Investment Analysis of
By Ray Szutu
Mar 26, 2009
What do they do?
The Classic Shoe
Business
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•
•
•
Founded in 1966
Designs, develops and markets shoes
Sells wholesale to footwear retailers
Sales: 42% domestic (U.S.), 58%
international
Investment Thesis
• Cheap relative to long term earning power
• Great balance sheet
• Well managed, simple company
K-Swiss Shoes
Figures in US$
•
•
•
•
$65 retail price
$26 wholesale price
$15 production cost (China)
$7.80 SG&A cost
~ 15% operating margin, historically
Unit Price
Avg wholesale price
$29.00
$28.00
$27.00
$26.00
$25.00
$24.00
$23.00
2008
2007
2006
2005
2004
2003
2002
2001
2000
Volume
19.00
17.00
Pairs sold (mil's)
15.00
13.00
11.00
9.00
7.00
5.00
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Margins
55.0%
45.0%
35.0%
25.0%
15.0%
5.0%
-5.0%
2008
2007
2006
2005
2004
Operating Margin
2003
2002
Gross Margin
2001
2000
1999
Selling, General & Admin Costs
• > $10M spent on data implementation
since 2007
• Increased stock option expense
• Non-recurring
• International expansion
Earning Power
Figures in US$, averages since 1997:
• Net income = $33.4M
• Free cash flow = $34M
• Bal Sheet earnings = $41.7M
Ugly near-term outlook
Free Cash Flow
100.0
80.0
Free Cash Flow
60.0
40.0
20.0
2008
(20.0)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Capital Structure
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•
•
•
Almost no debt ($9M)
$207M in cash
$312M market cap ($8.95/sh)
$52M in lease and purchase obligations
**Very conservatively financed
Liquidation Value
Figures in mil’s $
Cash
2008
Recvry
Adj.
207.4
1.00
207.4
A/R
35.0
0.90
31.5
Inventory
74.4
0.70
52.1
PP&E
25.7
0.33
8.5
Total Assets
Liabilities
Liquidation Value
395.1
70.3
299.4
1.00
70.3
229.1
Management
• CEO: Steven Nichols (since 1987)
• CFO: George Powlick (since 1988)
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•
•
•
•
Invested alongside shareholders
Experienced
Long-term orientated
Good capital allocation
Re-priced stock options
Competition
• Nike, Adidas, Skechers
• Gross margins and ROE just as high
• Less development costs
Valuation
Typical metrics:
• P/E = 15.2 x
• P/B = 0.96x
• Div yield = 2.5%
These are not applicable
Valuation
• EV / FCF = 3.35x
• Private market valuation
– “What a reasonable buyer would pay for the
business in the private market in a cash
financed, arms-length transaction”
• Give away price = $5.50
Private Market Valuation
Target
Buyer
Umbro
Nike
Stride Rite
Payless Shoes
Reebok
Date
EV (mil's US$)
EV / FCF
10/23/2007
584
10.50
5/23/2007
815
11.11
Adidas
8/3/2005
3,527
14.29
Maxwell Shoe Co
Jones Apparel
7/7/2004
274
11.98
Converse
Nike
7/10/2003
335
11.11
Saucony
Stride Rite
7/1/2005
140
7.78
Private Market Valuation
• Min @ 7.8x: $604M
• Max @ 14.3x: $869M
• Avg @ 11.1x: $740M
Current market cap: $312M
The market…
“… is a voting machine in the short-term, and a
weighing machine in the long-term”