maxwell shoe company ben bittrolff mark mitchell andrea ranalli ryan ricci sonia varkey done by:

Maxwell Shoe Maxwell Shoe CompanyCompany

Ben BittrolffBen BittrolffMark MitchellMark MitchellAndrea RanalliAndrea RanalliRyan RicciRyan RicciSonia VarkeySonia Varkey

Done By:Done By:

Maxwell Shoe CompanyMaxwell Shoe Company

Founded in 1949, Incorporated in 1976Founded in 1949, Incorporated in 1976 Public in 1994 Public in 1994 The company produces casual and dress The company produces casual and dress

footwear for women. footwear for women. The company also designed and The company also designed and

developed private label footwear for developed private label footwear for selected retailersselected retailers

All products are manufactured off-shore All products are manufactured off-shore by independent factories at low cost.by independent factories at low cost.

Product LinesProduct LinesModerate, priced Moderate, priced

$25-$40$25-$40

Upper ModerateUpper Moderate

$35-$50$35-$50

UpscaleUpscale

$65-$80$65-$80

Private LabelPrivate LabelBudgetBudget

$12-$20 $12-$20

ChannelsChannels

Department StoresDepartment Stores Specialty StoresSpecialty Stores Catalogue RetailersCatalogue Retailers Cable television shopping channelsCable television shopping channels 1997 JV with GE Capital to operate 130 1997 JV with GE Capital to operate 130

retail Sam & Libby and Jones New York retail Sam & Libby and Jones New York stores through SLJ Retail. Owned 49%stores through SLJ Retail. Owned 49%

Company StrengthsCompany Strengths

Established brand recognitionEstablished brand recognition Strong manufacturing relationshipsStrong manufacturing relationships Low costs through high volumeLow costs through high volume Good price points to customersGood price points to customers Good relationships through EDIGood relationships through EDI

Strategy for GrowthStrategy for Growth

Since 1987 focused on its branded Since 1987 focused on its branded footwearfootwear

Expect to enhance current brands, Expect to enhance current brands, increase private label and acquire increase private label and acquire new brandsnew brands

Analysis

Rivalry Among Existing Firms

(HIGH)• Large number of firms

• Slow growth•Productive capability

•High fixed costs

Threat of New Entrants (MODERATE):

• Scale economies• Access to distribution channels• Common technologyBargaining Power of

Suppliers (HIGH):

• Lots of alternative products

• Low switching costs, may compromise quality

• Many suppliers

• Large volumes

• Established relationships with suppliers

Bargaining Power of Buyers (LOW):

• Low switching costs

• Many alternative products

•Cost and quality important

Threat of Substitutes (HIGH):

• Similar price and performance• Willingness & ease to switch

Monthly Stock Price Monthly Stock Price HistoryHistory

MAXWELL SHOE COMPANY Month End Closing Price

0

5

10

15

20

25

Jan

-96

Ma

r-9

6

Ma

y-9

6

Jul-

96

Se

p-9

6

No

v-9

6

Jan

-97

Ma

r-9

7

Ma

y-9

7

Jul-

97

Se

p-9

7

No

v-9

7

Jan

-98

Ma

r-9

8

Ma

y-9

8

Jul-

98

Se

p-9

8

No

v-9

8

Revenue BreakdownRevenue Breakdown

women 18-34women 18-34 ~50% of ~50% of revenuerevenue

women 21-35women 21-35 ~10% of ~10% of revenuerevenue

women over women over 3030

~25% of ~25% of revenuerevenue

Private Private LabelLabel n/an/a ~15% of ~15% of

revenuerevenue

AppealAppeal RevenuesRevenues

Class ParticipationClass Participation

Discuss Maxwell Shoe’s Discuss Maxwell Shoe’s competitive advantage and competitive advantage and

whether it is sustainable in the whether it is sustainable in the retail industryretail industry

Competitive AdvantageCompetitive Advantage

Cost LeadershipCost Leadership

Efficient production techniquesEfficient production techniques Competitive product designCompetitive product design Low costLow cost

Accounting AnalysisAccounting Analysis

Do the financial statements Do the financial statements accurately measure the accurately measure the economic activity of Maxwell economic activity of Maxwell Shoe?Shoe?

Answer: YesAnswer: Yes

Accounting AnalysisAccounting Analysis CASHCASH: Decreased in 1997 in order to fund : Decreased in 1997 in order to fund

rapid growth (inventory went from 12.2 MM rapid growth (inventory went from 12.2 MM in 1996 to 20.1 MM in 1997 with sales in 1996 to 20.1 MM in 1997 with sales growing 28% in 1997)growing 28% in 1997)

SALESSALES: Growth over past 3 years performed : Growth over past 3 years performed as well as sector (~16%)as well as sector (~16%)

NET INCOMENET INCOME: Growth outperformed sector : Growth outperformed sector (24% compared to 9%) due to Maxwell’s (24% compared to 9%) due to Maxwell’s low-cost sourcing capabilitieslow-cost sourcing capabilities

Gross Margin was 23.4% (1996), 26.8% (1997) Gross Margin was 23.4% (1996), 26.8% (1997) and 27.1% (1998) and 27.1% (1998)

Accounting AnalysisAccounting Analysis

Company is debt-freeCompany is debt-free Financials in-line relative with Financials in-line relative with

retail industry and Maxwell’s retail industry and Maxwell’s strategystrategy

No accounting disclosures No accounting disclosures reported in financial statementsreported in financial statements

No apparent “Noise”No apparent “Noise”

Ratio AnalysisRatio AnalysisHistorical Historical Historical Expanded Dupont

Ratios Ratios Ratios

1996 1997 1998 Year

5.75% 6.83% 8.08% Operating Margin

3.29 2.81 2.67 Asset Turnover

-23.80% -5.53% -22.95% Net Financial Leverage

14.42% 17.98% 16.63% Return on Equity (ROE)

18.93% 21.39% 21.58% Spread

18.93% 19.17% 21.58%Operating Return on

Assets (ROA)

N/A 28.7% 23.6% Sales Growth

N/A 51.7% 47.3% Net Income Growth

23.4% 26.8% 27.1% Gross Profit Margin

ForecastingForecasting

1.1. Focus Focus Valuation of Maxwell Valuation of Maxwell ShoeShoe

2.2. Determine Key DriversDetermine Key Drivers1.1. Strategy Analysis Strategy Analysis Type and Nature Type and Nature

of Driversof Drivers

2.2. Accounting Analysis Accounting Analysis Can Financial Can Financial Statement Items be used ReliablyStatement Items be used Reliably

3.3. Financial Analysis Financial Analysis Economic Economic Behaviour of DriversBehaviour of Drivers


Key Drivers for Maxwell Shoe:Key Drivers for Maxwell Shoe:

1.1. Sales Growth Sales Growth Commonly used, Commonly used, major expenses and Cap. Exp. major expenses and Cap. Exp. Track sales wellTrack sales well

2.2. Profit Margin (NOPAT margin) Profit Margin (NOPAT margin) Track shifts in operational efficiency Track shifts in operational efficiency and competitionand competition


Sales Growth Driven By:Sales Growth Driven By: Demand of Shoes/Industry GrowthDemand of Shoes/Industry Growth Competitiveness of IndustryCompetitiveness of Industry

NOPAT Margin Driven By:NOPAT Margin Driven By: Cost Structure (COGS) / Pricing StrategyCost Structure (COGS) / Pricing Strategy Competitiveness of IndustryCompetitiveness of Industry

Forecasting AssumptionsForecasting Assumptions Sales growth based on Strategy, Sales growth based on Strategy,

Accounting and Financial Analyses Accounting and Financial Analyses and and recent performance recent performance (previous year)(previous year)

Maxwell’s Sales growth well above Maxwell’s Sales growth well above industry so should only forecast for industry so should only forecast for 2-3 years (will eventually revert to 2-3 years (will eventually revert to industry mean)industry mean)

Similar for NOPAT margin growthSimilar for NOPAT margin growth

Forecasting – Sensitivity Forecasting – Sensitivity AnalysisAnalysis

1.1. Pessimistic – Grow at GDP/Inflation Pessimistic – Grow at GDP/Inflation levels (4%)levels (4%)

2.2. Most Likely – Grow at Industry Most Likely – Grow at Industry Growth Level (17%)Growth Level (17%)

3.3. Optimistic – Grow at Recent Pace Optimistic – Grow at Recent Pace (24%)(24%)

Sensitivity Analysis with the Class

Sales Growth at 4%

BALANCE SHEETYear 1999 2000 2001(in $ Million)

Total Net Assets 60.56 62.98 65.50

Total Net Capital 60.56 62.98 65.50

INCOME STATEMENT 1999 2000 2001Sales 172.54 179.44 186.61Net operating profits after tax 12.08 12.56 13.06

Net income 12.83 13.35 13.88

Basic Earnings Per Share 1.4585 1.5168 1.5775Operating ROA 19.94% 19.94% 19.94%ROE 16.95% 16.95% 16.95%Dupont ROE 16.30% 16.30% 16.30%

CASH FLOW FROM OPERATIONS 1999 2000 2001Cash from Operations 14.09 14.65 15.23

DISCOUNTED CASH FLOW METHODValue of the firm - Free cash flows to Capital 97.72Price per share DISCOUNTED CASH FLOWS (DEBT+EQUITY = TOTAL ASSETS) 11.10

Value of equity - Free cash flows to Equity 120.53Price per share DISCOUNTED CASH FLOWS (EQUITY ONLY) 13.70

Sales Growth at 17%





Net income 14.44 16.89 19.77





Sales Growth at 24%





Net income 15.30 18.98 23.53





Ratio Analysis of ForecastsRatio Analysis of Forecasts1999 2000 2001 Expanded Dupont

17.00% 17.00% 17.00% Sales Growth

7.00% 7.00% 7.00% Operating Margin

2.85 2.85 2.85 Asset Turnover

-20.00% -20.00% -20.00% Net Financial Leverage

38.71% 30.18% 22.89% NFL with 50 MM Debt

97.42% 80.36% 65.78% NFL with 100 MM Debt

16.95% 16.95% 16.95% ROE

27.18% 25.47% 24.11% ROE with 50 MM Debt

41.64% 36.99% 33.33% ROE with 100 MM Debt

14.95% 14.92% 14.92% Spread

18.69% 18.33% 18.22% Spread with 50 MM debt

22.27% 21.21% 20.36%Spread with 100 MM debt

19.95% 19.94% 19.94% Operating ROA

23.54% 22.93% 22.39% ROA with 50 MM Debt

27.21% 26.06% 25.07% ROA with 100 MM Debt

Subsequent EventsSubsequent Events 1999 (11999 (1stst 6 months): 6 months): Analyst Expectations: 61 centsAnalyst Expectations: 61 cents

Actual: 48 centsActual: 48 cents Disappointing performance was due to Disappointing performance was due to

lower than expected sales, attributed to lower than expected sales, attributed to the ‘softness in the footwear market’.the ‘softness in the footwear market’.

In July 1999, Maxwell sold the license for In July 1999, Maxwell sold the license for $25 million to the Jones Apparel Group.$25 million to the Jones Apparel Group.

Maxwell was bought by Jones New York Maxwell was bought by Jones New York in 2004.in 2004.

Forecast (4%)INCOME STATEMENT 1999 2000 2001Sales 172.54 179.44 186.61

Net income 12.83 13.35 13.88

ActualINCOME STATEMENT 1999 2000 2001Sales 150.30 158.20 -

Net income 18.90 9.90 -

The Perils of ForecastingThe Perils of Forecasting

maxwell shoe company ben bittrolff mark mitchell andrea ranalli ryan ricci sonia varkey done by:

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