Consumer Discretionary
Joshua Anderson
Kunal Arora
Branyan Booth
Joseph Chandraraj
Agenda
• Sector Recommendation Recap
• Stock Selected Overview
• Financial Analysis
• Valuation Analysis
• Stock Recommendation
Sector Allocation Overview
(07/31/09) S&P 500 Weight
SIM Weight
+/-
9.11%
7.19%
-1.92%
Consumer Staples
11.81%
11.65%
-0.16%
Energy
12.04%
10.74%
-1.31%
Financials
13.86%
8.93%
-4.93%
Health Care
13.73%
13.30%
-0.43%
Industrials
9.98%
12.37%
2.39%
18.72%
20.41%
1.69%
Materials
3.40%
4.98%
1.58%
Telecommunication Services
3.41%
3.39%
-0.02%
Utilities
3.94%
3.61%
-0.34%
Cash
0.00%
3.38%
3.38%
Consumer Discretionary
Information Technology
SIM Current Stock Holdings
Security
Mkt Price
(07/31/09)
Mkt Value
(07/31/09)
Unrealized
Gain/Loss
Price
Target*
Upside*
%age
Portfolio
(07/31/09)
%age
Sector
(07/31/09)
Aéropostale
36.40
$150,150
$998
$38.05
4.53%
0.87%
12.09%
Best Buy
37.37
$300,642
($86,982)
$44.00
17.74%
1.74%
24.20%
Comcast
14.86
$389,332
($41,341)
$19.05
28.20%
2.25%
31.34%
GameStop
21.89
$139,002
($21,751)
$29.11
32.98%
0.80%
11.19%
McDonalds
55.08
$263,282
$2,116
$57.04
3.55%
1.52%
21.19%
Total
7.18%
100.00%
* Price Target: DCF analysis except Comcast from Yahoo Finance
Sector Recommendation – Recap
View
Reason
Business
Slightly Positive
Mature, Low growth but global
expansion can open new
opportunities
Economic
Negative
Disposable Income
Consumer Spending
Saving Rate
Unemployment
Financial
Negative
Revenue growth
Margins
Valuation
Negative
Over valued high P/E ratios
Recommendation: Hold the Underweight Position at 150bps
Stock Screening
• Consumer Discretionary Universe – 822
– Price-to-Forward Earnings Below S&P 500
– EBITDA margins above industry and sector
– Net debt to Assets below 50%
• Stock Screening Results - 44
– Review of Fundamentals
• In Depth Analysis – 4
– Coach, Gymboree, Hasbro, GameStop
DCF Valuations
Company
Current Price
Target Price
Upside
(08/04/09)
Coach
$29.31
$34.44
17.5%
Gymboree
$39.87
$42.14
5.7%
Hasbro
$26.37
$19.65
(25.6%)
GameStop
$24.42
$29.11
19.2%
Aéropostale
$36.21
$38.05
5.1%
McDonalds
$55.01
$57.04
3.7%
Aéropostale in the SIM portfolio
• ARO outperformed the
sector for most of the
quarter
• ARO steadily reducing
cash conversion cycle
• High revenue growth,
competitive margins
• No long-term debt,
average lease shorter
Aéropostale Now
• Lots of Press for increasing
same-store sales for June
• P/S a little high, Forward P/E a
little low, all others right on
target
• Margins and Cash Flow/Share
as high as ever
• Share buybacks increasingly
important to meeting
consensus forecasts
YoY Growth in Diluted EPS
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
FY 2008
FY 2007
FY 2006
FY 2005
FY 2004
-10.00%
Total Growth
Growth from Stock Buyback
Growth from Earnings
FY 2003
Aéropostale’s Future
• Averaged 17% revenue growth over the last 5 years.
How quickly will it fall?
• Will PS from Aéropostale cannibalize Aéropostale’s
sales or generate synergies between the brands?
• Has Aéropostale’s management learned from the
failed Jimmy’Z experiment?
Coach Overview
• Designs & markets gifts for men & women, founded in 1941
• Primary products: handbags, footwear, wearables, business cases,
sunwear, watches, travel bags, and fragrance.
• Sells via company-operated stores, internet, catalog, and indirect
channels, such as department stores
• 324 retail stores & 106 factory stores in North America; 155
locations in Japan.
• 2009 Revenue $3.23 billion (2% increase from ‘08)
Coach –Valuations (DCF)
DCF Valuation:
-Current Price: $29.28; Target Price: $34.44; Upside: 17.6%
Key Assumptions:
- 3 year revenue growth: 14%
- 5 year historical growth rate: 21%
- Estimated long term growth rate 15%
- China sales up in double digits, plan to open 15 stores this
year and 50 stores over next 5 years
- New Men’s store in Japan
-Terminal growth rate: 4.5%
-Discount rate: 11%
Coach - Absolute Valuation
Target
E,B,CF
per share
(7/31/09 Price 29.59)
High
Low
Median
Current
Target
Multiple
P/FE
30.0
7.9
22.9
15.3
19.1
$1.22
$23.30
P/B
14.1
3.1
10.3
5.9
8.1
$4.75
$38.51
P/S
8.2
1.5
6.5
2.8
4.65
$8.63
$40.15
P/CF
36.5
5.8
25.8
12.0
18.9
$1.22
$22.99
Average Target Price: $31.24
Target
Price
07/01/2009
04/01/2009
01/01/2009
10/01/2008
07/01/2008
04/01/2008
01/01/2008
10/01/2007
07/01/2007
04/01/2007
01/01/2007
10/01/2006
07/01/2006
04/01/2006
01/01/2006
10/01/2005
07/01/2005
04/01/2005
01/01/2005
10/01/2004
07/01/2004
Coach - P/FE Relative to
S&P500
2.0
1.8
1.6
Median 1.47
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
07/01/2009
04/01/2009
01/01/2009
10/01/2008
07/01/2008
04/01/2008
01/01/2008
10/01/2007
07/01/2007
04/01/2007
01/01/2007
10/01/2006
07/01/2006
04/01/2006
01/01/2006
10/01/2005
07/01/2005
04/01/2005
01/01/2005
10/01/2004
07/01/2004
Coach - P/FE Relative to Sector
1.8
1.6
1.4
1.2
Median 1.21
1.0
0.8
0.6
0.4
0.2
0.0
Coach – P/S Ratio (Absolute)
9.0
8.0
7.0
6.0
Median 5.3
5.0
4.0
3.0
2.0
1.0
10/01/2000
10/01/2001
10/01/2002
10/01/2003
10/01/2004
10/01/2005
10/01/2006
10/01/2007
10/01/2008
Coach Recommendations
View
Business
Positive
Financial
Positive
Valuation
Positive
Reason
- Strong market position and brand
- Robust Financial Performance
- Strong product portfolio
- Revenue, EPS, are going up relative to
consumer Discretionary
- Target Price $33.80 (80/20 weight to
DCF), 15.5% upside and 1% div yield
Recommendation: Buy
Action Recommendation –
Within Sector
Current Weight
In SIM Portfolio
Proposed Weight
In SIM Portfolio
Proposed Change
Aéropostale
0.87%
0%
(0.87%)
Best Buy
1.74%
1.74%
0%
Comcast
2.25%
2.25%
0%
GameStop
0.80%
1.10%
0.30%
McDonalds
1.52%
1.22%
(0.30%)
0%
0.87%
0.87%
Coach
Questions?