MAXWELL SHOES CO' INC'

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MAXWELL SHOES CO. INC.

• Presented by
• Darryl Lum
• Hanney Yin
• Ken Reichelt

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Maxwell Shoes Co. Inc.

• This presentation is focused on assumptions of
  the forecast

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Maxwell Shoes Co. Inc.

• Assumptions
• Economic, Industry and Company
• Sales growth
• NOPAT
• After tax cost of debt
• Begin Net Operating WC/Sales
• Begin Net Operating LT Asset/Sales
• Net Debt at Begin of Year/Net Capital
• Cost of Equity

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Maxwell Shoes Co. Inc.
Economic Assumptions
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Maxwell Shoes Co. Inc.

• Shoe Mfg. Industry profile
• Highly competitive, mature and fragmented.

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Maxwell Shoes Co. Inc.

• Company Strategy
• Focused differentiation
• Core competencies - design and develop and market
  contemporary affordable footwear.
• Critical success factors
• Financial strategy - no long term debt, financed
  by operations and share issues.

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Maxwell Shoes Co. Inc.

• Sales Growth Assumptions
• Reduction in growth for four years to 10 in
  2003.
• General slowing of economic growth
• Reversion to the mean
• Hyper-growth of 23.6 (1998) is not sustainable

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Maxwell Shoe Co. Inc.
Projected Sales Growth Rates
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Maxwell Shoes Co. Inc.

• NOPAT Assumptions
• Decline to 4 to 2003.
• Expected slowing of economic growth.
• Higher inflation.
• Accounts Receivable too high (78 days).
• Accounts Payable too low (11 days).
• Advertising will increase.
• Tax rate at 38.
• Lower Gross Margins due to price pressure from
  Asia

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Maxwell Shoes Co. Inc.

• After Tax Cost of Debt Assumptions
• 0
• Cash flow sufficient to finance future expansion.
• Cash flow 3 million per year.
• Long-term assets of 10 million needed.
• Can be paid in 4 years.
• Working capital can be reduced.

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Maxwell Shoes Co. Inc.

• Beginning Net Operating Working Capital / Sales
  Assumption
• Decrease to 20
• Accounts receivable too high.
• (Company 78 days vs. industry 44 days)
• Accounts payable too low.
• (Company 11 days vs. industry 30 days)

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Maxwell Shoes Co. Inc.

• Beginning Net Operating Long-Term Assets/Sales
  Assumptions
• Assumed 4
• Low capital requirements due to outsourcing.
• Past performance.

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Maxwell Shoes Co. Inc.

• Net Debt at Beginning of Year/Net Capital
  Assumptions
• No debt.
• Net Debt/Net Capital ratio -5.6 in 1998, 0 in
  1999
• Aa rated Wal-Mart 5 year bond is 7.75
• Alternative 7.63 short-term debt
• Federal Funds rate 5.07 as of 10/31/98
• Risk premium 2.56
• 2.565.077.63

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Maxwell Shoe Co. Inc.

• Cost of Equity Assumptions
• Cost of Equity ROE 12
• SML5 0.7 (12-5)10
• Cost of Equity is 13 due to increased market
  risk and business risk
• Market risk possible recession
• Business risk sales volatility

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Maxwell Shoes Co. Inc
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Maxwell Shoe Co. Inc.
Sensitivity Analysis
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Maxwell Shoes Co. Inc.
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Maxwell Shoes Co. Inc
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Maxwell Shoes. Inc.
Possible valuations a) Pessimistic outlook
17.47 b) Weighted Average 22.24 c) P/E
model 16.70 d) Equity model Earning/ROE-g
25
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Maxwell Shoes Co. Inc

• Conclusion
• Agree with Barrons evaluation (20.00) 31 Oct/98
  based on
• (1) Forecast DCF equity model results in 25.00
• (2) Sensitivity analysis results in 22.24

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Maxwell Shoe Co. Inc.
Summary
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Questions?