dsw report final (1)
TRANSCRIPT
Covering Analysts: Phoebe Hsieh
1
University of Oregon Investment Group
February 27, 2015
Consumer Goods
Investment Thesis
Being the only company in the industry that operates a designer shoe
warehouse store with their level of quality and variety, DSW is in a unique
position to capture and maintain market share in this industry.
DSW’s shortcomings in 2013 with regards to predicting women’s trends
and failed experiments may have weakened consumer confidence in their
products.
DSW Omni-channel strategies and recent changes made to accelerate
women’s footwear will help drive revenue going forward
DSW’s success is dependent on its ability to predict trends and its failure to
do so will deteriorate consumer confidence in their brand.
B
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DSW, Inc. Ticker: DSW
Current Price: $37.35
Recommendation: Hold
Price Target: $29.68
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2/1/2010 2/1/2011 2/1/2012 2/1/2013 2/1/2014 2/1/2015
Adjusted Close 50-Day Avg 200-Day Avg Volume
Key Statistics
52 Week Price Range
50-Day Moving Average
Estimated Beta
Dividend Yield
Market Capitalization
3-Year Revenue CAGR
Trading Statistics
Diluted Shares Outstanding 9.047mm
Average Volume (3-Month) 1.12mm
Institutional Ownership 86.00%
Insider Ownership 100.00%
EV/EBITDA (Forward Comps) 11.0x
Margins and Ratios
Gross Margin (Forward Comps) 32.99%
EBITDA Margin (Forward Comps) 10.66%
Net Margin (Forward Comps) 5.27%
Debt to Enterprise Value -
6.25%
$23.45 - $41.11
$36.22
1.01
2.00%
3.30B
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Overview
Jerome Schottenstein and the Nacht family founded the Schonac Corporation in
1969. Their original goal was to manage leased shoe departments in different
retail operations. From there, they opened the first DSW store in July of 1991 in
Dublin, Ohio. They wanted to create a place where brand name shoes could be
bought at an everyday value price, or in their words, “designer shoes at
warehouse prices.”
In 1998, Value City Department Stores, owned by the Schottenstein family,
purchased DSW. In December of 2004, Retail Ventures, Inc consolidated many
of Value City’s subsidiary brand and later, Retail Ventures retained 60% of
DSW’s outstanding shares. DSW went public in 2005, after changing their name
from Schonac Corporation to DSW, Inc. In 2011, RVI Merged with DSW and
they have been operating as DSW ever since. Today, they operate in 433 stores,
431 in the United States and 2 in Puerto Rico.
DSW Designer shoe warehouse is the primary operation that DSW conducts. This
segment provides designer shoes at great values in over 400 stores nationwide
and in Puerto Rico. Their goal is to provide a vast selection of shoes that cater to
ever consumer base at an everyday price. They also bring to the market a vast
selection of accessories and handbags for consumers to enjoy.
Women’s
DSW’s women’s shoe department is their largest portion of their revenue. In
2013, women’s shoes accounted for 65% of revenue. Recently, women’s retail
has declined slightly, but has been compensated by the increase in men’s shoe
sales. In the future, women’s sales will remain the main driver of revenue for
DSW but the men’s retail is expected to increase their contributions. After a
dismal year for DSW Women’s, its corporate governance decided to make some
pivotal changes in management structure and assortment in an effort to turn
sales around in this segment.
Men’s
DSW Men’s has historically made up about 15% of total revenue. Recently,
men’s shoes has had increasingly positive response in the industry, boosting that
number up to about 17%. As men increasingly view DSW as an optimal place to
purchase footwear, I predict that men’s shoes will be a growing revenue driver
going forward.
Athletic Shoes
Athletic footwear typically makes up about 12% of DSW’s revenue. As DSW
focuses on becoming a more premier footwear brand for everyday wear shoes, I
predict this segment to decline slightly to accommodate higher end footwear.
Their strong competitors in the athletic footwear industry, such as Nike and Foot
Locker will also stand to draw customers from this segment.
Accessories and Handbags
Accessories and handbags are DSW’s clever footwear counterparts, making up
about 7% of revenue annually. After a failed luxury accessory test online in
2013, DSW will be continuing their experiments in their other sub segments.
Their failed test is a strong indication that their accessories are not quite ready
for expansion and I have reflected this in my model by decreasing revenue
contribution from this segment slightly in the future.
Source: Google Images
Figure 1: DSW Store
Source: DSW 10-K
Figure 2: 2013 Revenue Breakdown by Segment
65%
7%
12%
16%
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Affiliated Business Group A sub segment of DSW is the Affiliated Business Group (ABG). Their directive
is to enhance shoppers’ experiences by partnering with other retailers to help
build and promote their individual businesses. They conduct operations
including product supply and in-store experience enhancement in order to
extend DSW’s reach past their own doors. Although they do not directly break
out the ABG segment in their financial statements, ABG accounts for roughly 3-
5% of sales year over year.
Industry
Overview The footwear and shoe industry is a vast and highly concentrated industry. They
can retail items from running shoes to gladiator sandals and can be located
within a larger retailer, or in their own establishment. As per capita disposable
income increases and unemployment continues to decline, the industry is in an
optimal position to grow and strengthen. As an industry that is heavily impacted
by changes in consumer spending and consumer confidence, macroeconomic
factors pose challenges and sometimes increased risks as these factors can be
largely unpredictable.
Macro factors
Consumer Confidence:
Consumer confidence is one of the main economic drivers impacting retail
today. As spending generally relies on consumer expectation of future
economic conditions, consumer confidence is an important measure to consider
when evaluating retail companies. Consumer confidence is expected to increase
at a decreasing rate going forward, which could stand to slow growth in the shoe
retail industry.
Disposable Income/Consumer Spending:
Shoes in many cases, can be considered a luxury item. Disposable income and
consumer spending, therefore, can greatly affect customers’ ability to afford new
shoes on a recurring basis. As per capita disposable income continues to rise,
people may be more inclined to purchase more pairs of shoes. This can
adversely or conversely affect DSW depending on how strong their brand equity
is. Consumers who have a higher disposable income may prefer to buy higher
end shoes from more premium retailers such as Tory Burch. However, if DSW
can achieve its goal of increasing their brand awareness and customer loyalty,
customers, even with a higher disposable income, will shop at DSW but at a
higher capacity.
Competition Although DSW is a unique shoe retailer with innovative ideas, there is strong
competition in this industry from online retailers and large department stores.
Recently, an increase in online shoe and clothing retailers has shifted a lot of the
market towards digital. In an industry that is already heavily saturated with
competition, online merchandisers only further deteriorate market share from
those already in the industry. Some may argue that in store retailers offer the
invaluable choice of trying on shoes before buying them, but many online
retailers counter this by providing free returns or exchanges to customers.
The strongest competitors in the footwear industry include DSW, Brown Shoe
Company, Payless, and Foot Locker. Although those competitors dominate as
4.8%
7.1%
6.1%
11.6%
Figure 3: Shoe Retail Market Share
Source: IBIS World
70.4%
Source: IBIS World
Figure 4: Percent Change in Per Capita Change in
Disposable Income
Figure 5: Competitor Revenue Growth
Source: Financial Statements
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standalone shoe retailers, the industry also faces tough competition with retailers
who sell more than just shoes, including Nordstrom, Macy’s and J.C. Penny.
Online retailers are arguably DSW’s strongest adversaries at this time. Online
retailers have the unique capability of supplying a wide variety of shoes and
facing small set up costs because they do not have to build physical brick and
mortar stores. This eliminates the largest barrier to entry facing the market,
enabling those retailers to decrease costs.
Much of DSW’s future success will be greatly dependent on its ability to
maintain market share and predict trends accurately.
Strategic Positioning
Strong Supplier Relationships DSW prides itself in its strong supplier relationships. They merchandise directly
from around five hundred domestic and foreign vendors. Most of their domestic
vendors import merchandise from overseas and their top three vendors make up
around 19% of net sales. These relationships are the main way that DSW is able
to control costs in order to maximize their margins. These relationships will put
them in an optimal position for negotiations and cost reduction going forward.
Brand Recognition DSW is known nationally for selling high quality designer shoes at extremely
affordable prices. They use this as a tool to provide value to their customers as
well as retain customers. As men’s footwear gains traction, DSW hopes to use
their already strong foothold in the women’s department to boost sales and
expand of their men’s shoe department. Their effective branding strategy has led
them to hold a significant portion of the market share in this industry.
Wide Product Offering The intention of DSW is to provide the widest assortment of footwear to their
customers in order to fulfill each individual’s tastes and preferences. They want
to cater to every consumer in every market, offering brand name, designer, and
private brand footwear. Many of their competitors such as Nordstrom and
Macys carry a healthy selection of footwear, however, neither have the variety
of selection that DSW does. A typical DSW store carries up to 23,000 pairs of
shoes in 1,600 styles as well as a healthy assortment of handbags and
accessories.
Accurate Trend Prediction DSW history is indicative of the company’s competence when it comes to
predicting trends. The fact that they provide shoes of every variety, catering to
every consumer, lowers the risk that they will be unsuccessful as a whole. When
they have fallen short of expectations in any way, management has been
proactive with finding ways to mitigate pit falls. They struggled in this area in
2013, but are optimistic that they will be able to more accurately predict trends
going forward.
DSW Rewards The DSW Rewards Program is designed to incentivize customers to make DSW
their primary footwear destination. Points are correlated to dollars spent and
accumulated points can be converted into discounts. 90% of DSW’s sales were
conducted by DSW card holders in 2013. Their hope is to increase customer Source: Google Images
Figure 8: DSW Men’s Ad
Figure 6: DSW Store
Source: Google Images
Figure 7: Customer Revenue Contribution
Source: DSW 10-K
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retention rates through increased discounts and rewards for their most loyal
customers.
Business Growth Strategies
DSW Men’s DSW men’s has historically made up around 16% of DSW’s total revenue.
Recently, there has been increased demand for men’s footwear at DSW and they
hope to capitalize on this opportunity to expand further into this segment. The
response to trends and the various products offered in the men’s department has
been increasingly positive and if this continues, the men’s department may be
poised to become a strong driver of revenue going forward. This segment has
enormous potential for growth and DSW could stand to benefit from this shift in
the long run.
DSW App/Online Realizing that ecommerce is expanding rapidly, especially in the retail industry,
DSW intends to follow the trend by focusing more of their efforts on their online
retail. They launched an expansive online luxury accessory test in 2013, but it
proved to be unsuccessful. Since then, they have made efforts to sell more
online and even create a smartphone application where customers can track their
purchases, make new ones, and track their rewards points all from their mobile
device. They want to bring the most optimal shopping experience to their
customers and at this point, consumers are interested in ecommerce. In order to
accommodate this request, DSW is bringing customers free shipping and
returns, as well as in store fulfillment through their Omni-channel distribution.
Although this is a step in the right direction, most other retailers are already
invested in ecommerce and smartphone applications, begging the question of
whether DSW is a little late to the game.
Omni-channel Distribution DSW is launching a new Omni-channel strategy with fresh new ways to deliver
their products to consumers. They recently launched shoephoria, a system that
provides them the ability to fulfill out-of-stock orders from their fulfillment
center. They also launched a new charge-send drop ship capabilities allowing
them to sell product online while fulfillment takes place out of their suppliers’
warehouse. If proven successful, these methods could prove to be pivotal as it
allows DSW to control inventory in a more efficient way than ever before.
Management and Employee Relations
Michael R. MacDonald, President and CEO Michael MacDonald has over 30 years of business experience in retail,
enhancing various spaces including merchandising, marketing, operations, and
finance functions. He served in various roles at Shopko Stores from 1998 to
2009, including Chairman and Chief Executive Office from May 2007 to March
2009. He then left when he was appointed President and CEO of DSW, Inc.
Jay L. Schottenstein, Chairman of the Board Mr. Schottenstein serves as the Chairman of the Board of Directors. He served
in many executive roles at Schottenstein Stores Corporation since 1976 and
served as CEO of Retail Ventures from 1991 to 1997. He also serves as
Chairman of the Board of directors at American Eagle Outfitters, and
Schottenstein Stores Corporation. He was CEO of DSW from 2005 to 2009 and
Figure 10: Omni-channel Distribution
Source: Google Images
Figure 9: Men’s Revenue Contribution
Source: UOIG Projections
Figure 11: Michael MacDonald Executive Salary
Source: Morning Star
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now serves as a director at American Eagle Outfitters in addition to his present
position at DSW.
James O’Donnell, Inside Director James O’Donnell has an extensive background in retail and consumer goods. He
was a member of the Board of Directors of The Gap from 1987 to 1992 and
holds various other executive positions at Coleman Capital Advisors, Computer
AidedSystems and Lyte. He also served as CEO, and COO at American Eagle
Outfitters. Today, O’Donnell is an inside director and member of the
Technology Committee at DSW and a strategic advisor for American Eagle
Outfitters.
Joseph A. Schottenstein, Inside Director Joseph Schottenstein has served in many executive capacities at the
Schottenstein Property Group, a privately held company that develops shopping
centers in the United States. He has also served as a Manager of Indigo Nation
until 2004 and currently serves as an inside director and member of the
Technology Committee at DSW.
Management Guidance
Management guidance has been rather scarce historically. However, the seldom
times that they do set expectations, they usually achieve or surpass them.
Although their projections to grow stores by about 3% every year for the next
five years may seem bullish, they have not closed any stores in the past two
years and do not anticipate doing so in the future. Management predicts that
with the positive response to men’s footwear this past year, the men’s section as
DSW will continue to grow and expand with potential to become a strong driver
of revenue.
Portfolio Strategy
Because I believe DSW is not a strong investment at this time, I will not be
pitching DSW to any portfolios.
Recent News
“DSW Announces Management Changes”
01/29/2015
This article discuss the new management changes that DSW has put in place as
of February 2, 2015. They decided to promote several key executives in order to
“strengthen company organization, establish a single pyramid in charge of all
customer touch points, increase bench strength, and balance workload in those
parts of the organization that are undergoing significant change.” Carrie
McDermott, current Executive Vice President was appointed Executive Vice
President and Chief Operating Officer. Ms. McDermott has been an employee of
DSW for over eight years. She will add to her responsibilities, DSW site
operations, the Shoephoria call center, and marketing, making the customer
service experience more streamlined throughout the business. Bill Jordan,
current Executive Vice President and General Counsel was appointed Executive
Vice President and Chief Administrative Officer. He has been with DSW for
nine years and will add Information Technology to his responsibilities. Finally,
Harris Mustafa, Executive Vice President of Supply Chain, was appointed
Figure 12: Joseph Schottenstein Executive Salary
Source: Morning Star
Figure 13: Revenue Projections
Source: UOIG Projections
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Executive Vice President and Chief Supply Chain Officer. After eight years at
DSW, the company believes Mustafa is best suited for their new omi-channel
initiative and extra responsibilities as the company evolves.
“DSW Enhances Shareholder Returns”
02/18/2015
DSW has increased their quarterly dividend by 6.7% to 20 cents from 18.75
cents per share, in an effort to enhance shareholder returns. The new dividend
will go into effect on March 31, 2015.
Catalysts
Upside Continued growth in DSW’s men’s department could be a strong driver
in revenue going forward
Omni-channel strategies focused on making shopping more convenient
for customers could increase incentive to shop at DSW as opposed to
less convenient retailers
Reorganization of executive roles may serve to strengthen leadership
Everyday value prices and strong quality assurance will increase
customer retention
Downside Inability to accurately predict trends will have an adverse effect on
revenue and stock price
Merchandise manufactured abroad proses risks such as economic
and/or political instabilities; international discourse could increase
shipping costs, delays, or stoppages.
Increased consumer spending could drive customers to purchase higher
end shoes from higher end specialty retailers rather than DSW
Deceleration in consumer confidence could slow growth in the retail
industry
Comparable Analysis
Overview Comparable companies were screened for a variety of different metrics,
specifically focusing on companies with similarities to DSW in terms of product
offering, markets, market cap, growth rates, capital structure, margins, and
shared risk factors. After these metrics were evaluated, I assigned weightings
based upon which companies I felt like satisfied the various criteria the best.
Foot Locker (FL) - 40% Foot Locker Inc., is an American sport and footwear retailer in about twenty
countries worldwide. A household name when it comes to athletic shoes, Foot
Locker is the ultimate sports footwear destination for those looking for a wide
variety of choices.
Foot Locker operates in a different segment of the footwear industry with a
different focus, however Foot Locker offers the strongest value in terms of a
comparable. It is similar to DSW in terms of the fact that it has a similar market
cap, little debt, and rather similar margins as well. They have similar growth
Figure 16: Steve Madden Logo
Source: Google Images
Figure 15: Foot Locker Logo
Source: Google Images
Figure 14: One Year Stock Price
Source: Yahoo Finance
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rates and are susceptible to similar risks as DSW, including accuracy of trend
predictions, and supplier relationships.
Steve Madden (SHOO) - 35%
Steve Madden is a large shoe retailer for men, women, and children online, in
stores, and through wholesale. They sell a variety of shoes from sandals to
stilettos, but they do not sell athletic footwear. Their main objective is to offer
the most fashionable style shoes to the market.
Steve Madden is one of the strongest comparable companies to DSW
quantitatively and qualitatively. Not only do they offer arguably identical value
to customers and cater to the same consumer base, but they also operate stores
extremely similarly to DSW, with less variety and a bit higher price. The two
companies are also extremely in line with regards to margins, share a similar
capital structure and risk as well. They do not have the same objectives in terms
of offering shoes at an everyday price, but they do price their shoes at a
reasonably cost for the average middle class American. Although their growth
expectations and plans for growth differ quite a bit from DSW’s, I believe Steve
Madden is a strong comparable to DSW.
Brown Shoe Co (BWS) - 20% Brown Shoe Company is a global footwear company that owns and operates a
variety of brands. They are the shoe conglomerate responsible for the brands
Famous Footwear, Naturalizer, Life Stride, Dr. Scholl’s, Ryka, Via Spiga, Sam
Edelman, Vince, Franco Sarto, Fergie, and Carlos.
Brown Shoe Company is an interesting comparable because it caters to much of
the same consumer base that DSW does- mid to high end shoes that are
affordable and comfortable. They are a small cap company with similar product
offering but they do vary from DSW a bit in terms of margins. All things
considered, I do believe that qualitatively they are a very beneficial comparable
to DSW.
Sketchers (SKX) - 5% Sketchers is an American shoe company that operates over 731 stores globally.
Sketchers offers a variety of shoes ranging from athletic to work shoes, however
they only retail their own brand of shoes unlike Brown Shoe Company or DSW.
Recently, Sketchers has been trying to increase their customer base by widening
their product offering and catering to consumers with special footwear needs,
such as orthopedics.
I wanted to evaluate Sketchers as a comparable because they have similar
market caps and they both operate in the footwear industry. They are however,
expected to grow faster than DSW and have a bit higher margins. That being
said, I believed it to be reasonable to give Sketchers a 5% weighting in my
analysis.
Phillip Van Heusen (PVH) – 0% Phillip Van Heusen is a large cap American clothing and accessory company
which owns various brands such as Tommy Hilfiger, Calvin Klein, and Heritage
and licenses various other brands such as BCBG Max Azria and Geoffrey
Beene.
Although PVH is not a shoe retailer, they do cater to a similar consumer base. I
originally saw this company as an interesting comparable to evaluate. However,
Source: Google Images
Figure 19: PVH Logo
Figure 17: Brown Shoe Co Logo
Source: Google Images
Figure 18: Sketchers Logo
Source: Google Images
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upon further research I realize that quantitatively they do not offer any
significant value, and qualitative value is minimal as well.
Discounted Cash Flow Analysis
Revenue Model Because DSW is in the retail industry, revenue per year for DSW is calculated
based on revenue per square foot and total square footage. For 2014-2023,
management guidance was used to project total stores. Management has
previously spoken about their average square feet per store to be favorable
around 22,000 square feet per store and I anticipate that they will continue to
keep average square feet per store around that number. I project revenue per
square foot to increase at a constant rate of 3% from 2016 into perpetuity
because despite the lack of guidance or historical consistency, I believe that 3%
is a reasonable estimate based upon correlations between historical increase in
revenue and store openings. When DSW opened a great amount of stores one
year, their increase in revenue was much less than when they focused their
attention on their current stores rather than rapid expansion. For my second
revenue model, I wanted to project sales by segment in order to give the other
analysts an idea of what DSW plans to do in each segment going forward. This
was largely based on conversations had during earnings call transcripts and
historical performance. Due to lack of management guidance and information, I
decided to take a relatively bearish stance with regard to revenue, having it
increase at a decreasing rate going forward.
Operating Expense Operating expenses consist of expenses relating to store management and
payroll costs, advertising, ABG operations, new store advertising and other costs
as well as corporate expenses. DSW is actively engaged in making revenue
boosting improvements in their company. In 2013, they experimented with
expanding their luxury accessory line online and were unsuccessful. They have
spoken about doing more product line experimenting and making other potential
improvements that would increase operating expense. 2014’s operating expense
was projected based on management guidance and I predict that going forward,
these experiments will yield results and operating expense will marginally
decline into perpetuity.
Capital Expenditures Capital expenditures are connected with DSW expansion, improving
ecommerce, remodeling existing stores, and growing infrastructure. Capital
expenditures are set to increase this year as DSW is projected to open 39 new
stores and continue to open stores at a strong rate going forward. DSW is also
investing in their ecommerce, ramping up their smart phone application, in an
effort to increase customer retention.
Beta DSW’s beta was calculated using various linear regressions in comparison with
the S&P 500. I also used the Hamada and Vasicek methods to compare DSW
against its comparable companies in order to obtain a series of betas to evaluate.
I placed the most emphasis on my three and five-year daily betas because of
Figure 20: Cost of Goods Sold Projections
Source: UOIG Projections
WFM Beta SE Weighting
1 Year Daily 0.75 0.19 0.00%
1 Year Daily Hamada-Comps 1.13 0.00%
3 year daily 1.03 0.08 40.00%
3 year weekly 0.95 0.18 0.00%
3 Year Daily Vasicek- Comps 0.93 5.00%
3 Year Daily Vasicek-ETF 0.70 5.00%
3 Year Daily Hamada 0.93 0.00%
3 Year Daily Hamada- Comps 1.04 5.00%
3 Year Daily Hamada-ETF 0.68 5.00%
3 Year Weekly Hamada 1.08 0.00%
5 year daily 1.07 0.08 40.00%
5 Year Daily Hamada 1.46 0.00%
Weight Average Unlevered Beta Beta 1.01
Figure 21: Beta Calculations
Source: UOIG Projections
Figure 22: Beta Sensitivity Table
Source: UOIG Projections
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate
31 2.0% 2.5% 3.0% 3.5% 4.0%
0.82 34.93 36.66 38.74 41.28 44.45
0.92 31.12 32.41 33.93 35.75 37.96
1.02 28.00 28.99 30.13 31.47 33.06
1.12 25.41 26.17 27.05 28.06 29.24
1.22 23.22 23.82 24.50 25.28 26.18Ad
just
ed
Beta
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their low standard of error and the five-year reflected a longer period of time. I
took out of consideration betas with standard errors above 0.1 and weighted my
ETF betas 5% each.
Cost of Goods Sold DSW’s cost of goods sold are set to go up in 2015 due to their experimenting
with product lines. Management has not been very forthcoming with
information pertaining to their experimentation unless it has failed or succeeded.
I anticipate that their experiments will run through 2014-2015 and eventually
slow down. Because much of their footwear is manufactured abroad, they have
opportunities to decrease cost of goods sold even further by increasing their
overseas manufacturing.
Tax Rate DSW’s tax rate has been relatively consistent historically, ranging from about
38%-40%. They have not disclosed information regarding whether or not they
will be doing anything to decrease their tax rate going forward, nor have not put
any international expansion plans into place, so they will not have the
opportunity to take advantage of a lower tax rate. For those reasons, I took the
average of the historical tax rates and standardized them into perpetuity.
Recommendation
Given DSW’s slowing growth and unsuccessful product tests, a reasonable
overvaluation has been identified in both the DCF Assumptions and Forward
Comparable Analysis. For those reasons, I recommend a HOLD for all
portfolios.
Figure 23: Final Valuation
Final Implied Price Price Target Weight
DCF $30.56 50.00%
Forward Comparable Analysis $28.79 50.00%
Price Target $29.68
Current Price $37.35
Overvalued (20.54%)
Source: UOIG Projections
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Appendix 1 – Relative Valuation
Comparables Analysis DSW Fl SHOO BWS SKX PVH
($ in millions) DSW Foot Locker Steve Madden Brown Shoe Co Sketchers PVH Corporation
Stock Characteristics Max Min Median Weight Avg. 40.00% 35.00% 20.00% 5.00% 0.00%
Current Price $110.26 $28.39 $53.22 $42.00 $37.35 $53.22 $34.34 $28.39 $60.35 $110.26
Beta 1.38 1.01 1.09 1.09 1.01 1.01 1.01 1.38 1.19 1.09
Size
Short-Term Debt 0.09 - - 0.00 - - - - 0.09 -
Long-Term Debt 199.01 - 136.00 101.09 - 136.00 - 199.01 137.75 85.00
Cash and Cash Equivalent 858.00 82.50 372.00 441.40 112.02 858.00 180.28 82.50 372.00 593.00
Non-Controlling Interest 127.80 - - 45.04 - - 127.80 - 6.10 -
Preferred Stock - - - - - - - - - -
Diluted Basic Shares 151.67 48.81 67.38 96.61 94.59 151.67 67.38 48.81 51.86 83.13
Market Capitalization 9,079.01 1,251.66 3,114.03 4,405.82 3,460.46 8,012.95 2,270.29 1,251.66 3,114.03 9,079.01
Enterprise Value 8,571.01 1,368.17 2,885.97 4,110.55 3,348.44 7,290.95 2,217.82 1,368.17 2,885.97 8,571.01
Growth Expectations
% Revenue Growth 2014E 20.80% (1.10%) 2.80% 4.98% 7.62% 9.40% (1.10%) 2.80% 20.80% 1.10%
% Revenue Growth 2015E 11.74% 2.30% 4.10% 6.34% 11.74% 4.10% 9.80% 3.70% 10.60% 2.30%
% EBITDA Growth 2014E 20.40% (15.70%) 3.10% 0.47% 10.92% 10.80% (15.70%) 3.10% 20.40% 1.40%
% EBITDA Growth 2015E 12.00% 2.00% 4.70% 6.44% 8.28% 4.70% 8.80% 4.40% 12.00% 2.00%
% EPS Growth 2014E 43.20% (13.00%) 19.30% 10.84% (13.00%) 21.40% (10.70%) 19.30% 43.20% 3.40%
% EPS Growth 2015E 22.70% 7.60% 12.20% 12.13% 15.00% 9.40% 12.20% 14.80% 22.70% 7.60%
Profitability Margins
Gross Margin 52.67% 32.99% 40.62% 35.94% 32.99% 33.48% 34.89% 40.62% 44.29% 52.67%
EBIT Margin 12.06% 5.17% 11.15% 10.21% 8.28% 11.15% 12.06% 5.17% 9.94% 11.41%
EBITDA Margin 14.34% 7.26% 13.33% 12.12% 10.66% 13.54% 13.33% 7.26% 11.78% 14.34%
Net Margin 8.11% 3.10% 7.30% 6.74% 5.27% 7.30% 8.11% 3.10% 7.16% 7.62%
Credit Metrics
Interest Expense - - - - - - - - - -
Debt/EV 0.15 - 0.02 0.04 - 0.02 - 0.15 0.05 0.01
Leverage Ratio 1.03 - 0.14 0.28 - 0.14 - 1.03 0.40 0.07
Interest Coverage Ratio - - - - - - - - - -
Operating Results
Revenue $8,366.10 $1,409.20 $2,913.73 $4,081.15 $2,848.29 $7,276.14 $1,409.20 $2,658.96 $2,913.73 $8,366.10
Gross Profit $4,406.45 $491.67 $1,290.59 $1,427.07 $939.76 $2,436.16 $491.67 $1,079.94 $1,290.59 $4,406.45
EBIT $954.70 $137.50 $289.60 $425.93 $235.77 $811.20 $169.93 $137.50 $289.60 $954.70
EBITDA $1,199.49 $187.89 $343.31 $515.57 $303.69 $985.11 $187.89 $192.99 $343.31 $1,199.49
Net Income $637.44 $82.52 $208.52 $279.29 $149.98 $530.90 $114.28 $82.52 $208.52 $637.44
Capital Expenditures $288.33 $20.04 $53.19 $106.84 $113.93 $216.91 $20.04 $52.00 $53.19 $288.33
Multiples
EV/Revenue 1.6x 0.5x 1.0x 1.1x 1.2x 1.0x 1.6x 0.5x 1.0x 1.0x
EV/Gross Profit 4.5x 1.3x 2.2x 3.1x 3.6x 3.0x 4.5x 1.3x 2.2x 1.9x
EV/EBIT 14.2x 9.0x 10.0x 10.7x 14.2x 9.0x 13.1x 10.0x 10.0x 9.0x
EV/EBITDA 11.8x 7.1x 7.4x 8.9x 11.0x 7.4x 11.8x 7.1x 8.4x 7.1x
EV/(EBITDA-Capex) 17.6x 9.4x 9.7x 10.9x 17.6x 9.5x 13.2x 9.7x 9.9x 9.4x
Market Cap/Net Income = P/E 23.1x 14.2x 15.1x 16.8x 23.1x 15.1x 19.9x 15.2x 14.9x 14.2x
Multiple Implied Price Weight
EV/Revenue $34.43 0.00%
EV/Gross Profit $32.39 0.00%
EV/EBIT $27.73 50.00%
EV/EBITDA $29.85 50.00%
EV/(EBITDA-Capex) $22.97 0.00%
Market Cap/Net Income = P/E $26.59 0.00%
Price Target $28.79
Current Price $37.35
Overvalued (22.91%)
February 27, 2015
February 27, 2015
University of Oregon Investment Group
UOIG 12
Appendix 2 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in Millions) 2008A 2009A 2010A 2011A 2012A 2013A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1
% YoY Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% (0.40%) 4.45% 5.83% 21.13% 7.62% 17.13% 20.92% 7.22% 3.67% 11.74% 7.35% 6.34% 6.23% 6.13% 5.03% 4.79% 4.76% 4.35%
Cost of Goods Sold 1,047.5 1,088.4 1,208.4 1,319.1 1,475.3 1,565.3 394.6 398.3 434.5 457.5 1,684.9 463.0 475.6 466.9 503.0 1,908.5 2,044.9 2,170.4 2,301.3 2,437.9 2,555.6 2,672.9 2,794.8 2,910.7
% Revenue 71.60% 67.91% 66.31% 65.16% 65.34% 66.08% 65.88% 67.85% 64.86% 66.00% 66.10% 66.00% 67.00% 65.00% 70.00% 67.01% 66.88% 66.75% 66.63% 66.50% 66.38% 66.25% 66.13% 66.00%
Change in Fair Value of Derivative Instruments - (6.6) (4.9) (5.4) (6.1) - - - - - - - - - - - - - - - - - - -
Gross Profit $415.4 $507.6 $609.0 $699.8 $776.4 $803.4 $204.4 $188.8 $235.4 $235.7 $864.2 $238.5 $234.3 $251.4 $215.6 $939.8 $1,012.6 $1,080.9 $1,152.6 $1,227.9 $1,294.5 $1,361.6 $1,431.7 $1,499.4
Gross Margin 28.40% 31.67% 33.42% 34.57% 34.39% 33.92% 34.12% 32.15% 35.14% 34.00% 33.90% 34.00% 33.00% 35.00% 30.00% 32.99% 33.12% 33.25% 33.37% 33.50% 33.62% 33.75% 33.87% 34.00%
Operating Expenses 336.3 440.8 396.1 448.6 481.8 497.9 126.8 118.6 138.9 144.4 528.6 157.1 142.0 165.2 171.7 636.1 679.6 719.3 760.5 803.4 839.8 875.8 913.1 948.2
% Revenue 22.99% 27.51% 21.74% 22.16% 21.34% 21.02% 21.16% 20.20% 20.73% 20.83% 20.74% 22.40% 20.00% 23.00% 23.90% 22.33% 22.23% 22.12% 22.02% 21.92% 21.81% 21.71% 21.60% 21.50%
Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.4 17.2 17.3 17.3 17.6 67.9 76.7 84.7 92.6 100.6 107.3 114.1 120.3 125.8
% Revenue 2.48% 2.92% 2.65% 2.53% 2.56% 2.71% 2.73% 2.99% 2.51% 1.89% 2.25% 2.45% 2.43% 2.41% 2.45% 2.38% 2.51% 2.60% 2.68% 2.74% 2.79% 2.83% 2.85% 2.85%
% Net PP&E 13.07% 18.47% 18.77% 18.12% 17.80% 18.61% 4.63% 4.92% 4.59% 3.57% 16.76% 4.37% 3.88% 3.48% 3.20% 17.28% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47%
Earnings Before Interest & Taxes $42.8 $20.0 $164.7 $200.0 $236.8 $241.4 $61.3 $52.6 $79.7 $78.2 $278.2 $64.2 $75.0 $68.9 $26.2 $235.8 $256.3 $276.9 $299.5 $324.0 $347.4 $371.6 $398.3 $425.4
% Revenue 2.93% 1.25% 9.04% 9.88% 10.49% 10.19% 10.23% 8.96% 11.90% 11.28% 10.92% 9.15% 10.57% 9.59% 3.65% 8.28% 8.38% 8.52% 8.67% 8.84% 9.02% 9.21% 9.42% 9.65%
Interest Expense 0.8 13.6 13.5 11.8 0.9 0.6 0.1 0.1 0.2 - 0.4 - - - - - - - - - - - - -
% Revenue .05% .85% .74% .58% .04% .03% .01% .02% .03% - .01% - - - - - - - - - - - - -
Interest Income 3.4 2.3 3.2 2.6 4.7 3.2 1.0 0.7 0.8 1.1 3.7 1.2 1.1 1.1 0.9 4.2 4.9 5.2 5.5 6.2 0.1 6.9 7.2 7.5
% Revenue .23% .14% .18% .13% .21% .14% .17% .12% .12% .16% .14% .17% .15% .15% .12% .15% .16% .16% .16% .17% .00% .17% .17% .17%
Income from Discontinued Ops - 59.88 6.63 (4.86) 1.25 - - - - - - - - - - - - - - - - - - -
% Revenue 0.00% 3.74% .36% (.24%) .06% - - - - - - - - - - - - - - - - - - -
Non-Operating Income (1.13) (2.37) 1.50 - - - - - - - - - - - - - - - - - - - - -
% of Revenue (.08%) (.15%) .08% - - - - - - - - - - - - - - - - - - - - -
Earnings Before Taxes 44.3 66.2 162.5 185.9 241.9 244.0 62.2 53.2 80.3 79.3 281.5 65.4 76.1 69.9 27.1 240.0 261.2 282.1 305.0 330.2 347.5 378.5 405.5 432.9
% Revenue 3.03% 4.13% 8.92% 9.19% 10.71% 10.30% 10.39% 9.07% 11.99% 11.44% 11.04% 9.32% 10.72% 9.74% 3.77% 8.42% 8.54% 8.68% 8.83% 9.01% 9.03% 9.38% 9.59% 9.82%
Less Taxes (Benefits) 17.38 12.06 59.97 (58.07) 95.43 92.71 23.57 20.82 31.79 31.8 108.0 22.5 22.5 22.5 22.5 90.0 98.0 105.8 114.4 123.8 130.3 141.9 152.1 162.3
Tax Rate 39.25% 18.22% 36.90% 31.23% 39.45% 37.99% 37.89% 39.12% 39.59% 37.00% 38.35% 34.40% 29.57% 32.17% 83.07% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50%
Net Income $26.90 $54.12 $102.56 $244.01 $146.44 $151.30 $38.64 $32.40 $48.50 $47.49 $173.57 $42.91 $53.59 $47.44 $4.58 $149.98 $163.26 $176.34 $190.63 $206.39 $217.17 $236.56 $253.45 $270.58
Net Margin 3.38% 5.63% 12.05% 6.49% 6.39% 6.45% 5.52% 7.24% 6.85% 6.81% 6.12% 7.55% 6.60% 0.64% 5.27% 5.34% 5.42% 5.52% 5.63% 5.64% 5.86% 6.00% 6.14%
Add Back: Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.4 17.2 17.3 17.3 17.6 67.9 76.7 84.7 92.6 100.6 107.3 114.1 120.3 125.8
Add Back: Interest Expense*(1-Tax Rate) 0.5 11.1 8.5 8.1 0.5 0.4 0.0 0.1 0.1 - 0.2 - - - - - - - - - - - - -
Operating Cash Flow $63.71 $112.00 $159.34 $303.36 $204.78 $215.77 $55.03 $50.04 $65.46 $60.61 $231.14 $60.07 $70.85 $64.77 $22.20 $217.90 $239.96 $261.00 $283.22 $306.94 $324.49 $350.69 $373.72 $396.42
% Revenue 4.36% 6.99% 8.74% 14.99% 9.07% 9.11% 9.19% 8.52% 9.77% 8.74% 9.07% 8.56% 9.98% 9.02% 3.09% 7.65% 7.85% 8.03% 8.20% 8.37% 8.43% 8.69% 8.84% 8.99%
Current Assets 297.5 317.6 381.9 492.2 508.6 476.6 507.5 516.8 562.8 523.8 590.0 599.2 604.1 577.5 543.2 618.2 663.6 704.7 747.7 793.6 832.4 872.3 913.8 953.5
% Revenue 20.34% 19.82% 20.96% 24.31% 22.53% 20.12% 84.74% 88.02% 84.02% 75.57% 23.15% 85.41% 85.10% 80.40% 75.58% 21.70% 21.70% 21.68% 21.65% 21.65% 21.62% 21.62% 21.62% 21.62%
Current Liabilities 156.0 223.1 261.3 275.9 273.7 283.6 306.8 350.7 343.5 337.5 337.5 291.9 320.5 360.3 393.7 393.7 404.0 422.9 442.1 461.7 484.0 506.2 529.3 551.2
% Revenue 10.67% 13.92% 14.34% 13.63% 12.12% 11.97% 51.23% 59.73% 51.28% 48.70% 13.24% 41.61% 45.15% 50.16% 54.78% 13.82% 13.21% 13.01% 12.80% 12.59% 12.57% 12.55% 12.52% 12.50%
Net Working Capital $141.50 $94.52 $120.61 $216.27 $234.92 $192.92 $200.73 $166.08 $219.33 $186.25 $252.46 $307.30 $283.59 $217.20 $149.47 $224.49 $259.54 $281.85 $305.62 $331.93 $348.48 $366.13 $384.56 $402.32
% Revenue 9.67% 5.90% 6.62% 10.68% 10.41% 8.14% 33.51% 28.29% 32.74% 26.87% 9.90% 43.80% 39.95% 30.24% 20.80% 7.88% 8.49% 8.67% 8.85% 9.05% 9.05% 9.08% 9.10% 9.12%
Change in Working Capital 113.2 (47.0) 26.1 95.7 18.7 (42.0) 7.8 (34.6) 53.2 (33.1) 59.5 54.8 (23.7) (66.4) (67.7) (28.0) 35.0 22.3 23.8 26.3 16.6 17.7 18.4 17.8
Capital Expenditures 81.0 21.8 52.3 76.9 99.8 83.8 25.2 21.6 26.6 34.7 108.1 35.1 35.5 35.9 28.7 113.9 122.3 130.1 138.2 139.3 146.3 149.3 152.2 154.4
% Revenue 5.54% 1.36% 2.87% 3.80% 4.42% 3.54% 4.20% 3.68% 3.97% 5.00% 4.24% 5.00% 5.00% 5.00% 4.00% 4.00% 4.00% 4.00% 4.00% 3.80% 3.80% 3.70% 3.60% 3.50%
Unlevered Free Cash Flow ($130.5) $137.2 $81.0 $130.8 $86.4 $174.0 $22.0 $63.1 ($14.4) $59.0 $63.5 ($29.8) $59.1 $95.2 $61.2 $131.9 $82.6 $108.6 $121.3 $141.3 $161.6 $183.8 $203.1 $224.3
Discounted Free Cash Flow 57.84 (28.65) 55.57 87.82 55.28 68.82 83.44 85.89 92.28 97.31 102.00 103.96 105.84
EBITDA $79.14 $66.74 $212.93 $251.21 $294.60 $305.49 $77.60 $70.17 $96.54 $91.29 $335.60 $81.38 $92.29 $86.19 $43.84 $303.69 $333.02 $361.60 $392.07 $424.54 $454.73 $485.77 $518.60 $551.27
EBITDA Margin 5.41% 4.16% 11.68% 12.41% 13.05% 12.90% 12.96% 11.95% 14.41% 13.17% 13.17% 11.60% 13.00% 12.00% 6.10% 10.66% 10.89% 11.12% 11.35% 11.58% 11.81% 12.04% 12.27% 12.50%
EBITDA Growth (35.23%) (15.68%) 219.07% 17.98% 17.27% 3.70% (74.60%) (9.58%) 37.58% (5.43%) 267.62% (75.75%) 13.40% (6.60%) (49.14%) 592.79% 9.66% 8.58% 8.43% 8.28% 7.11% 6.83% 6.76% 6.30%
February 27, 2015
February 27, 2015
University of Oregon Investment Group
UOIG 13
Appendix 3 – Revenue Model
Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in Millions) 2008A 2009A 2010A 2011A 2012A 2013A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Stores 298.0 305.0 311.0 326.0 364.0 394.0 408.0 410.0 431.0 433.0 433.0 438.0 443.0 448.0 448.0 448.0 463.0 478.0 493.0 508.0 518.0 527.0 536.0 543.0
% Growth 15.06% 2.35% 1.97% 4.82% 11.66% 8.24% 3.82% 0.49% 5.12% 0.46% 9.90% 1.15% 1.14% 1.13% 0.00% 3.46% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%
Total Square Feet 6.7 6.8 7.0 7.3 8.1 8.7 9.0 9.0 9.5 9.5 9.5 9.6 9.7 9.9 9.9 9.9 10.2 10.5 10.8 11.2 11.4 11.6 11.8 11.9
% Growth 9.88% 1.34% 1.93% 4.55% 11.40% 6.98% 3.82% 0.49% 5.12% 0.46% 0.46% 1.15% 1.14% 1.13% 0.00% 0.00% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%
Average Square Feet Per Store 22.6 22.4 22.4 22.4 22.3 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0
% Growth (4.50%) (.99%) (.04%) (.26%) (.23%) (1.16%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Revenue Per Square Foot 216.7 234.3 261.4 277.7 278.1 272.7 66.7 65.1 70.6 72.8 275.2 72.8 72.8 72.9 72.9 291.4 300.2 309.2 318.5 328.0 337.8 348.0 358.4 369.2
% Growth 22.80% 8.10% 11.56% 6.25% 0.12% (1.94%) (3.41%) (2.46%) 8.54% 3.00% 0.94% 0.05% 0.05% 0.05% 0.05% 5.89% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Stores Opened 41.0 9.0 9.0 17.0 39.0 30.0 14.0 2.0 21.0 2.0 39.0 5.0 5.0 5.0 0.0 15.0 15.0 15.0 15.0 15.0 10.0 9.0 9.0 7.0
Stores Closed 2.00 2.00 3.00 2.00 1.00 - - - - - - - - - - - - - - - - - - -
Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1
% Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% 0.28% (1.98%) 14.10% 3.48% 7.62% 1.21% 1.19% 1.18% 0.05% 11.74% 7.35% 6.34% 6.23% 6.13% 5.03% 4.79% 4.76% 4.35%
Revenue Model
($ in Millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Women's Shoes 965.5 1,057.7 1,202.8 1,336.1 1,467.6 1,656.9 1,822.9 1,956.8 2,080.8 2,141.4 2,272.8 2,348.6 2,501.4 2,620.4 2,734.3
% of Sales 66.00% 66.00% 66.00% 66.00% 65.00% 65.00% 64.00% 64.00% 64.00% 62.00% 62.00% 61.00% 62.00% 62.00% 62.00%
% Growth 0.00% 9.55% 13.71% 11.08% 9.84% 0.00% (1.54%) 0.00% 0.00% (2.00%) 0.00% (1.00%) 1.00% 0.00% 0.00%
Men's Shoes 219.4 240.4 273.4 303.6 361.2 433.3 512.7 580.9 650.3 759.9 806.5 885.5 927.9 972.1 1,014.3
% of Sales 15.00% 15.00% 15.00% 15.00% 16.00% 17.00% 18.00% 19.00% 20.00% 22.00% 22.00% 23.00% 23.00% 23.00% 23.00%
% Growth 0.00% 0.00% 0.00% 0.00% 1.00% 1.00% 1.00% 1.00% 1.00% 2.00% 0.00% 1.00% 0.00% 0.00% 0.00%
Athletic Shoes 190.2 208.3 236.9 242.9 270.9 305.9 218.7 215.3 208.1 214.1 227.3 234.9 250.1 262.0 273.4
% of Sales 13.00% 13.00% 13.00% 12.00% 12.00% 12.00% 12.00% 11.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
% Growth (1.00%) 0.00% 0.00% (1.00%) 0.00% 0.00 0.00% (1.00%) (1.00%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Accessories and Other 87.8 96.2 109.3 141.7 158.0 152.9 109.4 117.4 124.8 128.5 136.4 140.9 125.1 131.0 136.7
% of Sales 6.00% 6.00% 6.00% 7.00% 7.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 5.00% 5.00% 5.00%
% Growth 1.00% 0.00% 0.00% 1.00% 1.00% 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% (1.00%) 0.00% 0.00%
Total Stores 298.0 305.0 311.0 326.0 364.0 433.0 448.0 463.0 478.0 493.0 508.0 518.0 527.0 536.0 543.0
% Growth 15.06% 2.35% 1.97% 4.82% 11.66% 18.96% 3.46% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%
Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,549.1 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1
% Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% .28% (1.98%) 14.10% 3.48% 7.62% 1.21% 1.19% 1.18% .05%
February 27, 2015
February 27, 2015
University of Oregon Investment Group
UOIG 14
Appendix 4 – Working Capital Model
Working Capital Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
( $ in millions) 2009A 2010A 2011A 2012A 2013A 2014A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1
Current Assets
Accounts Receivable 6.9 5.4 12.4 16.9 26.8 26.6 22.8 27.9 26.5 31.6 31.6 31.3 33.2 27.3 23.4 32.0 34.3 35.6 36.9 39.2 40.1 42.0 44.0 45.9
Days Sales Outstanding A/R 1.7 1.2 2.5 3.0 4.3 4.1 3.5 4.4 3.6 4.2 4.5 4.1 4.3 3.5 3.0 4.1 4.1 4.0 3.9 3.9 3.8 3.8 3.8 3.8
% of Revenue 0.47% 0.34% 0.68% 0.83% 1.19% 1.12% 3.80% 4.74% 3.96% 4.00% 1.24% 4.46% 4.67% 3.80% 3.26% 1.12% 1.12% 1.10% 1.07% 1.07% 1.04% 1.04% 1.04% 1.04%
Inventory 244.0 262.3 309.0 334.4 393.8 397.8 420.0 415.0 486.3 450.6 450.6 498.1 496.9 502.8 464.6 478.2 513.4 545.9 579.9 615.5 646.4 677.4 709.6 740.5
% of Revenue 16.68% 16.37% 16.96% 16.52% 17.44% 16.79% 70.12% 70.68% 72.59% 65.00% 17.68% 71.00% 70.00% 70.00% 64.65% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79%
Prepaid Expenses 24.8 20.8 29.9 24.4 20.6 34.1 44.4 51.6 26.6 34.7 34.7 52.6 56.8 30.2 37.9 39.0 41.9 44.5 47.3 50.2 52.7 55.3 57.9 60.4
Days Prepaid Expense Outstanding 26.9 17.2 27.6 19.9 15.6 25.0 32.2 40.0 17.6 7.1 23.9 30.8 36.8 16.8 20.3 22.4 22.5 22.6 22.7 22.8 22.9 23.0 23.1 23.3
% of Revenue 1.69% 1.30% 1.64% 1.21% 0.91% 1.44% 7.41% 8.79% 3.97% 5.00% 1.36% 7.50% 8.00% 4.20% 4.00% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37%
Deferred Income Taxes 21.9 29.1 30.5 116.5 67.4 18.1 20.4 22.3 23.5 6.9 73.1 17.2 17.2 17.2 17.2 68.9 74.0 78.7 83.6 88.7 93.2 97.6 102.3 106.7
% of Revenue 1.50% 1.82% 1.68% 5.75% 2.99% 0.77% 3.40% 3.80% 3.51% 1.00% 2.87% 2.46% 2.43% 2.40% 2.40% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42%
Total Current Assets $297.5 $317.6 $381.9 $492.2 $508.6 $476.6 $507.5 $516.8 $562.8 $523.8 $590.0 $599.2 $604.1 $577.5 $543.2 $618.2 $663.6 $704.7 $747.7 $793.6 $832.4 $872.3 $913.8 $953.5
% of Revenue 20.34% 19.82% 20.96% 24.31% 22.53% 20.12% 84.74% 88.02% 84.02% 75.57% 23.15% 85.41% 85.10% 80.40% 75.58% 21.70% 21.70% 21.68% 21.65% 21.65% 21.62% 21.62% 21.62% 21.62%
Long Term Assets
Net PP&E Beginning 233.4 278.0 253.1 257.1 282.8 324.7 344.4 353.3 357.3 367.1 344.4 394.8 447.1 499.9 553.2 394.8 440.5 485.8 531.0 576.4 615.0 653.9 688.9 720.7
Capital Expenditures 81.0 21.8 52.3 76.9 99.8 83.8 25.2 21.6 26.6 34.7 108.1 35.1 35.5 35.9 28.7 113.9 122.3 130.1 138.2 139.3 146.3 149.3 152.2 154.4
Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.7 17.2 17.3 17.4 17.7 68.2 77.0 84.9 92.8 100.7 107.4 114.2 120.4 125.9
Net PP&E Ending 278.0 253.1 257.1 282.8 324.7 344.4 353.3 357.3 367.1 388.6 394.8 447.1 499.9 553.2 599.7 440.5 485.8 531.0 576.4 615.0 653.9 688.9 720.7 749.2
Total Current Assets & Net PP&E $575.5 $570.6 $639.0 $775.0 $833.3 $821.0 $860.8 $874.0 $929.9 $912.4 $984.8 $1,046.3 $1,104.0 $1,130.7 $1,142.8 $1,058.7 $1,149.4 $1,235.8 $1,324.1 $1,408.6 $1,486.3 $1,561.2 $1,634.5 $1,702.7
% of Revenue 19.00% 15.79% 14.11% 13.97% 14.38% 14.54% 58.98% 60.86% 54.80% 56.06% 15.49% 63.73% 70.42% 77.02% 83.45% 15.46% 15.89% 16.33% 16.69% 16.78% 16.98% 17.08% 17.05% 16.99%
Current Liabilities
Accounts Payable 92.9 119.1 148.2 148.9 150.5 167.9 148.5 192.3 185.2 198.9 198.9 151.0 191.3 208.1 218.7 218.7 219.2 232.6 246.7 261.3 273.9 286.5 299.5 312.0
Days Payable Outstnading 32.4 39.9 44.8 41.2 37.2 39.2 34.6 44.4 39.2 40.0 43.1 30.0 37.0 41.0 40.0 41.8 39.1 39.1 39.1 39.1 39.1 39.1 39.1 39.1
% of Revenue 6.35% 7.43% 8.13% 7.36% 6.66% 7.09% 24.79% 32.76% 27.64% 28.70% 7.80% 21.52% 26.95% 28.97% 30.43% 7.68% 7.17% 7.15% 7.14% 7.13% 7.11% 7.10% 7.09% 7.07%
Accrued Charges 63.1 104.0 113.1 127.0 123.2 115.7 158.3 158.3 158.3 138.6 138.6 140.9 129.2 152.2 175.0 175.0 184.9 190.3 195.5 200.4 210.0 219.7 229.7 239.2
Days Charges Outstanding 22.0 34.9 34.2 35.1 30.5 27.0 36.9 36.6 33.5 27.9 30.0 28.0 25.0 30.0 32.0 32.0 33.0 32.0 31.0 30.0 30.0 30.0 30.0 30.0
% of Revenue 4.31% 6.49% 6.21% 6.27% 5.46% 4.88% 26.43% 26.97% 23.64% 20.00% 5.44% 20.09% 18.21% 21.20% 24.35% 6.14% 6.05% 5.85% 5.66% 5.47% 5.46% 5.45% 5.43% 5.42%
Dividends Payable - - - 98.86 98.86 98.86 - - - - - - - - - - - - - - - - - -
% of Revenue - - - 4.88% 4.38% 4.17% - - - - - - - - - - - - - - - - - -
Total Current Liabilities $156.0 $223.1 $261.3 $275.9 $273.7 $283.6 $306.8 $350.7 $343.5 $337.5 $337.5 $291.9 $320.5 $360.3 $393.7 $393.7 $404.0 $422.9 $442.1 $461.7 $484.0 $506.2 $529.3 $551.2
% of Revenue 10.67% 13.92% 14.34% 13.63% 12.12% 11.97% 51.23% 59.73% 51.28% 48.70% 13.24% 41.61% 45.15% 50.16% 54.78% 13.82% 13.21% 13.01% 12.80% 12.59% 12.57% 12.55% 12.52% 12.50%
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UOIG 15
Appendix 5 – Discounted Cash Flows Valuation Assumptions
S
Discounted Free Cash Flow Assumptions Considerations
Tax Rate 37.50% Terminal Growth Rate 3.00%
Risk Free Rate 1.96% Terminal Value 4,968
Beta 1.01 PV of Terminal Value 1,416
Market Risk Premium 6.45% Sum of PV Free Cash Flows 1,475
% Equity 100.00% Firm Value 2,891
% Debt 0.00% Total Debt 0
Cost of Debt 0.00% Cash & Cash Equivalents 112
CAPM 8.46% Market Capitalization 2,891
WACC 8.46% Fully Diluted Shares 95
Terminal Risk Free Rate 2.71% Implied Price $30.56
Terminal CAPM 9.21% Current Price $37.35
Terminal WACC 9.21% Overvalued (18.17%)
Final Implied Price Price Target Weight
DCF $30.56 50.00%
Forward Comparable Analysis $28.79 50.00%
Price Target $29.68
Current Price $37.35
Overvalued (20.54%)
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Appendix 6 – Sensitivity Analysis
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
31 2.0% 2.5% 3.0% 3.5% 4.0% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
0.82 34.9 36.7 38.7 41.3 44.5 0.81 (2.71%) (2.71%) 5.59% 16.89% 33.15%
0.92 31.1 32.4 33.9 35.8 38.0 0.91 11.26% 11.26% 22.94% 39.60% 65.26%
1.02 28.0 29.0 30.1 31.5 33.1 1.01 11.26% 11.26% 22.94% 39.60% 65.26%
1.12 25.4 26.2 27.1 28.1 29.2 1.11 (2.71%) (2.71%) 5.59% 16.89% 33.15%
1.22 23.2 23.8 24.5 25.3 26.2 1.21 (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
High growth rate going into terminal year, possibly consider doing an intermediate growth rate31 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
7.0% 30.5 30.5 32.2 34.4 37.3 7.5% (19.76%) (19.76%) (15.17%) (9.34%) (1.64%)
7.5% 29.9 29.9 31.6 33.8 36.7 8.0% (18.15%) (18.15%) (13.57%) (7.73%) (0.03%)
8.0% 29.4 29.4 31.1 33.2 36.1 8.5% (18.15%) (18.15%) (13.57%) (7.73%) (0.03%)
8.5% 28.8 28.8 30.5 32.7 35.6 9.0% (19.76%) (19.76%) (15.17%) (9.34%) (1.64%)
9.0% 28.3 28.3 30.0 32.2 35.1 9.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
31 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
4.5% 42.3 42.3 46.9 53.4 63.6 4.5% 13.25% 13.25% 25.47% 43.01% 70.32%
5.5% 34.4 34.4 37.1 40.7 45.8 5.5% (7.86%) (7.86%) (0.63%) 9.03% 22.61%
6.5% 34.4 34.4 37.1 40.7 45.8 6.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
7.5% 24.7 24.7 25.9 27.3 29.1 7.5% (33.74%) (33.74%) (30.69%) (26.94%) (22.20%)
8.5% 21.6 21.6 22.4 23.3 24.5 8.5% (42.19%) (42.19%) (40.09%) (37.56%) (34.47%)
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
31 2.2% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
57.5% 28.8 28.9 30.6 32.8 35.6 57.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
47.5% 28.8 28.9 30.6 32.8 35.6 47.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
37.5% 28.8 28.9 30.6 32.8 35.6 37.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
47.5% 28.8 28.9 30.6 32.8 35.6 47.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
57.5% 28.8 28.9 30.6 32.8 35.6 57.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)
Tax Rate
Tax
Rate
Ad
just
ed
Beta
Adjusted Beta
WA
CC
WA
CC
Market
Risk
Premium
Mark
et
Ris
k
Pre
miu
m
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University of Oregon Investment Group
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Appendix 7 – Sources
BWS Filings
Damodoran
DSW Earnings call transcripts
DSW Filings
FactSet
FL Filings
Google Images
IBIS World
Market Watch
Morning Star
Press Releases
PVH Filings
SHOO Filings
SKX Filings
Yahoo! Finance
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