DuPont Analysis: Wal-Mart Vs. Target

Includes: TGT, WMT
by: Bennington Investment Ideas

As the holiday shopping season fast approaches, my thoughts are turning to retailers and how they might perform. The Christmas shopping quarter from November to the end of January is a make or break period for many retailers. Without question, it is the peak quarter for revenue and often profits. There is also no question that Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) will be ready for the shopping season. These two industry titans battle it out year in and year out.

There are many financial analyses that can be applied to get a better understanding of the strengths and weaknesses of competing companies. There are a variety of ratios for performance, liquidity and cash management.

DuPont Analysis is another way to dig a little further into the companies to see what similarities (or differences) there might be. DuPont Analysis is a view of breaking down Return on Equity (ROE) into factors that can be further analyzed. These factors are commonly a profitability measure, a turnover measure, and a leverage measure. DuPont Analysis was created by E. I. du Pont de Nemours and Company (NYSE: DD) in the 1920s. For this analysis, I looked at a five factor analysis:

DuPont Analysis Factors
Factor Calculation
Asset Turnover Revenue/ Average Assets
Profitability Net Income/ Revenue
Interest Burden (EBIT - Interest Expense)/EBIT
Tax Efficiency* 1 - "Tax Expense"/(EBIT - Interest Expense)
Leverage Average Assets/Average Equity

*For simplification, I've included minority interest in tax expense and ignored the impact of some minor discontinued operations.

More simplified versions of the DuPont Analysis will treat the middle three factors as a single profitability factor that looks at net income to revenue. However, companies have become more focused on tax reporting, and this increases the overall complexity. While leverage is calculated in the Asset to Equity ratio, the cost of the leverage is lost in the profitability margin. Possibly one company has obtained lower cost debt than another, and that financial engineering is different from how it runs its day to day operations. It should also be noted that the values for tax expense are book accounting values, and not the same as the ones reported to the IRS, which are tax accounting values.

The first step of completing the analysis is to pull some basic financial data for both companies as listed below. All figures are in $ billions:

WMT Basic Data

Basic Financial Data WMT Data Quarter ending July 2011 Quarter ending Oct 2011 Quarter Ending January 2012 Quarter Ending April 2012 Quarter Ending July 2012
Revenue 104.2 109.4 110.2 123.2 113.0
EBIT 5.9 6.4 5.9 8.4 6.4
Interest Expense 0.6 0.6 0.6 0.6 0.6
Tax Expense* 2.0 2.0 2.0 2.7 2.1
Net Income 3.4 3.8 3.3 5.2 3.7
Assets 186.1 193.7 195.0 193.4 197.1
Equity 65.0 67.9 67.2 71.3 69.0

Source: Yahoo Finance *Includes adjustments for minority interests but has limited impact

Basic Data TGT

Basic Financial Data TGT Data Quarter ending July 2011 Quarter ending Oct 2011 Quarter Ending January 2012 Quarter Ending April 2012 Quarter Ending July 2012
Revenue 15.9 16.2 16.4 21.3 16.9
EBIT 1.2 1.3 1.1 1.7 1.3
Interest Expense 0.2 0.2 0.2 0.3 0.2
Tax Expense* 0.4 0.4 0.3 0.4 0.4
Net Income 0.7 0.7 0.6 1.0 0.7
Assets 43.0 45.5 48.4 46.6 46.2
Equity 15.2 15.1 15.3 15.8 15.9

Source: Yahoo!Finance *Includes adjustments for minority interests but has limited impact

This data can then be converted into the ROE breakdown to see what differences there are between the two companies.

DuPont Analysis - WMT
DuPont Analysis Factors Factor Quarter ending July 2011 Quarter ending Oct 2011 Quarter Ending January 2012 Quarter Ending April 2012 Quarter Ending July 2012
Asset Turnover 0.58 0.57 0.63 0.58 0.58
Profitability 5.9% 5.4% 6.8% 5.7% 5.9%
Interest Burden 0.91 0.90 0.93 0.91 0.92
Tax Efficiency* 66% 62% 66% 64% 65%
Leverage 2.86 2.88 2.81 2.78 2.82
ROE 5.7% 4.9% 7.5% 5.3% 5.8%

Source:Author Calculations*Includes adjustments for minority interests

DuPont Analysis -TGT
DuPont Analysis Factors Factor Quarter ending July 2011 Quarter ending Oct 2011 Quarter Ending January 2012 Quarter Ending April 2012 Quarter Ending July 2012
Asset Turnover 0.37 0.35 0.45 0.36 0.36
Profitability 8.1% 6.5% 8.0% 7.6% 7.5%
Interest Burden 0.84 0.81 0.83 0.86 0.85
Tax Efficiency* 63% 65% 70% 63% 66%
Leverage 2.92 3.09 3.06 2.93 2.94
ROE 4.6% 3.7% 6.3% 4.4% 4.4%

Source:Author Calculations *Includes adjustments for minority interests

The first observation is that TGT tends to trail WMT on ROE. The other observation is that despite the holiday quarter, most values are relatively consistent across the time periods. However, there are some clear differences and similarities in components to explain this. The following table shows the average value across each dimension

DuPont Analysis Comparison
DuPont Analysis Factors Factor WMT TGT
Asset Turnover 0.59 0.38
Profitability 5.9% 7.5%
Interest Burden 0.91 0.84
Tax Efficiency* 64% 65%
Leverage 2.83 2.99
ROE 5.8% 4.7%

Source: Author Calculations *Adjusted for minority interest

This comparison shows the key differences. TGT has the higher profitability, but due to lower asset turnover it ends up with a lower ROE. Of secondary importance would be a heavier interest burden slightly offset by higher leverage.


WMT provides the superior ROE which is part of the reason of its higher overall success. WMT is one of the leading corporations in the world. Both companies have comparable tax efficiencies and almost the same leverage. For TGT to improve it should probably focus on Asset Turnover - how can it drive greater revenues from its existing assets. There is one note though that asset values are book values - it is possible that WMT has had greater depreciation lowering its book PP&E, reducing its overall asset level. While this analysis shows some of the key differences between TGT and WMT, it is not necessarily sufficient for an investment decision. An investment decision would require a perspective on valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.