Enterprise Risk Management

in
Walmart Inc. and Target Corp.
Asperti Nico, Vedovati Gabriele, Vuerich Luca
Corporate Finance

April 25, 2020

Abstract
The purpose of this paper is to analyse and discuss the main differ-
ences between the Enterprise Risk Management systems of two of the most
important retailers in the United States, namely Target Corporation and
Walmart Inc. Firstly, the authors will briefly introduce the two compa-
nies, focusing on the different types of business strategies implemented
and their history, considering then the main risk factors that character-
ize each company such as competitive and reputational, operational and
investment, security and data privacy, supply chain and finally a short in-
troduction about financial risks that will be the subject of deeper analysis
afterwards. Likewise, the authors will evaluate the distinctive features of
the financial structures and the strategic and tactical risk management
processes of both companies, starting from the top level of the strategic
planning to get to selected tools by the firms in order to face both fi-
nancial and business risks that affect their activities. After that, it will
be provided a deep analysis about the risk factors faced by Target and
Walmart during their activities, with a main focus on financial risks that
emerge from their financial structures, also considering derivative con-
tracts to address the interest rate risk and the performance and cost of
hedging interest rate risk. Moreover, the authors will underline differ-
ences and similarities among the two retailers in order to facilitate the
comparison and the evaluation of the two ERM systems, but even further
considerations highlighted in the paper.

Electronic copy available at: https://ssrn.com/abstract=3581698

Contents
1 Introduction 1

2 Risk factors 1

3 Distinctive feature of the financial structure 6

4 Distinctive feature of the strategic and tactical risk manage-

ment process 11

5 Exposure to Financial Risks 14

5.1 Liability management strategies . . . . . . . . . . . . . . . . . . . 14
5.2 Use of derivative contracts to address interest rate risk . . . . . . 15
5.3 Performance and cost of hedging interest rate risk . . . . . . . . 17

6 Conclusions 19

References 21

Electronic copy available at: https://ssrn.com/abstract=3581698

1 Introduction
As well known, it is a long time since the challenge between Walmart Inc,
headquartered in Arkansas but incorporated in Delaware in 1969, and Target
Corporation, incorporated in Minnesota more than 100 years ago, has begun:
two of the most important retailers in the United States, which sell a wide range
of products including food, household goods and office supplies. The two com-
petitors operate in the retail industry adopting different business strategies, due
to the differences in terms of size and market presence. In fact, Walmart with
a total of almost 12,000 stores in 27 countries of which 4,500 in the US, can
be seen as a multinational; whereas Target, the most popular department store
in America according to YouGov.com [1], is significantly smaller, counting less
than 2,000 units operating only in the US and Canada. In 2018, both companies
were included in the leading 15 fast-moving consumer goods retailers worldwide,
where Walmart achieved the first place with more than $514 bn revenues, while
Target the 12th with more than $74 bn (Statista, 2019 [2],[3] ). In 2019 Walmart
has been recognized as the largest company by revenue according to Fortune [4],
topping the world biggest industries, it is also the largest private employer in the
world with 2,2 million employees. As regards the business model, Target focuses
on slightly smaller stores compared to its competitors, focusing less to direct
bottom-line savings than on a younger commercial draw. Moreover, in order
to address the quickly changes in consumer preferences, it has evolved from an
in-store experience to interaction with guests across multiple channels, such as
in-store, online, mobile, social media, voice assistants, and smart home devices,
channels that guests use to shop and provide feedback and public commentary.
On the other hand, Walmart is characterized by a traded family-owned business,
as the company is controlled by the founder’s family, it operates internationally
with three lines of stores: Walmart US, Walmart International and Sam’s Club.
It primarily revolves around brick-and-mortar retail, even if it is gaining momen-
tum in e-commerce as well. As discussed before for Target, it is essential also
for Walmart to identify on time consumer trends and preferences, working on
price transparency, assortment of products, cost and speed of shipping that are
becoming crucial factors on which the society relays in order to increase growth
and market share of the business. Furthermore, Walmart is investing heavily
in the development of technology and eCommerce, exploiting different types of
strategic alliances and other business relationships in countries in which it has
existing operations or in other foreign markets to expand its retail operations,
indeed, this continuous research for increasing growth and business expansion
has led the company to be the world’s largest brick-and-mortar retailer by a
substantial margin

2 Risk factors
Enterprise Risk Management (ERM) is critical for companies operating in the
global retail industry in order to achieve their highest long-run expected values.

Electronic copy available at: https://ssrn.com/abstract=3581698

ERM consists in adopting an holistic approach to manage the risk across all
parts of the organization so that, at any given time, it incurs just the optimal
risk taking in order to pursue strategic goals [5]. Despite the different business
strategies adopted by Walmart Inc. and Target Corporation, both retailers are
subject to similar risks, that may materially and adversely affect their business,
results of operations, financial conditions and liquidity [6].

Target Corporation
Target’s business is subject to material risks that can be grouped into the fol-
lowing main risk categories: competitive and reputational risks, investments
and infrastructure risks, cybersecurity risks, supply chain and third-party risks,
external risks and financial risks.

Competitive and Reputational Risk First, competitive and reputa-

tional risks refer to the capacity to differentiate itself from other retailers and
being able to positively influence the perception of Target’s guests, respectively.
Social media are the principal threats to Target’s reputation as they allow any-
one to make public feedback that can influence perceptions, consequently nega-
tive publicity is difficult to control. Target’s ability to compete is also influenced
by the guests’ perceptions regarding the cleanliness and safety of its stores, the
functionality and speed of its online channels and the values of their promotions,
among other factors. Moreover, Target exclusive brand helps the company to
positively differentiate, generating higher margins compared to national brand
competitors. Finally, the company’s ability to compete is affected by the capac-
ity to provide a unique experience for its guests across multiple channels that
Target implemented (in-store, mobile, social media, etc.), and the capacity to
quickly adapt to consumers’ changes in preferences, so if the company is not
able to collect consumers’ data, it may experience loss in sales and an increase
in inventory markdown, negatively affecting its results of operations.

Investments and Infrastructure risks Another relevant category of

risks faced by Target can be seen in the investments and infrastructure risks,
which are mainly related to remodelling existing stores, building new ones and
optimizing technology and supply chain infrastructure. Target’s store remodel
program adopts a custom based approach on the store features, while when
building new stores, Target seeks the most suitable locations, competing with
other retailers; choosing the wrong model or pursuing the wrong opportunities
can negatively impact the returns on the company capital investment.

Information security, Cybersecurity and Data Privacy risks Since

Target regularly stores data about its guests, team members, vendors and other
third parties; information security, cybersecurity and data privacy may deter-
mine significant risks for the company. A damage to Target’s computer systems
due to cyber-attacks and implementation errors can result in repairment costs,

Electronic copy available at: https://ssrn.com/abstract=3581698

data loss or theft and loss in consumers’ confidence, impacting the company’s
results of operations. Target continually invests to maintain and update its
computer systems, but implementing system changes produces an increase in
the risk of experiencing system disruption. Target is being active in detecting
and responding to data security damages, but the techniques utilized by third
parties to obtain unauthorized access to these relevant information changes fast
and may be difficult to implement program that detect them properly. As con-
sequence of the occurrence of these risks, Target can be exposed to additional
costly government actions and private litigations, as well as a lost in its guests’
confidence regarding its ability to protect their data, which can adversely affect
Target’s reputation, sales and results of operations.

Supply Chain and Third-party risks Target is also significantly ex-

posed to supply chain and third-party risks, meaning changes in vendors rela-
tionships, changes in tax or trade policy, interruption of its supply chain and
increase in commodity or supply chain costs that can threat the company’s
profitability. Given the fact that Target is heavily dependent on its vendors to
supply merchandise to its guests and most of its merchandise is sourced from
China, operating its fulfilment network is crucial, but it is becoming more and
more challenging given currency fluctuations, trade wars and the outbreak of
pandemics or other illnesses (such as the recent coronavirus), that may nega-
tively affect its results of operations.

External risks External risks category is also responsible to impact Tar-

get’s results of operation, as consequence of the occurrence of different types of
risks, mainly related to the state of macroeconomic conditions and consumer
confidence, catastrophic events, workforce management and talents attractive-
ness and the ability to comply with federal and international laws. In par-
ticular, a significant part of the company’s total sales is highly dependent on
the economic conditions of the following five states: California, Texas, Florida,
Minnesota and Illinois. Moreover, Target counts over 300,000 team members as
workforce, that represent its largest operating expensive, and the capacity of se-
lect, train and retain the appropriate mix of qualified workforce has a significant
impact on their business.

Financial risks Finally, Target’s business is affected by financial risks.

The first financial threat is related to the possible increase in Target’s income tax
rate and its volatility generated by the operations outside the US, both adversely
affecting their business, results of operations, liquidity and net income. A further
threat is defined by the ability to access to capital markets, which is vital for the
company, assuring to Target liquidity for everyday operations. The accessibility
of the market depends on multiple factors such as the condition of the market
itself, the operating performance of the company and being able to maintain its
strong credit ratings. In order to obtain financing at a reasonable cost, Target is
concerned in maintaining good quality judgment by credit agencies. In addition,

Electronic copy available at: https://ssrn.com/abstract=3581698

Target uses a variety of derivative products to manage its exposure to market
risk, principally interest rate fluctuations.

Walmart Inc.
According to Walmart’s 10K, the company’s main risk factors can be divided
into four groups: strategic risks, operational risks, financial risks and the last
category that embeds legal, tax, regulatory, compliance, reputational and other
risks.

Strategic risks Regarding the first risk category, namely strategic risks,
they can be identified in general and macro-economic factors, both domestically
and internationally, which may negatively affect Walmart’s financial perfor-
mance, including most of the activities of the supply chain: starting from sup-
pliers’ operations, meaning an increase in the cost of goods, reaching company’s
operations, resulting in impairment charges to different assets and comprising
also administrative expenses, labour and healthcare costs. Moreover, the society
continuously faces strong competitions that characterize this sector as several
retailers and wholesale club operators are focused on prices competition in every
segment of the business, but also on the best services offered to customers and
on the overall shopping experience, with the aim of understanding in advance
consumer needs, feelings and emotions.

Operational risks Operational risks incorporate many types of risks, such

as the possibility of running into natural disasters, global health epidemics or
pandemics outbreaks, geo-political events and catastrophic events, risks associ-
ated with suppliers, information and technology-based systems risks, security
faults and failures in attracting and retaining qualified associates, all these fac-
tors could materially adversely affect company’s financial performance. Such
events could result in physical damage to, or the complete loss of, one or more
properties, the closure of one or more stores, the lack of an adequate work
force in a market, the inability of customers to the stores and clubs due to by
such events, the unavailability of digital platforms to the customers, changes in
the purchasing patterns of consumers and in consumers’ disposable income, the
disruption of utility services to the stores and facilities. Moreover, global sourc-
ing is a key aspect, in fact, the ability to find qualified suppliers who uphold
standards of Walmart, and to access products in a timely and efficient man-
ner are significant challenges, as there are too many factors such as political
and economic instability, suppliers’ failure to meet terms and conditions, the
availability of raw materials to suppliers, merchandise safety and quality issues,
transport security and other factors relating to the suppliers and the countries
in which they are located that go beyond the control of the society. Last but
not least, all the risks linked to technology are very important and the company
has implemented strategies to hedge against them, as information systems are
essential for business operations and a damage of them can result in high repair
costs. Moreover, digital platforms are regularly subject to cyber-attacks and if

Electronic copy available at: https://ssrn.com/abstract=3581698

the company is unable to maintain an adequate security level and keep them
operating within acceptable parameters, it could suffer loss of sales, reductions
in transactions, reputational damage and deterioration of competitive position.

Financial risks Another considerable category from which Walmart needs

to protect against is financial risks (analyzed more deeply in the next sections),
which refers to fluctuations in foreign exchange rates, that may increase cost of
sales with a corresponding adverse effect on the gross profit; these risks may also
include any failure to meet market expectations for the financial performance of
the society, that could affect the market price and volatility of stocks, changing
dividend or stock repurchase programs or policies.

Legal, Tax, Compliance, Reputational and Other risks Finally, in-

ternational operations expose Walmart to legislative, accounting, legal, political
and economic risks. Future operating results in foreign countries could be neg-
atively affected by a variety of factors, most of which are beyond the company’s
control, and any violation of internal policies could adversely affect the business
or financial performance and the reputation. In addition, changes in tax, laws
and regulations may have a significant impact on the group’s performance. In
particular, the imposition of higher tariffs on imports or exports of goods, the
difference between the ultimate tax outcome and the tax amounts recorded in
financial statements, any failure to comply with applicable regulations or new le-
gal requirements and even changes in worldwide tax laws, tax rates, regulations
or accounting principles will result in significant financial exposure, damage to
reputation and adverse effect on results of operations of the company.

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 1: Risk factors comparison

Risk factors Target Corporation Walmart Inc

Influenced by social media, Influenced by cyber-attacks to
Competitive
guests’ perception, digital platforms, violation of
and
exclusive brand, capacity to adapt internal policies, failure to
Reputational
to consumers changes in preferences. comply with new regulations.
Related to remodeling existing stores,
Investment
building new ones and the optimization
and NA.
of technology and supply
Infrastructure
chain infrastructure.
The company tries to maintain
The company invests heavily
an adequate security level
to maintain and update its
Cybersecurity keeping digital platforms
computer systems, detecting
operating within acceptable
and responding to data security damages.
parameters.
Exposed to changes in vendors
Exposed to an increase in the
Supply Chain relationships, changes in tax
cost of goods and to
and or trade policy, interruption
strong competition and to the
Third-party of its supply chain and increase
imposition of higher tariff barriers.
in costs.
Exposed to geo-political
Exposed to macroeconomic
events and catastrophic
conditions, catastrophic events,
External events, failures in attracting
workforce management,
and and retaining qualified associates,
the ability to comply with
Operational changes in international tax,
international laws, government
law and rates, regulations
actions and private litigations.
or accounting principles.
Exposed to fluctuations in
Exposed to increase in income tax
foreign exchange rates
Financial rate and to the ability to access
and to failure in meeting
the capital markets.
market expectations.

3 Distinctive feature of the financial structure

An adequate financial structure ensures funding for operating activities on a
daily basis or on a long term perspective. The companies subject of the analysis
are US based and, as many other companies in this region, they rely heavily
on the market to collect the needed funds. In particular, it will be seen how
important is for them the issue of commercial papers for short term funding and
the issuing of debt for longer maturities.

Electronic copy available at: https://ssrn.com/abstract=3581698

Target Corporation
Target financing strategy is to ensure liquidity and access to capital markets,
to maintain a balanced spectrum of debt maturities, and to manage the net
exposure to floating interest rate volatility. Within these parameters, the com-
pany seeks to minimize the borrowing costs. The ability to access the long-term
debt and commercial paper markets has provided Target with ample sources of
liquidity. The access to the market is conditioned on the requirements listed
above: good credit ratings (Table 2), healthy debt capital market, good oper-
ating performance [7].

Table 2: Target credit ratings

Credit Ratings
Debt Moody’s Standard & Poors Fitch
Long-term debt A2 A A-
Commercial paper P-1 A-1 F1
Source: Target 10K, 2020

Any downgrade of the current credit rating can adversely impact Target’s
ability to access the debt market, their cost of fundings and any other terms
for new debt issuances. However, Target believes that their source of liquidity
will continue to be adequate to maintain operations, fund debt maturities, pay
dividends and finance strategic initiatives [7].
As of February 1, 2020, the carrying values and maturities of the debt port-
folio were as shown in Table 3 hereunder:

Table 3: Debt portfolio duration

Debt portfolio at February 1, 2020

Years Rate % Value in mill$
2020-2024 3.80 2,205
2025-2029 3.30 2,180
2030-2034 4.20 1,305
2035-2039 6.80 1,109
2040-2044 4.00 1,466
2045-2049 3.70 1,727
Total debentures 4.10 9,992
Swap adjustments 137
Finance lease liabilities 1,370
Amount due within one year -161
Total long term debt 11,338
Source: Target 10K, 2020

In Figure 1 displayed below it can be observed graphically what is shown in

Electronic copy available at: https://ssrn.com/abstract=3581698

Table 3 about the value of Target Corporation’s debt portfolio from year 2020
to 2049 divided into six different subperiods.

Figure 1: Target’s debt portfolio in mill $

Source: Own representation using Target 10-K data

From the figure it is clear that Target’s debt is more concentrated in the
maturities 1-4 years and 5-9 years. Unfortunately, in the case of Target, the
division between fixed and floating debt is not shown in the society’s 10-K.
However, in the Item 7A Target says “As of February 1, 2020, our floating rate
short-term investments exceeded our floating rate debt by approximately $300
million” [7], then looking at the maximum outstanding amount of commercial
papers in 2019 of $744 mil, it can be assumed that the amount of floating debt is
approximately $440 mil. This represents less than the 4% of the total long-term
debt. Substantially, all of Target outstanding borrowings are senior, unsecured
obligations. Large part of Target’s long-term debt obligations contain covenants
related to secure debt levels.

Walmart Inc.
As concern the financial structure, the company is extremely focused on the
importance of funding, in fact, except for having a great current cash position,
it has the advantage of a wide access to capital markets thanks to strong com-
mercial paper and long-term debt ratings (Table 4) which allows Walmart to
meet all the operating cash needs, including acquisitions, capital expenditures,

Electronic copy available at: https://ssrn.com/abstract=3581698

 dividend payments and share repurchases.

Table 4: Walmart credit ratings

Credit Ratings
Debt Moody’s Standard & Poors Fitch
Long-term debt Aa2 AA AA
Commercial paper P-1 A-1+ F1+
Source: Walmart 10K data, 2020

Any downgrade of current short-term credit ratings could impair Walmart

ability to access the commercial paper markets with the same flexibility that
it has experienced historically, potentially requiring it to rely more heavily on
more expensive types of debt financing [8]. Concerning Walmart’s financial
structure, Table 5 explains the composition of the debt portfolio, while Table 6
represents the debt composition in percentage of the total debt.

Table 5: Walmart debt structure

Debt structure at February 1, 2020 in mill $

Maturity 2021 2022 2023 2024 2025 Thereafter Total
Short-Term
Variable rate 575 0 0 0 0 0 575
Rate % 5 0 0 0 0 0 5
Long-Term
Variable rate 750 750 0 0 0 0 1,500
Rate % 2 2.2 0 0 0 0 2.1
Fixed rate 4,612 2,366 2,802 4,670 4,400 28,726 47,576
Rate % 2.8 3.8 1.7 3.2 2.7 4.4 3.8
Interest Rate Swaps
Fixed to variable 750 0 0 1,750 1,500 0 4,000
Paid rate % 3.2 0 0 2.2 2.8 0 2.6
Received rate % 3.3 0 0 2.6 3.3 0 3
Source: Walmart 10K data, 2020

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 6: Composition of debt as a percentage of the total

Maturity 2021 2022 2023 2024 2025 Thereafter Total

Fixed 3,862 2,366 2,802 2,920 2,900 28,726 43,576
Fixed in % 7.87% 4.82% 5.71% 5.95% 5.91% 58.53% 88.79%
Floating 1,500 750 0 1,750 1,500 0 5,500
Floating in % 3.06% 1.53% 0.00% 3.57% 3.06% 0.00% 11.21%
Source: Own computation
using Walmart 10k data, 2020

From Table 5, it can be seen the long maturity that characterize Walmart
debt, that is higher than 5 years. The majority of the debt is fixed (88.79%),
while the floating part is significantly lower (11.21%), the percentage in Table 6
refers to the total debt long-term debt that amounts $49,076 million. Figure 2
shows a graphic representation of that debt, at a first glance it can be seen that
the floating debt is present only in the next 5 year maturity with an exception
at the 3rd year, thereafter there is only fixed debt.

Figure 2: Walmart’s debt portfolio duration and division

Source: Own representation using Table 6 data

10

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 7: Financial structure comparison

Main features Target Corporation Walmart Inc

S&P: A S&P: AA
Long-term Debt
Moody’s: A2 Moody’s: Aa2
Credit Rating
Fitch: A- Fitch: AA
Long-term Debt $11,338 mil $49,076 mil
Fixed/Floating Fixed debt: $10,898 mil (96.12 %) Fixed debt: $43,576 mil (88.79%)
Long-term Debt Floating debt: $440 mil (3.88%) Floating debt: $550 mil (11.21%)
Long-term Debt Fixed debt: Longer than 5 years
Concentrated in 1-4 and 5-9 years
Maturity Floating debt: next 5 years

4 Distinctive feature of the strategic and tacti-

cal risk management process
Through this chapter the authors will focus on the instruments and strategies
adopted by Target Corporation and Walmart Inc. starting from the top level
of the strategic planning to get to selected tools by the two companies in order
to face both financial and business risks linked to their activities. Moreover,
differences and similarities between the processes of the two societies will be
highlighted, comparing them in such a way that will emerge the distinctive
features of each society.

Target Corporation
Even though Target has an enterprise-wide risk program, it has experienced a
deep revision process. In particular, the company was assisted by a consulting
firm and created two new executive positions regarding security and compliance,
deciding to elevate the role of key positions including the risk management [9].
First, the society bolstered its intentions creating an enterprise-wide risk pro-
gram with a top-down perspective for the majority of its strategic risks, dividing
the ERM function from the internal audit and collocating it with legal, com-
pliance and other risks divisions. Then, Target’s ERM program classified four
main objectives concerning the raising of risk awareness and dialogue, the reduc-
tion of operational losses, the alignment of risk appetite and the anticipation
and management of cross-company risks. After that, the ERM staff sched-
uled the main risk exposures faced by the company, allowing the prioritization
of high risks distinguishing them into inactive or active category according to
whether they were adequately addressed by existing processes or not. Finally,
the last step consists of risk identification and analysis stage which requires the
review by different teams made-up of executives and CEO of how important
each risk will be in the future of Target, assigning a level rating for uncomfort-
ableness with actual current controls, strategy, and also management approach
for that risk. What emerged underlined the divergent perceptions among dif-

11

Electronic copy available at: https://ssrn.com/abstract=3581698

ferent groups, but definitely convinced the executives that an enterprise-wide
risk management program was necessary to protect against possible future risks,
maximizing the company’s profitability [10].

Walmart Inc.
It has been 30 years since Walmart’s ERM was created by CFO John Menzer,
even if it has changed throughout time: starting from a bottom-up, grassroots
approach without a company-wide mandate from the top management which
has characterized the early 2000s [11]; after that, in 2007 the ERM program
was part of the audit group supported by the treasury with a risk management
committee that made recommendations to the BoD regarding policy options
[12]. The ERM process of the company is now made of five main steps: the first
one is Risk Identification that starts with clearly identified business targets, by
this stage a workshop group will create a list of around 25 risks based on seven
categories divided either into internal or external risk subcategories, where the
former identify legal, political and business environment risks, while the latter
classify financial, strategic, operational and integrity risks. Next, the second
step consists of Risk Mitigation, it is conducted by another facilitated workshop,
but in this case the three to five most important risks are further defined and
quantified, also evaluating eventual procedures already in place. Then it comes
the Action Planning, where project teams are assigned for every risk chosen
previously in order to assign responsibility and actions to employees to mitigate
those risks. After that, when metrics are assigned to each risk, it results as
having either a positive or negative impact on the identified risks, achieved
by comparing the target performance to the actual one over time. Finally,
the matter is evaluating whether or not the process described above increased
shareholder value through an increase in turnover or a reduction in outcomes.
By the end, Walmart’s ERM aids the company in identifying and focusing on the
few risks that are most important to address rather than classifying risks it is not
familiar with [11]. The following tables (8-9) have the meaning to highlight the
main similarities and differences in the ERM Governance of Target Corporation
and Walmart Inc.

12

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 8: ERM governance similarities between Target Corp. and Walmart Inc

ERM Similarities Target Corporation Walmart Inc

Start with top 20 risks Start with top 30 risks
Risk Analysis and reduce to 10. and reduce to 4-5.
Qualitative in nature. Qualitative in nature.
ERM shaped by past ERM shaped by past
History
incidents. incidents.
Multi-channels strategy as Multi-channels strategy as
Reputational critical to reputation. critical to reputation.
Risk Public relations efforts. Public relations efforts.
Focus on Ethics. Focus on Ethics.
Difficult to prevent Difficult to prevent
moderate to high probability. moderate to high probability.
Cyber Risk Two risks: Data Two risks: Data
protection; protection;
System disruption. System disruption.

Table 9: ERM governance differences between Target Corp. and Walmart Inc

ERM Differences Target Corporation Walmart Inc

Implemented in 2009.
Implemented in 1990.
US implications.
Global implications.
Separate from Internal Audit.
ERM Governance Part of Internal Audit
Presence of a Chief Risk
combined with the CFO.
and Compliance position.
Bottom-up approach.
Top-Down approach.
Senior Executive perform analysis.
Use of Risk workshops.
Risks are active or inactive
Risk Classification Risks are Internal or External
and categorized in: External,
and categorized in 7 groups.
Internal and Market.
Groups with Competitive Risk:
Identification of stand-alone risk
Human Resource and
Reputational and also other risks that
System Failure risks.
Risk are contributing factors.
Managed both reactively
Managed reactively.
and proactively.
No third-party or vendors included. Third-party and vendors included.
General definition of Granularity in defining
Cyber Risk system disruption. system disruption.
Chief Information Security Officer. No Information Security position.
Use of insurance. No insurance.

13

Electronic copy available at: https://ssrn.com/abstract=3581698

5 Exposure to Financial Risks
In this chapter, the authors will provide a deeper analysis of the financial risks
to which both Target Corporation and Walmart Inc. are exposed, focusing
in particular on: the main liability management strategies adopted in order
to reduce the refinancing risk; the interest rate hedging policy, meaning using
derivative contracts to decrease the interest rate risk; and the evaluation of the
performance and the cost of hedging interest rate risk. All of above, comparing
the two companies in order to highlight the most relevant differences related to
hedging the exposure to financial risks.

5.1 Liability management strategies

A type of threat embedded in the financial risks is represented by the possibility
that the borrower is unable to refinance to repay the current debt or he is
able to refinance to worse conditions in terms of size, maturity and cost. This
refinancing risk is overdue by the companies using liability management which
means repurchase the old bonds from the existing investors prior to maturity
and offering them new, longer-dated bonds in exchange. In this paragraph,
the authors will analyse the way in which Target and Walmart implement this
technique.

Target Corporation
As part of the liability management, Target made some operations on the debt.
As summarized in Table 10, in March 2019, Target issued $1 billion of debt,
and in June 2019, repaid $1 billion of debt before maturity. In January 2020, it
issued $750 million of debt and redeemed $1 billion of debt before its maturity.
Even if it incurred in some losses in 2017 and 2020, Target achieved the objective
to cover the refinancing risk.

Table 10: Target Liability Management operations

Operations on the debt in mill $

Years January 2020 March 2019 October 2017
Issued 750 1,000 750
Rate % 2.35 3.375 3.9
Redeemed before maturity 1,000 1,000 463
Rate % 3.88 2.30 3.44
Gain/(Loss) from the operation (10) 0 (123)
Source: Own computation
using Target 10-K data

Target believes that sources of liquidity will continue to be adequate to

maintain operations, finance anticipated expansions and strategic initiatives,

14

Electronic copy available at: https://ssrn.com/abstract=3581698

fund debt maturities, pay dividends, and execute purchases under the share
repurchase programs for the foreseeable future. Finally, the company continues
to anticipate ample access to commercial paper and long-term financing [7].

Walmart Inc.
Regarding Walmart’s liability management, no strategies have been implemented
by the company. In fact, looking at Figure 2, it can be seen that a liability
management policy is unnecessary for Walmart. In particular, focusing on the
maturities, a significant part of the debt shows a maturity longer than 5 years,
so refinancing risk is not a crucial issue in the short term. Perhaps, this can
be the result of a past liability management strategy from which the company
can now benefit. Anyway, Walmart now cannot benefit from a debt issue at
the current market conditions, which are favourable for a low cost issue. What
presumed by the authors might be confirmed in the plot below, Figure 3 (built
on data available to the authors [13]).

Figure 3: Total debt issued and repaid by Walmart

Source: Own representation using TIKR.com data

5.2 Use of derivative contracts to address interest rate

risk
Once the debt has been issued, the company is exposed to interest rate risk that
must be managed. The practice of managing this risk is known as interest rate

15

Electronic copy available at: https://ssrn.com/abstract=3581698

 hedging policy, which can document the allowed instruments, limits on size and
counterparties, and other organisational and process related issues.

Target Corporation
The company adopts interest rate swaps in order to mitigate interest rate risk.
As a result, Target has counterparty credit exposure to large global financial
institutions and this is an important, but often undervalued, issue when entering
in derivative contracts. During 2019, the retailer entered into interest rate swaps
with a total notional amount of $1,000 million. Under the swap agreements, it
pays a floating rate equal to 1-month London Interbank Offered Rate (LIBOR)
and receives a weighted average fixed rate of 2.5 %. The agreements have a
weighted average remaining maturity of 9.2 years. Under the two previously
existing swap agreements, each with a notional of $250 million, which mature
during 2024 and 2026, respectively, Target pays a floating rate equal to 1-month
LIBOR and receive a weighted average fixed rate of 2.9 % [7]. The instruments
above are reported in Table 11.

Table 11: Target’s swap agreement

Swaps: Floating for fixed Swap 1 Swap 2 Swap 3

Maturity 2029 2026 2024
Notional in mill $ 1,000 250 250
Floating rate 1-month LIBOR 1-month LIBOR 1-month LIBOR
Fixed rate % 2.5 2.9 2.9
Source: Own computation
using Target 10K data, 2020

Walmart Inc.
Walmart is also exposed to changes in interest rates as a result of the short-
term borrowings and long-term debt. It hedges a portion of interest rate risk by
managing the mix of fixed and variable rate debt and by entering into interest
rate swaps [8]. Below, Table 12 provides information about Walmart financial
instruments that are sensitive to changes in interest rates. For long-term debt,
the table represents the principal cash flows and related weighted-average in-
terest rates by expected maturity dates. For the interest rate swaps, the table
represents the contractual cash flows and weighted-average interest rates by the
contractual maturity date, unless otherwise noted.

16

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 12: Walmart’s financial instruments sensitive to interest rate changes

Liabilities and Interest rate derivatives in place at February 1, 2020 in mill $

Years 2021 2022 2023 2024 2025 Thereafter Total
Long-Term
Variable rate 750 750 0 0 0 0 1,500
Rate % 2 2.2 0 0 0 0 2.1
Fixed rate 4,612 2,366 2,802 4,670 4,400 28,726 47,576
Rate % 2.8 3.8 1.7 3.2 2.7 4.4 3.8
Interest Rate Swaps
Fixed to variable 750 0 0 1,750 1,500 0 4,000
Paid rate % 3.2 0 0 2.2 2.8 0 2.6
Received rate % 3.3 0 0 2.6 3.3 0 3
Source: Own computation
using Walmart 10K data, 2020

Finally, it can be concluded that the hedging strategy implemented by Wal-

mart covers the next 5 years with an exception in 2022 and 2023 where, looking
back at Figure 2, the debt was sensitively lower. As of February 1, 2020, the
variable rate borrowings, including the effect of the commercial paper and in-
terest rate swaps, represented 12% of the total short-term and long-term debt,
this can be in line in what found in Table 6.

5.3 Performance and cost of hedging interest rate risk

The actual interest rates environment allows the retailers to take certain ad-
vantages by hedging with a certain approach. It will be discussed what emerge
from Target and Walmart 10-K data about the performance and cost of hedging
interest rate risk. The authors will analyze in the next paragraphs how the two
companies use derivative contracts, highlighting the main differences between
the two strategies.

Target Corporation
As of February 1, 2020 and February 2, 2019, interest rate swaps with notional
amounts totalling $1,500 million were designated as fair value hedges, and all
were perfectly effective during 2019 and 2018 [7]. The fair value hedge allows to
register P&L of the hedged instrument in the income statement, as illustrated
in Table 13.

17

Electronic copy available at: https://ssrn.com/abstract=3581698

 Table 13: Target’s P&L on fair value hedges

Effect of hedges on net interest expense in mill $

Gain (Loss) on fair value hedges
Years 2019 2018 2017
IRS designated as fair value hedges 130 13 (10)
Hedged debt (130) (13) 10
Total 0 0 0
Source: Own computation
using Target 10K data, 2020

From Table 13, it is clear that Target’s approach has been conservative,
looking at the effects on net interest expense. Potential benefits from market
movements are not targeted as the effect is null. Finally, it can be concluded
that the hedges qualify for hedge accounting.

Walmart Inc.
For the fiscal year 2020, the net fair value of the interest rate swaps increased to
$175 million, primarily due to fluctuations in market interest rates [8] as shown
in Table 14. In order to better understand the fair value increase, it occurs
to be reminded that Walmart pays the variable and receives the fixed rate, so
with the rate cut occurred last month, the retailer has a lower cash outflow as
obligation from the swap agreement.

Table 14: Walmart’s IRS at their Fair Value

Interest rate swaps at their Fair Value in mill $

Years 2020 2019
Receive fixed, pay floating 97 (78)
Source: Own computation
using Walmart 10K data, 2020

From the increase in the fair value Walmart can benefit, qualifying its ap-
proach as dynamic. Another consideration can be done on the shorter swaps’
maturity than Target has (look at Table 11 and Table 12), it seems that Wal-
mart wants to take advantage of the current market conditions from the change
in the derivatives fair value. The objective is not to exclusively minimise the
impact of adverse market movements, but partly benefit from positive variable
fluctuations in the short-term. Eventually, a 100 basis point change in prevailing
market rates would cause the annual interest costs to change by approximately
$61 million, which means the 0.4% of the 2020 net income ($14,881 mil) or the
2.3% of the actual net interest expense ($ 2,599 mil). Cost of hedging is not
given in the two 10Ks but according to Myint and Famery the average cost of
hedging is 1.78% at the 80 % level of fixed proportion [14], so for Walmart and

18

Electronic copy available at: https://ssrn.com/abstract=3581698

 Target with a level of fixed higher than this threshold, the authors suggest to
lower the fixed portion, this will allow to save on the hedging policy.

Table 15: Exposure to Financial Risks: Target Corp. and Walmart Inc

Target Corporation Walmart Inc

Implemented: the goal of hedging
Not implemented: not necessary
Liability Management the refinancing risk has
as large part of the debt has
Strategies been achieved for 2017, 2019
a maturity longer than 5 years.
and 2020 debt issues.
Interest Rate Swap contracts. Interest Rate Swap contracts.
IRS fair value: $1,500 mill. IRS fair value: $175 mill.
Derivative
Maturity: next 10 years. Maturity: next 5 years.
Contracts
Pays 1-month LIBOR receives Receives fixed
fixed rates. pays floating.
Performance and Cost Performance: Effective P&L Performance: Positive
of Hedging Interest on fair value hedges: null ∆IRS on fair value: $97 mill.
Rate Risk Conservative approach. Dynamic approach.

6 Conclusions
In order to achieve the purpose of the paper, such as analyse the Enterprise
Risk Management systems of Target Corporation and Walmart Inc, the authors
started by introducing the history and the business strategy of both companies.
In particular, the two companies are both main players in the US retail industry,
which implemented different business strategies as Walmart has an international
presence with a significant number of stores while Target operates only in the US
and Canada markets, counting less stores. Despite different business strategies,
both retailers are exposed to the same main risks, that can be identified in com-
petitive and reputational, cybersecurity, supply chain and third-party, external
and operational and financial risks. In order to better analyse the exposure
to financial risks, the authors started by examining the main features of the
companies’ financial structure, focusing on the long-term debt portfolio. Both
companies received a good quality credit rating, Target has $11,338 mil long
term-debt, 96.12% fixed and 3.88% floating, with maturity concentrated in the
next 9 years; while Walmart has $49,076 mil, 88.79% fixed and 11.21% floating,
with maturity longer than 5 years, except for floating debt that is concentrated
only in the next 5 years. After that, the analysis has been focused on the in-
struments and strategies implemented by the two companies to address both
financial and business risks, starting from the top level of the strategic planning
to the selected tools adopted. What emerge from the analysis is that the two
companies show similarities and differences in ERM Governance, in fact, Target
implemented it only 10 years ago and has US implications, while for Walmart
it is already in place since 1990 and has a global implications; for Target it is

19

Electronic copy available at: https://ssrn.com/abstract=3581698

separated from the Internal Audit and has the presence of Chief Risk, while for
Walmart is part of the Internal Audit and it is combined with the CFO; Target
adopts a top-down approach, while Walmart a bottom-up approach that could
better align employees and stakeholders to the company vision. Concerning the
risk classification, for Target the Senior Executives perform the analysis and the
risk can be active or inactive, while Walmart uses risk workshops and the risk
are internal or external. In the risk analysis both companies start with about
20 risks and reduce them to 5/10 risks and both companies’ ERM systems are
shaped by the history of incidents. Finally, the focus has been on the exposure
to financial risks and the strategies implemented by both companies in order to
hedge them. Concerning the liability management strategies, only Target has
implemented them at moment, achieving the hedging of the refinancing risks,
while for Walmart no strategies have been implemented at the moment, but
looking at the maturity of the long-term debt can be assumed that such strate-
gies were implemented in the past and now the company is benefitting from
them. Regarding the use of derivatives to hedge the interest rate risk, both
companies entered in Interest Rate Swap contracts, from which the companies
benefit paying floating and receiving fixed rates. It can be concluded that the
performance of hedging the interest rate risk are positive for both companies,
Target used a conservative approach that resulted in a null P&L on fair values
hedge, while Walmart adopted a dynamic approach that in 2020 has seen an
increase in the IRS fair value by $97 mil. Both companies could lower the cost
of the hedging policy by decreasing the high level of fixed debt.

20

Electronic copy available at: https://ssrn.com/abstract=3581698

References
[1] YouGov.com. The most popular department stores in amer-
ica. https://today.yougov.com/ratings/consumer/popularity/
department-stores/all, 2020.
[2] Statista. Walmart. Dossier, 2020. study ID 14698.

[3] Statista. Target. Dossier, 2019. study ID 21632.

[4] Fortune. Global 500. https://fortune.com/global500/, 2019.
[5] Frasier J. & Simkins B. Enterprise Risk Management: Today’s Leading
Research and Best Practices for Tomorrow’s Executives. Wiley, 2010.

[6] Christopher Furton. Analysis of enterprise risk management of two retail

industry competitors. 2015.
[7] Target Corporation. 10k form. https://www.sec.gov/ix?doc=
/Archives/edgar/data/27419/000002741920000008/tgt-20200201.
htm, 2020.

[8] Walmart Inc. 10k form. https://www.sec.gov/ix?doc=/Archives/

edgar/data/27419/000002741920000008/tgt-20200201.htm, 2020.
[9] Target Public Affairs, 2014.
[10] NCU state University. Enterprise risk management at target. 2010.

[11] W. Atkinson. Enterprise risk at wal-mart. Risk management magazine,

pages 36–39, 2003.
[12] R. Gamble. Steering a giant. Treasure and Risk, pages 41–43, 2007.
[13] TIKR.com. Walmart cash flow. https://app.tikr.com/stock/
financials?cid=313055&tid=2663222, 2020.
[14] Stanley Myint & Fabrice Famery. The Handbook of Corporate Financial
Risk Management. Risk Books, 2012.

21

Electronic copy available at: https://ssrn.com/abstract=3581698