cfa investment research challenge files/univ of houston global 20… · cfa-dfw/hsfa student...

CFA Investment Research ChallengeJoe CorkinMauricio FrancoJohn KeetonQuyen Nguyen

April 30, 2008

CFA-DFW/HSFA Student Research

Executive Summary

Recommendation:BUY

• Market Price $24.86• Target Price $37.00

• Conservative Approach• Economy

• 52-Wk Range $16.76 - $56.64• Market Capitalization $1.27B

• Product Mix• High Quality at Great Prices

Key Points


Business Description

• Leading retailer of men’s dress apparel and tuxedo rentals

• Designer, brand name & private label merchandise

• Dry cleaning and corporate uniform businesses

• Purchasing & distribution

• 1,273 retail stores under four brand names


Revenue Breakdown

2006 Sales by Brand

MW65%

K&G23%

Moores12%

2007 Sales by Brand

MW58% K&G

19%

After Hours

9%

Other2%

Moores12%


Revenue Breakdown

2007 Sales by Product

Men's Tailored Clothing

41%

Men's Non-Tailored Clothing

34%

Other5%

Tuxedo Rentals

15%

2006 Sales by Product

Men's Tailored Clothing

47% Men's Non-Tailored Clothing

37%

Other5%

Tuxedo Rentals

6%


Industry Overview

• Highly competitive

• Low-growth industry

• Correlated with economy

• Shift to business casual

Industry Analysis Competitive Positioning

• Strong brand

• Product mix

• Customer service

• High quality/great price


Valuation

• Multiples• Weighted Average• Growth Adjustment

Model

Comparables DCF

Average Intrinsic

Value

Target Price

• 5-YR Projections • FCF from Op. Assets• CAPM


Valuation: Comparables

The Men’s Wearhouse, Inc.MW

Macy’s, Inc.M

Kohl’s CorporationKSS

Nordstrom, Inc.JWN

J.C. Penney Company, Inc.JCP

Jos A. Banks Clothiers, Inc.JOSB

CompanyTicker

EV/EBITDA

EV/S

P/B PEG(5 yr Expected)

P/Sales

AVERAGEP/E

TTMP/E

$32.52

Multiples


Valuation: DCF

131102213330FCF

3648796364∆ in WC

14113315811585CAPEX

433397361290240EBITDA

$2,6575.7%

$2,5146.6%

$2,3588.2%

$2,1792.7%

$2,1220.5%

RevenuesGrowth

20122011201020092008In millions

• Terminal Growth Rate 5.0%• Cost of Equity 10.3%• Cost of Debt 5.5%

• PV Free Cash Flow $1,818M • PV Debt Tax Shield $35M• Off-Balance Sheet Liabilities $17M

INTRINSIC VALUE = $34.54


DCF Drivers

SAME STORE SALES GROWTH

-12%

-8%

-4%

0%

4%

8%

12%

2000 2002 2004 2006 2008 2010 2012


DCF Drivers

EBITDA MARGIN

8%

10%

12%

14%

16%

18%

2000 2002 2004 2006 2008 2010 2012


DCF Sensitivity

$24.00

$29.00

$34.00

$39.00

$44.00

$49.00

EBITDA Margin±1%

Capex ±1%

WC Needs ±1%

Beta ±0.2

Risk-FreeRate±1%

Terminal GrowthRate ±0.5%


Investment Risk

• Economic conditions

• Failed expansion strategies

• Continued demand changes

• Disruptions in supply


Final Thoughts

Why buy Men’s Wearhouse in the current economic environment?


IndexPRESENTATION

• Executive Summary• Business Description

– Sales by Brand– Sales by Product Type

• Industry Overview• Valuation Model

– Multiples– DCF– Drivers: Comp Sales– Drivers: Margins– Sensitivity

• Investment Risks• Final Thought

VALUATION ANALYSIS

• DCF Model– Projections Worksheet –

Revenues– Projections Worksheet –

Capex & Margins– Off-B/S Liabilities– Un-levered Beta– Beta Sensitivity– Interest Rate Sensitivity– Income Statement– Balance Sheet– Free Cash Flow Graph– Capex & Rev/Op Assets Graph

• Multiples• Sales by Brand Forecast & Comp

Sales History• Beta Comparisons for MW• Recession Scenarios• Operating vs. Capital Leases

WALL STREET & MANAGEMENT GUIDANCE

• Management Guidance -Comp Sales & EPS

• Wall Street EPS Projections vs UH Team

• Wall Street Analyst Ratings• Institutional & Mutual Fund

Holders

RATIO ANALYSIS• Profitability• Liquidity• Operating Performance & Cash

Flows• Z M F Scores• Inventory Turnover vs JOSB• Revenues per Store vs JOSB• Revenue per Sq Ft vs JOSBHISTORY• Comp Sales, Margins, and

Multiple History• Stock Repurchases• Dividend History• Charts

– MW vs Apparel Retailers Index

– MW historic price chart– Comp Sales vs Nonfarm

PayrollsOTHER• JOSB Snapshot• CFO Presentation Slides

– Market Share – Men’s Dress Apparel

– Market Share – Men’s Suits– Men’s Dress Apparel U.S.

Sales• Economic Stimulus Info


DCF Model


Projections Worksheet


Off-B/S Liabilities


Unlevered Beta


Beta Sensitivity

$24.001.65$22.501.75$21.001.85

$26.001.55$28.501.45$31.001.35$34.501.25$38.501.15$43.501.05

Intrinsic ValueBeta


Interest Rate Sensitivity

$21.005.0%1.2513.1%7.0%

$24.505.0%1.2512.1%6.0%

$28.505.0%1.2511.2%5.0%

$34.505.0%1.2510.3%4.0%

$43.005.0%1.259.3%3.0%

Intrinsic Value

Market Risk Premium

BetaCost of Equity

Risk-free Rate


Income Statement


Balance Sheet


Free Cash Flows


Capex vs. Revenues/Op. Assets


Multiples


Sales by Brand

1.5%8.7%2.7%7.1%-5.1%-2.1%4.2%8.3%Moores

-2.5%1.9%8.4%7.3%6.1%-3.1%-10.2%3.3%Total

K&G

MW

-10.9%-1.8%16.4%3.9%-0.3%N/AN/AN/A

-0.4%3.1%6.2%8.2%7.9%-3.1%-10.2%3.3%

20072006200520042003200220012000Comparable Store Sales Growth History:


Beta Comparison• Our Method: Linear regression of 3 years of weekly

returns for MW and the S&P 500 = 1.25• Other Sources:

– ValueLine: 1.10– Standard & Poor’s: 1.55– Yahoo! Finance: 2.40– Reuters: 1.66


Recession Scenarios

Base Case: Intrinsic Value = $34.5016.3%15.8%15.3%13.3%11.3%EBITDA Margin5.7%6.6%8.2%2.7%0.5%Revenue Growth20122011201020092008

Deeper Recession: Intrinsic Value = $30.0016.3%14.2%12.2%9.3%7.9%EBITDA Margin5.6%6.6%9.1%2.0%-1.7%Revenue Growth20122011201020092008

16.0%15.3%13.0%13.0%11.3%EBITDA Margin5.7%5.7%3.9%2.7%0.5%Revenue Growth20122011201020092008

Prolonged Recession: Intrinsic Value = $28.00


Operating vs Capitalizing LeasesOperating lease expense in current year = 150.00$ Operating Lease Commitments (From footnote to financials)

Year Commitment ! Year 1 is next year, ….1 147.50$

1-3 246.00$ 4-5 163.30$

6 and beyond 201.90$

Pre-tax Cost of Debt = 5.50%.

From the current financial statements, enter the followingReported Operating Income (EBIT) = 229.00$ Reported Debt = 110.00$ Reported Interest Expenses = 5.00$

Number of years embedded in yr 6 estimate = 1 ! I use the average lease expense over the first five yearsto estimate the number of years of expenses in yr 6

Converting Operating Leases into debtYear Commitment Present Value

1 147.50$ 139.81$ 1-3 246.00$ 221.02$ 4-5 163.30$ 131.82$

6 and beyond 201.90$ 146.43$ ! Commitment beyond year 6 converted into an annuity for ten yearsDebt Value of leases = 639.08$

Restated Financials

Debt with Operating leases reclassified as debt = 749.08$

Full Operating lease adjustmentReported Operating income = $229.00 + Current year's operating lease expense = $150.00 - Depreciation on leased asset = $106.51Adjusted Operating Income $272.49

Adjusted EBITDA $459.00

Adjusted Intrinsic value 74.43$


Management Guidance

Comparable Store Sales Growth

FlatUp 1-3%

Down 1-3%

Moores

$1.80-2.00N/A

$0.18-0.20

EPS

Down 7-9%Down 1-7%FY 2008Down 11-13%Down 1-7%Q2 2008

Down 11-13%Down 4-7%Q1 2008

K&GMW


Forecast Comparison

0.580.35Jan 2009Quarterly

0.400.62Oct 2008Quarterly

0.750.82Jul 2008Quarterly

0.180.22Apr 2008Quarterly

1.912.01Jan 2009Annual

$2.49$2.47Jan 2010Annual

U of HWall Street MeanFiscal period


Analyst Ratings1 – Strong Buy 32 – Buy 13 – Hold 34 – Underperform 05 – Sell 0

Mean Recommendation: 2.0

Sell Strong Buy


Institutional & Mutual Fund HoldersInstitutional HoldersPrimeCap Management Co. 5.98%Vanguard Group Inc. 5.66%Maverick Capital Ltd. (HF) 5.51%Barclays Global Investors UK 5.47%Fidelity 5.23%

Mutual Fund HoldersFranklin Strategic Small-Mid Cap Growth 4.80%Vanguard Horizon Fund Opportunity Portfolio 4.60%


Ratio Analysis – Profitability


Ratio Analysis - Liquidity


Ratio Analysis – Oper. Performance & Cash Flow


Ratio Analysis – Z M F Scores


Inventory Turnover

1.0

1.4

1.8

2.2

2.6

3.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

CO

GS/

Inve

ntor

y

MW JOSB


Revenues per Store

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Rev

enue

s pe

r Sto

re (i

n m

illio

ns)

MW JOSB


Revenues per Sq. Ft.

$250

$260

$270

$280

$290

$300

$310

$320

$330

2001 2002 2003 2004 2005 2006 2007

Rev

enue

s pe

r SQ

FT

MW JOSB


Comp Store Sales & Margins

35.1%31.4%30.5%31.1%30.7%29.7%29.6%28.0%SG&A Margin

P/E

EBIT Margins

Comp Store Sales

Growth

16.312.815.19.411.313.115.38.4

10.8%11.9%9.6%7.6%5.9%5.4%5.7%10.6%

-2.5%1.9%8.4%7.3%6.1%-3.1%-10.2%3.3%

20072006200520042003200220012000


Stock Repurchase

2004 2005 2006 2007Authorized purchase (millions) $50 $40 $100 $90Total costs (millions) $90.3 $40.3 $106.1Shares repurchased (thousands) 3,200 1,134 2,985Average price per share $28.21 $35.53 $35.54

Total Authorized ~ $280MTotal Repurchased ~ $236MRemaining Available ~ $44M


Dividend History

2006 20071st quarter $0.05 1st quarter $0.052nd quarter $0.05 2nd quarter $0.063rd quarter $0.05 3rd quarter $0.064th quarter $0.05 4th quarter $0.06

(8.5% Dividend Payout)

20081st quarter $0.07 (1.2% Dividend Yield)


MW vs DJ US Apparel Retailers Index

Source: BigCharts.com


Stock Chart

Source: BigCharts.com


Correlation with Non-farm Payroll

Source: CFO Presentation


JOSB• Market Cap: $441M• 52-Wk Range: $18.81 - $46.16• 2007

– Sales: $604M– EBITDA Margin: 16.8%– TTM P/E 8.9

• Beta– Linear regression of 3 years of weekly returns for JOSB and the S&P

500 = 2.05– ValueLine: 1.60– Standard & Poor’s: 1.48– Yahoo! Finance: 2.62– Reuters: 1.56


Market Share Total Dress Apparel



Market Share – Men’s Suits



Men’s Dress Apparel U.S. Sales



Economic Stimulus• 2001 Tax Rebate

– According to Congressional Budget Office, rebate checks increased total consumption by 0.8% in the quarter issued and 0.6% in the subsequent quarter.

– In 2001, $38 billion in rebate checks were distributed (about 0.4% of GDP)

• 2008 stimulus package is $168 billion.

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