target, as revealed by

the analysis, expects to increase earnings in the future; however, the company faces difficulty of

entrance in a new market. TJ Maxx was hold by the Applied Portfolio Management class during

the years 2010 and was sold to buy Target. At the time, the company provided an annualized

holding period return of 35%. Last year, the analysis revealed that TJ Maxx had a strong moat

but seemed overvalued. However, the valuation analysis revealed that the company could be

undervalued when a more reasonable high earnings growth rate is used. TJ Maxx has a strong

moat and plans to expand its company in markets where it has been doing well. The brand

already made its proof to the public and there is no skepticism if it will succeed in their growth

plan in terms of consumer’s acceptance. The only question is how much can they grow before

the market get saturated? On the other hand, Target is getting inside a new market, which is

always risky. So far the company has had less than expected earnings but believe that it will

achieve its goals. Based on all these factors, the financial and valuation analysis, TJX is the

winner.

Economic overview:

The outlook for the consumer discretionary sector is promising for the months to come. The

sector outlook of the economy illustrates the way the sector will behave. The main factors of a

movement for the sector are the employment rate, the GDP growth, the credit availability, and

the consumer confidence. As these factors rise, the consumer’s wealth increases and creates

spending in the sector.

Employment is the main driver of consumer spending. During the past six years, the United

States suffered from an increasing unemployment rate due to the recession. Today, numbers look

better and while the unemployment rate reached 10% in 2009, it is currently at 7.2%. Remember,

as consumers regain their job they have more disposable income and are more willing to spend.

Even though some people attribute the decrease in the unemployment rate to a decrease in the

labor force, this does not mean it is improving and will keep improving. The recent fear during

the government shutdown to lose 800,000 jobs received a little extension but will be back in the

table in beginning of 2014.

GDP growth is an important indicator of consumer spending. Note that 70% of the GDP is

due to consumption; therefore, for one percent increase in GDP growth, 70% is due to

consumption. After the recession the country has face, the rate of GDP growth should be around

5%. The first two quarters of 2013 experienced a GDP growth of 1.1% and 2.5% respectively. It

is lower than what it should be, but it is trending upward.i

Another factor to the consumer sentiment is the availability of the credit. The recession and

the housing crisis created a hostile environment for people to obtain loans. There is a slight

increase in the availability of loans that is still insufficient to impact the consumption. The future

is not clear if the availably of loans will increase or not.

The U.S. stock market is a reliable indicator for consumer spending. There is a positive

correlation between the way the stock market performs and consumer spending. As the market

increases, investors interpret it as a gain of value without having to close any of their positions.

The S&P 500 growth rate has increased over the past years; 24% in 2009, 13% in 2010, 13.4% in

2012 and 16.3% up to September 2013 this encourages investment.

Finally, the Consumer Confidence Index or CCI reveals the way consumers feel about

spending. In August, the CCI reached 81 while it was 60.6 the same month last year. It is a plus

for the economy as people consumption should increase. The expectations for the next six

months are also encouraging as it is projected to reach 88.7. Unfortunately, The CCI has

decreased from its previous month moving from 81.8 to 79.7. As a result, expectations for the

next six months have fall from 89 to 84.1. More importantly, the consumer confidence is

expected to increase and therefore lead to an increase of the consumption.

3. Brief industry Analysis

3.1 Business Cycle Analysis

The company report will analyze five stocks: Target, Home Depot, Lowe’s Home

improvement, Gap Inc, and TJ Maxx. All of these companies are in the consumer discretionary

sector and do some type of retail; however, the economic outlook affects them differently. Target

is part of the general merchandiser sub-industry under the multi-line-retain industry. Home

Depot and Lowe’s are classified under the home improvement retail sub-industry, which is part

of the specialty retail industry. Gap Inc and TJ Maxx are part of the apparel retail sub-industry

under the specialty retail industry.

Over their life, companies develop trough different stages of their life cycle from start-up

to decline. All the companies being analyzed and their respective sub-industries are in the third

stage of their life cycle. The third-stage is made of mature companies and is characterized by

average growth stage and is often driven by the whole economy. There is an important

completion between companies; they usually use their brand name as an asset and look for

mergers and acquisitions that could stimulate their growth. Companies try to make the difference

through product differentiation, customer service, and cost leadership.

The industries performing retailing are cyclical. For instance, the apparel retail sub-

industry provides frequently new products as consumers often look for new fashion but also from

the weather cycle that makes them change their clothing. This cyclical movement, therefore,

impacts the revenue from different lines depending on the season. Home Improvement

companies are highly cyclical because of the nature of the goods being sold. In general most of

the income is made from early spring when home owners are willing to renovate and improve

their housing. It is often considered that Home improvement and housing market are correlated

and as the housing market keeps improving, there should be a good outlook for the Home

improvement companies. General merchandisers are more stable over time because of the variety

of goods they provide. Consumers buy food during all times of the year however within one

categories there is still cyclical movement. For example, the sale of ice-cream decreases during

winter while the sale of tea increases. The cyclical aspect of these industries requires an annual

look of their financial result instead of quarterly analysis. ii

3.2 External Analysis

3.2.1 Threat of Obsolescence

Technology is not a high threat for the industries studied. Consumers are still going to the

store when it comes to buy home improvement items or food and other goods offered by general

merchandiser. Consumers start to buy more clothing online but it is still not well established as

they prefer to try what they are purchasing. Often time, they will go to the store to see what size

fit them the best and will make their purchase online to take advantage of sales; still, it is not a

big threat. Consumers have faith on well-established retailers and industry such as home

improvement, in which they do not usually know that much, and are likely to go to the store to

ask for advice. Companies in the industry will most likely use technology as a way to

communicate with customers and makes it easy for them to get exactly what they look for.

Technology is also an important means of advertisement trough the increase in social media.

3.2.2 Social

Social risk is different among industries. In general, general merchandiser and home

improvement do not face much risk. Apparel retail however face more risk from different trends.

It is hard to know how people will react to a new style while success does not guaranty

perpetuity. If a style is fashionable now, it can change anytime for any reason. It just takes a

“star” to adhere or not to a style to see his or her followers decide on the future of a new trend.

3.2.3 Government

Earlier, the discussion about the outlook of the economy shows what could happen to the

consumer discretionary sector. Factors such as employment rate and consumer confidence are

highly correlated with the decisions the government will take. Recently, the government shut-

down for days has had an impact on the consumer confidence since some workers were about to

lose their jobs. Fortunately or unfortunately the decision about government debt was extended to

the beginning of the year 2014. While workers got confident in the support of the government to

maintain their job, others see an unclear resolution of what will happen in the coming months.

The result is the small decrease in the consumer confidence for the month of September and a

slight decrease in the expectation for the following months.

3.2.4 Foreign

The foreign economic outlook is important for the consumer discretionary sector. The

increasing consumer consumption in Asian market leads lots of companies to expand their

businesses abroad. Companies like General Motors have seen their sales greatly increase due to

international market; however, not all companies are guaranteed a success, recalling Best Buy

that failed to get inside the Chinese Market and Walmart still struggling. The Chinese

government reforms increase its population consumption will benefit companies in the sector.

3.3 Internal analysis

3.3.1 Competitive rivalry-High

The market for retailing companies has many competitors. Some companies have biggest

market of shares especially when it comes to general merchandizing while others try to

specialize and where shares are more split. During the sector report there was the example of

Best Buy competing with companies like Walmart that have a broader line of products in one

place at similar prices. Companies in the apparel retail have huge competition with so many

different brands.

3.3.2 Threat of new entrants-High

Depending on the industry, the threat of new entrants increases. It is less significant for

companies in the general merchandising industry, but it is still present due to the low start-up

cost. Again companies in other industries such as apparel retail or electronic retail face more

threat due to the low bargaining power of the companies when it comes to pricing.

3.3.3 Availability of Substitutes-Low

For the apparel retail industry there is a low availability of substitutes, consumers are

framed by the society to wear not only clothing but a certain type of clothing to appear decent

among people. Also, they need to eat and drink; while there are many different products lines,

consumers like to vary what they eat and therefore this creates a low availability of substitutes.

3.3.4 Bargaining power of customer-High

The market for retailing is saturated with many both traditional and online stores. The

ability of consumers to compare prices through the internet and that they are price sensitive give

them a high bargaining power. The efficiency of shipping makes that sometimes consumers do

not hesitate to purchase online and pay for international shipping.

3.35 Bargaining power of supplier-Low

The fact that there is a high demand to suppliers and a high number of supplier from

different countries ready to sell their product at competitive price makes the bargaining power of

supplier low. In the case of Chinese and Indian retailers who are constantly looking for market

shares using their ability to produce at low cost using cheap labor.

4. Business analysis

4.1 Initial stock picking

Picking the stocks to analyze for the companies report was not easy. The study of the

macro-economic questions and the sector reports during the first half of the semester gave an

incentive to look through retailing companies. The research of good companies started by

screening overall businesses in the consumer discretionary sector that pictured a good outlook

for the future.

After choosing several companies in the sector, I started an excel spread sheet where I

simply compared each other based on the ROE and its drivers, the P/B ratio, the P/E ratio and the

beta of the companies. First, I did not want any company with a beta higher than 1.25. It was not

easy because Gap Inc has a higher beta but had a better outlook than other companies and I made

an exception for it. I wanted companies that had ROE driven mostly on net present value and

asset turnover ratio rather than leverage. I briefly looked at the P/B, P/S, and P/E ratios

eliminating the companies that were obviously overpriced or did not seem to have a moat. After

all, I had left Lowe’s companies, Gap Inc, TJ Maxx, Home depot and the current portfolio stock

Target.

Stock ROE NPM Asset turnover Leverage P/B P/S P/E Earn Growth BetaTarget 16.97 4.09 1.5 2.9 2.52 0.55 13.1 -13.2 0.61GAP Inc 40.75 7.2 2.1 2.5 5.02 1.07 12.2 24.7 1.42Home depot 30.13 6.07 1.83 2.3 6.95 1.38 17.33 17.2 0.92Lowes'companies 15.54 3.87 1.56 2.35 3.94 0.98 18.43 26 1.06TJX companies 55.22 7.37 2.91 2.6 10.72 1.54 17.93 13.9 0.4

4.2 TJ Maxx

TJ Maxx Companies Inc is one of the leading off-price retailer of apparel and home

fashions. The company operates globally with most business done in the United States and

Canada. With $25.9 billion of revenues and $906.7 million in profits in the current year, the

company is ranked 115th of the fortune 500. It has currently 3050 stores and sees itself as global.

TJ Maxx has four major divisions; Marmaxx group which includes T.T. Maxx and Marshals,

HomeGoods, TJ Maxx Canada, and TJ Maxx Europe.

The main strengths of the company are the extensive product offering, sound profitability

indicators, and strong operational base.

First, the company offers a broad range of products and solutions to answer the high demand

from the whole market. The company operated in the U.S, Canada and Europe. It offers different

products going from family apparel to home furniture. Some example of products are home

fashions, jewelry and accessories, lighting, bedding, decorative accessories and so on. The ability

to have such different products with a high turnover rate indicates the confidence of customers in

the company.

Second, the company presents sound profitability indicators over the years. In general the

financial expectations are always met if not improved. The company is looking to provide wealth

to its shareholders by keeping an eye on expansion opportunities. From 2011 to 2012, the

company has annually improved their revenues and net income. Important ratios such as net

profit margin, and return on equity have respectively improved from 6.12% to 6.45% and

43.32% to 46.61%. Since the company went public, it has provided steady earnings growth

including some of the highest returns on retail investment. Going forward into this report I will

provide the current positive outlook of the company using current data and information.

Third, the company has a strong market position and can maintain a competitive advantage over

the competition due to a robust operational base. TJ Maxx has a strong market presence with

3,050 stores today compared to 2,900 last year. It is the largest off-price retailer store in the U.S.

Also, the company’s off-price business is flexible and allow the business adaptation to market

trends.

One weakness the company faces is the ongoing lawsuits from former employees that can

affect the brand image. These lawsuits bring fines and penalties increasing the costs of the

company. Some law-suits are Halton-Hurt versus TJ Maxx or Ahmed versus TJ Maxx. The

lawsuits are related to fairly employment and minimum wage. Note that it has nothing to do with

patent infringement or other more important lawsuit that could have a bigger impact on any

company.

The main opportunities of the company are growth prospect in online retailing and

business expansion.

The rising trend of online retailing has two faces for TJ Maxx. The company does not perform

yet online retailing in a world where most people adapt to a new way of shopping. Not doing

online retailing is a weakness for the company; however, the growth of the company shows the

attachment of the customers to it. Online selling has raised over 600% in the past decade and will

keep increasing. It is a tremendous opportunity for TJ Maxx to enter the online retailing

commerce which would decrease its operating cost and increase profits. TJ Maxx has been doing

well for the recent years and has a good outlook for the future. Online retailing is a huge

opportunity which when will be performed will increase significantly the value of the company.

The main threats of the company are the global economic scenario, the highly

competitive market and the growth of the production of counterfeit goods.

The global economic slowdown, especially in Europe constitutes a challenge to the company.

After the recent years of the global economic slowdown, the recovery is still slow. It is quite

hard for a company to expand in new markets when the economy is not optimal. Still, despite the

slow motion of the economy, numbers are supposed to increase. According to the World Bank,

global GDP is expected to expand 3% during the next year and 3.3% in 2015. The global trade is

expected to expand 4%; a number significantly lower than 7.3% of the pre-crisis.

Another threat it the highly competitive market. TJ Maxx faces competition from other big

players in the national and international market. Most of the competition affects employees,

product availability, customer service, product offerings, and quality and price. American Eagle,

Charlotte Russe, as well as online retailers are example of competitors. In general competition is

a threat to a division of market shares.

Last, the company product lines, such as casual, athletic and fashion footwear faces counterfeit

product risk. According to the Counterfeit Intelligence Bureau, such goods make about 7% of the

world trade. The apparel and footwear industries estimate annual loss on counterfeit goods of

about $12 billion. The rise of counterfeit goods affect the business growth prospects especially

when it comes to enter new markets that are difficult to analyze. iii

Recently, TJ Maxx has increased its third quarter and 2014 guidance. The company has

announced its store expansion plan and its long term earnings and top line growth target.

Moreover, TJ Maxx expects their sales to increase 4% during this year third quarter while

announced to be 2 to 3%. Last year the company had already announced a comparable sales

growth of 7% during the same period. This shows that the company is on the right track selling

their goods and explains the increase in the asset turnover ratio.

The positive outlook for the current year third quarter has led to an increase in the estimations for

next year. In fact, the company expects it earning per share to be $2.82 compared to a previous

estimation of $2.78; a 13% increase compared to last year earnings of $2.47.

In terms of the store expansion plans, the company has had an aggressive program toward

opening new stores. During the fiscal year 2013 the number of stores went up from 2905 to

3050. The company targets to open over 50% new locations by the end of fiscal year 2014. Most

of the stores will be open in the United States and Europe. The company has been doing well in

the European countries despite the slow economic recovery and much better than its competitors.

Also, the company expects its profit margin to be around 10% while previously targeted at 8%.

Looking into the future, TJ Maxx expects its earning per share to grow at 10% to 113% over the

next three years. The revenues are expect to grow at 6% from the increase in square footage

growth, segment profit margin expansion and a share buyback program. iv

Based on the business analysis of TJ Maxx, I have decided to give a 7 years moat. It is

clear that the company has a current competitive advantage over its competitors in the U.S and

other countries. During the past years the company has been doing well and its expansion plans

for the future picture a positive outlook. Consumers recognize the strong brand of the company

through its different stores. The company has high margins and expect to get them even higher

and therefore deserve a consequent moat.

4.3 Gap Inc

Gap Inc was founded in 1969 and is headquartered in San Francisco, California. It is an

apparel retail company and offers apparel, accessories, and personal care products for men,

women, children, and babies. The main brands are Gap, Old Navy, Banana Republic, Piperlime,

Athleta, and Intermix brands. The company has about 3100 stores, 300 franchises stores, and e-

commerce sites in 90 countries worldwide. The company has stores in Asia, Australia, Eastern

Europe, Latin America, Middle East, and Africa under the Gap and Banana Republic brands.

What are the strengths, weaknesses, opportunities and threats of the company?

The company strengths are the strong brand image and its net profit margin, a strong

brand image, and the franchises. The net profit margin of the company was 6.5% in 2011, while

the competitors American Eagle and TJ Maxx had respectively 6% and 6.8%. It shows the ability

of the company to compete with other companies in terms of profit margins. The net profit

margins are currently 7.25% for Gap Inc and 7.37% for TJ Maxx. Since the 1990’s, the company

has established a strong brand image to its customers through the use of successful ads and

slogans such as ‘fall into the gap.’ When the company tried to change their logo in 2010, the

customers were mad and as a result the stock price of the company had dropped making the

company going back to the original logo. This shows how much customers care about what the

company does. Gap has stores in many countries and use efficiently franchises to be represented

almost everywhere. For instance, there is a Gap store in my country Gabon which is not attached

in general to franchises and strong branding. There is no McDonald's, neither Walmart but Gap.

The strong brand name and availability of good in many countries is one distinction that Gap

holds compares to its direct competitors. Even though TJ Maxx is established internationally,

there is no comparison to Gap reputation.

The main weakness the company faces is the assignment of its costs compared to other

vendors. Almost 30% of the manufacturing of the company is in China and this might lead to a

decrease in its margins because of the increase in labor wages. The urban household income in

China went up 13% from 2009 to 2012. Also, the government trying to promote consumption of

the Chinese consumers is correlated with a wage increase that will increase the cost of

manufacturing in that country. It would create an important cost to restructure the manufacturing

process and avoid these costs.

The main opportunities faced by Gap Inc are the falling price of cotton and an increase in

online channel as well as the growing plus size market. First, note that a decrease in the price of

cotton and an increase in online retailing is beneficial to all the companies in the apparel retail

industry and therefore Gap ’competitors. the main opportunity, however, is the growing of plus

size market. More than two thirds of the American population is overweight and people have

difficulties to find what they want in stores. While American Eagle offers big size only in their

online stores, TJ Maxx does it in-store. Gap ,however, does a better Job in providing big size in

stores and online and while lots of people complain about getting what the size they need, it will

be easier for the company to expand what they have and get a bigger market share. Also, the

rising production cost presented earlier as weakness because of the great amount of manufactures

the company has in China constitutes an important threat. v

In terms of financial analysis, the company has a strong free cash flow that allow for the

repurchase shares and increase their shareholder’s value. Recently, the company increased its

dividends to 80 cents; an increase of over 50%. The company has repurchased its shares and paid

out dividends for a value of $14 billion. The company has realized a growth in its sales

performance due to a good promotional campaign. Up to August, the monthly revenues in 2013

were higher than last year except for the month of March. vi

Based on the SWOT analysis of the company, a moat of 4 years should be attributed.

Despite the strong branding the company has, it has faces difficulties due to the slow economic

recovery in Europe and the U.S. While the company wants to expand it is not sure if it will

succeed because of the high competition from companies such as American Eagle, Abercrombie

and Fitch, or TJ Maxx.

4.4 Home Depot

The Home Depot, Inc. is a home improvement retailer. The company offers building

material, lawn and garden supplies, and home improvement products. It is the world’s largest

home improvement retailer. The main services offered can be cut in three categories: the do-it-

yourself, do-it-for-me, and professional customers. Today, the company operates about 2,258

retail stores in the U.S, Canada, and Mexico.

The main strengths of the company are its bargaining power, the improvement of the

supply chain, and improving customer satisfaction. Being the largest home improvement retailer

gives the company a high bargaining power that helps it to produce at lower costs. The company

offers everyday low pricing which provides value and loyalty from its customers. The company

improvement of its supply chain through the establishment of rapid deployment centers helps it

compete with their main competitor Lowe’s. Finally, the company focuses on maintaining

customer’s reliance by increasing its net promoter scores. NPS measures the probability of a

customer to refer the company to a friend. AS NPS increases that means the company is doing

better giving back value to customers.

The main weaknesses of the company are the declining opportunities of growth in

domestic market and some legal proceedings. The domestic market for home improvement is

mature and therefore reduces the opportunities for growth. Internationally, Home Depot has been

doing well in Mexico but failed in China. China is the main emerging market when companies

try to expand internationally. A failure to access the Chinese market reduces considerably the

growth opportunities. Also, for the past years Home Depot has faced some lawsuits from

customers which are not good for the company brand.

The opportunities for home improvement are promising. First, a recent consumer survey

revealed that 64% of U.S homeowners are planning on renovating their houses. Also, the

increase in the immigrant population pictures an increase in the demand for homes and therefore

for the demand for building materials provided by Home Depot. Finally, customers are currently

looking into energy efficient products. Since 2007, Home Depot has launched a Eco Options

program that offered about 4,000 energy efficient products. There is still room for market share

in green retailing. vii

Finally, the outlook for the housing market constitutes a threat for Home Depot. While

the housing market has improved about 8% over the past year there is still uncertainty that the

market will crash back. Lest Christie researched information about the housing market when she

published her article in CNNmoney “3 reason that the housing recovery may not last.” The first

factor is that the housing recovery is held by investors and therefore driven by some type of

speculation. The second factor is the slow growth of the economy and employment rates. Last,

the government cuts might lead to a decrease in income and therefore affecting the GDP growth. viii

In August 2013, Home depot had released positive information in regards of its financial

statements. The U.S store sales had increased 11.4% compared to last year earnings. Also, the

earning per share were 22% up at $1.24 higher of estimates for $1.21. The company reviewed its

annual earnings per share previously estimated at $3.52 to $3.6. The company has bought $4.3

billion worth of shares during the first half of 2013 which lead to the increase of the earnings per

share. Finally, the company overall earnings growth of 9.5% during the second quarter were

concurrent with a 17.5% increase in operating profit margin. ix

Given the SWOT analysis and recent financial performance, a moat of 5 years should be attributed to Home Depot. The company presents a strong brand over its customers and has increased it margins over the past year. Also after the failure in China and cost that are now looked behind, the company has increased its experience of the international market and can now look forward for new expansion. Unfortunately, the outlook for the housing market in the U.S is still uncertain and it is still hard to predict what will happen.

4.5 Lowe’s Companies Inc.

Lowe’s companies, Inc. is the second largest home improvement retailer after Home

Depot. The company offers maintenance products, repair, home decorating and remodeling. It

also provides installation services through independent contractors. The company services

consist of do-it-yourself, do-it-for-me, and commercial businesses. Currently the company has

about 1,758 stores in the United States, Canada, and Mexico. It has a good online presence

through its online sites Lowes.com, Lowes.ca, and ATGstore.com. Following is the SWOT

analysis of the company.

The strengths of Lowe’s companies are its efficient marketing and merchandising, an

efficient distribution system, and an enhanced multi-channel experience. The company has

effective specific store department to respond to customer needs. Some examples are the drive

through lumber yards and outdoor garden centers. The company has 14 regional distribution

system and 15 flatbed distribution centers for lumber, building materials, and long-length items.

It helps the company to distribute its merchandise to its stores efficiently and make orders at

discounts. This helps passing saving to the customers. The company technological service is

great because it helps customers be flexible in how they want to make their purchase. The

flexible fulfillment system was implemented in 2012 and helps customers make orders online

and have them delivered within two days at the desired location.

One weakness of the company is the lack of control in product manufacturing. The

company has about 7,000 suppliers domestically and internationally; therefore, it has little

control over the quality and risk related to foreign policies. For instance the increase in Chinese

wages will increase the cost of the items purchased in that location. Moreover, the company

international market is limited to Canada and Mexico even though they do ship worldwide. The

lack of presence in foreign countries limits the market size. Finally, the company has faced some

recalls in items sold exclusively by them. This is not good for the company brand image.

The opportunities of the company are based on online sales, increase in home

improvement, and purchasing power and growth of immigrant population. First, the company

offers more than 250,000 items online and, as the Department of Commerce noticed, the increase

in online retailing, it is a good opportunity for the company to provide good online service. It is

not only an opportunity to the company but to the competitors too; therefore they need to find a

comparative advantage in hoe they can provide better services. Earlier, I discussed the

opportunities for Home Depot and most of them can be applied to Lowe’s. The increase in the

home improvement demand as people are looking for more durable investment after the crisis is

good for the business. Finally, the increase in the immigrant population higher the demand for

building materials as the demand for homes increases.

The threats faced by Lowe’s companies are based on the economic condition of the U.S,

the competition, and the U.S housing market. The economic recovery is happening but is slow.

The unemployment rate decreases but not because many people getting jobs but mostly people

leaving the labor force. The government recent shut down brought fear to households and what

could happen. If Jobs are lost, household income will decrease which I not good for the housing

market. The company faces threat from the high bargaining power of its competitors to their

suppliers and needs to compete with pricing and in-stock merchandise if they want to maintain a

strong financial performance. As stated earlier, the outlook for the housing market is not clear.

Some people think it might crash again in which case the company will suffer a lot. x

On August 23rd 2013, Lowe’s companies had released its second quarter performance.

The company faced an increase in earnings of 26% compared to the previous year. Also the

diluted earnings per share increased 37.5% going from $0.64 last year to $0.88 this year. For the

six months period, the company saw its net earnings increased 16.2% compared to the same

period last year. Comparable sales for the second quarter went up 9.6%. Obviously, the company

has taken advantage of the small housing market increase. xi

Base on the SWOT analysis of Lowe’s companies and recent financial information, a

moat of 5 years should be attributed to the company. Lowe’s has presented its ability to take

advantage of market trends in the U.S. However, the company has smaller presence intentionally

than its competitor but has the opportunity to avoid the mistakes Home Depot has done and take

advantage in going strong expanding the international market. Both companies mostly face the

same opportunities and threats.

4.6 Target

Target is the second largest merchandiser behind Wal-Mart. The company’ operations

can be divided in three segments: U.S retail, U.S. credit card, and Canada retail. The company

provides a service preferred by the customers when compared to its rival but fail to provide low

prices. Currently the company has 1,870 stores of which 1,788 are in the United States and 82

stores in Canada. The company uses distribution centers, third parties, and shipping from

vendors to deliver its merchandise.

The main strength Target is its brand recognition. The company logo is well recognized

by the population and admired for the quality of the service it offers. Also, the company has

established a relationship with young consumers through the collaboration with well-known

artist such as Michael Graves, Mossimo, or Liz Ange. Moreover, the marketing campaign of the

company gives it a unique image among consumers. Finally, the company does well in gaining

loyalty from its customers by providing high-quality and innovative products.

The lack of international presence constitutes a weakness for the company. The entrance

in the Canadian market is still timid and the company needs to establish a strong marketing

campaign to satisfy that market to gain shares. For the past years the company faced some

lawsuits which lost them from their business goal. Also, the over emphasis of high quality

products makes them more expensive than their competitor. In a recovering economy, consumers

try to look for best prices and get them elsewhere; it is a disadvantage for the company.

Target outlook in the international market is important. The company has the ability to go

out there and gain share in the international market. An international expansion necessitates a

good understanding of the foreign market and its culture. The company can learn from the

mistakes its competitor has made to go stronger and more efficiently in overseas markets.

The main threat faced by Target is the competition with local, national, and international

retail stores. The company needs to battle against Wal-Mart which has a stronger bargaining

power among the suppliers to get and offer the best prices. The economic situation cuts

consumers disposable income and makes them more likely to go to the competition that offers

better prices.

In August 2013, Target has announced a 13% decrease in their profit for the comparable

second quarter. This is due to a more challenging environment in regards of it expansion in

Canada. Comparable total revenue went up 2%. In general, the company has had lower sales than

expected in its international market. Target expansion in Canada is their first international

experience and this is why it is so hard. However, the company has made it a long term goal and

believes they will be able to go strong in the market. Target is on track with its stores opening

and expects to open more stores the following year. The company will have 124 stores in Canada

by the end of the year. Based on the company performance, SWOT analysis, and released news,

a moat of 6 years is attributed. xii

5. Financial analysis

5.1 Revenue growth, Free Cash Flow, Net Operating Margin

Revenue growth shows the company ability to increase its sales. Over the past four years,

all the companies have done better than the average sales growth of the market at 1.56%. TJX

surpasses the revenue growth with an average of 9% while Lowe’s had the lowest average

growth of 1.89%. The most relevant information is that TJ Maxx and Target are the only two

companies that faced an increasing growth of sales over the years except for 2012 for TJX when

sales growth was a little lower. Also they are the only two companies that never had a sales

decrease during this period.

2010 2011 2012 2013 ttm

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Revenue growth

TJX HD TGT GPS LOW

Most companies have had a quiet constant growth of free cash flow. Home depot has had

a rapid growth of its free cash flow since 2009 due to a high growth in sales. Target has seen its

free cash flow growth decrease since 2011 because of the capital expenditure they are doing for

expanding in Canada; however, they still had an increase in their cash flows. TJX has seen its

cash flow growth increase due to a better management of its cost that caused an increase in profit

margins. Lowe’s companies and Gap Inc. had the slowest growth of cash flows. Gap Inc. had

seen its cash flow decreases in 2012 due to a drop in it sales performance; however, it bumped

back the following months.

2009 2010 2011 2012 20130

1000200030004000500060007000

Free Cash Flow

TJX HD TGT GPS LOW

Net Profit Margin illustrates the ability of companies to manage their cost. From the

graph, it is clear that Gap Inc. has the highest operating margin and the decrease in 2012 again is

due to the decrease in sales; it shows that most of the company costs are fixed. Home Depot and

TJ Max has done well over the past five years to constantly improve their margins. Target

Operating Margin, while they increased until 2011, decreased since then because of more

administrative expenses. During the SWOT analysis of LOWE’s Inc., one weakness was the lack

of control over the suppliers. Since 2009, the company has seen its cost of goods sold increase

significantly which reduce the margin of operations.

2009 2010 2011 2012 20130.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Net Operating Margin

TJX HD TGT GPS LOW

5.2 Earnings Quality analysis, and Inventory Turnover.

Earning qualities are measured from computing the ratio of operating cash flows over net income. A ratio less than 1 suggests that the net income is overstated while a ration greater than 1 suggests that net income is understated. All the companies have an understated net income. In the 2013 trailing twelve month, Target’s net income is the most understated.

Earnings quality2009 2010 2011 2012 2013

TJX 1.31 1.87 1.47 1.28 1.28HD 2.45 1.93 1.37 1.71 1.49TGT 2.00 2.36 1.81 1.86 2.57GPS 1.46 1.75 1.45 1.64 1.41LOW 1.88 2.29 1.93 2.38 2.01

The inventory turnover ratio is a good indicator for retail companies because it shows

their ability to sale and regenerate their inventory. Target has the best inventory turnover ratio,

while TJ Maxx and Gap Inc. do significantly well. Home Depot does better in comparison to its

competitor Lowe’s. Also it makes sense that the two companies have lower inventories turnover

due to the high seasonal products. Target does better because of highly consumed goods that are

constantly renewed in stores. An example is food.

2009 2010 2011 2012 20130.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Inventory turnover ratio

TJX HD TGT GPS LOW

5.3 Dupont Analysis: study of ROE and its factors

For the past 5 year, the return on equity is higher for TJ Maxx. The company does well in

giving value back to its shareholders offering sometimes twice as more than the second highest

on the list Gap Inc. Gap has been doing well in valuing its shareholders. Lowe’s companies has

done the worst, lower than the S&P 500 and the consumer discretionary sector. Home Depot has

constantly increased it ROE for the past 5 years. Target has usually moved along with the market

and the sector, doing better than the market but less than the sector.

2009 2010 2011 2012 20130.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Return on Equity

S&P 500 Cons disc TJX HD TGT GPS LOW

It is impossible to analyze the return on equity without understanding what is going on in

its drivers.

2009 2010 2011 2012 2013 ttm0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

10.00%

Net Profit Margin

S&P 500 Cons disc TJX HD TGT GPS LOW

In general the net profit margin is dominated by the market and the consumer

discretionary sector. Remember NPM describes the amount of money a company keeps from its

sales. It is an important indicator. Gap Inc. had the highest NMP until the past two years because

of the increase in labor wages in Chinese manufactures. TJX saw its NPM increasing over the

years which illustrate the company ability to keep more cash from its sales. Lowe’s companies in

contrast has seen its NPM decrease over the years because of the lack of control over the

manufacturing of its goods.

2009 2010 2011 2012 20130.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

Asset turnover ratio

S&P 500 Cons disc TJX HD TGT GPS LOW

Most companies as well as the S&P 500 and the consumer discretionary sector has had a

quite constant asset turnover ratio. TJX has done much better than anybody else, Gap Inc. comes

second, Home Depot third, at fourth place is Target and then Lowe’s. It is hard to compare the

companies because of the different nature of their activities; still, they all do better than the

market and the sector.

2009 2010 2011 2012 20130

1

2

3

4

5

6

Equity Multiplier

S&P 500 Cons disc TJX HD TGT GPS LOW

The equity multiplier or leverage illustrate how much of a company is financed through

debt. In general, the S&P 500 and the sector were both more financed through debt. It looks

better the lower the debt used by the company. Target is the company with higher debt; this is

due to the fact of their expansion plan. Lowe’s had lower debt financing most of the time.

In general it is hard to understand or view the numbers given by the Dupont analysis

because of the number of factors. This is why I have created a way to grade the companies and

try to estimate which provides better ROE. The way the grade works is by giving weight to the

three factors in term of the more important. A weight of 50% is given to NPM, 40% to asset

turnover ratio and 10% to leverage. Also every company is graded out of 10 under each of these

factors. A grade of 10 is given to the company that has the highest NMP, highest asset turnover

and lower leverage. The result are in the following table:

Dupont Analysis

ROE NPM Asset Turnover LeverageGrade/10

S&P 5000.13475

68.35

% 0.354.638847

5 8.55

Cons disc0.20677

36.92

% 0.923.245165

8 8.3

TJX0.51916

27.37

% 2.595 2.595 9.5HD 0.3223 6.07 2.311 2.311 8.85

%

TGT0.16903

94.09

% 2.909 2.909 8.65

GPS0.37449

47.25

% 2.581 2.581 9.5

LOW0.16467

63.88

% 2.357 2.357 8.1

Based on the system graded for the Dupont analysis, TJ Max and Gap Inc. have the

highest grade. Followed are Home Depot and Target. Then come the S&P 500, the consumer

discretionary sector, and Lowe’s companies.

5.4 Abnormal returns based on ROE less cost of capital

TJX HD TGT GPS LOW0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

ROE-Ke

All the companies are able to provide abnormal returns. TJ Maxx does better than all the

other companies with a difference of ROE to cost of equity of nearly 40%. Gap Inc. is the second

highest then come home depot and Target. Lowe’s companies have the lowest abnormal returns.

These results are consistent with the previous ranking based on the grade given for the

quality of the return on equity. Furthermore, TJX which has high performances has the strongest

moat.

6. Valuation analysis

6.1 Discounted cash flows models

In order to back out an implied growth rate, I have used a two-stage discounted cash

flow. The implied growth rate is obtained using the price of the closing price of the stock on

November 6th, 2013. The high growth period used is based on the assigned most of each

company. The over variable such as earning per share, dividend per share, or cash flow per share

were obtained using the data offered from the S&P Net advantage. An arbitrary constant growth

rate of 2% was given based on inflation rates.

The free cash flow method has shown that all the companies were much undervalued if

we compare the obtained implied growth rate to the analysts 5 years estimate. Also it is shown

that 2 out five companies could lower their earnings.

The economic value added model is segregated. Base on the numbers, TJ Max, Home Depot,

and Gap Inc. have close numbers to the analyst estimates but still present the companies as

undervalued. Based on this model, Target is the most undervalued company and Lowe’s is the

only overvalued company.

The discounted cash flow model presents all the companies as overvalued Gap Inc. being the

most overvalued followed by TJX, LOW, and HD. Target seems to be the less overvalue based

on this numbers.

Free cash flow modelTJX HD TGT GPS LOW

5-years Analyst growth predictions 11.23% 15.92% 10.48% 13.35% 17.21%Current stock price 61.72 76.42 65.7 38.02 49.97Cost of Equity 8.33% 8.90% 8.90% 9.47% 9.47%

Cash Flow/share 4.207 4.7 8.252 4.181 3.389High growth period 7 5 6 4 5Terminal growth rate 2.00% 2.00% 2.00% 2.00% 2.00%Implied high growth rate 0.38% 4.20% -9.98% -9% 3.80%

Economic value added modelCurrent stock price 61.72 76.42 65.7 38.02 49.97Cost of Equity 8.33% 8.90% 8.90% 9.47% 9.47%Earnings per share 2.55 3 4.28 2.33 1.43High growth period 7 5 6 4 5Terminal growth rate 2.0% 2.0% 2.0% 2.0% 2.0%Implied high growth rate 9.15% 15.15% 2.75% 7.14% 25.68%

Dividend discount modelCurrent stock price 61.72 76.42 65.7 38.02 49.97Cost of Equity 8.33% 8.90% 8.90% 9.47% 9.47%Dividend per share 0.44 1.16 1.32 0.5 0.62High growth period 7 5 6 4 5Terminal growth rate 2.0% 2.0% 2.0% 2.0% 2.0%Implied high growth rate 43.47% 41.23% 27.92% 61.37% 50.18%

There is no such thing as a right or wrong model. The only thing to do is to try as much

as possible. The following table describes a sensitivity analysis based different period of high

growths. In the best case scenario all companies were added three more years for a maximum of

seven years. For the worst case scenario all companies’ high growth period was reduced by 3

years for a lowest period of 3 years.

In the best case scenario, all the companies are overvalued compared to analysts’

estimates. TJ Maxx seems to be the most overvalued company while Home Depot and Target are

the closest but still about 14% higher. In the worst case scenario, companies are moving all over

and there is no much information to get from this. The data shows that the company are so much

overvalued that without looking at other data it would make sense to feel like giving up, but not

yet.

Dividend discount sensitivity analysis-Period of High growthBest case scenario TJX HD TGT GPS LOWPeriod of High growth 7 7 7 7 7Implied growth rate 43.47% 29.90% 24.36% 34.77% 35.98%Current estimate TJX HD TGT GPS LOWPeriod of High growth 7 5 6 4 5

Implied growth rate 43.47% 41.23% 27.92% 61.37% 50.18%Worst case scenario TJX HD TGT GPS LOWPeriod of High growth 4 3 4 3 3Implied growth rate 43.47% 71.66% 41.21% 85.64% 89.38%

Estimate high growth rate is a hard. After looking at the previous numbers I was skeptic

about what was wrong. It is hard to think that analysts could be wrong. Following this analysis I

started doing the Damodaran’regression using the analysts’ predicted growth rate and the result

was brutal: All the companies seemed to be over-valued. Then, I decided to look at the

company’s 5 years average historical growth. The data is summarized in the table below.

Analyst expectation Average growth Implied growth DDMTJX 11.20% 37.62% 43.47%HD 15.90% 7.65% 41.23%TGT 10.50% 13.61% 27.92%GPS 13.40% 19.81% 61.37%LOW 17.20% 8.22% 50.18%

The first information to get from this table is three companies out of five have had a

higher average growth than the analysts ‘estimate. Only two companies had lower average

growth to estimates. Also implied high growth was closer to average growth, still higher, for TJ

Maxx and Target. However, for two companies that initiate in international expansion, TJ Maxx

in Europe and Target in Canada, it should be normal that they would have higher growth

estimate. Therefore I cautiously used the growth rate to use for the Damodaran model. I did not

want to take the smallest numbers because it would not make sense for companies that plan to

expand to have lower growth rate than their average. Therefore, I decided to use the average

growth rate for TJ Maxx and Target. Home Depot has a strong brand recognition and I therefore

decided to use the analysts estimate. Gap Inc. has a strong brand name and keeps looking at the

international expansion and therefore got the average earnings growth. Finally Lowe’s

companies are trying to get in the Canadian market and should increase its revenue in the next

years. The analyst estimate was twice higher than the company average and I found. I therefore

took the average number of the analysts ‘estimate and the company’s average earning growth.

The next step is to apply it to the Damodaran’model.

6.2 The Damodaran’regression

Completing a valuation analysis for companies is not easy. There are many ratios that

analyst look at. The main ratio analyst often look at are Price/Book, Price/Sales, and

Price/Earnings. Looking at these numbers by themselves does not make any sense neither. It is

important to look at the factors that drive the ratios. For instance, a company with high return on

equity should expect to have a high Price/Book. However, this is only a one to one facto analysis

and ratio such as the one cited previously are driven by other factors and looking at one is

meaningless. The Damodaran regression has analyze the factors that drive ratio such as P/B, P/S,

and P/E. This regression was made using all the companies in the market and the results are

explained trough the following equations:

PE= 7.95+ 57.72g+ 11.48 Payout-3.6Beta (R^2 = 35.4%)

PB= 0.18+ 6.44g +1.17Payout- 0.77 Beta + 11.28 ROE (R^2= 60.5%)

PS= 0.7 Payout + 4.11g – 0.47 Beta + 12.87 NPM (R^2= 64%)

In order to have a more consistent valuation of the companies, each one is placed in to

regression line illustrated by these formulas. The following table reveals the result from the regression.

G Payout Beta ROE NPM Regression P/B Actual P/B Difference Regression P/S Actual P/S Difference Regression P/E Actual P/E Difference

TJX 37.6% 18.4% 0.8 51.9% 7.37% 8.06 11.39 41% 2.25 1.64 -27% 28.14 22.66 -19%HD 15.9% 42.0% 0.9 32.2% 6.07% 4.64 7.11 53% 1.31 1.41 8% 18.41 22.62 23%TGT 13.7% 25.6% 0.9 16.9% 4.09% 2.57 2.55 -1% 0.84 0.56 -34% 15.26 15.84 4%GPS 19.8% 28.3% 1 37.5% 7.25% 5.24 5.08 -3% 1.48 1.08 -27% 18.64 14.01 -25%LOW 12.7% 28.4% 1 16.5% 3.88% 2.42 4.08 69% 0.75 1.02 36% 14.69 25.59 74%

TJX 40.6% 18.4% 0.8 51.9% 7.37% 8.25 11.39 38% 2.37 1.64 -31% 29.81 22.66 -24%HD 18.9% 42.0% 0.9 32.2% 6.07% 4.83 7.11 47% 1.43 1.41 -1% 20.08 22.62 13%TGT 16.7% 25.6% 0.9 16.9% 4.09% 2.77 2.55 -8% 0.97 0.56 -42% 16.93 15.84 -6%GPS 22.8% 28.3% 1 37.5% 7.25% 5.43 5.08 -7% 1.60 1.08 -32% 20.31 14.01 -31%LOW 15.7% 28.4% 1 16.5% 3.88% 2.61 4.08 56% 0.87 1.02 17% 16.37 25.59 56%

TJX 34.7% 18.4% 0.8 51.9% 7.37% 7.87 11.39 45% 2.13 1.64 -23% 26.51 22.62 -15%HD 12.9% 42.0% 0.9 32.2% 6.07% 4.45 7.11 60% 1.18 1.41 19% 16.72 18.01 8%TGT 10.7% 25.6% 0.9 16.9% 4.09% 2.38 2.55 7% 0.72 0.56 -22% 13.61 15.84 16%GPS 16.8% 28.3% 1 37.5% 7.25% 5.05 5.08 1% 1.35 1.08 -20% 16.96 14.01 -17%LOW 9.7% 28.4% 1 16.5% 3.88% 2.22 4.08 83% 0.63 1.02 63% 13.02 25.59 97%

Undervalued companies

Damodoran's Regression and Sensitivity Analysis

Current Estimates

Best Case Scenario

Worst Case Scenario

Overvalued companies

The first time I implemented the Damodoran’regression I had used the analysts estimated

growth for the next five years. Previously, I explained that I had changed the growth rate in

analyzing five years historical growth rate with the business analysis. The result was that it

would have been wrong to use the analyst’s estimates in this model; thus, I have use the growth

rates that I determined based on my logical analysis in this regression. The result is totally

different. Recall that the difference number in the regression represents the percentage change in

the factor compared to where it is now. The current data was obtained based on valuation data

from yahoo finance. Moreover, the best case scenario and worst case scenario are computed by

respectively adding or subtracting 3% from the current growth estimate.

TJ Maxx regression analysis has shown that with current estimates of growth, the

company looks overvalued compared to same companies with same characteristics in the market

in terms of P/B. Based on the P/B analysis, the company is the lower overvalued company

among others but does worse than Target and Gap Inc. that appear undervalued. In terms of P/S,

the company is the second among undervalued companies, beaten by Target. TJX seems to be

undervalued as well based on P/E analysis but has a slightly lower performance compared to Gap

Inc. In the best case scenario, the company is overvalued based on P/B, but undervalued based

on P/S, and P/E analysis. In the worst case scenario, analysis for P/B does not change, P/S sends

the company as the most undervalued, and analysis for P/E is the same.

Target is the only company that seemed undervalued under the best case scenario for all

the factors. In current estimates of growth, the company is one of the two undervalued based on

P/B. The company does better than the others based on P/S but seems overvalued in terms of

P/E. In the worst case scenario, the company is overvalued based on P/B and P/E.

Gap Inc. is the only company to be undervalued in all the factors in both current growth

estimate and best case scenario. In current growth estimate of the company, it is the most

undervalued based on P/B and P/E ratios. In the worst case scenario, which is not likely to

happen, the company will be overvalued based on P/B, but undervalued in terms of P/S and P/E.

Finally, Home Depot and Lowe’s appear to be the most overvalued companies in general.

Gap Inc. is the most undervalued company based on the regression.

7. Recommendation review

Based on the business, financial, and valuation analysis, I recommend to sell Target and

Buy TJ Maxx. This is not a random answer but comes from a careful analysis. I have been

thinking a lot how I would made my decision and wanted to avoid as much as I could to avoid

base my decision on sentiments. At that effect, I have created a mathematical that I would base

my decision on. I have looked for the most important factors I have made this report on. It came

off that I selected five factors: Business analysis, Earnings quality, Dupont analysis, discounted

cash flows, and Damadoran’regression.

The business analysis and Earnings quality count for 15% of the grade each. The Dupont

Analysis and Damodaran’regression count for 30% each. Finally, the discounted cash flow

counts for 10%. The reason the Dupont analysis and Damodaran’regression count for more

because they are the only two factors that have three other factors underneath them. The

discounted cash flows implied growth rate accounts for the less because it was the less precise

valuation of the report and did not bring any valuable information.

The Dupont analysis was broken into its three factors: Net profit margin, Asset turnover

ratio, and Equity multiplier. The Net profit margin is the most important of the factors and

therefore accounts for 50% of the overall Dupont analysis grade. The asset turnover ratio

accounts for 40% of the grade and the Equity multiplier 10%. The result is summarized in the

following table.

NPMAsset Turnover

Leverage Grade

0.5 0.4 0.1TJX 9.5 9.5 9.5 9.5HD 8.5 9 10 8.85TGT 7.5 10 9 8.65GPS 9.5 9.5 9.5 9.5LOW 7 9 10 8.1

Based on this analysis, TJ Maxx and Gap Inc. are the strongest companies.

The Damodaran’regression valuates three man factors: Price/Book, Price/Sales, and

Price/Earnings. P/B counts for 40% of the grade, P/S for 30%, and P/E 30%. The result for this

analysis is summarized in the following table:

P/B P/S P/EWeight 0.4 0.3 0.3 GradeTJX 9 9.5 9.5 9.3HD 8.5 9 8.5 8.65TGT 9.5 10 9 9.5GPS 10 9.5 10 9.85LOW 8 8.5 8 8.15

Based on this analysis, Gap Inc. and Target are the strongest companies.

Overall, the complete mathematical analysis revealed that TJ Maxx should be the

company to buy and the result is summarized in the following table.

Moat analysis Earnings quality Dupont Analysis Discounted cash Flows Damodaran regression RecommandationWeight 0.15 0.15 0.3 0.1 0.3TJX 10 9 9.5 9.5 9.3 9.44HD 9 9.5 8.85 9 8.65 8.925TGT 9.5 10 8.65 10 9.5 9.37GPS 8.5 9.5 9.5 8.5 9.85 9.355LOW 9 10 8.1 8.5 8.15 8.575

Final Recommandation

As presented in the table, all the companies were graded out of 10 for each factor

analyzed. In the moat analysis, the company with the highest moat obtained a 10. The company

that had the highest earnings quality ratio obtained a 10 as well. Finally the company which

seemed the less overvalued based on the discounted cash flows analysis obtained a 10. The result

is clear, TJX is the company to buy.

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ii Asaeda, Jason. Industry Surveys - Apparel & Footwear: Retailers and Brands. Rep. New York: Standard & Poor's, n.d. NetAdvantage. Web. October 28, 2013.

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viii Christie, Les. “3 reasons the housing recovery may not last.” CnnMoney. April 18, 2013 Web. November 2nd, 2013. < http://money.cnn.com/2013/04/18/real_estate/housing-recovery/>

ix Michael, Santoli. “Home Depot: Still the most important stock.” Yahoo finance. August 20, 2013. Web. October 28, 2013. < http://finance.yahoo.com/blogs/michael-santoli/home-depot-still-most-important-stock-better-worse-171235709.html >

x "SWOT Analysis Lowe's Companies Inc." SitesGoogle. 2012. Web. November 4, 2013.

xi “Lowe’s Reports Second Quarter Sales and Earnings Results.” Yahoo Finance. August 21,

2013. Web. October 29, 2013. < http://finance.yahoo.com/news/lowe-reports-second-quarter-sales-100000378.html>

xii “Target Set to Complete Canadian Store Openings for 2013.” Yahoo Finance. October 28,

2013 Web. November 2nd, 2013. < http://finance.yahoo.com/news/target-set-complete-canadian-store-130000531.html>

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