luxury retailerspeople.stern.nyu.edu/iag/presentations/2007-2008/jwn_sks.pdf · retail sector –...
TRANSCRIPT
Neal Sangani
&Dina Model
LUXURY RETAILERS
Agenda
• Investment Thesis
• Luxury Retail
• Nordstrom (JWN)
• Saks (SKS)
• Q&A
How We Outperformed
The Sky Is Not Falling• Trailing earnings yields of 8% to 12% across the
retail sector– Superior vs. 3.50% in Treasuries
• Absurdly cheap unless there is a massive decline in earnings or cash flow– We believe both JWN and SKS will continue to grow
earnings and cash flow
• Though luxury retailers are not immune to recession, as usual, the market has grossly over- discounted shares
The Sky Is Not Falling
Nordstrom FY 08• Same store sales: down
2% to flat
• Gross margin: 30bp to 60bp decrease
• SG&A margin: 60bp to 80bp increase
• EPS: $2.75 to $2.90 (8% earnings yield)
Saks FY 08• Same store sales: mid-
single digit increase
• Gross margin: modest decline
• SG&A margin: modest leverage
• Est. EPS: $0.50 (4% earnings yield)
Luxury Fares Best
• Sales and margins weather recessionJWN 2000A 2001A 2002A 2003A 2004ACash flow analysisSales 5,529 5,634 5,975 6,449 7,131growth 1.91% 6.05% 7.93% 10.59%
Gross margin 38.7% 37.9% 38.4% 39.4% 40.8%change -0.8% 0.4% 1.0% 1.4%
Stores 114.25 126.50 139.25 145.25 149.25growth 10.72% 10.08% 4.31% 2.75%
Luxury Fares Best
• Merchandise buying targets true luxury customers– “Aspirational” vs. “High-end”– Gross margin benefit of higher ticket items– Ideally offsets lower traffic and markdowns for
lower segments
• New store openings can offset weakness in comparable store sales
Luxury Fares Best
• Tight inventory and expense controls– Commission-based employees– Growing direct-to-customer businesses– Inventory turns 5x-6x per year beat peers
JWN 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007ASG&A 1747 1723 1814 1899 2023 2101 2297 2360margin 31.6% 30.6% 30.4% 29.4% 28.4% 27.2% 26.8% 26.7%Inventory 946 888 953 902 917 956 997 956Inventory/ square foot 61.5 53.3 53.1 47.9 47.4 48.3 49.2 47.0
Thesis
• Nordstrom (JWN)– The best positioned luxury retailer with a
healthy cash flow yield and solid growth potential
– Current multiples represent trough valuation
• Saks (SKS)– A major turnaround play due to massive
potential for margin improvement– Small size creates ideal takeover target for a
foreign retail buyer
Thesis
• Play ahead of the cycle for fast money– Maximum returns tend to be accrued if
department store stocks are bought early within an recession• 1990-1991 downturn produced gains of 55% by
buying two months into recession• 2001 recession produced gains of 25% by buying two
months into the recession
Nordstrom Overview
• Stores– 103 Full-line– 50 Rack discount– 2 Jeffrey boutiques– 2 Last Chance clearance
• Direct– Catalog and Internet– 7% of sales for FY 07, 16% growth
Nordstrom Overview
• Share price: $35.00
• Market capitalization: $7.64bn
• Net debt: $1.87bn
• Net sales: $8.82bn
JWN Growth On Track
• Aggressive new store openings and remodels of existing stores– 8 new full-line stores, 6 remodels– New stores “the most productive use of capital
available”
• High-priced designer goods continues to outpace the store average– No evidence of “trading down“– good early response of spring merchandise
• cropped jackets and non-denim bottoms
JWN Growth On Track
• Low private label penetration is opportunity– Only estimated to be 13% of inventory– Nordstrom's Classiques Entier line for women– Recently launched Public Opinion label for men
• New inventory management software– Will enable employees to view inventories at full line
stores and the direct business on one platform– More insight into consumer trends
JWN At Trough Valuation
• Average low valuation for JWN is 15x forward earnings– Currently 13x forward earnings– Spiked to 30x forward earnings by January
2002 after 2001 recession• 80% gain in 3 months
– On average since 1987, JWN has risen 16.6% in the 12 months following the initial interest rate reduction by the FOMC
Our Cash Flow Model
• Modest sales growth driven by new store openings
• Modest near-term pressure on gross margins and SG&A
• Gradual capex reductions due to fewer new openings
Saks Overview
• Stores– 54 Saks Fifth Avenue
• 20% of revenue from flagship store in New York
– 49 Off Fifth• Successful with no evidence of cannibalization• Expect 3-4 new stores in 2008
– 95 Club Libby Lu
Saks Overview
• Divestments– Saks DSG to Belk in 2005
• 47 Proffitt’s and McRae’s stores
– Northern DSG to Bon-Ton in 2006• 142 stores under the Bergner's, Boston Store, Carson
Pirie Scott, Herberger's, and Younkers nameplates
– Other Stores to Belk in 2007• 38 Parisian stores that were renamed Belk
Saks Overview
• Share Price: $12.41
• Market capitalization: $1.74bn
• Net debt: $.47bn
• Net sales: $3.28bn
It’s All About Margins
• Set for operating margin improvement– Saks 4.2% vs. 10%-12% for Neiman Marcus,
Bloomingdale’s, Nordstrom
• Still cost-cutting following discontinued operations– Implementation of planning, allocating,
markdown management and point-of-sale technology
– Consolidation of buying and planning groups– Renewed Saks private label
Bauger
Will Buy SKS
• Icelandic private investment group–Stakes in about 20 retailers–3,900 outlets in 35 countries –Sales topping $19 billion
• Baugur needs to expand its British high-end brands into the US market–Karen Millen (currently in 10 US stores)
Bauger
Will Buy SKS
• Bauger had set aside £1 billion for “investments” (possible LBO of Saks)– Already own 8.5% stake
• Weak dollar and lower share price means Saks may be bought outright– $2.01bn raised vs. $2.06bn + premium
remaining
Valuable Real Estate
• Real estate sale can provide cash for buyout– Saks owns 55% of its real estate, including the
flagship store
– At $244/sqft, Saks’ real estate is worth $1bn• Est. total real estate value between $500mn to $2bn
– Bear Stearns
Multiples Justify LBO
• Typical retail buyouts occur at around 10x EBITDA while SKS trades at 8x– Competitor Barney’s was taken out at 14x
EBITDA (though in a better climate)
For the “Newbies”
& Todd
• A leveraged buyout (LBO) is when a company is purchased using mostly debt financing– Ideally, the cash flows generated by the
company offset the interest payments and repayment of principal the buyer must make
– The low equity the buyer must commit allows for high returns on the investment
Our LBO Assumptions
• Purchase price: $16.50 (~30% premium)
• Financing: 40% equity, 60% debt
• Required rate of return: 10%
• Interest rate: 8.00%
• Sustainable growth (post 2010): 4.50%
Questions?