UNIVERSITY OF OREGON
INVESTMENT GROUP
April 29, 2009
Consumer Goods
Abercrombie & Fitch (ANF)
BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Diluted Shares Out.
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
29.94-70.49
NYSE: ANF
1.39
89.90M
2.74M
6.28B
$69.88
.17
1.01%
$72.89 (50%)
$113.74 (50%)
$93.32
$69.88
Summary Financials
Revenue
Net Income
Operating Cash Flow
2010A
$3.47B
$150.30M
$381.69M
BUSINESS OVERVIEW
Abercrombie & Fitch is an American company founded in 1892 and is based out of New Albany, Ohio. Abercrombie
has changed its product offerings many times, and was even forced to file for chapter 11 bankruptcy in 1976. Before
becoming the specialty apparel retailer it is today, the company was an outdoor store that sold guns, fishing rods, and
various other outdoor supplies. About 10 years after its bankruptcy, the company was sold to The Limited Group.
Shortly after this purchase, Limited CEO Leslie Wexner disbanded interest in the company and handed off operations
Covering Analysts: Elan Gibb & Ari Siegel
Email: egibb@uoregon.edu & asiegel@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
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to the current CEO, Michael Jeffries. The company was taken public later that year and had its initial public offering
at $11.50. Management states that the most valuable piece of property that the firm owns is its brand image. Today,
Abercrombie generates revenue through clothing and fragrance sales through the following brands: Abercrombie &
Fitch, Hollister, abercrombie kids and Gilly Hicks. Each of these product lines has its own distinct style and
associated target market.
Abercrombie & Fitch targets young adults aged 18-22 and sells jeans, dress shirts, shorts, fragrances, and a number of
other products for both men and women. These products are designed to be “casual luxury” and offer consumers
with both quality and style. The company has had a high level of success in the fragrance segment and Abercrombie’s
Fierce brand cologne is the best-selling men’s fragrance in the United States. There are currently 325 stores dedicated
to this product line.
Hollister is a Southern California-inspired brand that targets ages 14-18, and has a very similar, yet lower priced
selection of products. Hollister is the largest
revenue generator for ANF, and there are now
Gilly Hicks, 1%
540 Hollister stores worldwide.
Abercrombie Kids targets children aged 7-14, and
has a rugged and athletic appeal. Styles are almost
identical to those of A & F, but are marketed to a
younger age group. abercrombie kids has 185
stores worldwide, and more store openings are
planned for the future.
Hollister, 45%
A & F, 43%
Gilly Hicks offers underwear and loungewear
exclusively for women ages 18 and up. This brand
abercrombie,
is very similar to Victoria’s Secret in terms of
11%
product design, price, and age group. The product
line is in its infant stages, but its success is gaining momentum. Styles range from casual to sexy and are inspired by
Australian design. Gilly Hicks is currently the least substantial source of company revenue at 1%, with only 19 stores
in operation.
Abercrombie plans to continue operating all of these segments and does not have plans to acquire new companies or
to change their brand mix in the near future.
BUSINESS AND GROWTH STRATEGIES
Abercrombie holds a prominent position in the domestic space and operates stores in North America,
Europe, Japan, and Canada. At the end of the company’s 2010 fiscal year, there were 1,069 total stores in operation,
made up of 1,017 stores in North America and 52 stores internationally. At the end of FY 2010, domestic revenue
contributed 81% of total revenue with the remaining 13% and 6% coming from the international and direct to
consumer (DTC) segments, respectively. DTC, which are sales through the company’s websites, are expected by
management to grow substantially and to reach about $1 Billion, or roughly 11.3% of total sales over time. However,
by far the largest growth opportunity for this company comes from the large-scale international expansion which will
occur primarily between 2011 and 2015. Management has set the goal to shift from a 13% international, 81%
domestic focus to one equally weighted at 50% by 2015. There are a number of factors that will contribute to the
success of this expansion. The most important factor is the extreme popularity of Abercrombie stores abroad. As an
example, the 50 stores that have been opened overseas are currently producing almost three times as much revenue as
an equivalent number of stores at home. In addition, management plans to open twenty international flagship stores
by the end of FY 2012. Flagship stores are unlike typical mall-based stores due to the fact that they are large standalone buildings which contain substantially more floor room, lavish décor, and all products sold under the A & F
name. These stores are strategically positioned in high-end shopping areas that bring in a high volume of shoppers
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with high levels of disposable income. The A & F flagship stores are typically placed next to very high-end luxury
stores such as Louis Vuitton, Dior, Gucci, and Prada. This strategic placement is critical to the growth of the brand,
allowing the company to charge higher prices and achieve significantly higher margins than is possible in the domestic
space. There are currently flagship stores in New York, London, Tokyo, Milan, Copenhagen, and Fukuoka.
Management expects that the combination of the five existing, and five confirmed (by 2011) international flagship
stores will contribute $450 Million annually in sales. The following graphic shows the main A&F flagship stores that
will fuel these expected 2011 growth levels, and also confirmed 2012 flagship locations:
Location
Paris
Madrid
Singapore
Brussels
Dusseldorf
Expected
1Q11E
3Q11E
4Q11E
4Q11E
4Q11E
Dublin
Hamburg
Hong Kong
2012E
2012E
2012E
Aside from the substantial growth that will be attained through these Abercrombie & Fitch flagship stores,
Hollister stores are also expected to play an important role in international expansion as well. There are currently 29
Hollister stores spread over four countries, however management believes that the Asian and European markets can
handle 185 stores spread over 15 different countries. Given this number of stores, management expects $1.5 Billion
in annual revenue to be contributed by Hollister stores abroad. Hollister will expand internationally using a mallbased model, as opposed to using a high-end flagship model. This strategy is in line with Hollister’s target consumer,
since the brand has a stronger focus on casual, as opposed to more luxurious products.
Overall, the most important factor to achieving significant growth is management’s ability to manage the
brands they operate and to continue to focus on quality. This key driver is also where management’s core
competencies lie. During 2008, CEO Michael Jeffries refused to cut prices to stimulate sales growth in order to
preserve the strong brand image that the company has spent years developing. During this time Jeffries also stated
that the company would not lower the quality of input materials during this period in order to increase profits. As a
result of this strategy, short-term stock performance suffered, however the company emerged from its 2008 low of
$14.64 and appreciated by 378%, to $70 per share. Since a strong brand image is critical to the success of the
company moving forward, management’s strategy for preserving this image will play a pivotal role in the success of
expansion in these markets.
MANAGEMENT AND EMPLOYEE RELATIONS
Michael Jeffries has been involved in the consumer retail space since 1968 and has been CEO of ANF since 1992.
Jeffries is credited with the profitable transformation of the company over time. In 1992 when Abercrombie sold
books, gardening supplies, and cooking supplies the company was again on the verge of bankruptcy. Since then,
Jeffries has transformed the failing business into a multi-billion dollar retailer with a strong brand image and demand
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for its products worldwide. As of March 23, Jeffries held 999,941 shares of ANF with a (current) market value of
about $70 Million. Jeffries' FY 2009 total compensation was $36.3 Million including salary and stock options.
Jonathan Ramsden has held positions both as Executive Vice President and Chief Financial Officer of the
company. Ramsden is currently the CFO of Abercrombie, and has served as CFO for TBWA Worldwide, an
international advertising agency. He also served as Controller and Principal Accounting Officer for Omnicom Group,
a publicly trade multi-billion dollar advertising firm. Ramsden's FY 2009 total compensation was $743,900 including
salary and stock options.
The top five institutional and mutual fund holders of Abercrombie & Fitch stock are as follows:
Institutional Holder
Shares
% Outstanding
Columbia Asset Management
5,684,900.00
6.52%
Vanguard
4,371,611.00
5.01%
Bank of NY Mellon Corporation
3,616,605.00
4.15%
Pennant Capital Management
3,353,337.00
3.84%
State Street Corporation
3,352,262.00
3.84%
Mutual Fund Holder
Shares
% Outstanding
Fidelity Low-Priced Stock
8,000,000.00
9.17%
Columbia Acorn Fund
2,835,000.00
3.25%
Columbia Acorn Select Fund
1,600,000.00
1.83%
Calamos Growth Fund
1,075,000.00
1.23%
Vanguard Mid-Cap Index Fund
1,026,313.00
1.18%
RECENT NEWS
4-6-2011 Abercrombie Rises on Bullish Outlook- Seeking Alpha
Abercrombie shares rose 11% on April 6th after the company provided an optimistic outlook for fiscal 2011,
suggesting operating margin improvements as well as giving a $7.5 billion sales target for 2015. Management gave
guidance of $4.75 of earnings per share for the fiscal year ended January 2012.
4-12-2011 A& F Downgraded- Wall Street Journal
Argus cut its short term view on Abercrombie to a Hold from a Buy saying some of the retailer’s projections are a “bit
aggressive.” Longer term, Argus says Abercrombie remains a buy as it likes the company’s focus on overseas growth.
4
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INDUSTRY
The Specialty Apparel Retail Industry is comprised of businesses that sell luxurious clothing items to end
consumers through brick-and-mortar stores, online websites and direct-to-consumer sales. Companies keep their
products relevant through the branding of clothing lines, and maintaining this brand equity is mandatory in order to
maintain the success of the clothing. Major retailers today include Abercrombie & Fitch, Aeropostale, American
Eagle, Bebe Stores, Limited Brands, and many others; however due to the capricious nature of fashion trends, new
businesses are constantly entering the market.
Profit margins are slightly higher within the specialty apparel retailers industry compared to the broader
apparel industry, however on an absolute scale margins are still low. The most significant expenses in order of
magnitude are cost of goods sold, wages, and product distribution. Maintaining a strong brand image is just as
important for the top line as for the bottom line, as better known products enjoy pricing premiums over their generic
counterparts. Due to the luxurious nature of specialty apparel, the industry is particularly sensitive to changes in
economic conditions.
The economic recovery and preceding recession has led to particularly volatile industry performance over the
past few years. Same-Store sales across the industry dropped in 2008 and 2009, followed by a partial recovery in 2010.
In the near term, important macro indicators for the industry as a whole include consumer sentiment, commodity
prices, disposable income, and the unemployment rate. Monthly economic reports on retail sales and business
inventories also add insight into the health of the industry. As a whole, the outlook of specialty apparel is brightening,
with same store sales expected to increase industry wide in 2011 and onward as the economy recovers. This has been
driven in the short term by increases in consumer sentiment, however the drivers of this momentum are transferring
to more fundamental factors such as improved business conditions, slowly improving employment and slowly
increasing disposable income. Key indicators affecting future demand for the specialty apparel retail industry can be
referenced below:
Several significant underlying trends are currently affecting the industry. The most important to note is a shift to
online sales from traditional in-store sales. Online sales are currently growing at almost three times the rate of in store
sales, and are thus becoming an increasingly larger portion of the top line for specialty apparel retailers. In addition,
these sales tend to have proportionally higher margins, and so their effect on the bottom line is amplified even further.
Second, specialty apparel retailers are increasingly going to international markets looking for growth. In contrast to
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normal apparel brands, this increasing international presence is a relatively new trend for more specialized brands.
Specialty retailers that have maximized their potential at home are finding new and significant opportunities in Europe
and Emerging Markets. Finally, cotton and oil are significant inputs in clothing production and distribution, and
prices for these commodities were up significantly for the year due to turmoil in the Middle East. In the short term
this will drive margins down, however commodity prices are expected to return to more normal levels in the next few
years as evidenced by the following futures curves:
S.W.O.T. ANALYSIS
Strengths
-
Healthy liquidity and cash cushion
-
Management team experienced in creating new and successful product lines
-
Strong brand equity abroad
Weaknesses
-
Weak brand equity at home
-
Sensitivity to economic conditions
Opportunities
-
Significant growth potential abroad
-
Gilly Hicks product line
Threats
-
Potentially decreasing brand equity at home
PORTER’S 5 FORCES ANALYSIS
Supplier Power
-
Low and steady: Suppliers of cotton are largely price takers on the international market
Barriers to Entry
-
Low and steady: Clothing lines are cheap to produce and easy to brand, little capital is required to open
clothing stores online or in malls
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Buyer Power
-
High and steady: Consumers are sensitive to price movements and it is difficult for retailers to pass on large
cost increases to customers
Threat of Substitutes
-
High and steady: Generic clothing is easily accessible
Degree of Rivalry
-
High and steady: Due to ease of entry, there are a large number of competitors in the industry
CATALYSTS
-
Increasing/Decreasing momentum of sales abroad
-
Increasing/Decreasing momentum of Gilly Hicks Brand
COMPARABLES ANALYSIS
Comparable companies were chosen based on similar risk and growth. Potential indicators of these factors include
consensus forecasts, beta, product similarities, and other metrics shown in the comparables valuation in Appendix 1.
EV/EBITDA was the only multiple selected for the relative valuation. Top line multiples were not included due to
incomparable margins and cash flow multiples were not used due to excessive volatility. The following table shows
expected consensus EBITDA growth rates for all comparable companies used in this valuation:
Consensus EBITDA growth expectations
2011
2012
2013
2014
ANF
26.1%
32.0%
29.6%
26.9%
DECK
7.5%
18.7%
LULU
26.4%
27.6%
38.6%
29.6%
UA
27.2%
21.0%
24.7%
7.3%
ZUMZ
13.3%
13.5%
13.3%
15.5%
Deckers Outdoor Corporation (DECK)- 35%
“Deckers Outdoor Corporation, incorporated in 1975, is engaged in
designing, producing, marketing and brand managing of footwear and
accessories. The Company sells its products, including accessories, such as
handbags, headwear, packs and outerwear, through domestic retailers and
international distributors and directly to the consumers, both domestically and
internationally, through its Websites, call centers, retail concept stores and retail outlet stores. The Company markets
its products under three brands: UGG, Teva and Simple. The Company acquired 100% of the ownership interest of
Ahnu, Inc. in March 2009.”-Reuters
Deckers was chosen as a comparable company and weighted 35% as a result of similar forward-looking growth and
similar sensitivity to economic conditions. Deckers was also chosen on the basis that it has a very similar geographic
mix and also sells products using a direct to consumer model. In addition to these factors, Deckers is similarly sized
and has significant growth expected from international markets.
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Zumiez Inc. (ZUMZ)- 30%
“Zumiez Inc. is a mall-based specialty retailer of action sports
related apparel, footwear, equipment and accessories operating
under the Zumiez brand name. As of January 30, 2010, the
Company operated 377 stores primarily located in shopping malls,
giving it a presence in 35 states. Zumiez’s stores cater to young men and women between the ages of 12 and 24 who
seek brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, bicycle
motocross (BMX) and motocross. Most of the Company’s stores, which average approximately 2,900 square feet,
feature couches and action sports-oriented video game stations.”-Reuters
Zumiez was chosen as a comparable company and weighted 30% for similar reasons as Deckers. Its growth and risk
are very comparable, and its business model is the classic specialty retailer format. The 5% discount to Deckers was
due to its size difference and also the company’s lack of international exposure. Zumiez currently only sells its
products internationally through direct to consumer methods and does not operate international stores.
Under Armour, Inc.- 20%
“Under Armour, Inc. (Under Armour), incorporated in 1996, is engaged in
developing, marketing and distributing branded performance apparel, footwear and
accessories for men, women and youth. Its products are sold worldwide and are
worn by athletes at all levels, from youth to professional, on playing fields, as well as
consumers with active lifestyles. Its revenues are generated primarily from the
wholesale distribution of its products to national, regional, independent and
specialty retailers. Under Armour’s products are offered in over 20,000 retail stores
worldwide. Most of its products are sold in North America. The Company’s
trademarks include Under Armour, Heatgear, Coldgear, All Season Gear, and the Under Armour UA Logo. The
Company’s product offerings consist of apparel, footwear and accessories for men, women and youth.”
Under Armour was weighted at 20% due to comparable growth and risk, like all other companies chosen in the
comparables analysis. The company does not have a presence in international markets, and it sells sports apparel as
opposed to daily use clothing. For these reasons Under Armour was weighted slightly less than Deckers or Zumiez.
In addition, Under Armour often sells its clothes through broader apparel stores as opposed to mall-based locations.
Lululemon Athletica Inc. (LULU)- 15%
“lululemon athletica inc., incorporated on November 21, 2005,
is a designer and retailer of technical athletic apparel primarily in
North America. Its yoga-inspired apparel is marketed under the
lululemon athletica brand name. The Company offers a line of
apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga,
running and general fitness. As of January 31, 2010, its branded apparel was principally sold through 124 stores that
are primarily located in Canada and the United States. As of January 31, 2010, its retail footprint included 45 stores in
Canada, 70 stores in the United States and nine franchise stores in Australia.” – Reuters
LULU and ANF both offer products to consumers with higher levels of disposable income. In addition to both
companies operating in the specialty retail industry, LULU also has very similar expected EBITDA growth over the
next five years. It’s less substantial weighting was a result of continued significant long term growth potential that was
not reflected in short-term consensus forecasts. Lululemon’s domestic growth potential in comparison with
Abercrombie’s was also factored into the decision to weight the company at 15%. LULU also has higher margins as it
will have the ability to continue to charge a price premium in the domestic market.
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DISCOUNTED CASH FLOW ANALYSIS
Revenue
Revenue was forecasted through a same store sales model that divided operating segments into domestic, international
and direct to consumer sales. The number of stores for the domestic and international segments were forecasted and
revenue per store was then forecasted through same store sales growth. The Direct-To-Consumer segment was
forecasted proportional to the number of in store sales.
Domestic Revenue
Over the next decade, domestic revenue growth will be modest. In the short term management plans to close the
most inefficient stores out until 2014, causing the average revenue per store and thus same store sales growth to
increase. In addition, economic recovery and the Gilly Hicks line will contribute to same store sales growth. After all
inefficient stores have been closed, the total number of stores and revenue per store are expected to moderately
increase into perpetuity.
International Revenue
A significant number of international store openings are forecasted throughout the revenue model as Abercrombie
moves forward with its overseas expansion plans. Revenue per store in Europe and elsewhere is significantly higher
than within North America due to higher levels of popularity of the Abercrombie brands and the use of flagship
stores. Because the current stores overseas are already seeing such high sales volumes, additional stores will likely not
raise the average revenue per store significantly. Thus, international same store sales are forecasted to grow slowly,
with total growth being driven by store openings.
Other
Direct-To-Consumer sales are expected to significantly increase as more consumers purchase their Abercrombie
apparel online as opposed to in store. Currently Other sales make up about 6% of total revenue, and this proportion
is forecasted to more than double by 2020.
Gross Margin
Cost of Revenue should remain relatively flat over the next two years as commodity pricing pressures net out with
gross margin improvements from increasing international sales. After these input pricing pressures recede, gross
margin should slowly improve as international sales become a proportionally larger part of total revenue. Annual
gross margins were forecasted through estimating operating segment margins and the percentages of total revenue
that these operating segments made up. Appendix 6 contains the model used to compute gross margin.
Stores & Distribution Expense
Distribution expenses will decrease as a percent of revenue over the next two years as management consolidates its
two distribution centers into one. After the benefit from this consolidation, distribution expenses are expected to
increase as a constant percentage of revenue.
Selling, General & Administrative Expense
SG&A is forecasted to slowly decrease as a percentage of revenue as top line growth outpaces the growth of fixed
costs.
Net Working Capital
No significant changes are expected within net working capital, and so the line item was forecasted with respect to
Abercrombie’s historical current ratio.
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Capital Expenditures & Depreciation
Capital Expenditures were forecast to grow modestly throughout the DCF due to a fairly constant rate of store
openings throughout the revenue model. Depreciation was then forecasted to trend closely with Capital
Expenditures.
Beta
Abercrombie experienced a large decrease in value around the trough of the recession, yet managed to achieve
explosive growth in its equity price in the following two years. As a result of this, a five year monthly and 52 week
regression yielded upwardly biased beta estimates of 1.70 and 1.94. A hamada estimation on the other hand produced
a beta of 1.15. This estimation was intuitively low, and so a beta of 1.4 was selected, which is an average of the 5 year
monthly and Hamada betas.
RECOMMENDATION
Despite explosive forward looking growth, Abercrombie trades at a modest EV/EBITDA multiple of 11x. This is a
result of qualitative factors blinding investors to the significant cash flow growth that will be generated by
international expansion. Domestically, investors question potentially declining brand equity, and overlook consensus
expectations that show Abercrombie’s significant expected bottom line growth over the next four years is greater than
that of any of the companies presented in the comparables analysis. Weighting both the relative and DCF valuation at
50% each, Abercrombie has a target price of $93.32, or an undervaluation of 33.5%.
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APPENDIX 1 – COMPARABLES ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
35.00%
DECK
30.00%
ZUMZ
20.00%
UA
15.00%
LULU
69.88
67.83
68.41
1.38
96.68
88.97
90.15
1.68
28.91
27.40
27.62
1.63
78.42
78.13
78.32
1.76
101.87
100.65
99.74
1.65
0.00
68.60
826.40
0.00
0.00
89.90
6282.21
5524.41
0.00
0.00
445.20
2.70
0.00
39.30
3799.52
3357.02
0.00
0.00
128.80
0.00
0.00
30.80
890.43
761.63
6.90
9.10
203.90
0.00
0.00
51.30
4022.95
3835.05
0.00
0.00
316.30
3.90
0.00
71.90
7324.45
7012.05
57.11%
8.09%
14.70%
4.33%
50.20%
24.88%
26.10%
15.81%
35.60%
7.82%
11.60%
5.05%
49.90%
10.60%
13.50%
6.40%
55.50%
25.60%
29.10%
17.10%
7.30
0.01
0.14
0.00
0.00
0.00
0.00
0.00
0.00
0.60
0.00
0.11
3468.80
1980.10
502.00
391.80
230.86
1001.00
515.20
270.20
139.90
117.40
478.85
170.40
55.30
48.70
19.30
1063.00
530.50
143.70
50.10
19.90
0.00
0.00
0.00
0.00
722.30
400.60
208.60
180.00
149.60
11.00 x
12.42 x
13.77 x
26.69 x
33.61 x
ANF
Stock Characteristics
Current Price
50 Day Moving Avg.
200 Day Moving Avg.
Beta
Size
ST Debt
LT Debt
Cash and Cash Equiv.
Minority Interest
Preferred Stock
Diluted Share Count
Market Cap
Enterprise Value
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense (MRQ)
Debt/Equity (MRQ)
Debt/EBITDA (LTM)
Operating Results
Revenue (LTM)
Gross Profit (LTM)
EBITDA (LTM)
Operating Cash Flow (LTM)
Free Cash Flow (LTM)
Valuation
EV/EBITDA
Metric
EV/EBITDA
Price Target
Current Price
Under (Over) Valued
Implied Price
113.74
W.A.
18.86 x
Weight
100.00%
113.74
69.88
62.77%
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APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
Total Company Revenue
% Y/Y Growth
Cost of Revenue
% Revenue
Gross Profit
Gross Margin
Operating Expenses
Stores & Distribution Expense
% Revenue
SG & A
% Revenue
Total Operating Expenses
EBIT
EBIT Margin
Interest Expense (Income), Net
% Revenue
Pre-tax Income
% Revenue
Less Taxes (Benefit)
Tax Rate
Net Income
Net Margin
Add Back Depreciation and Ammortization
% Revenue
Add Back Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Net Working Capital
Capital Expenditures
% Revenue
Unlevered Free Cash Flow
Discounted Unlevered Free Cash Flows
1
2011 E
2
2012 E
3
2013 E
4
2014 E
5
2015 E
6
2016 E
7
2017 E
8
2018 E
9
2019 E
10
2020 E
2008A
2009A
2010A
3,540.30
2,928.60
-17.28%
1,283.80
43.84%
1,644.80
56.16%
3,468.80
18.45%
1,487.90
42.89%
1,980.90
57.11%
4,067.76
17.27%
1,749.14
43.00%
2,318.62
57.00%
4,844.72
19.10%
2,067.71
42.68%
2,777.00
57.32%
5,645.77
16.53%
2,346.67
41.57%
3,299.10
58.43%
6,605.07
16.99%
2,691.40
40.75%
3,913.67
59.25%
7,346.70
11.23%
2,943.45
40.06%
4,403.25
59.94%
7,994.19
8.81%
3,167.46
39.62%
4,826.73
60.38%
8,627.15
7.92%
3,391.64
39.31%
5,235.50
60.69%
9,258.44
7.32%
3,615.27
39.05%
5,643.17
60.95%
9,964.26
7.62%
3,863.35
38.77%
6,100.91
61.23%
10,708.86
7.47%
4,122.88
38.50%
6,585.98
61.50%
1187.20
40.54%
353.30
12.06%
1,527.00
117.80
4.02%
(1.60)
0.05%
119.40
4.08%
40.60
34.00%
78.80
2.69%
238.75
8.15%
(1.06)
316.50
10.81%
1,235.80
42.20%
449.40
15.35%
786.40
26.85%
151.40
175.50
5.99%
(10.40)
1309.70
37.76%
400.80
11.55%
1,700.40
280.50
8.09%
3.40
0.10%
228.60
6.59%
78.30
34.25%
150.30
4.33%
229.15
6.61%
2.24
381.69
11.00%
1,433.30
41.32%
558.90
16.11%
874.40
25.21%
88.00
160.90
4.64%
132.79
1423.72
35.00%
488.13
12.00%
1,911.85
406.78
10.00%
6.51
0.16%
400.27
9.84%
140.09
35.00%
260.17
6.40%
284.74
7.00%
4.23
549.15
13.50%
1,627.10
40.00%
610.16
15.00%
1,016.94
1598.76
33.00%
581.37
12.00%
2,180.12
596.88
12.32%
7.75
0.16%
589.13
12.16%
206.20
35.00%
382.93
7.90%
290.68
6.00%
5.04
678.66
14.01%
1,937.89
40.00%
726.71
15.00%
1,211.18
1806.65
32.00%
663.38
11.75%
2,470.02
829.08
14.68%
9.03
0.16%
820.04
14.52%
287.02
35.00%
533.03
9.44%
282.29
5.00%
5.87
821.19
14.55%
2,258.31
40.00%
846.87
15.00%
1,411.44
2097.11
31.75%
759.58
11.50%
2,856.69
1,056.97
16.00%
10.57
0.16%
1,046.40
15.84%
366.24
35.00%
680.16
10.30%
330.25
5.00%
6.87
1,017.29
15.40%
2,642.03
40.00%
990.76
15.00%
1,651.27
2314.21
31.50%
826.50
11.25%
3,140.72
1,262.54
17.19%
11.75
0.16%
1,250.78
17.03%
437.77
35.00%
813.01
11.07%
293.87
4.00%
7.64
1,114.52
15.17%
2,938.68
40.00%
1,102.01
15.00%
1,836.68
2498.18
31.25%
839.39
10.50%
3,337.57
1,489.15
18.63%
12.79
0.16%
1,476.36
18.47%
516.73
35.00%
959.64
12.00%
319.77
4.00%
8.31
1,287.72
16.11%
3,197.68
40.00%
1,199.13
15.00%
1,998.55
2674.42
31.00%
862.71
10.00%
3,537.13
1,698.37
19.69%
13.80
0.16%
1,684.57
19.53%
589.60
35.00%
1,094.97
12.69%
345.09
4.00%
8.97
1,449.03
16.80%
3,450.86
40.00%
1,294.07
15.00%
2,156.79
2870.12
31.00%
925.84
10.00%
3,795.96
1,847.21
19.95%
14.81
0.16%
1,832.40
19.79%
641.34
35.00%
1,191.06
12.86%
324.05
3.50%
9.63
1,524.73
16.47%
3,703.38
40.00%
1,388.77
15.00%
2,314.61
3088.92
31.00%
996.43
10.00%
4,085.35
2,015.56
20.23%
15.94
0.16%
1,999.62
20.07%
699.87
35.00%
1,299.75
13.04%
348.75
3.50%
10.36
1,658.86
16.65%
3,985.70
40.00%
1,494.64
15.00%
2,491.06
3319.75
31.00%
1,070.89
10.00%
4,390.63
2,195.34
20.50%
17.13
0.16%
2,178.21
20.34%
762.37
35.00%
1,415.84
13.22%
348.04
3.25%
11.14
1,775.01
16.58%
4,283.54
40.00%
1,606.33
15.00%
2,677.21
142.54
325.00
7.99%
81.61
72.24
194.24
300.00
6.19%
184.42
144.51
200.26
309.00
5.47%
311.92
216.36
239.83
318.27
4.82%
459.19
281.94
185.41
327.82
4.46%
601.29
326.81
161.87
337.65
4.22%
788.19
379.21
158.24
347.78
4.03%
943.01
401.61
157.82
358.22
3.87%
1,008.69
380.27
176.45
368.96
3.70%
1,113.45
371.57
186.15
380.03
3.55%
1,208.83
357.09
1,403.92
39.66%
2,136.38
60.34%
1255.60
35.47%
419.70
11.85%
1,666.50
469.88
13.27%
(11.40)
0.32%
450.68
12.73%
178.50
39.61%
272.18
7.69%
225.33
6.36%
(6.88)
490.63
13.86%
1,084.80
30.64%
449.80
12.71%
635.00
17.94%
367.60
10.38%
12
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university of oregon investment group
http://uoig.uoregon.edu
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Assumptions for Discounted Free Cash Flows Model
Tax Rate
35.00% Terminal Growth Rate
Risk-Free Rate
3.38% Terminal Value
Beta
1.39 PV of Terminal Value
Market Risk Premium
7.00% Sum of PV Free Cash Flows
% Equity
98.92% Firm Value
% Debt
1.08% LT Debt
Cost of Debt
5.00% Cash
CAPM
13.08% Equity Value
WACC
12.97% Diluted Share Count
Implied Price
Current Price
Under (Over) Valued
3.00%
12489.83
3689.51
2931.59
6621.10
68.60
826.40
6552.50
89.90
72.89
69.88
4.30%
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
Beta
1.7
1.55
1.4
1.25
1.1
St. Deviation
2.00
1.00
0.00
-1.00
-2.00
Implied Price
55.92
63.11
72.89
82.85
96.82
Under (Over) Valued
-19.98%
-9.69%
4.30%
18.56%
38.55%
13
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APPENDIX 5 – REVENUE MODEL
(Millions)
Domestic
Revenue
% Growth
Revenue/Store
Stores
Same Store Sales Growth
International
Revenue
% Growth
Revenue/Store
Stores
Same Store Sales Growth
2008A
$
3,220
$
2,862 $
1125
$
265
$
$
$
0
Other
Revenue
% Growth
% of Domestic & Int. Sales
Total Revenue
% Growth
2009A
$
2010A
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2,561 $
-20.45%
2,337 $
1096
-18.35%
2,822 $
10.18%
2,640 $
1069
12.97%
2,964 $
5.02%
2,877 $
1030
9.00%
3,079 $
3.88%
3,079 $
1000
7.00%
3,139 $
1.95%
3,187 $
985
3.50%
3,265 $
4.03%
3,298 $
990
3.50%
3,397 $
4.02%
3,414 $
995
3.50%
3,533 $
4.02%
3,533 $
1000
3.50%
3,675 $
4.02%
3,657 $
1005
3.50%
3,823 $
4.01%
3,785 $
1010
3.50%
3,976 $
4.01%
3,917 $
1015
3.50%
4,135
4.01%
4,054
1020
3.50%
229 $
-13.26%
8,195 $
28
444 $
93.44%
8,535 $
52
4.16%
848 $
91.08%
9,218 $
92
8.00%
1,440 $
69.78%
10,140 $
142
10.00%
2,103 $
46.03%
10,951 $
192
8.00%
2,839 $
35.00%
11,827 $
240
8.00%
3,361 $
18.42%
11,591 $
290
-2.00%
3,787 $
12.66%
11,475 $
330
-1.00%
4,188 $
10.61%
11,475 $
365
0.00%
4,578 $
9.30%
11,590 $
395
1.00%
5,024 $
9.75%
11,821 $
425
2.00%
5,486
9.20%
12,058
455
2.00%
132
203 $
53.70%
6.21%
256 $
26.11%
6.71%
326 $
27.37%
7.21%
404 $
24.03%
7.71%
501 $
24.00%
8.21%
589 $
17.46%
8.71%
674 $
14.53%
9.21%
764 $
13.26%
9.71%
858 $
12.33%
10.21%
964 $
12.38%
10.71%
1,087
12.75%
11.30%
4,068 $
17.27%
4,845 $
19.10%
5,646 $
16.53%
6,605 $
16.99%
7,347 $
11.23%
7,994 $
8.81%
8,627 $
7.92%
9,258 $
7.32%
9,964 $
7.62%
10,709
7.47%
$
4.73%
$
3,484
$
2,923
$
3,469
$
14
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APPENDIX 6 – GROSS MARGIN MODEL
Segment Margins
International
Domestic
Other
2011E
67.00%
52.00%
82.84%
2012E
66.00%
51.00%
82.00%
2013E
66.00%
51.00%
82.00%
2014E
66.00%
51.00%
82.00%
2015E
66.00%
51.00%
82.00%
2016E
66.00%
51.00%
82.00%
2017E
66.00%
51.00%
82.00%
2018E
66.00%
51.00%
82.00%
2019E
66.00%
51.00%
82.00%
2020E
66.00%
51.00%
82.00%
Segment Percentage of Revenue
International
20.40%
Domestic
73.31%
Other
6.29%
28.23%
65.04%
6.73%
34.77%
58.07%
7.16%
39.33%
53.08%
7.59%
43.00%
48.98%
8.02%
45.08%
46.48%
8.44%
46.28%
44.87%
8.85%
47.19%
43.54%
9.27%
48.19%
42.14%
9.68%
49.02%
40.83%
10.15%
Gross Margin
57.32%
58.43%
59.25%
59.94%
60.38%
60.69%
60.95%
61.23%
61.50%
57.00%
APPENDIX 7 – HAMADA BETA REGRESSION
Company
DECK
AEO
UA
LULU
JWN
BEBE
ZUMZ
RUE
GAP
RL
Mean
Pure Business Beta
Sample D/E
Unlevered Beta
Beta
1.68
0.92
1.76
1.65
1.58
1.03
1.62
1.31
0.95
1.36
D/E
0.00%
1.40%
6.00%
0.00%
152.90%
0.00%
2.50%
124.40%
3.10%
18.70%
1.39
30.90%
1.39
30.90%
1.15
15
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university of oregon investment group
http://uoig.uoregon.edu
APPENDIX 8– SOURCES










Abercrombie Investor Relations
Bank of America Merrill Lynch Research
Barrons
CBS News
http://www.sec.gov
Standard and Poor’s Industry Reports
Yahoo! Finance
FactSet
IBISworld
Reuters
16