Target's Receivables: Does a 3-Day CCC Showcase Efficient Cash Management?

Target's iconic bullseye symbolizes growth and success, but behind the scenes, cash flow challenges loom. With CCC shifting from -7 to 3 days and working capital plunging to -$1.8B, can Target maintain its momentum?

Target's iconic red bullseye is a symbol of quality, convenience, and style. With over 1,900 stores across the U.S., Target seamlessly combines affordability with a superior shopping experience, standing out in a highly competitive retail market.

In recent years, Target has demonstrated impressive financial growth, with revenues exceeding $100 billion for three consecutive years with a 5-year Compound Annual Growth Rate (CAGR) of 8.29% (from 2020 to 2024). This success reflects strong consumer trust and effective market strategies, particularly through investments in online platforms and same-day delivery services that cater to modern shoppers’ needs.

However, a deeper look at Target's financials reveals a concerning trend—a decline in working capital over the past few years!

Liquidity Concerns: Target's Working Capital Stands at -$1.8 Billion

In 2020, Target's working capital was $0.41 billion, rising to $0.63 billion in 2021, which can be attributed to the post-COVID recovery. However, it declined significantly, dropping to -$0.18 billion in 2022, -$1.65 billion in 2023, and -$1.8 billion in 2024.

This negative working capital indicates that current liabilities exceed current assets.

This prompts a deeper analysis of Target’s Order-to-Cash (O2C) metrics, starting with the Cash Conversion Cycle (CCC). The CCC reveals how long it takes Target to convert inventory into cash from sales. We’ll compare Target’s performance with industry leaders like Walmart, Kroger, and Costco.

Target converts inventory to cash 3 days faster than the industry average

Data shows that Target’s CCC shifted from negative (2020-2022) to positive in 2023-2024—rising from -7 days in 2022 to 3 days in 2024.

This suggests slower cash flow efficiency in recent years. Meanwhile, Target’s working capital has dropped—from $0.63 billion in 2021 to -$1.8 billion in 2024—raising concerns about liquidity.

However, despite this uptick in the CCC, Target's five-year average CCC of -2.6 days remains better than the industry benchmark of 1.35 days.

Let’s now deep dive to understand how the DSO, DIO and DPO metrics resulted in an increased CCC over the last few years!

Target collects cash 33% faster than its peers

Over the past five years, Target’s Days Sales Outstanding (DSO) has ranged from 1 to 4 days, with an average of 2.6 days—lower than the industry average of 3.9 days. However, DSO has gradually increased from 1 day in 2020 to 4 days in 2024.

Target's accounts receivable (AR) increased from $0.498 billion in 2020 to $0.891 billion in 2024. This rise aligns with the increasing DSO, indicating that more receivables are being carried over time as payments are being collected at a slower pace.

The total credit sales figure shows significant fluctuations, peaking at $181.77 billion in 2020 and declining to $81.30 billion in 2024. This decline could reflect a shift in changes in customer preferences or economic factors affecting credit-based purchasing.

What could be the reason for an increased DSO? 

Recent changes in consumer trends and instances of public outrage against the brand may have affected payment trends, potentially leading to an increase in Days Sales Outstanding (DSO) over the last five years.

1. Decline in brand perception: Target's 2023 10-K form notes that "negative incidents involving us, our workforce, or others with whom we do business could quickly erode trust and confidence, resulting in changes in consumer behavior (including consumer boycotts), workforce unrest, or government investigations."
2. Shifting consumer behavior: The 10-K also highlights the challenge of responding to changing consumer preferences, noting that "a large part of our business depends on our ability to make trend-right decisions in a broad range of merchandise categories. Failure to quickly respond to changing consumer preferences could lead to lower sales, spoilage, and increased markdowns."
3. Increased online sales: Target's e-commerce growth has been significant, with digital sales rising 163% in 2020 and 8.7% in Q2 2024. However, e-commerce brings challenges. In 2023, online purchases had a 17.6% return rate compared to 10.02% for brick-and-mortar stores. This higher return rate could impact Target's inventory management and cash flow, adding complexity to their financial operations. Managing these factors is crucial for maintaining a lower DSO.

This raises the importance of examining Days Inventory Outstanding (DIO), a metric that reflects how long it takes Target to sell its inventory.

Target's inventory turnover lags 21 days behind the industry average

Target’s Days Inventory Outstanding (DIO) has ranged from 54 to 62 days over the past five years, with an average of 59.4 days—higher than the industry average of 38.6 days. In 2024, Target’s DIO stood at 60 days.

During the same period, Target’s cost of goods sold (COGS) increased from $55.7 billion in 2020 to $76.94 billion in 2023, before slightly declining to $73.61 billion in 2024.

Why does Target hold its inventory longer?

Several factors contribute to Target holding onto its inventory longer:

• Unfavorable sales mix: In 2020 and 2021, consumers shifted from buying higher-margin goods like electronics to less profitable items like groceries, affecting inventory turnover.
• Overstocking: Despite cost improvements, Target is still experiencing higher digital fulfillment and supply chain costs, which could increase the time it takes to move inventory.
• Demand forecasting challenges: The unpredictable nature of consumer behavior following the pandemic made it difficult for retailers like Target to accurately forecast demand and plan inventory strategies.

How is Target improving demand forecasting to boost inventory turnover?

Target is enhancing demand forecasting to improve inventory turnover through several key strategies, as noted in their 10-K form, they are:

• Investing in supply chain infrastructure and technology to improve backend operations and customer experience
• Leveraging AI and machine learning to enhance inventory positioning and demand forecasting
• Implementing precise inventory planning techniques
• Maintaining leaner, healthier inventory levels to achieve better profits and improved inventory levels.
• Increasing flexibility in inventory management to quickly react to changing trends

Now, this brings us to Target’s supplier payment trends, which is indicated through a metric known as DPO (Days Payable Outstanding).

Target pays its suppliers 23 days later than the industry average

From 2020 to 2024, Target’s Days Payable Outstanding (DPO) ranged from 60 to 69 days, with an average of 64.2 days—well above the industry average of 41.05 days. This longer payment period allows Target to manage its cash flow more effectively by delaying payments. However, DPO decreased from 69 days in 2022 to 60 days in 2024, possibly indicating faster payments or a shift in supplier terms.

How Has Target Improved Supplier Relationships Over the Years?

According to Target’s 10-K form, the company has implemented several strategies to enhance supplier relationships:

• Financial Flexibility: Target has agreements with financial institutions to act as paying agents, allowing vendors to sell receivables for early payment at a discounted rate.
• Extended Payment Terms: These arrangements permit payment terms of up to 120 days, benefiting Target's cash flow.
• No Additional Costs: Target incurs no fees or security pledges for these financial arrangements, maintaining cost efficiency.
• Significant Scale: As of February 2024, vendor obligations eligible for early payment totaled $3.4 billion, indicating strong supplier engagement.
• Mutual Flexibility: Either party can terminate these arrangements with notice, ensuring adaptability to changing business needs.

Overall, the report also highlights that cost improvements are being prioritized to offset higher promotional markdowns, suggesting that Target is optimizing its supply chain costs. This could potentially help delay supplier payments without harming relationships.

What does the future hold for Target Corporation?

As Target continues to navigate its impressive growth trajectory, the future holds both opportunities and challenges.

While cash flow concerns and working capital pressures are apparent, the company’s investments in technology, supply chain optimization, and customer experience suggest a path forward. With its strong brand loyalty and adaptive strategies, Target has the potential to turn these financial hurdles into stepping stones.

The key question remains: Can Target maintain its balance between growth and financial efficiency, and emerge even stronger in the years to come? Only time will tell, but the outlook remains optimistic for this retail powerhouse.