Bender Trust Workshop
9:30 PM Wednesday September 16, 2015
Overview
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Timeline
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Pick Teams/Register by Sunday, September 20th 11:59pm
Presentations towards end of October
Qualitative Analysis
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Quantitative Analysis
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SWOT, Porter’s Five Forces, Investment Thesis
Income Statement Model, DCF, etc.
Awards & Incentives
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Winner and Runner-ups
SMF Interview or seats
Company Description
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One paragraph (6-10 sentences)
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What does the company do to make money?
Products/Services?
Costs of production?
Resources
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10-K/Q Statements (http://sec.gov/)
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Company Website
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“About” or “Company Profile” in Investor Relations section
Yahoo! Finance
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“Company Description”, “Business”, “Management’s Discussion and
Analysis”
“Company Profile”
Equity Research Reports
Company Description
Ralph Lauren (RL) is a global retail company focused on
the design, marketing and distribution of men’s, women’s and
children’s apparel, accessories (including footwear), fragrances
and home furnishings. For more than 45 years, the company has
boasted a strong reputation and distinctive image, which allows
them to succeed as one of the most widely recognized
consumer brands. Their notable brand names include Polo by
Ralph Lauren, Ralph Lauren Collection, Club Monaco, Black Label,
and Blue Label. Ralph Lauren sells its branded merchandise at
over 11,000 different retail locations, 474 concessions-based
shop-within-shops, and six e-commerce sites throughout the
U.S., Canada, Europe, Asia and South America.
Ralph Lauren Corporation (RL)
S&P 500: $1,460.91
Price:
$163.02
52 Week High:
$182.48
52 Week Low:
$134.29
2012A
$7.13
2013E
$7.85
2014E
$8.98
22.9x
20.8x
18.2x
$98
$102
$110
S&P P/E
14.9x
14.3x
13.3x
Relative P/E
154%
145%
137%
EPS
P/E
S&P EPS
Industry Overview
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One paragraph (6-10 sentences)
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What industry is the company in?
Industry size
Historical/Future revenue growth
Major players
Resources

10-K/Q Statements (http://sec.gov/)
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IBIS World
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http://www.libraries.rutgers.edu/cms/indexes/descriptions/ibisworld
Yahoo! Finance
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“Business”, “Risk Factors”, “Management’s Discussion and Analysis”
“Company Industry”
Equity Research Reports
Industry Overview
Ralph Lauren operates primarily in Textile – Apparel
Clothing, which is a $558 billion industry. Demand from
developed markets, led by the United States, is increasing at a
more subdued rate of 0.1% over the five years through 2012,
Nonetheless, industry revenue is forecast to grow strongly over
the five years through 2017, as demand from growing middle
classes in emerging economies becomes even stronger. Over the
next five years, industry revenue is forecast to grow by an
annualized 3.7% to reach $668.3 billion in 2017. Major players in
this industry include: PPR SA, LVMH Moet Hennessy,VF
Corporation, and The Jones Group Inc.
SWOT

What is SWOT?
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Strengths
Weaknesses
Opportunities
Threats
Why is a SWOT analysis important?


Assists you in identifying the positives and negatives of the
company (Strengths/Weaknesses) and its external environment
(Opportunities/Threats)
Help you develop a fundamental understanding of the
company’s inner-workings and how it functions in the market
Strengths
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What advantages does the company have? What do they
do better than others?
How does the market perceive the firm in relation to its
competitors?
What is their unique selling proposition? Is there a moat?
Ralph Lauren has had a respectable history, growing to become one of the world’s
premier and universally recognizable brands. The firm is a consistent performer as
its wholesale margins held up during the 2009 economic downturn; its sales and
margins are the second least volatile in all of US branded apparel. Unlike its
competitors, the company contracts production to 400 different manufacturing
firms worldwide which has allowed them to leverage its scale and distribution
capabilities for efficiency gains. Ralph Lauren has a narrow moat because they have
survived as an aspirational apparel brand and can target a large range of customers
through key relationships with wholesalers like Saks and Kohl’s.
Weaknesses
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What can the company improve on?
What factors are slowing revenue growth?
Are they losing market share? Why?
Are competitors outperforming them? Why?
Ralph Lauren is susceptible to fluctuation in raw material prices which has been the
main source of margin weakness. 98% of their products were produced outside the
US last year so tariffs, regulations, and supply chain disruptions can severely cripple
their sales. The company is very reliant on department stores and wholesalers who
account for half of their revenue; most notably, one customer, Macy’s, accounts for
19% of their wholesale revenue. Its premium image of the brand has been
diminishing because a lot of distribution passes through lower-priced channels.
Morgan Stanely’s AlphaWise survey of wealthy Chinese consumers identified the
RL more with “casual wear” than luxury/premium branded peers.
Opportunities
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What opportunities are available to the company?
How and where can they increase their market share?
Ask yourself if the company’s strengths lead to
opportunities or if eliminating weaknesses presents
opportunities
Ralph Lauren has a long term growth strategy involving regions outside of North
America. It recently acquired businesses in Asia (i.e. Doosan Corp. and Dickson
Concepts International Limited) to elevate brand strength and recognition. With
less than 100 full-price retail stores outside of the US, there is ample opportunity
for international expansion of its specialty retail store base; this would lead to
bettermerchandising margins. Furthermore, they are expanding in non-apparel
goods such as footwear and fragrances that have higher margins. Finally, expansion
of e-commerce in Europe and America and introduction of e-commerce in Asia will
increase sales and help build global brand awareness.
Threats
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What obstacles does the company face?
What are competitors doing that they aren’t?
Could any internal weaknesses threaten the business?
Think about the macroeconomic conditions, future
trends, funding sources, etc. to evaluate threats
Ralph Lauren is threatened by changes in consumer preferences regarding style and
fashion. Consumers are very fickle when it comes to fashion and their spending
patterns can change rapidly. Current domestic unemployment levels leads to less
discretionary income for consumers to purchase products the company sells thus
leading to less sales. Uncertain macroeconomic conditions have a negative impact
on major wholesalers and suppliers which in turn could affect Ralph Lauren’s
operating margins. This would then limit the implementation of their growth
strategy in Europe and Asia.
Porter’s Five Forces
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Why use the Porter’s Five Forces?
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Simple but comprehensive tool to better understand the
strength of a company’s current competitive position and the
industry context in which it operates
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Degree of Competitive Rivalry in the Industry
Porter’s Five Forces
SUPPLIER POWER
-
Threat of New Entrants
Barriers to Entry
- Proprietary learning curve
- Absolute cost advantages
- Access to inputs
- Government policy
- Economies of scale
- Capital requirements
- Brand identity
- Switching costs
- Access to distribution
- Expected retaliation
- Proprietary products
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
THREAT OF
SUBSTITUTES
-Switching costs
-Buyer inclination to substitute
-Price-performance trade-off of
substitutes
Rivalry
BUYER POWER
-
Bargaining leverage
Buyer volume
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyers' incentives
DEGREE OF RIVALRY
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Exit barriers
Industry concentration
Fixed costs/Value added
Industry growth
Product differences
Switching costs
Brand identity
Threat of New Entrants
Medium-High Threat
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No barriers to entry, changing retail landscape
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Margins low for apparel
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Economies of scale
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Mature relationship with wholesalers
Global brand recognition
Strong customer loyalty in apparel industry
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High brand equity
Threat of Substitute Products
High Threat
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High number of substitute products available in the
apparel market
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U.S. Polo Association
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Changes in consumer preferences and trends
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Buyer inclination to substitute is high
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Consumers are very price sensitive
Competing for limited disposable income dollars
Bargaining Power of Suppliers
Low Power
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Suppliers have weak bargaining power
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Minimal switching costs
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No one manufacturer provides more than 8% of total RL
production
Can dissolve business relationship and find another manufacturer
Low threat of forward integration
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RL sources raw material and production from over 400
manufacturers
Difficult to compete with established brands
Recent volatility of cotton prices
Bargaining Power of Buyers
High Power
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High bargaining power due to no switching costs
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High quantity and concentration of buyers

Relatively homogeneous product
Competitors
have products that are similar to that of RL’s
Intensity of Competitive Rivalry
Moderate-High Competition
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Many competitors in the industry (i.e. The Jones Group, Liz
Claiborne, etc.)
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Low switching costs
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Moderate level of product differentiation
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Can purchase products from competitors based on the consumer’s
fashion preferences
Powerful branding strategy with the “POLO” name
High product quality with desirable fashion styles
Relatively low exit barriers
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Inventory can be applied to retail or wholesaled
Additional Resources
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Equity Research Reports
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Company Presentations and Quarterly Earnings Call
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Can be found via Bloomberg Terminal (AAPL US Equity
BRC<GO>)
Online brokerage services (TD Ameritrade, etc.)
Through the company’s Investor Relations website
More information on Porter’s Five Forces
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
http://www.quickmba.com/strategy/porter.shtml
http://research3.bus.wisc.edu/pluginfile.php/1196/mod_page/co
ntent/1/Toolkit/Content/Porter_forces_1.pdf
Investment Thesis
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Think of it as a logical argument with main supporting points
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Sources of growth
Where is Wall St. Consensus wrong?
Change in strategy or Financial Policy?
Gilead Sciences (GILD)

Gilead Sciences, Inc. is a BUY because there is too much gossip on the
street regarding the justification of the blockbuster drug, Sovaldi, steep
price tag. This has led to the consensus discounting the fundamentals of
this company regarding their robust drug pipeline, promising
impending FDA approvals and expansion of Sovaldi’s approvals,
which gives the company plenty of cash to explore in their future
pipeline through internal R&D and/or strategic acquisitions.
Deadlines
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Qualitative deadline: Friday, October 9th 11:59 PM
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Company description
SWOT
Porter’s 5 forces
Industry Breakdown
Investment Thesis
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Quantitative deadline: Friday, October 23rd 11:59PM
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Have an in-depth understanding of how the company makes money and
catalysts for growth in the future
Valuation of your choice (P/E Multiples, Discounted Cash Flow)
Final Presentation date: TBD (~Friday October 30th)
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Greg Francfort will come in to judge the presentations
Quantitative Workshop
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3 statement analysis & Valuation techniques
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Time: Saturday, October 3rd
Place: TBD
Will provide details closer to the date!
What is expected?
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A modeled and forecasted Income Statement
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Show at least 3 years of financial history
Forecast at least 1 year but a maximum of 5 years
Have an assumptions page
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Shows how much you think sales will grow, COGs, SG&A, ect.
Be able to defend every number in the model

Know why revenue went up x%

Don’t just plug in random numbers!
Resources for Modeling Income Statement

WST 9.1 Adv FM Core Model:
http://www.youtube.com/watch?v=5Jl29ejWhR8

http://www.wallstreetprep.com/extrafiles/sampledownloads/Fin
modeling.pdf

http://financialmodelingtutorial.com/how-to-forecast-incomestatement/
Announcements

Bender Trust Applications due Sunday, September 20th


LIBOR Financial Applications due Friday, September 18th


Look out for email tomorrow morning w/ details
Look out for email tomorrow morning w/ details
NEXT MEETING: Goldman Sachs Information Session


Monday, September 21st 7:00 PM
Dress code: business casual
Questions?
What is the Quantitative part of Bender
Trust?

Modeling an income statement
 Forecast- make predictions to what may happen in the future

Shows how a company makes profits!

Why?
 To determine growth profile

At the end
 Compare EPS diluted with Wall St. estimates (Yahoo! Finance)
What is an Income Statement?



Revenue-expenses-taxes= Net Income
Shows financial performance of a company over a given time period
 Pretty good indication of strength for a given company
 Part of SEC filings both quarterly and annually (10-Q & 10-K)
This 2 minute video gives a great example of how an income statement
is made for a simple lemonade stand
 http://www.youtube.com/watch?v=2RupCSFcY7w
Simple example of Income Statement

Revenue – COGS leads to
 Gross Profit

Then you subtract “operating” costs
 SG&A (marketing, salaries, rent)
 Also known as overhead
You then get
 Operating profit (profit for running the business)
 Sometimes called EBITDA (if D&A isn’t subtracted)
Subtract taxes and interest
 You have net income!
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Step 0: Understand the company
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Part I of the Bender Trust
How they make money
What their plans are
Answer
 How will they grow?
 How will they stay competitive ?
 What are the new drivers for the industry?
Step 1: Look at the 10-K


Go into the 10-K and get the 3-5 year financial history of the company
 Income Statement: just copy the info down into excel!
 For things like Gross Profit, Operating Profit, and Net Income USE
EQUATIONS FOR THESE LINE ITEMS!
This will allow you to
 See trends in the company
 See how the company has grown in (recessions & booms)



Major events? Why does the company have negative revenue in one year?
Big jumps in revenue in another?
How margins have been effected (grown, shrunk?)
Step 2: Break down the Revenue (majority of
time)


Example Costco
 Revenue is broken down by
 1. Number of Stores 2. Membership fees  3.Sales
Thesis on revenue?
 More stores they open= more membership fees and sales
 Management said- they want to increase premium members
How do you find the info/ideas for Revenue?

Where to get ideas?
 What management planned/discussed
 Look into the notes of the 10-K
 Look in Seeking Alpha, abnormal returns, equity research reports,
ect.
 You can even use your own opinion!

OPPORTUNITY FOR FIELD RESEARCH (your own unique look!)
What should you try and say?

Try to explain
 Will volumes increase?

Margins increase?

Or both?

Or none?
The “expenses”

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COGS- usually a percentage of revenue
SG&A- wages and overhead costs
D&A- Depreciation and amortization (allocation of cost, so look
into the 10-k)
Interest expense- payment for debt (like your student loan,
credit card)
Other items (one times loses, income from sale of operations,
ect.)
The Margins

Margins represent how much a certain line item takes away
(expense items) or represents (income line items) in respect to sales
 Ex: Operating Margin= Operating Profit/Sales


Allows you to compare a company's efficiency, or quality of operations, to that of
other companies. Operating margin is a measurement of what proportion of a
company's revenue is left over after paying for variable costs of production,
such as wages, raw materials, etc.
Ex: Profit Margin= Net Income/Sales(revenue)

Measures how much out of every dollar in sales a company actually keeps in
earnings. Profit margin is very useful when comparing companies in similar
industries.
37
Step 3: Forecast the Line Items using
YOUR assumptions
Income Statement Assumptions
Starbucks
SEGMENT ITEMS
US
EMEA
CAP
Other
Sales Growth Rates
2011
2012
2013
2014
2015
2016
2017
6.8%
9.8%
35.6%
9.6%
9.0%
30.6%
44.8%
9.0%
5.0%
35.0%
40.0%
9.0%
2.5%
40.0%
35.0%
8.0%
2.5%
45.0%
30.0%
8.0%
2.5%
45.0%
30.0%
8.0%
2.5%
45.0%
30.0%
25.3%
16.5%
31.9%
26.1%
18.1%
33.8%
43.0%
26.4%
15.1%
33.2%
35.5%
26.5%
14.5%
33.5%
35.5%
26.5%
14.0%
33.5%
35.5%
26.5%
14.0%
33.5%
35.5%
26.5%
14.0%
33.5%
35.5%
26.5%
14.0%
33.5%
35.5%
US
EMEA
CAP
Other
SG&A Margins
0.7%
6.1%
6.7%
0.7%
6.2%
6.0%
57.0%
0.7%
6.3%
5.3%
41.1%
0.7%
6.5%
5.5%
30.0%
0.7%
6.5%
5.8%
20.0%
0.7%
6.5%
6.0%
10.0%
0.7%
6.5%
6.0%
7.5%
0.7%
6.5%
6.0%
6.0%
US
EMEA
CAP
Other
D&A Margins
4.6%
5.3%
3.9%
4.3%
5.1%
3.3%
5.9%
3.9%
5.0%
3.2%
5.2%
3.9%
5.0%
3.2%
5.2%
3.9%
5.0%
3.2%
5.2%
3.9%
5.0%
3.2%
5.2%
3.9%
5.0%
3.2%
5.2%
3.9%
5.0%
3.2%
5.2%
US
EMEA
CAP
Other
Gross Profit Margins
2008
2009
2010
Step 4: Get the Net Income

Once you subtract all of your expenses, you will end up with
“operating profit”
 Subtract operating profit by interest expense and taxes
Interest Income
5
37
50
116
94
Interest Expense
55
41
35
36
35
457
563
1,446
1,832
2,089
145
170
493
572
687
Pretax Income (EBT)
Tax Expense
Loss attributable to noncontrolling interest
Net Income
Shares Outstanding (Diluted)
EPS



-4
1
3
2
1
316
392
951
1,258
1,401
771
789
802
807
811
$0.41
$0.50
$1.19
$1.56
$1.73
Compare your EPS (diluted) to the Wall St. Estimates of EPS
(diluted)
Your EPS > Wall St. (BUY rating)
Your EPS < Wall St. (SELL rating)
What is expected?


A modeled and forecasted Income Statement
 Show at least 3 years of financial history
 Forecast at least 1 year but a maximum of 5 years
 Have an assumptions page
 Shows how much you think sales will grow, COGs, SG&A,
ect.
Be able to defend every number in the model
 Know why revenue went u x%
 Don’t just plug in random numbers!
Resources for Modeling Income
Statement

WST 9.1 Adv FM Core Model:
http://www.youtube.com/watch?v=5Jl29ejWhR8

http://www.wallstreetprep.com/extrafiles/sampledownloads/Fin
modeling.pdf

http://financialmodelingtutorial.com/how-to-forecast-incomestatement/
Announcements

Bender Trust Applications due Sunday, September 20th


LIBOR Financial Applications due Friday, September 18th


Look out for email tomorrow morning w/ details
Look out for email tomorrow morning w/ details
NEXT MEETING: Goldman Sachs Information Session


Monday, September 21st 7:00 PM
Dress code: business casual
Questions?