Company Presentations Consumer Discretionary

1
Company PresentationsConsumer Discretionary

• Erin Bailliard
• Jerron Schmoll
• Neil Sethi

2
Recommendation

• Sell
• Kohls (currently 3.58 of portfolio)
• Trim
• Lowes (currently 4.86 - trim to 3.26)
• Panera (currently 6.58 - trim to 2.83)
• Buy
• McDonalds (buy to 4.5)
• Abercrombie Fitch (buy to 3.0)

3
Industry/Sector Overview

• Recommend market weight due to numerous
  uncertainties
• Within sector recommend underweight in Media and
  Auto
• Overweight on smaller segments (StockVal expected
  change in EPS in Q1)
• Textiles Apparel (86)
• Hotels, Restaurant, and Leisure (50)
• Auto components (26)

4
Business Analysis Sell Stock

• Kohls
• Growth company
• Sales growth avg. 26.7 per year
• Still expanding aggressively
• Only half as big as Pennys
• Nondurable consumer spending up 1.3 in January
• But, competitors closing gap
• Sears, Pennys, etc. copying their model
• Can they maintain margins?

5
Business Analysis Trim Stock

• Lowes
• Growth company
• Excellent recent performance
• NI up 28 annually since 97
• Investing in new distribution infrastructure
• But, consumer spending down 0.1 in January
• Consumer tapped out?
• Expanding aggressively despite economic
  uncertainties
• Home Depot comeback?
• Spending 250m to improve stores

6
Business Analysis Trim Stock

• Panera
• Growth company
• Growing 30 per year
• Same store sales increasing at
• rate of over 3 annually
• Fast casual dining growing rapidly
• Future growth mostly through franchisees

7
Business Analysis Buy Stock

• McDonalds
• Mature company
• Slowing growth due to turnaround
• World class brand and real estate
• Turnaround well under way
• Closing underperforming stores
• Increasing efficiency
• Upgrading stores

8
Business Analysis Buy Stock

• Abercrombie Fitch
• Growth company
• AF stores reaching saturation
• Hollister stores expected to grow by
• 70 over next 5 years
• Hollister brand performing better than expected
• Company has done an excellent job predicting
  fickle fashion trends
• Very aggressive marketing

12
3
9
6
9
Financial Analysis

• Earnings Growth (from year earlier)

10
Financial Analysis Sell Stock

• Kohls
• Increasing operating margins
• 9.0 to 11.4 99 to 02
• Earnings growth slowing
• Highly leveraged
• Long-term debt tripled since 99 to 1.1b (equal
  to 22 of firm value)
• Due to heavy expansion almost no free cash flow
• Only 92m cash on hand

11
Financial Analysis Trim Stock

• Lowes
• Stock-Val expects earnings growth
• to increase in 2003
• Expanding aggressively
• Investing CFs over 2b per year
• Long term debt doubled since 99 (to 3.7b 27
  of firm value)

12
Financial Analysis Trim Stock

• Panera
• No long-term debt
• Despite aggressive expansion,
• positive free cash flow
• However, currently financing aggressive growth
  primarily based on employee stock option exercise

13
Financial Analysis Buy Stock

• McDonalds
• Financials starting to turn around
• Earnings expected to steadily increase
• Heavily investing (2b per year) in improving
  stores
• Consistently positive free cash flow over last 10
  years (782m last year)
• Heavily leveraged
• 8.5b in long-term debt equal to 38 of firm
  value

14
Financial Analysis Buy Stock

• Abercrombie Fitch
• Fiscally conservative
• No long term debt
• 167 million in Cash (31 of assets)
• Breakeven or positive free cash flows since 96
• Stock-Val anticipates reduced earnings growth in
  03
• probably due to expectation that new Hollister
  stores will have lower margins, but
• Positive 4Q02 earnings surprise with gross
  margins widening 80 bps during the quarter

15
Valuation Analysis Sell Stock

• Kohls
• Ratios all above sector and SP averages
• Below 5-yr company averageslowing earnings
  growth, increased competition

16
Valuation Analysis Sell Stock
17
Valuation Analysis Trim Stock

• Lowes
• Ratios above or close to sector and SP averages
• Below 5-yr averageincreased competition

18
Valuation Analysis Trim Stock
19
Valuation Analysis Trim Stock

• Panera
• Ratios above sector, SP, and 5-yr average

20
Valuation Analysis Trim Stock
21
Valuation Analysis Buy Stock

• McDonalds
• Ratios below sector, SP, and 5-yr average
• DDM predicted price of 18.58

22
Valuation Analysis Buy Stock
23
Valuation Analysis Buy Stock

• Abercrombie Fitch
• Most ratios close to sector averages despite
  companys growth potential
• P/E ratio below sector, SP, and 5-yr average

24
Valuation Analysis Buy Stock
25
Recommendation

• Sell
• Kohls (3.58)
• Positives
• Good growth opportunities
• Successful strategy
• Negatives
• Expensive stock growth priced in, but not risks
• -Expanding aggressively
• -Highly leveraged, very little cash
• -Competitors duplicating strategy

26
Recommendation (cont.)

• Trim to 3.26
• Lowes (currently 4.86 of portfolio)
• Positives
• Great performance over last several years
• Growth expected to continue
• Negatives
• Expensive stock (growth already priced in)
• Expanding aggressively despite economic
  uncertainty
• New home sales, home price appreciation, and
  durable goods sales down
• Home Depot aggressively improving stores

27
Recommendation (cont.)

• Trim to 2.83
• Panera (currently 6.58 of portfolio)
• Positives
• Great growth potential with no debt
• Valuations relatively low given growth
  opportunities
• Negatives
• Financing based primarily on employee stock
  optionslong-term stability of cash flows?
• Will lose some quality control with franchisee
  operations

28
Recommendation (cont.)

• Buy to 4.5
• McDonalds
• Positives
• Beginning upturnstrong mgmt
• Upgrading stores
• Increasing efficiency
• Closing underperforming stores
• World-class brand
• Depressed ratios (currently inexpensive)
• DDM predicts much higher price
• Negatives
• Mature brand with lower growth potential

29
Recommendation (cont.)

• Buy to 3.0
• Abercrombie Fitch
• Positives
• Fiscal discipline
• Strong cash flow
• No long term debt
• Hollister doing better than expected
• Excellent history of brand management
• February positive earnings surprise
• Seems underpriced given growth opportunities
• Negatives
• Success based on ability to continue to predict
  fashion trends

30
Recommendation

• Sell
• Kohls (currently 3.58 of portfolio)
• Trim
• Lowes (currently 4.86 - trim to 3.26)
• Panera (currently 6.58 - trim to 2.83)
• Buy
• McDonalds (buy to 4.5)
• Abercrombie Fitch (buy to 3.0)