project group members - mark e. moore
TRANSCRIPT
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Project Group Members:
Jayson Adams [email protected]
Patrick O'Neal [email protected]
Michael Madden [email protected]
Anthony Magliaro [email protected]
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Table of Contents
Business and Industry Analysis 4
Company Review 4
Industry Review 6
Five Forces Model 7
Rivalry Among Existing Firms 8
Level of Concentration 8
Industry Growth 9
Economies of Scale 9
Exit Barriers 10
Conclusion 10
Threat of New Entrants 10
Economies of Scale 11
First Mover Advantage 13
Distribution Access and Relationships 14
Legal Barriers 15
Conclusion 16
Threat of Substitute Product 16
Relative Price and Performance 17
Buyers Willingness to Switch 18
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Bargaining Power of Customers 19
Price Sensitivity 19
Relative Bargaining Power 21
Bargaining Power of Customers Conclusion 22
Bargaining Power of Suppliers 22
Switching Costs 22
Differentiation 23
Importance of Product Costs and Quality 24
Number of Suppliers 25
Bargaining Power of Suppliers Conclusion 25
Competitive Strategy 26
Superior Quality 26
Superior Product Variety 26
Creativity and Innovation 27
Firm Competitive Advantage 27
Superior Quality 28
Superior Product Variety 28
Creativity and Innovation 29
Conclusion 29
Formal Accounting Analysis
Key Accounting Policies
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Pension Plans
Operating and Capital Leases
Revenue Recognition
Foreign Currency Translation
Accounting Flexibility
Pension Plans
Goodwill
Operation and Capital Leases
Conclusion
Evaluate Accounting Strategy
Goodwill
Foreign Currency Translation
Pension Plans
Operating and Capital Leases
Revenue Recognition
Conclusion
Qualitative Analysis
Quantitative Analysis
Sales Manipulation Diagnostic
Net Sales/Cash From Sales
Net Sales/Accounts Receivable
Expense Manipulation Diagnostic
Asset Turnover
CFFO/OI
CFFO/NOA
Conclusion
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Potential Red Flags
Comparison between ACCT Receivable and Sales
Comparison between Inventories and Sales
Comparison between NI and CFFO
Large Asset Write-Offs
Conclusion
Undoing Accounting Distortion or Irregularities
Financial Analysis, Forecasts, Cost of Capital Estimation 64
Liquidity Analysis 64
Current Ratio 65
Quick Asset Ratio 67
Working Capital Turnover 68
Account Receivable Turnover 70
Days’ Supply of Receivables 71
Days Sales Outstanding 72
Inventory Turnover 73
Day’s Supply of Inventory 74
Cash-to-Cash Cycle 75
Profitability Ratio Analysis 76
Gross Profit Margin 77
Net Profit Margin 78
Asset Turnover 79
Return on Assets and Equity 81
Capital Structure Analysis 83
Debt-Equity Analysis 84
Debt-Service Margin 86
Times Interest Earned (TIE) 87
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Growth Rate Analysis 88
Internal Growth Rate (IRG) 89
Substantial Growth Rate (SGR) 90
Financial Statement Forecasting 91
Income Statement 91
Statement of Cash Flow 92
Balance Sheet 92
Cost of Capital Estimation 93
Cost of Equity 93
Cost of Debt 96
Weighted Average Cost of Capital
Valuation Analysis
Method of Comparables
Price/Earnings Trailing
Price/Earnings Forecast
Price/Book
Price Earnings Growth (P.E.G.)
Price/EBITDA
Enterprise Value/EBITDA
Price/Free Cash Flows
Dividends/Price
Conclusion
Sealed Air
Intrinsic Valuation Models
Discounted Dividends Model
Discounted Free Cash Flows Model
Residual Income Model
Abnormal Earnings Growth Model (A.E.G.)
Long Run Residual Income Model
Analyst Recommendations
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Appendices
References
Works Cited
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Executive Summary Overvalued, Sell November 3, 2008
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Industry Overview
American Greetings was founded in 1906, and since has been one of the top leaders in
the social expression and greeting card industry. Through the years they expanded their
business by acquiring different licenses on brands such as Strawberry Shortcake and Care
Bears. They have also created their own brand called Carlton Cards. AM owns and operates in
over 414 card and gift retail stores in North American and has 18,000 employees.
American Greetings has three main competitors within the industry: Hallmark, Creative
Seasonal Solutions, and Taylor Corp. (only CSS is publicly traded). These firms create very
similar products, which creates a challenge for firms to gain a competitive advantage. For
success in this industry, firms will compete on superior product variety and product quality,
because having many different products will translate into a broader customer base. Firms
within this industry will also focus on R&D, brand recognition, innovation, and first mover
advantages. Investment in R&D within this industry is crucial for success because many of the
products are similar and firms need to distinguish themselves away from their competitors.
Within this industry, there are strategies that may make one company more successful than the
other. For example, American Greetings has a first mover advantage over some competitors by
being one of the first to invest highly in digital media such as e-cards and text messaging
services, and also by acquiring the Strawberry Shortcake and Care Bears licenses. The analysis
of the five forces model gives an idea of the degree of competition in each segment of the
industry:
Competitive Force Degree of Competition
Rivalry Among Existing Firms High
Threat of New Entrants Low
Threat of Substitute Products High
Bargaining Power of Suppliers Moderate
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Bargaining Power of Buyers Low
Due to the estimated 3000 greeting card companies within this industry, there is a high
level of competition among existing rival firms. Also, the low level of differentiated products will
cause tense competition. Conversely, the threat of new entrants is low for a couple of reasons.
The industry is already highly established with the larger firms having high recognition brands.
Small firms will not pose a threat to companies such as Hallmark and American Greetings, who
both own 40-45% each of the entire market share. Also, the economies of scale the industry
has will force new entrants to have to take a smaller role because of the lack of capital they will
have, which is needed for economies of scale. The threat of substitute products is high because
of the abundance of companies offering a relatively similar product. Also, in considering that the
switching costs in this industry are low for consumers, this will allow for customers to switch
more easily if a substitute product is offered.
Accounting Analysis
The purpose of the accounting analysis section is to determine whether or not American
greetings accurately portray the value of the company through the financial statements. The
level of disclosure is extremely important when evaluating a company due to the fact that
assets can be overstated and liabilities can be understated therefore giving a false sense of
value to the firm. High disclosure is best when determining company value because it gives
analysts and investors an accurate “snapshot” of the company. Many distortions may be
discovered when a company only reports what is required by the SEC.
The key accounting policies for the firms in the seasonal greetings and social
expressions industry are pension plans, return revenue recognition and foreign currency
translations, to name a few. When looking at what the other firms within this industry are
disclosing, the disclosure American Greetings provides is fairly constant. American Greetings
does a fairly respectable job when reporting pension plans. When looking at the financial
statements of Creative Seasonal Solutions (CSS) and comparing them to the financial
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statements of American Greetings, the amount of disclosure American Greetings provides is
much more detailed when determining where the money is allocated such as, how they derive
the discount rates used. American Greetings had a fairly low level of disclosure when
identifying foreign currency translations. This is due to the fact that hedging against losses
experienced with currency translations is not applicable, meaning American Greetings doesn’t
hedge against such losses. However, Americans Greetings does keep with the industry norm
when reporting operating and capital leases.
American Greetings does keep goodwill on the balance sheet. According to GAAP
regulations it is required of companies to impair and expense goodwill throughout the income
statement if the book value of goodwill exceeds the fair market value. The amount of goodwill
American Greetings kept on the balance sheet in 2007 and 2008 is 12.6% and 15.8% which is a
percentage of total assets. This seems to be a fairly consistent amount when looking at the
industry as a whole. CSS holds about the same amount of goodwill on their balance sheet but
American Greetings is more transparent when reporting it. When looking at the financial
statements of CSS, American Greetings displays a more accurate depiction in reporting
standards which results in a more accurate portrayal of value for analysts and investors.
Return revenue recognition is an area that American Greetings is detailed about
reporting. CSS, in the notes to financial statements, doesn’t disclose how return revenue
recognition is reported. On the contrary, American Greetings does disclose that return revenue
recognition is reported as deferred income. In the notes to financial reports it states that return
revenue recognition is reported as “other current liabilities” on the income statement.
After analyzing American Greetings along with its’ competitors we conclude that all
companies within this industry emphasize different reporting standards. Pension plans and
foreign currency translations are very detailed within the financial statements of American
Greetings disclosing a great deal of information on discount rates and plan allocations. On the
other hand, an industry trend follows American Greetings when considering operating leases.
CSS and American Greetings report along the same scope when reporting these items.
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Financial Analysis, Forecast Financials, and Cost of Capital Estimations
In order to complete the task of forecasting the financial statements we had to go over
many ratios in order to calculate accurate data. We used ratio analysis to assess the liquidity,
profitability, and capital structure of the firm. After we did this, we forecasted out the financial
statements for the next 10 years. The ratio analysis allowed us to come up with logical numbers
for the future. In order to come up with an accurate assumption on whether American
Greetings is overvalued, fairly valued, or undervalued we had to use the forecasted numbers to
find the intrinsic values. Also, in order to value the firm, we determined the necessary inputs to
calculate the cost of capital.
We created a common sized income statement that helped us forecast certain line items
accurately to make assumptions of where American Greetings was heading in the future. The
reason that we are able to forecast out the future is because we have a good idea of what
American Greetings is capable of doing in their industry. We also had to forecast out the
statement of cash flows and the balance sheet for the next 10 years. The reason that we did
this was to come up with the proper numbers to run the intrinsic valuations. We forecasted out
the net sales, net income, retained earnings, dividends paid to shareholders, and many other
items from the financial statements. Also, we forecasted the cash flows from operations for the
next 10 years to link the balance sheet to the statement of cash flows. After these numbers
were calculated, we used them for the intrinsic valuation models. We forecasted these models
into the future and then discounted them back to present values. Also, we calculated the
discount rates by finding the cost of debt, cost of equity, and the weighted average cost of
capital. This allowed us to come up with the proper valuation for American Greetings.
Valuation Analysis
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In order to find the most accurate and true value of the company the intrinsic valuation
models and methods of comparable are needed. The five intrinsic models that are needed to
value the firm are the free cash flows model, residual income model, the long run residual
income model, the discounted dividends model, and the abnormal earnings growth model. The
models are very important because they use the present value of future cash flows. These
numbers are then used to determine the stock price. In addition to these models, we used the
industry average ratios comparing American Greetings to Creative Seasonal Solutions. American
Greetings’ other main competitor, Hallmark, is privately held so therefore their comparable were
not available. The share price found from the industry average ratios was compared to the
share price found from the models to decide if the company is fairly, over, or undervalued.
By using the intrinsic valuation models we were able to find that in residual income
model American Greetings was overvalued. The result from the residual income model was that
American Greetings’ share price was estimated to be $4.54, on average. The long run residual
income model had the company overvalued as well. The discounted dividends model had the
company overvalued, but this is the least reliable model. Also, the abnormal earnings growth
model resulted in the company as being overvalued. The abnormal earning growth model and
the residual income both had the same result for American Greetings. After reviewing the
intrinsic models, we have come up with the conclusion that American Greetings is overvalued.
Our final decision about how well American Greetings’ current stock price reflects
the value of the company, we determined that it is overvalued. This decision was
based on the intrinsic valuation models. We found all the models to be very informative
when making our decision. When the models were used to determine if the current
stock price reflected the value of the company, we found that all five models valued the
stock as overpriced. The 52 week range for American Greetings was $7.85-$24.85,
with a current price of $9.99. The discounted dividend model showed an intrinsic price
of $.50, meaning that the current price is overvalued. The free cash flow model
showed an intrinsic value of $9.46 which also makes the current stock price overvalued.
In fact all 5 models showed an intrinsic value well below the current price of $9.99.
The residual income and abnormal growth models both showed intrinsic values of $4.45
and $.57, respectively. As for the long run residual income model it determined an
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intrinsic value of $5.86. the residual income and abnormal growth models correlate
with each other using annual change from residual income. Our final decision when
valuing American Greetings is that the current stock price is overvalued, sell.
Business and Industry Analysis
Company Overview
In 1906, a young polish immigrant by the name of Jacob Sapirstein had the
American Dream, to own a company and prosper in a new world. Jacob believed that
through ambition, hard work, and ethics anyone could achieve this dream. Taking $50
borrowed from a bank, Jacob proceeded to purchase penny post cards from German
manufacturers and sold them to local merchants in the Cleveland, Ohio area. At the
time, these post cards were quite popular and thus the American Greetings Corporation
was born.
For over 100 years, American Greetings has been operating predominately in a
single industry which consists of the design, manufacture and sale of everyday and
seasonal greeting cards and other social expression products. Throughout the years,
American Greetings has been involved in the sale and manufacturing of greeting cards,
gift wrap, party goods, stationary, and giftware which are sold in many different
countries around the world. With their headquarters located in Cleveland, Ohio, they
also have business facilities in Canada, UK, Mexico, Australia, New Zealand, and South
Africa. The major domestic greeting card brands utilized by American Greetings
Corporation are American Greetings, Carlton Cards and Gibson.
American Greetings has established itself primarily through everyday and
seasonal greeting cards. However, during the last 10 years, they have become a major
competitor among digital media. American Greetings has developed AG Interactive,
Inc. which distributes social expression products, including electronic greetings, through
e-mail and text message services, personalized printable greeting cards, and a broad
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range of graphics and digital service products. The channels of distribution have
crossed over from only using typical mass retail and drug stores, to today’s mainstream
of websites and internet portals. Licensing of Strawberry Shortcake and Care Bears
brands are done through Those Characters From Cleveland, a subsidiary of American
Greetings.
As of February 29, 2008, American Greetings operates in five business segments:
North American Social Expression Products, International Social Expression Products
which is responsible for all business outside of the United States, Retail Operations
which oversees 414 card and gift retail stores, AG Interactive which is responsible for all
business conducted online through websites and internet portals, and also non-
operating segments.
American Greetings is now one of the world’s leader in the designing,
manufacturing, and selling of greeting cards and other social expression products. They
are now a moderately large company with over 18,000 employees with international
operations in more than 6 countries, as well as licenses in approximately 60 other
countries. From a fifty dollar loan to a multibillion dollar company, Jacob Sapirstein had
the heart, drive, and ambition to provide a life for his family and bring joy to the people
of America during some of the toughest times this country has ever endured. American
Greetings has helped millions of people worldwide stay connected and celebrate life’s
special occasions. With hard work and strong work ethics the American Dream was
achieved. Jacob Sapirstein and American Greetings have proven this to be true.
Industry Overview
American Greetings competes in the seasonal greetings and social expressions
industry, which is responsible for more than $6.6 billion in the U.S. market. Seasonal
greeting cards as well as everyday greeting cards, gift wrap, party goods and stationary
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are responsible for the majority of this market. On top of the products readily available,
the companies that comprise this market compete in several other areas that have
matured in the last 10 years. Areas such as digital media, e-cards and text-messaging
services have grown up in the last decade. The main competitor in this industry is
Hallmark. Hallmark and American Greetings share 85% of the market. Firms such as,
Creative Seasonal Solutions, Taylor Corp., and approximately 3000 others absorb the
other remaining 15%.
In the last 10 years, technology has spurred a new trend within the typical
greeting cards industry. As mentioned above online digital media accounts for
significant portion of revenue within this industry. With all the competitors fighting for
a piece of this new market, American Greetings has taken steps to set itself apart from
the other firms within the industry. Hallmark offers online media and many other firms
are occupying this segment of the market. E-cards are available through many
websites online such as, bluemountain.com, egreetings.com and dayspring.com even
offers Christian based greetings. Dayspring is providing a niche to acquire their small
share of the ever growing online media surge. But the quality and reliability of
American Greetings is heavily recognized because they have established brand
recognition.
American Greetings is an industry leader within the Social expression and
greeting cards market. They are responsible for the licensing of the Strawberry
Shortcake and Care Bears brands which are recognized worldwide. They are in charge
of AG Interactive which promotes online digital media and Tumbleweeds, Inc., the
company responsible for delivering e-cards to many people around the world.
However, their main concentration focuses on the sale and distribution of seasonal
greetings and social expressions.
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Total
Assets(in
millions
2004 2005 2006 2007 2008
American
Greetings
$2,484,013 $2,535,628 $2,218,962 $1,778,214 $1,804,428
Creative
Seasonal
Solutions
$370,397 $333,906 $334,149 $343,070 $345,041
Total
Sales(in
millions)
2004 2005 2006 2007 2008
American
Greetings
$1,953,729 $1,902,727 $1,875,104 $1,744,603 $1,730,784
Creative
seasonal
Solutions
$539,397 $333,906 $334,149 $343,070 $345,041
The company that competes most directly with American Greetings is Hallmark.
American Greetings and Hallmark share almost 85% of this industry thus representing a
large portion of the market. With so much market share occupied by these two
companies, it causes other companies within the same industry to focus on product
quality and differentiation. Smaller companies within the industry may not be able to
compete directly with American Greetings or Hallmark due to economies of scale, but
can compete on quality and differentiated products. As seen in the charts above,
American Greetings is a giant in this market. They have nearly twice the sales and
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almost 6 times the assets as CSS, a competitor in this industry but CSS remains
profitable because they have found their niche. CSS owns Berwick Offray, LLC, which is
the world’s largest manufacturer of ribbons and bows.
At last, every firm in the social expressions industry must overcome many
obstacles. Each company must create and niche which sets it apart from the others
within the market. American Greetings relies on brand awareness, innovative and
differentiated products and services, product quality, and competitive prices (American
Greetings 10-K).
Five Forces Model
The porters five forces model is a unique tool designed to evaluate and analyze
the structure, competition, and profitability of a company. The five aspects of a
company it analyzes are rivalry among existing firms, threat of new entrants, threat of
substitute products, bargaining power of suppliers and bargaining power of buyers.
The first three forces assess the degree of potential and actual competition; the
remaining two collectively evaluate the power the firm has over its buyers and
suppliers. When each of these forces is properly assessed the firm can then find its
place in the market and act accordingly. In the following section American Greetings
will be assessed based on the five forces model to identify its place in the market.
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Rivalry among existing firms
In the seasonal greeting card business, just like any industry, the rivalry is
extremely high. There are several factors that inter-company rivalry is based on.
These factors include the level of concentration, industry growth rate, economies of
scale, and exit barriers. Rivalry among existing firms is extremely saturated with
approximately 3000 competitors to choose from, although Halmark is our main
competitor. Halmark and American Greetings share 85% of the seasonal greeting card
business, although there are more than 3000 other competitors Halmark is the only
other company that can compete on the same scale as American Greetings.
Level of concentration
The concentration of the seasonal greeting card industry is quite simple. It is
highly concentrated, meaning that only a few firms control a high percentage of the
market. On the contrary, if an indusrty has a low level of concentration then the
opposite occurs, price erosion starts to take place.
American Greeetings is in an industry that is highly concentrated, about 3000
competitors exist in this market. However, American Greetings and Halmark control
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about 85%. Competition isn’t very substantial with such a high level of concentration
because of the many competitors.
According to page 2 of the annual AM 10-K report there are approximately 3000
greeting card companies in the United States ranging from small “mom and pop”
companies to larger mass scale types such as Hallmark, the leading rival. Because the
level of concentration is so high, it is important for us to be a diverse and competitive
company. American Greetings must have strict control of trademarks, service marks,
trade secrets, copyrights, and inventions. Intellectual property rights are vital for
company growth and our differentiation must be protected.
Industry growth
Industry growth in the greeting card industry is measured by consumer demand.
The growth in the greeting card business in the past 5 years has been on a slight
decline. The threat of companies moving into this market is high. Although the new
entrants don’t compete on the same level as the two biggest market holders, American
Greetings and Halmark, they do compete on quality and specialty/differentiation. New
entrants may be smaller and their products may be a bit more expensive, but they may
offer one-of-a-kind products and other merchandise of the sort. New products have
also been a contributing factor to this decline, such as digital media.
In the past 5 years this industry has been on a steady decline, especially in the
past 18 months to 2 years. Certain factors affecting this sharp drop in the industry may
be due to the electronic card taking off online and text-messaging becoming so popular.
It may be a bit easier to send a “text” or an “e-card” than it is to go to the store, pick
out a card, stand in line, fight traffic, and then might not get together to give the card
to the person. With e-cards and such it’s instant.
Economies of scale
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Economies of scale are the cost advantages that a firm obtains due to expansion.
In the greeting card industry, the size of the company plays a huge role with how well
that particular company does. With the level of competitors being so high everyone is
fighting for a piece of the market, and with American Greetings being one of the largest
greeting card companies in the United States economies of scale definitely comes into
the equation. American Greetings has the advantage of buying in bulk, because they
are such a big company, therefore driving variable costs down. American Greetings is
able to get supplies at a cheaper price thus being able to produce at a cheaper price.
Without a niche in this market small companies have a hard time surviving. The niche
American Greetings has developed is its specialty brands. Because of expansion
American Greetings has made its footprint in this industry a bit larger. The Strawberry
Shortcake and Care Bears brands are exclusive to American Greetings and therefore
provides its niche in the market. American Greetings has a large place in this industry
and controls over 40% of this market.
Exit barriers
According to wikipedia, “barriers to exit are obstacles in the path of a firm which
wants to leave a given market or industrial sector. These obstacles often cost the firm
financially to leave the market and may prohibit it doing so.” In an industry, exit
barriers are high when the assets are specialized or if there are regulations which make
it costly to exit (Palepu & Healy). Exit barriers do exist in this printing industry. The
reason these barriers exist is because large printing press machines are used to print all
the greeting cards. The only way to exit this industry is to sell the equipment used to
another company within the industry looking to expand. These large machines play a
role in exiting the business, because once out of the business the machines have no use
but to print cards, nothing else can be done with the machines they use. Large
machines mean larger fixed costs. Larger fixed costs means a company will operate at
negative net when the business slows down.
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Conclusion
During the past 5 years the greeting card industry has been on a decline, due to
substitutes, which mean that the companies in this industry are fighting extremely hard
for market share. With 3000 competitors in a shrinking market mean that prices have
to become extremely competitive and companies have to distinguish themselves in
order to stay profitable. This is why strict control over intellectual property is so
important.
Rivalry Among Existing Firms High
Threat of New Entrants Low
Threat of Substitute Products High
Bargaining Power of Buyers Moderate
Bargaining Power of Suppliers Low
Threat of New Entrants
Every industry that has any level of competition will always face the threat of
new entrants. The more attractive the industry, based on the ability to make a high
potential profit, the higher the degree of threat companies will ultimately face.
Whenever other companies become considered a threat, the prices of other companies
will go down and possibly even profits. New entrants will usually be at a disadvantage
compared to the successful companies already existing in the industry. Consequently,
newly created companies who wish to enter an industry and make any profit must
research the competition. There are five components that companies will use to
measure the amount of threat new entrants will give. These components are: the
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economies of scale, first mover advantage, distribution access, relationships between
suppliers and consumers, and legal barriers. It is vital that both new entrants and
existing companies use this as a building block in order to have success in the industry.
In the social expression and greeting card industry, new entrants may have a hard time
trying to survive when competing with the larger firms with high recognition brands.
Small firms will not pose a threat to companies such as Hallmark and American
Greetings, who both own 40-45% each of the entire market share. The following are
the conclusions concerning the threat of new entrants in this industry.
Total Assets (in thousands) 2004 2005 2006 2007 2008
American Greeting $2,484,013 $2,524,207 $2,218,962 $1,778,214 $1,804,428
CSS $370,397 $333,906 $334,149 $343,070 $345,041
Hallmark Privately held
Scale economies
Economies of scale refer to the cost advantages and added production efficiency
companies receive when they expand or increase the number of goods being produced.
The chart above shows the number of total assets of the selected firms in the social
expression and greeting card industry over the past five years. However, Hallmark is
privately held and do not release their numbers. But, considering they control 45% of
the market, you can expect them to have more total assets than American Greetings
Corp. In analyzing the economies of scale, companies are able to see if they may be
advantageous and profitable upon entering into this industry. If a certain industry has
small economies of scale, it will help newly created companies achieve success because
of the small cost of entering. However, a new small firm entering into this industry
would see many problems. This industry is dominated by a few main firms who own
nearly 85% of the market space (American Greetings, Hallmark). These main firms
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have been in business for years and have already gained brand recognition and
customer loyalty for the most part. For the customers who are loyal to a brand, they
will tend to give all their business to that certain brand or company, further decreasing
the chances for the newly entering companies to succeed. Also, for the customers who
have no brand of choice, they are more likely to buy a well known brand over an
unknown brand based on the reputation that they have acquired. This will help the
customer’s confidence in knowing he/she bought a good quality item.
When there is international trade, the size of the market increases as well as the
number of firms producing, therefore decreasing the overall costs to each firm. This
particular industry has achieved high economies of scale by concentrating their
manufacturing and selling of products in places outside of the United States such as
Canada, The United Kingdom, Mexico, Australia, New Zealand, and South Africa
(corporate.ameriacangreetings.com/aboutus.html). They also sustained growth through
the invention of events such as mother and father’s day. Some leading greeting card
businesses have expanded into comic books, mail order catalogue and magazine
production, directory printing, board game manufacturing, gift shop and photo studio
operation, and even broadcasting
(http://www.caslon.com.au/egreetingsnote.htm). This allows the firms to produce even
more products, further driving economies of scale.
When there are large economies of scale present, new entrants will at first
always have a cost disadvantage in competing with existing firms. The reasoning being
that they will face the option of having to enter with less than the most favorable
capacity, or having to invest in large capacity which may be costly and drive profits
down and costs up. In order to take any type of role in an industry, companies know
they need an abundance of capital to make an impact. Considering this industry has
large economies of scale, new entrants will have to take a smaller role because of the
lack of capital they will have, in which is needed for economies of scale. This is
important to us considering this will be a disadvantage to new firms trying to enter into
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this greeting card industry. This will help the well established firms, such as Hallmark,
American Greetings, and CSS, to be able to expand further in the market.
First Mover Advantage
The first mover advantage is achieved by the first original occupant in the
industry market space. These occupants achieve an advantage by being able to control
certain resources that new entrants may have a hard time gaining. For example, there
may be patents and trademarks already claimed by current companies such as “scarce
government licenses to operate in regulated industries” (Business Analysis and
Valuation text). Also, first movers may already be involved with certain suppliers who
have certain arrangements for the cheapest raw materials. Early profits earned can be
invested into improving the resource base by finding cheaper suppliers and arranging
agreements with suppliers. This is a main disadvantage seeing as though new entrants
will have to search for new suppliers who may charge a higher price for these raw
materials. Other advantages for first movers are the reputation they will receive over
time and the brand loyalty customers will have after controlling the market for some
time. However, being a first mover does have its disadvantages, for example the
drawbacks of the initial cost and risk. It is expensive to be the first in a market, having
to invest in both research and development, and also market education. This is also
risky because they will not be able to gain knowledge from other preceding companies
who have made mistakes are had success. To be a first mover would only make sense
if its rewards outweigh the risks.
In this particular industry, there would be a high advantage in being a first
mover considering two main companies make up most of the market space. These
being Hallmark and American Greetings, which have been around since the early
1900’s. Also, in being the larger and more established firms, this allowed Hallmark and
American Greetings to gain brand recognition and occupy product space that
newcomers may see and end up avoid entering. Customers are more likely to buy the
products and brands they know and have trust in, rather than newer entrants to the
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market. This industry also has a first mover advantage because of the high learning
costs of having to know your target audience and staying up to date on the political and
social issues that concern society, which are constantly changing. In considering all of
the details of “first mover advantages,” new entrants would have a difficult time in
trying to gain this advantage and therefore would not pose a high threat. First mover
advantage will also allow the company to price their products at a premium considering
they are of the only companies offering products within the market. Profits will reflect
first mover advantage based on the fact that there are no similar products being offered
during this time. Once new companies enter the market, profits will decline because the
level of competition will rise and the premium prices can no longer be taken advantage
of. However, brand recognition and reliability will allow for profits to be consistently
higher than competitors, even though they will not be as high as before. Many
customers will still buy the same brand based on the establishment this company has in
their particular market.
Distribution Access and Relationships
Having good relationships with the distributors and suppliers of your product can
be very crucial in any line of business. New entrants to a long lived industry will find out
that they will have barriers in trying to establish relationships with the supply and
access chains. There will always be existing relationships between firms and customers
of an industry which will make it difficult for new firms to enter into an industry. In
order to be profitable and well serve their customer base, new entrants will need to
spend a high amount of capital in order to start relationships with the distributors and
suppliers.
In the social expression and greeting card industry, the main customers are not
only supercenters such as Wal-mart, K-mart, and Target, but also local drug stores in
nearly every town such as Walgreens. There is constrained capacity in the current
distribution channels, and new channels of distribution are very costly to establish. This
is due to the fact that the industry is in decline (based on the decrease in total assets
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and total sales volume growth over the past five years). Relationships with customers
are a moderate factor in this industry due to the fact of the different interpretations
customers will have on the numerous products that the firms in this industry offer. For
example, if a customer reads a birthday card and finds out that it is funny, enjoyable,
exactly what he or she is looking for, they may still not buy it based on the brand
loyalty for some other card. However, relationships with key suppliers and distributors
in this industry are of a high factor. This is considering the industry is declining and also
that two firms make up most of the industry. Suppliers and distributors will be less likely
to give business to new entrants based on their ability to pay suppliers. Since 85% of
the market is taken, new entrants will have a hard time earning any profits because of
the relationships that already stand with the existing firms in the industry.
Legal Barriers
Legal barriers do act as a powerful restraint to new entrants into the social
expression and greeting card industry. The greeting card industry has become a
worldwide business and doing business internationally can be very complicated. Laws
change dramatically from country to country. Government agencies have placed
limitations on business between countries. Companies trying to enter the market would
have difficulties knowing the current policies in place since they are ever changing. In
this and almost every industry, there will be numerous legal barriers that managers of
firms must take into consideration. This is especially true if this firm is trying to enter
upon a new industry.
Some examples of such legal barriers would be: contracts with suppliers and
distributors, patents for new technology, trademarks, licensing agreements, certain
zoning and real estate permits needed for operations, health and safety regulations,
copyrights, etc. In this particular industry, there will usually be contracts with the
suppliers and distributors of the paper they use for the greeting cards. However,
American Greeting Corp. “generally do not have long-term supply contracts and some
of our imports are subject to existing or potential duties, tariffs or quotas” (10-K, page
7). This implies that although subject to currency and foreign exchange risk, any
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disagreements that come about can soon be changed, considering they have no long-
term contracts. If long-term contracts are used, American Greetings is at a cost
advantage. If tariffs are increased in the long run, they will not have such an impact as
they would under long-term contracts. Licensing agreements and patents already exist
for all the internet business that has helped profits in this industry. For example,
American Greetings has a Tumbleweed Inc. patent for their online greeting card
deliveries. “This agreement will enable AmericanGreetings.com to license Tumbleweeds
patented personalized URL (PURL) technology for delivery of greeting cards over the
internet” (http://www.tumbleweed.com/news/press_releases/2001/2001-12-14.html).
Also, American Greetings has sold some of its licenses to other people in the industry:
“With the sale, American Greetings Properties—the entertainment and licensing
division of American Greetings- will continue its efforts further developing the
licensing, marketing and promotional programs for its other franchises. These
include the greeting card sensation Twisted Whiskers, 80’s sensation Mad Balls,
Holly Hobbie, TinPo, and its new preschool property Maryoku Yummy.” (Wall
Street Journal article, July28th)
Overall, the legal barriers to entry in this industry are high. This is because there
are many licensing agreement with suppliers and distributors that already take place
with the companies with the industry. Also, the internet has been used for much of the
revenue these companies obtain. Patents for new technology are needed and are of
high importance to any new entrant to the industry. Some legal barriers, such as
patents and copyrights, can both increase and decrease profits for a company. For
example, if one company has a copyright on the most popular brand, they will benefit
because no other company can produce this exclusive brand. The majority of
consumers will want to buy this product, therefore resulting in having increased profits
for the firm. On the contrary, the companies who are not able to produce this popular
brand will need to lower their prices in order to compete.
Conclusion
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Overall, we believe that the threat of new entrants in this industry is low. First,
by looking at economies of scale, this industry will already have firms who have
obtained economies of scale considering two firms make up approximately 85% of the
overall market. New entrants will at first always have a cost disadvantage in competing
with existing firms. They will face the option of having to enter with less than the most
favorable capacity, or having to invest in large capacity. Also, the first mover advantage
will allow the big corporations to earn abnormal profits in which new entrants would not
pose any threat. These existing corporations will already have the relationships with
suppliers and distributors this way and also gain brand recognition with the consumers.
The relationships new entrants will try to gain with suppliers and customers will be hard
to achieve as a new entrant as suppliers, distributors, and consumers will have
recognized a “main” brand already and may stay loyal to a certain company. With the
internet being a main part of the greeting card business today, there will be many legal
barriers to new entrants such as the patents for new technology as well as licensing
agreements.
The Threat of Substitute Products
Substitute products within the greeting card industry are one of the greatest
threats. Considering there are so many competitors, each company has to compete on
differentiation and offering products at a better cost than the competitors. It is
important for companies to establish innovative technologies in the products they
produce. The reason it is important that these innovations are established is to
distinguish themselves from the other competitors. American Greetings along with
Hallmark share 85% of the greeting card industry, although there are 3000 other
competitors. American Greetings main threat for substitute products is with Hallmark.
Switching costs remain relatively low for customers because there are so many
competitors in the greeting card industry. Although American Greetings and Hallmark
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may be able to offer products at a cheaper price than a small “mom and pop” card
company, the customer possesses the right to go to many other suppliers. The two
qualities that could effect the customer’s decision in the greeting card industry could be
the message actually on/in the card or the quality of paper. If people are going to
spend so much money relatively on a card, they are going to want it to convey exactly
what they want and they are going to want the card to last a certain amount of time.
Relative price and performance and the buyers willingness to switch are two of
the main attributes that determine the threat of substitute products within this industry.
In such a saturated market, innovation is heavily relied on considering the low level of
differentiated products. Successful companies will be the first to make use of the
newest technologies and invest heavily in R&D within the industry. This industry will
have a high threat of substitute products because of the abundance of companies
offering a relatively similar product. Also, in considering that the switching costs in this
industry are low for consumers, this will allow for customers to switch more easily if a
substitute product is offered.
Relative price and performance
Price and performance are factors that greatly affect the greeting card industry.
As I mentioned above, message and paper quality play a big role in this industry, with
the message being one of the key roles. What this means is that companies pay huge
fees to authors to write the messages contained in the seasonal greeting cards. If the
messages are long, well thought out, and beautifully written, then it is going to cost a
bit more to produce. Everyone has been to the card shop and has seen cards that may
say, “You’re stoopid, Happy Birthday.” This contains hardly any thought but is still
effective and funny. This may not cost a lot to produce. However, people have also
seen cards that may be more elaborate and have a quality message which may cause a
higher author fee resulting in higher production costs. This is a factor that can
definitely raise or lower the price of the card.
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Another factor that can have an effect on the card price is paper quality. Paper
quality is important because this is the ingredient that can determine the life of the
card. The heavier the paper, the longer the card will usually last. Customers want to
have something that will harness the memory and last forever. A cheaper card may be
a little lighter, which would mean it is more susceptible to the elements such as dirt and
the wear and tear on the card. However, a heavier card is more durable and can handle
the weather more effectively. Just about all the greeting card companies offer the same
basic commodity, a card with a message. Some companies don’t even put a message
in their cards, yet they are charging a premium. Reason being, it may be that the
company paid a high price for the art contained on or within the card.
Buyer’s willingness to switch
In the greeting card industry, companies offer the same basic variety of
products, in which they will have to present the customer with an attractive price. For
instance, customers who are looking for an anniversary card may be willing to shop
around and find the lowest price card that would portray the same message. Price
sensitivity is a factor when considering the buyer’s willingness to switch. However,
some people do not like spending time shopping around. In this case, they may find
themselves at any store, choosing a card that doesn’t meet their particular satisfaction,
and end up paying a premium for it. This is why price sensitivity plays a role. The
store is going to want to attract the customer in, but at the same time the store is
going to need to offer quality products.
Conclusion
The threat of substitute products is definitely present. In today’s age the
greeting card industry is slightly declining due to substitute products available.
Substitute products that have surfaced in the past 5-7 years include text messaging and
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e-cards. These two substitutes have driven card companies to enter other markets. It
is much easier to send someone an e-mail containing a virtual card than it is to travel to
a store and go through the motions. You might not even be able to give them the card
on their “special” day. Also, the relative price and performance heavily influences the
demand for a specific product. If the price of a product does not fit within the
customer’s budget, the threat of a substitute product may present itself which may
decrease the overall profitability of a company. Therefore, companies within the
greeting card industry must constantly be forward looking by using innovative
technology advancement to create quality customer satisfaction.
Bargaining Power of Customers
The business strategy of social expression product companies is affected by the
bargaining power of buyers. If buyers hold a great deal of bargaining power,
competition will increase among industry competitors. This will most probably cause
companies to use a low cost strategy in order to compete. If buyers hold less
bargaining power, companies are less restrained and can more freely choose their
business strategies. In the social expression product industry, buyers mostly consist of
mass retailers like Wal-Mart and Walgreen’s. The following paragraphs will discuss the
three major factors that determine the bargaining power of buyers.
Price Sensitivity
Price sensitivity is the weight a buyer attaches to the price of a product
compared to its cost. This determines whether the buyer will bargain for a better price
of the product being sold. When examining the social expression product industry, there
are only two brand-recognized companies along with high switching costs to the buyer.
This suggests the industry has low price sensitivity. In contradiction, the industry seems
to be highly price sensitive due to the large number of competitors and price sensitive
buyers.
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The first argument claims the industry to be less price sensitive. According to
American Greetings most recent 10-K, the industries main customers are “comprised of
mass merchandisers, chain drug stores, and supermarkets.” Since mass retailers are
the major buyers, the industries products only pertain to a small fraction of the buyers’
cost. Therefore, mass retailers are not likely to spend the money to search for new
suppliers. Also, they are less likely to stray from their brand-recognized suppliers.
Another characteristic to consider is the seemingly monopolized market.
American Greetings and Hallmark consist of over 85% of the market have well-known
brand recognition. Brand-recognition carries quality and reliability with it. Since these
companies cover such a large part of the market, it is easy to assume they have
dependable resources and employees to make the best possible cards. This causes
switching costs to be high, thus, causing price sensitivity to be low. For example, if
Hallmark rises the price of cards by twenty-five cents, Wal-Mart will be hesitant to
restock their inventory with a lesser recognized companies products.
The second argument claims the industry to be more price sensitive. First, this
industry is mostly undifferentiated. This causes switching costs to be low, therefore,
causing price wars to partake between companies. For example, if two companies
make similar birthday cards but one is a dollar more expensive, a company will most
likely choose the least expensive one and use it as a price advantage within its retail
stores. Also, to add to the argument there is over 3,000 companies within this
particular market. It would be easy for a company like Wal-Mart to restock their
shelves with similar cards at a lesser expense.
In conclusion, this market is mostly less price sensitive. Even though there are
many competitors, two major brand-recognized companies dominate approximately
85% of the market. These two companies dominion over the other competitors also
bear strong brand-recognition. In addition, brand-recognition makes switching costs
higher for buyers. Moreover, the market is more differentiated than assumed because
of the two major competitors. Since these competitors are more superior to the others,
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they are able to have higher quality products. Furthermore, these companies are able
to hire better employees that improve the content of the products.
Relative Bargaining Power
The bargaining power of customers determines whether they can keep low
prices. The ability of customers to keep these low prices depends upon the cost to each
party of not doing business with the other party. Bargaining power is determined by a
variety of factors: The number of buyers relative to the number of suppliers, volume of
purchases by a single buyer, number of alternative products available to the buyer, and
the buyers’ costs of switching from one product to another (Business Analysis &
Valuation, pg. 2-5).
In the card industry, the major customers consist of mass retail companies and
chain drug stores, such as Wal-Mart and Walgreen’s. The bargaining powers of these
mass retail stores are relatively low because of the low number of trusted suppliers to
buyers. As explained above, even though these customers can easily take their
business elsewhere, it would include a high switching cost because of the brand-
recognition. Also, in the ever-changing environment of “social expression products,” the
highest quality of new products is found within the top companies. These companies
include large numbers of well-educated employees with new ideas. Therefore, these
companies usually receive first option for new products and technology available. Also,
they usually are first to patent new products and ideas, giving them a competitive
advantage in the market over other competitors. For example, American Greetings
patent with Tumbleweed for the process of using a URL for e-card sending. According
to a Tumbleweed press release:
“The licensing agreement covers AmericanGreetings.com offerings that provide
for or facilitate document delivery over the Internet, and that include the
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provision for sending an email delivery notification to the recipient with a URL
unique to the recipient and the delivery (Tumbleweed Press Release, Page 1).”
This competitive advantage gives companies with patents on new products and
techniques bargaining power over the customers.
In comparison, mass retail stores have moderate bargaining power because of
the volume of purchases per buyer. If customers decided to switch between suppliers,
it would have a large impact on the card industry. The problem is that only a small
amount of companies are able to support the volume of products that mass retail stores
need. Therefore, the bargaining power lies within the hands of the main competitors
within the industry.
Bargaining Power of Buyers Conclusion
The companies have moderate bargaining power over the customers. Since
there are high switching costs and moderate product differentiation, it would be slightly
difficult for buyers to bring their business elsewhere. Also, given that two brand-
recognized companies cover approximately 85% of the market, it is difficult to find
another business to handle the required inventory and quality that mass retailers
require. Again this proves that the companies have a greater bargaining power.
Bargaining Power of Suppliers
American Greetings mass produces and sells greeting cards for every holiday, season,
and special occasion. American Greetings’ main raw material involved in the production
of our merchandise is paper. There are many mass paper producers in the United
States for American Greetings to choose from. Some examples of large paper producers
are American Fine Paper Company, Boise Cascade, and FiberMark, but there are many
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others located in the United States. The suppliers with the most bargaining power in the
industry are the suppliers who offer the best quality product at the lowest price
possible. In American Greetings’ industry switching costs are low, so a supplier must
have a quality product.
Switching Costs
American Greetings’ and its competitor’s main components in its products are different
grades of paper. Since paper is a low commodity product switching costs are low. The
industry that American Greetings competes in purchases paper from large commercial
paper companies, and then has it shipped directly to its warehouses for printing. The
competitors in this industry are going to purchase paper from the supplier that offers
the lowest price and the lowest shipping costs. If American Greetings decided to change
suppliers very suddenly for whatever reason, they could easily start up a relationship
with a new supplier for a low price since paper is not a specialty good. Switching costs
are not an advantage that paper suppliers have over the industry; American Greetings,
Hallmark and CSS, have the competitive advantage. Also, the industry is not limited to
just one paper supplier. Different locations of suppliers are important because of
shipping costs. Card companies are obviously going to have a different paper supplier
located in England, rather then shipping paper there to be manufactured into greeting
cards.
Number of Suppliers
American Greetings is in an industry that is provided with many different suppliers, and
this is a good thing for our business. One reason that it is good to have many suppliers
is that the suppliers will compete with each other to provide a lower cost of paper.
Another reason that having many suppliers is a good thing is because it minimizes
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switching costs. “American Greetings generally does not have long term supply
contracts (10-K, p. 7).” One of the reasons that American Greetings does not have long
term supply contracts is because having the option of switching suppliers quickly and
affordably is an advantage. American Greetings would not have this advantage if it sold
specialty products and if there were a limited amount of suppliers. However, it is very
important that the paper industry is running well because paper is our primary raw
material. Different regulations regarding environmental issues could easily drive the
costs of producing paper up, and that could result in many paper producers having to
shut down. Then the number of paper suppliers would shrink and they would have a
bargaining power over American Greetings.
Bargaining Power of Suppliers Conclusion
American Greetings has the overall power over suppliers in the greeting card industry.
One reason for this is that American Greetings is such a large corporation in the
industry. “We believe that we are one of only two main suppliers offering a full line of
social expressions products, together, are estimated to encompass approximately 85%
of the overall market (10-K, p. 2).” American Greetings needs large amounts of paper
products to stay in business, and are definitely a large customer for any of the major
paper producers. Since switching costs are low for American Greetings, major paper
suppliers should try to keep their products low-priced and of the suitable quality. If one
of American Greetings’ suppliers does provide poor quality paper, then American
Greetings can find a new supplier very quickly.
Competitive Strategies
In order for a firm to remain profitable in the greeting card industry certain strategies
must be taken advantage of. Because of the many competitors in this industry, a firm
must rely heavily on brand image and superior quality to differentiate themselves from
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the other competitors. American Greetings, together with Hallmark control more than
85% of the market with the remaining 15% occupied by more than 3000 other firms.
For future growth in the greeting card industry, it is important to offer a superior
product at a lower price than the competition. With a slight decline in industry growth
over the past last 5 years it is also important to find new areas of the industry to
explore while at the same time creating new ways of offering products. If a firm wants
to stay competitive in the greeting card and social expressions market, it must invest a
great deal of capital in media such as, artwork for the cards. It is also important to
invest in the authors that write the cards so customers can express the message they
are trying to send. This is a main reason that American Greetings invests so much
money into the protection of intellectual property such as copyrights and patents. It
must also invest a great deal of capital into the protection of its’ licenses. If American
Greetings is unable to protect such property then it will find profits declining.
Superior Quality
In the greeting card industry it is important to have a superior quality product. The
reason superior quality is important is due to the fact that if a product is comprised of
cheap materials then it will not last as long and customers will look elsewhere for a
more durable product. The weight of the card is important because a higher quality
paper means the greeting card will have a long life. A superior product is important
because that is an attribute that will keep customers returning. The greeting card is not
unique when it comes to this idea. Brand image is also relied on. American Greetings
has been in business since 1906. They have created many new ideas and capitalized
on such brands as Strawberry Shortcake and Care Bears. American Greetings is a
recognized brand, therefore customers continue purchasing products produced by
them. A great deal of emphasis has been placed on the above items which creates
recognition within this industry.
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Superior Product Variety
The most important way a company can make themselves stand out amongst the many
competitors is through product variety. American Greetings offers a great deal of
variety to its customers. As mentioned above Strawberry Shortcake and Care Bears are
the two most recognizable characters produced by American Greetings. Strawberry
Shortcake was purchased by American Greetings in 1977 and has been the cause of
major trends in the early 1980’s. Care Bears were also created by American Greetings
in the early 1980’s and have developed into a clothing line as well as 3 feature films.
Not only does American Greetings offer such recognizable characters, but in the last 10
years they have crossed over into the digital mainstream with the creation of AG
Interactive in 1999. AG Interactive is an online media studio that is responsible for
bringing American Greetings into the present day. Customers can access AGI online
and create 100% original greeting cards and have them sent to people throughout the
world via e-mail. Text messaging services are also offered for an instant greeting at the
touch of a few buttons. This superior product variety eliminates the threat of
substitutes that may be offered by the other competitors within the industry. First
mover advantage plays a role in this concept.
Creativity and Innovation
As discussed earlier, creativity and innovation play a big role in developing the superior
product variety. American Greetings saw a need to offer e-cards so the capitalized on a
young online opportunity and created AG Interactive. Text messaging was becoming
popular so they took step in order to establish a footprint in the texting service industry.
A customer can now purchase a tangible product or they can send an e-card instantly.
They still produce greeting tangible greeting cards but they have just opened up new
ways of creating and delivering their products.
Conclusion
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The competitive advantage created by American Greetings is really distinguishes them
from the other competitors within the typical greeting card industry. This is a new day
and age and firms must always be looking out for ways to create brand recognition.
First mover advantage, superior product quality, and superior product variety are ways
of establishing a name for yourself of rejuvenate a slightly declining industry through
different forms of media not offered before. American Greetings has created and
innovated new ways to bring life back into the greeting card industry.
Firm competitive advantage
American Greeting is among the industry leader for good reason; it controls
almost 45% of the greeting card market. As mentioned before, it is vital for growth
within this industry to maintain a certain set of standards. Money spent on innovation
and creativity is necessary to stay profitable and maintain market share. American
Greetings for example, has invested in R&D and has partnered up with Tumbleweeds,
Inc. to provide e-cards to people around the world. Tumbleweeds is on online secure
document delivery service that gives people the opportunity to send e-cards all over the
world, with over 25 million visits to the website monthly. They have effectively become
the frontrunner for digital media.
Superior quality
Over a hundred years ago, American Greetings, Inc. was established. Since
then, American Greetings has incorporated the highest standards into its products.
From paper quality to the investment put into the messages, to the art that is contained
within the cards has always been of the highest quality. This has been a driving force
behind American Greetings products since becoming a company. Another way
American Greetings tries to distinguish itself, as mentioned above, is to offer a superior
product that has a lower cost than competitors. This includes, but is not limited, to
paper quality, investment, and protection for products offered.
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Superior variety
Variety must be attained within the greeting card industry to remain profitable.
American Greeting has acquired a large market position because they have invested in
creativity and innovation, and basically cornered the market in the digital sense. E-
cards, among other factors, have given American Greetings a unique position because
they have partnered up with Tumbleweeds, Inc. to provide digital media to its
customers. In the last ten years, this has been extremely important for them,
considering so many people in the world are now online. This convenience has
propelled this particular market.
American Greetings has also created AG Interactive which is a web based service
that provides custom e-cards that the customer can create that are 100% original. This
has been the fastest growing division in the 102 year existence of the company. With
so many people wanting to receive and send things fast, it is no wonder why this has
been such a success. “AGI, with its own industry-recognized technology and creative
studios, hosts over 3.4 million subscribers who send electronic greeting cards across the
globe. In addition, over 200 million cell-phone users and instant messages share 30-
second sentiments of love, friendship, and fun”, according to the history of the
company on their website. This venture has been one of the key products that have
set American Greetings apart from the other major greeting card companies.
There are many different aspects of the social expression and greeting card
industry that American Greetings has involved itself in. Some of these are:
Tumbleweeds, Inc., the creation of AG Interactive, and the exclusivity of the Strawberry
Shortcake and Care Bears brands. Tumbleweeds, Inc. allows American Greetings to
send digital media throughout the world. The creation of AG Interactive has allowed
customers to create original social expressions. The Strawberry Shortcake and Care
Bears licenses have allowed American Greetings to increase brand recognition
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worldwide. These all have given American Greetings the product variety needed in
order to maintain market share in the seasonal greeting card industry.
Creativity and innovation
Greeting Cards have stayed about the same for the last hundred years, folded
paper with messages within. Creativity and innovation have become such a pivotal role
in that if you don’t distinguish yourself from the proverbial herd, then you risk losing
giant revenues that other companies generate. In 1977, American Greetings acquired
the Strawberry Shortcake brand and has since made huge profits off its licensing. In
the 1980’s, Strawberry Shortcake was a huge trend, therefore establishing its creativity
in the market place. In 1981, American Greetings created the Care Bears characters
which have been extremely successful, spurring the creation of feature films and a
clothing line. First mover advantage plays a key role in creativity and innovation, due
to the fact that you must remain innovative to remain profitable in this business, like
any other.
In 1999, American Greetings decided it would be a profitable move to create AG
Interactive, an online media studio. AGI is responsible for allowing customers to create
and send cards via e-mail through Tumbleweeds, Inc. The growing online community
and the easy transfer of digital media can be contributed to the creation of this
subsidiary. The creation of AGI has definitely given new wind to the seasonal greeting
card business. Now customers have the option of going to a store to purchase a card,
or they can simply access the AGI website and create something completely original.
They may also use the website to create custom text messages. “AGI, with its own
industry-recognized technology and creative studios, hosts over 3.4 million subscribers
who send electronic greeting cards across the globe. In addition, over 200 million cell-
phone users can access and instantly share 30-second sentiments of love, friendship,
and fun.” (AGI website).
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Formal Accounting Analysis
In order to understand the correct value of a firm one must research the
financial information provided. It is very important that the accounting records provided
are correct and accurate. The Generally Accepted Accounting Policies (GAAP) are the
guidelines that companies are expected to follow when reporting their accounting
information. There are six steps that are used to analyze the accounting policies. These
steps are to identify the accounting policies, identify accounting flexibility, evaluate the
accounting strategy, evaluate the quality of disclosure, identify all of the red flags, and
undo any accounting distortions. All of these steps are important because this is how
any accounting mistakes can harm potential investors. In order to value a firm
correctly, all of the accounting must be accurate and not distorted.
Key Accounting Policies
The key accounting policies are related in ways that affect the manner in which
the assets and liabilities are stated on the balance sheet. A company’s key accounting
policies are directly related to the key success factors discussed in the business analysis
section. This is important because it is a method a company uses to make their
company look more profitable by overstating assets or less in debt by understating
liabilities. The key accounting policies directly related but not limited, to American
Greetings are pension plans, capital leases v. operating leases, revenue recognition, and
goodwill. These accounting policies are present throughout the industry and American
Greetings does follow the industry trend of transparency. These policies are important
to know and understand because they are behaviors companies use to make
themselves look more valuable than they actually are. Without knowledge of these
policies it would be easy for a company to manipulate the numbers to add value. After
44
all, these numbers are controlled by managers, and management always has an
incentive to add value to the company even though it is not present.
Pension Plans:
A pension plan is a means a company uses to provide security for the employees
after they leave the company. It is a stream of income an employee receives after
retirement and the way a corporation computes the plan that can have a major impact
on the bottom line. Other than retirement plans a company, a company utilizes health
care packages and vacation plans.
Since 2006 American Greetings has gone through a major change. During that
year, September to be exact, the FASB issued SFAS No. 158 (SFAS 158), “Employers’
Accounting for Defined Benefit Pension and Other Post Retirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” As of February 28,
2007, SFAS 158 requires an employer to recognize a plans funded status in its
statement of financial position, measure a plan’s assest and obligations as of the end of
the employers fiscal year and recognize the changes in a defined benefit postretirement
pland funded status in comprehensive income in the year in which the changes occur.
(American Greetings 10-K) American Greetings uses a noncontributory plan for most of
its United States employees, with contributory 401(K) provisions.
American Greetings has used a discount rate of 6.25%, 5.75%, 5.5%, 5.75%,
and 6.5% for the years 2004, 2005, 2006, 2007, 2008 respectively. According to the
FED, historical treasury bills carried an interest rate of 4.27%, 4.29%, 4.80%, 4.63%,
3.78% for the years 2004-2008, respectively. American Greetings is keeping with the
trend of increasing or decreasing their pension plan discount rate with the rise and fall
of the Treasury bill rate.
CSS, on the other hand has chosen a more general approach to raising or
lowering their discount rate. In 2004 and 2005 the rate used by CSS was 5%. In 2006
45
CSS chose to raise their discount rate to 6% and it has remained at 6% for the past 3
years.
The significance of the two different approaches is quite simple. American
Greetings takes a more accurate approach when dealing with the matter of the pension
plan discount rate. The numbers better reflect what is being contributed based on
historic data and can therefore more accurately forecast future contributions.
According to page 71 of the American Greetings 10-K, “for 2008 the corporation
assumed a long-term asset rate of return of 7% to calculate the expected return for the
postretirement benefit plan. In developing the 7% expected long-term rate
assumption, consideration was given to various factors, including a review of asset class
return expectations based on historical 15-year compound returns for such asset
classes. This rate is also consistent with actual compounded returns earned by the plan
over several years.”
The discount rate used to calculate the contributions towards the pension plan is
based on long-term rate of return on current assets, equity securities, and debt
securities as well as previous returns. American Greetings chose to use a 7% discount
rate assumption for postretirement benefits. The adjustments for adoption will be
unrecognized actuarial losses and be reflected in accumulated other comprehensive
income. In the years following the adoption of SFAS 158, unrecognized gains will be
reflected in comprehensive income. As indicated in the chart on the following page,
notice how American Greetings discount rate for pension plans move in a negative
relationship with the U.S. T-Bill risk free rate.
46
Capital leases V. Operating leases:
A key accounting principle that can greatly have an effect on liabilities is the use
of capital leases and operating leases. When a company uses capital leases for
instance, it recognizes the lease as an asset which increases liabilities. Over time a
capital lease is depreciated and therefore can be written off the books. An operating
lease on the other hand is kept off the balance sheet by treating it as an expense.
Because of this practice, an operating lease can greatly reduce the amount of liabilities
a company actually is responsible for. American Greetings has operating lease
payments of $34,156,000 due in 2007, $30,115,000 in 2008, $30,986,000 in 2009, and
$23,829,000 in 2010 with a steady decline in future years (American Greeting Corp. 10-
k).
American Greetings also capitalizes leases. American Greetings owns
approximately 10,000,000 square feet of space which 150,000 is leases. As far as
assets go, American Greetings have extremely positive assets because ownership of
buildings which contain equipment used for production are kept on the books. The
operating lease payments are only 1.89% of total assets, which is a very small
percentage of total assets. According to the AM 10K, they use a straight line method
of 25-40 years for the depreciation of buildings and other time amounts for the
depreciation of other assets. There are approximately 414 retail stores that carry our
products and we have agreements with third parties to satisfy the leases.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2004 2005 2006 2007 2008
American Greetings
CSS
T‐Bill Rate
47
Return Revenue Recognition:
A key accounting policy that has an effect on the books is return revenue
recognition. What this means is that when American Greetings sells its inventories to
an unrelated third party retailer, the sales are recorded at the cost close to the date the
product is received also known as ship-to-arrive date. When this occurs it is the
responsibility of American Greetings to account for sales returns. During the high
volume of products produced during the seasonal months the merchandise is sold with
a “right of return” on unsold items for third party retailers. Manipulation is possible if
the right allowances are not considered, meaning that items may not be accounted for
during the preparation of the books which can lead to the understatement of liabilities.
On the contrary, items sold to company owned stores are sold generally without the
right of return. Credits are given to damaged items also including obsolete items as
well. Return revenue is also recognized by the licensing of the “Care Bears” and
“Strawberry Shortcake” brands. This accounts for a large portion of return revenue due
to the fact that American Greetings owns the right to these products. Return revenues
from agents are paid quarterly to the company and are required a minimum royalty
from said agents.
The key significance of this policy is for tax purposes. In June of 2006, American
Greetings adopted EITF 06-3 which states, “How taxes collected from customers and
remitted to governmental authorities should be presented in the income statement (that
is gross v. net presentation).” The main component of this policy includes any tax
assessed by governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer, according to the AG 10-K. If taxes
subject to this issue happen to be significant then that company is required to disclose
that information or accounting policy for presenting taxes and the taxes are recognized
on a gross basis. Since American Greetings records such taxes on a net basis the
adoption of EITF 06-3 has no impact on the company.
48
Foreign Currency Translation:
A very difficult part of business is when a company trades over seas they must
deal with translating the foreign currency into U.S. dollars. A company recognizes the
translation at the time the transaction takes place. Assets and liabilities are converted
into dollars using the exchange rates in effect at the time the consolidated statement of
financial position is presented. Revenue and expense accounts are translated using an
average over the related period. Translation adjustments are reflected as a component
of shareholders equity. Because of this practice a loss or a gain is inevitable due to the
fact that currency adjustments will always take place. Also, gains and losses resulting
from foreign currency transactions, as well as intercompany transactions that are not
considered permanent investments are included in net income as incurred. Flexibility is
very difficult, a company must invest in futures contracts to hedge against the potential
loss due to converting foreign currency into dollars.
In 2006, American Greetings had a loss due to the effects of exchange rate
changes of $1,924,000. In 2007 and 2008 the company had gains of $4,507,000 and
$7,758,000, respectively. Although American Greetings does not hedge against foreign
currency translation losses,
Conclusion:
When looking at financial statements one must keep in mind the key accounting
policies. These are the areas that need to be looked at in order to form a educated
opinion about the growth potential of a company. On the contrary, these are the areas
that can also be manipulated or inflated on the financial statements to give a
misleading idea about the company.
When looking at the policies American Greetings takes into consideration it is
possible to gather how transparent a company is. Revenue recognition is conservative
due to the fact that they report on a net basis. Pension plans have fluctuated with the
49
historical T-Bill rates, rising and falling in negative relationship. Operating leases are a
small portion of total assets which makes the estimated value of the company much
more accurate. Based on the key policies identified it is a safe argument that American
Greetings is conservative when reporting financial data.
Degree of Accounting Flexibility
Flexibility is important to managers and their decisions because it gives them a
chance to manipulate the overall accounting strategy. When it comes to accounting
there are two basic forms, conservative and aggressive. Conservative accounting is the
practice of recording assets at the historical cost therefore misrepresenting the true
value of assets and overstating expenses. Flexibility of a firm determines the quality of
information made available to investors. This information is very important when
investors are determining what financial position the firm is actually in. Having more
flexibility within a firm gives managers a chance to make the numbers reflect a position
that may look good to investors but in actuality aren’t. The firm could be in a more
disastrous position than what is stated. A prime example of managers taking
advantage of flexibility is Enron. Although it looked wonderful on paper, it was actually
in a position of turmoil. FASB regulates through the SEC what the firms within a
particular industry have flexibility over. For instance, leases and pension plans have a
degree of flexibility through arrangements and discount rates, respectively. On the
other hand research and development have no flexibility and must be expensed,
therefore not being able to carry R&D on the books as an asset. The flexibility that
arises out of the seasonal greeting card industry are pension plans, operating and
capital leases, goodwill, and foreign currency translations.
Pension Plans flexibility:
50
Pension plans are recognized as a key accounting policy in the seasonal greeting
card industry. The reason these policies exist and why they are so important is because
it gives the employees a sense of security for post-retirement life. Flexibility exists
among pension plan liabilities. The area where the most flexibility is present lies on the
discount rate used to handle the funds because this determines the contribution
required from the company. If the discount rate where to decrease then the payment
contributed by the company would increase and the opposite would happen if where
changed. The value of the firm can be distorted based on this principle due to the fact
that if payments increase then the expenses would increase therefore taking away from
the net income of the company. In 2006 American Greetings adopted SFAS 158 which
states, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement
Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). In the past
companies were required to only report the prepaid expenses contributed to the fund, it
did not take into consideration the money that was to be paid out over the course of
the retirees post-retirement life. This process could have a big impact on the value of
said company. For instance, if a company only accounts for the cash given to the fund
then it could have a noticeable influence on the bottom line, the company would
actually be valued lower than what is stated in the financial statements. Companies are
now required to state the full-funded status of the plan, meaning that liabilities will be
much higher than what would have been stated prior to the adoption of SFAS 158. It
now accounts for all the cash given to the fund and all accrued funds that must be
acquired for the employees benefit after retiring.
Goodwill:
Goodwill typically represents a large amount of a company’s net worth. This is
why understanding a company’s accounting policies and flexibility for goodwill is
important to investors. Companies containing goodwill include a great deal of flexibility
in the reported values within their statements. Until 2002, goodwill was amortized over
its useful life. Beginning in 2002, the GAAP changed this rule and adopted the FASB
51
142. This rule states that goodwill is no longer allowed to be amortized, but has to be
tested for impairment each year. The test for impairment was set up as an attempt to
prevent companies from overstating assets, equity, and net income values. It does this
by making companies take more forceful steps in writing down goodwill’s value within
their financial statements. The impairment test includes two-steps. The first step tests
whether goodwill is impaired, “by comparing the fair value of a reporting unit to its
carrying amount” (appraisaleconomics.com). Goodwill is impaired if the fair value of
goodwill is less than its carrying value. The second step is only essential if goodwill is
found to be impaired. Even though the impairment test takes an aggressive stand on a
companies reported goodwill value, “it is possible for the allocation process to be
manipulated for the purpose of avoiding flunking the impairment test”
(appraisaleconomics.com).
The impairment test still gives corporations a large amount of flexibility when
reporting goodwill. The fair market value, used in reporting impairment, is not required
to be reported on the financial statements. This provides companies with a large
amount of flexibility in the accounting process of reporting goodwill. Also, this flexibility
helps companies avoid write-offs of goodwill. By avoiding write-offs of goodwill,
managers can delay the write-offs and expense it through the income statement.
Doing this would overstate equity and net income. Even though this manipulation may
help the company within the current year, the following year could result in a lowered
EPS.
Capital leases v. operating leases flexibility:
There is some degree of flexibility when dealing with capital leases versus
operating leases. An operating lease is an expense which can be kept off the balance
sheet because the company does not own the property; they are just paying for the use
of the property. A capital lease on the other hand is put on the balance sheet and can
decrease the opportunity for growth due to the fact that liabilities are increased a great
52
deal. There are several factors that separate these two items; this includes benefits
and burdens on both. An operating leases is good to enter into so you can expense
costs which would otherwise be capitalized. For instance if a company uses a great
deal of operating leases then wont get stuck with the taxes and depreciating expenses
associated with capitalized. This is very beneficial if a company has property in places
where the land values increase a great deal. The company owning the property would
be required to pay that expense. Also the company renting the propert would not be
required to maintain the property or have the burden of paying the interest payments
as well. A company renting the space is usually not required to expense the costs of
building out the property to suit the business needs. Those costs are incurred by the
renter and built into the monthly payments.
When a company uses capital leases like American Greetings, it is able to receive
the tax benefits associated with having the asset on the balance sheet. The company is
then able to, in the future, depreciate the asset over time and sell the property if they
wanted to generate cash. American Greetings uses capital leases for the most part.
Approximately 95% of the space used to produce greeting cards for American Greetings
is under capitalized leases. This is a benefit for them due to the fact that they will
receive all the tax benefits, depreciation benefits and if the properties are in places
where the property appreciates then they may then sell the property to increase cash
flows.
Foreign currency flexibility:
International operations expose American Greetings to translation risk when the
local currency financial statements are translated into U.S. dollars. As exchange rates
fluctuate, translation of statements of international subsidiaries to U.S. dollars can and
will affect comparability of results between years. Approximately 28%, 26%, and 23%
of the 2008, 2007, and 2006 years total revenue were granted from operations outside
the U.S. Operations in other countries are denominated in currencies other than U.S.
dollars. A company can have some flexibility with foreign currency due to the hedging
53
activities used to offset any losses. The flexibility arrives from the gains and losses
from said hedging activities.
Conclusion:
In conclusion, four key parts have been identified as being areas for potential
accounting flexibility. Pension plans, foreign currency translations, goodwill, and capital
v. operating leases are areas that present an accounting flexibility issue. The discount
rates utilized by American Greetings are disclosed in great detail in the notes to the
financial statements because of this detail no question exists about manipulating
earnings, it is clearly stated. The impairment of goodwill and how it is expensed is also
disclosed in the American Greetings 10-K. Flexibility in foreign currency translations,
although discussed in the 10-K is vague, so there could be some degree of flexibility
with this issue. Operating and capital leases are also discussed in detail in the 10-K,
evidence does exist about where the money is being spent and how it is being spent.
Nevertheless, no data exists that would lead us to believe American Greetings is using
any means of inflating the financial statements for the purpose of misrepresenting
company value.
Evaluate Accounting Strategy
When properly evaluating a firm’s actual accounting strategy, it is important to
access what type of disclosure their financial statements have. There are two types of
disclosures, high and low. When a firm has high disclosure, they tend to give high
amounts of very detailed information within their financial reports. This is used by
investors to make accurate decisions when evaluating a firm’s value. High disclosure
goes further than the requirements set by both the Securities and Exchange
Commission and the generally accepted accounting policies. However, firms with low
disclosure, tend to hardly meet these requirements set forth by the SEC and GAAP.
Investors may misinterpret their assets, liabilities, earnings, etc. if the firm’s statements
54
are lowly disclosed. Firms that are considered to have low disclosure tend to maximize
the flexibility in their accounting practices. When accounting flexibility is present,
managers may use it either to show their company’s present economic status, or to
hide the firm’s true performance, which many managers do.
There are a few ways that will help to decide if the company has high or low
disclosure. For example, if the company uses levels of dis-aggregation, segment
reporting, and broad discussion within the financials, they typically are highly disclosed.
There are also two main strategies firms’ will use that are vital to know when evaluating
the firm. These are whether the company uses an aggressive accounting strategy that
will lead to higher reported earnings, or a conservative strategy that will lead to lower
reported earnings. In order to accurately assess a firm’s actual accounting strategy,
these two strategies will need to be thoroughly evaluated.
Goodwill:
Referring to American Greetings, the corporation takes a semi-aggressive form of
accounting. Evaluating the corporation’s policy for reporting goodwill shows this.
American Greetings goodwill accounts for increasingly large percentages of its total
assets, even with goodwill impairments. For example, American Greetings recorded
$285.1 million in goodwill for 2008, which accounted for over 15% of their total assets,
not impaired. In 2007, the corporation recorded $224.1 million in goodwill, which
accounted for over 12% of the total assets, but the goodwill was impaired. The
following chart and graph illustrates American Greetings ratio of goodwill to assets for
the past 4 years, compared to its competitors.
55
Within the graph, we can observe which companies have overpaid for assets
without adjusting or writing-down. Companies with a relatively high goodwill/asset
ratio show this. Among its main competitors, the graph shows that American greetings
have been slightly aggressive in comparison regarding goodwill. Not only has goodwill
been increasing, but also it comprises of almost 16% of the companies total assets.
When taking into account American Greetings goodwill impairment (as explained
below), which lowers earnings, it is concluded that the corporation is aggressive in its
reporting of goodwill.
Referring to goodwill impairment, American Greetings has shown a history of
goodwill impairment in 2006, and 2007. This is compared to CSS Industries who does
not show any past goodwill impairment, but does disclose how they receive their fair
values in estimating goodwill impairment. In addition, American Greetings has partially
disclosed their methods of estimating the fair value for goodwill impairment. These
methods include “discounted cash flows and market based analysis” (Current 10-k page
52). This shows how this is a high disclosure company within reporting goodwill, since it
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
2005 2006 2007 2008
Goodwill/Total Assets
American Greetings
Hallmark
CSS Industries
56
is not required to disclose this information. Disclosing this information shows that
American Greetings does not take advantage of their accounting flexibility in goodwill.
Also, by not manipulating its goodwill, American Greetings helps its investors realize the
true standpoint of the company. This shows the company uses a moderate form of
accounting. The 2007 impairment was a result of losses from discontinued operations.
The discontinued operations included Learning Horizons and Hatchery, resulting in a
$2.2 million dollar goodwill impairment and a $0.42 cent drop in EPS (Old 10-K page
24). These losses correspond with the company’s key success factors, including
product variety. Even though goodwill impairment may be bad for American Greetings
Earnings Per Share, it helps investors know that the company is not taking advantage of
their flexibility options and manipulating their financial statements. Overall, the industry
seems to disclose a great deal of information, including their methods of determining
fair value, within their financial statements.
Foreign Currency Expansion:
Taking advantage of an accounting policy’s flexibility to manipulate data is common
among managers. Unlike other policies, managers do not have a reason to adjust their
numbers when dealing with foreign currency. Since exchange rates can greatly affect
foreign currency, companies who have foreign currency in material amounts generally
hedge using future contracts to avoid losses. According to American Greetings,
“approximately 28%, 26%, and 23% of their 2008, 2007 and 2006 total revenue from
continuing operations, respectively, were generated from operations outside the United
States” (AG 10-K). Therefore, an investor would assume that the company would
hedge their foreign currency. In the case of American Greetings, the company does not
57
hedge at all. This opens them up to a lot of risk. In 2007 and 2006, American
Greetings made a gain of 18.5 and 31 million in foreign currency translation. This
upcoming year, we assume American Greetings will most likely have millions in losses
due to foreign currency translation. At this moment, we believe American Greetings
should consider hedging their foreign currency to avoid potential future losses. Since
they translate their foreign currency without hedging, the firm is exposing themselves
to a great deal of risk.
Foreign Currency Expansion:
Taking advantage of an accounting policy’s flexibility to manipulate data is
common among managers. Unlike other policies, managers do not have a reason to
adjust their numbers when dealing with foreign currency. Since exchange rates can
greatly affect foreign currency, companies who have foreign currency in material
amounts generally hedge using future contracts to avoid losses. According to American
Greetings, “approximately 28%, 26%, and 23% of their 2008, 2007 and 2006 total
revenue from continuing operations, respectively, were generated from operations
outside the United States” (American Greetings 10-K, 2008). Therefore, an investor
would assume that the company would hedge their foreign currency. In the case of
American Greetings, the company does not hedge at all. This opens them up to a lot of
risk. In 2007 and 2006, American Greetings made a gain of 18.5 and 31 million in
foreign currency translation. This upcoming year, we assume American Greetings will
most likely have millions in losses due to foreign currency translation. At this moment,
we believe American Greetings should consider hedging their foreign currency to avoid
potential future losses. Since they translate their foreign currency without hedging, the
firm is exposing themselves to a great deal of risk.
Pension Plans:
58
Pension plans tend to be one of the highest expenses that a company will incur
for their employees. Several different expenses can be incurred for a company’s
pension plans such as health care, vacations, and retirement benefits. These quality
retirement and health care benefits are huge assets for employees and will help in
keeping themselves loyal. Retirement is the most unpredictable of the expenses
because they have to be continuously estimated using different growth and discount
rates keeping on track with changing inflation rates. This is another way in which
managers may manipulate their financials to satisfy their quotas. Discount rates, in this
case, are the rates that are calculated to determine the amount of payments in the
future discounted back to the present to calculate their current net present value of the
company’s future payments to their employees..
American Greetings has always taken pride in their employees. They operate on
a defined-benefit plan, which has been recently adopted on February 28, 2007
(previously had defined-contribution plan). Pension plans can help in producing superior
quality products, which is one of American Greetings key success factors. Having a high
quality pension plan will result in having higher quality employees, thus producing
higher quality products. However, quality pension plans are very costly to a corporation
and its investors.
In September 2006, FASB issued SFAS No. 158 which requires an employer to
recognize a plan’s funded status in its statement of financial position, measure a plan’s
assets and obligations as of the end of the employer’s fiscal year and recognize the
changes in a defined benefit postretirement plan’s funded status in comprehensive
income in the year in which the changes occur (American Greetings Corp 10-k, 2008).
This shows a way in which American Greetings has a conservative way of reporting its
pension plans in which they must report the pension funds as expenses every period
which would effectively lower reported earnings. Also, American Greetings Corp. has
provided numerous financial reports concerning their pension and post-retirement plans
suggesting that they have a high level of disclosure. For example, their financial
statements also claim that for all their pension plans, their accumulated benefit
59
obligation for 2007 and 2008 was $158.844 million and $149.05 million respectively.
They also presented the discount rates for their pension and post retirement plans to be
5.75% and 6.25% for 2007 and 2008 (respectively) for the US, and 5.25% and 5.75%
for their International subsidiaries. They claim that their discount rates are based on
their long-term asset rates which take into consideration their expected returns based
on their current investment policy and historical return for their asset classes. American
Greetings shows sufficient information regarding their pensions and information on how
they come up with their rates, thus having high disclosure. The chart below will show
the discount rates this industry has used in the past five years for their pension
obligations.
Operating and Capital Leases:
In most industries, companies will use both operating and capital leases.
However, American Greetings Corp. uses only operating leases. American Greetings
Corp. is committed under noncancelable operating leases for commercial properties, in
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2004 2005 2006 2007 2008
Discount Rates (pension plans)
American Greetings
CSS
60
which some have been subleased, and equipment with terms that are generally less
than 25 years. American Greetings Corp. has operating lease payments of $34,156,000
due in 2007, $30,115,000 in 2008, $30,986,000 in 2009, and $23,829,000 in 2010 with
a steady decline in future years (American Greeting Corp. 10-k). The chart below
compares the operating lease payments due (in thousands) for American Greetings
Corp. and its publicly held competitor, Creative Seasonal Solutions (CSS).
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2007 2008 2009 2010
Operating Lease Payments
American Greetings
CSS
61
American Greetings has moderately disclosed their information pertaining to their
operating leases. The company gave much information needed on their operating
leases, including what they were for, how much they were and the payments due in
future years. They state their current financial position with these leases as well as their
future obligations. The graph above shows that American Greetings Corp. is well above
the industry’s average of operating leases. This is due to the fact that American
Greetings Corp. has a larger market capitalization compared to CSS. This being $586.13
million compared to $242.03 million. In considering that American Greetings has such a
huge part of the market share, this helps the company achieve economies of scale,
another key success factor. They will have numerous resources, resulting from their
bargaining power over customers, in which to print an abundance of products which will
effectively cost them less.
Companies have been known to experience some problems when reporting
operating leases. It is important for firms to consistently record their leases and avoid
the mistake of both the lessor and lessee recording an operating lease. To correctly
reflect the lease agreement, one party must record an operating lease while the other
party records a capital lease. Managers who are flexible in there accounting policies
tend to lease a significant portion of its assets and keep it off its financial statements.
When reviewing the firm’s financial statements, this will give a very misleading view of
the company's financial strength. However, rules have been made making companies
reveal the extent of their operating leases on the financial reports. American Greetings
Corp. has consistently showed loyalty to these laws by highly disclosing all of their lease
obligations with detailed reporting. Operating leases are a rent expense to this
company. With American Greetings Corp. choosing to use operating leases, some of
their assets are not reported on the balance sheet. This increases their expenses and
lowers their reported earnings showing American Greetings Corp. as using conservative
accounting policies in recording their operating leases.
Revenue Recognition:
62
Revenue recognition is one of the most popular forms of earnings management
referred by the SEC. For most industries, income is recognized as revenue whenever
the business actually receives the payment for the product or service. Except for
seasonal products, sales are generally recognized by American Greetings Corp. upon
shipment of products to unrelated, third party retailers and upon sale of products to
consumers at the corporation’s own retail locations. However for seasonal products,
sales are recognized at the approximate date the product is received by the customer,
which is known as the Ship-to-Arrive date (“STA”). American Greetings maintains STA
data due to the large volume of seasonal product shipment activity and the lead time
required to achieve customer-required delivery dates (American Greetings Corp. 10-k,
2008).
Managers will usually have certain information on revenue recognition, whether
the firm’s product or service has previously been given to its customers and if the cash
collection is likely and when it should be received. However, these managers will have
an incentive to boost the recognition of revenues, which is an aggressive style and will
overstate reported earnings for the firm. Potential warning signs for this manipulation
would include growth in receivables outpacing sales growth, and increasing days’
receivable. Upon reviewing American Greetings Corp.’s financial statements over the
past five years, their receivables and also their sales have declined by 74% and 11%
respectively. Therefore, the receivables are not outpacing the sales growth for this
company. Therefore, American Greetings would be conservative in reporting their
revenue recognition.
Conclusion:
Accounting strategies are a major concern for company’s financial statements.
Companies and managers tend to manipulate their data in their statements, which can
allow a false recognition of the current state of the company. The accounting strategy
of American Greetings financial statements is quite conservative. American Greetings
does a good job when disclosing how they calculate the fair values for impairment of
goodwill since companies are not required to disclose this information. The company
also uses a variety of statements regarding their pension plans. Considering FASB
63
issued SFAS No. 158 which requires an employer to recognize a plan’s funded status in
its statement of financial position, they are required to report the pension funds as
expenses every period which lowers reported earnings, thus being conservative in
reporting their pensions. They also state how they come up with their discount rates for
their pension obligations as well as showing financials on these discount rates and the
total amount of the pension obligations. However, in reference to American Greetings
foreign currency, the company takes a poor approach. Instead of hedging their foreign
currency, the company takes on a considerable amount of risk by only translating their
foreign currency. We assume this will lead to millions in losses for the upcoming year.
Altogether, American Greetings uses a conservative approach and has high disclosure
when recording their financial data.
American
Greetings
(KAP)
Goodwill Foreign
Currency
Exchange
Pension
Plans
Operating vs
Capital
Leases
Revenue
Recognition
Quality of
Disclosure
Moderate High High High High
Qualitative Analysis
In order for investors to be able to successfully analyze a company, it must make
sure that all of the accounting and financial reports are adequately disclosed. Managers
can leave out certain information that may distort the actual state of the company. It is
very important that all of the information in the 10-K is accurate, and that managers
have not left anything out. Investors may or may not be satisfied with the quality of
disclosers.
American Greetings quality of disclosure is pretty good. Many companies do not
disclose their fair values used in determining goodwill impairment since it is not a
requirement. American Greetings on the other hand, does not disclose their fair values,
but they do disclose to investors how it is determined. American Greetings states, “its
64
primary methods are discounted cash flows and a market based analysis. The required
annual goodwill impairment test is completed during the fourth quarter” (10-K).
American Greetings and CSS Industries disclose how they receive their fair values. Also,
in comparison, American Greetings has a history of writing-down goodwill impairment
unlike its main publicly held competitor, CSS Industries.
American Greetings does a good job of keeping shareholders up to date on what
is going on with the company in comparison to what the industry is doing. They
disclose this information in the quarterly reports. American Greetings states, “Our lower
earnings were driven by several factors within our North American Social Expression
Products segment, which experienced increased costs in the current quarter compared
to the prior year period. These items included increases in product content costs and
increased supply chain, scrap and distribution costs” (Quarterly Report, 10/08/2008).
American Greetings does not have a problem with disclosing information that is not
exactly good news, such as a decrease in earnings. This means that the quality of
disclosure is good.
Quantitative Disclosure
Quantitative disclosure helps to determine the accuracy and effectiveness of the
numbers within company’s financial statements, the way these numbers are related to
one another, and how they may be distorted to mislead analysts and investors in the
estimation of a firm’s true value. Managers are responsible for producing the company’s
financial statements, and are allowed flexibility in doing so. With the flexibility that they
have, it would allow firms to produce self-satisfying numbers in order to make the
company look more profitable than they really are. The company’s actual business
activities would then effectively be distorted. By analyzing these diagnostic ratios, an
investor could potentially better determine the true value of a firm, and may also be
able to spot any red flags in policies that show signs of manipulation.
65
Two key quantitative measures will help in determining whether the company is
appropriately showing the consequences of their business activities. The first set of
ratios needed to be looked at is the core sales manipulation diagnostics. These will
show the affect of different factors on net sales. By dividing net sales by cash from
sales, accounts receivables, and inventory, this will help in determining the overall
affect of each factor on the individual ratios, and also whether the company has
manipulated these numbers to appear more productive. The second set of ratios
needed to be looked at is the core expense manipulation diagnostics. A potential red
flag would be found if these ratios show unexplained increases or decreases in their
reported expenses. These ratios will help in determining the accuracy of the figures in
the firm’s financial statements.
Sales Manipulation Diagnostics
The flexibility of key accounting policies allows firms to manipulate the data they
provide. Sales manipulation diagnostics helps determine if any manipulation has
affected the viewpoint of American Greetings revenues. As the name suggests, sales
manipulation diagnostics focuses on net sales and how alterations in current assets
affect it. In determining these manipulations, certain ratios are run in order to reveal
potential “red flags.” These ratios use 10-K data over six years to compare American
Greetings to its industry competitors. The ratios include the net sales to cash from
sales, net sales to net accounts receivable, and net sales to inventory ratios. Distortion
is assumed if a ratio reveals American Greeting’s to be different than the industry. If
distortion is assumed, a further examination will follow. It is important to understand
that the industry includes only one major publicly held competitor. Therefore, the
benchmark for comparing American Greetings to industry averages is weak.
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Net Sales / Cash from Sales:
In order to get an idea of how much sales are collected in cash, we use the net
sales to cash from sales ratio. This ratio determines if sales are supported by cash from
sales. A perfect ratio would equal one. A ratio equaling one claim’s a company has
received compensation for the sales they have made during the year. It also indicates a
companies allowance for doubtful accounts are generally low. A ratio above or below
one can raise a potential ‘red flag.’ Large differences in the ratio between years can
also raise a ‘red flag.’
The Net Sales/Cash from Sales ratio gives us an idea of how much sales are
collected in cash. Since the industry includes only one major publicly held competitor,
the benchmark for comparing American Greetings to industry averages is weak. The
chart above shows that American Greetings ratio has been low in comparison to CSS
Industries. CSS Industries ratio has stayed close to 1 throughout the past 5 years,
showing that its revenue is almost completely maintained through its cash sales. On
the other hand, American Greetings ratio has stayed between 2% to 4% below one.
From 2004 to 2006 American Greetings ratio improved by increasing 2%. This was
0.930
0.940
0.950
0.960
0.970
0.980
0.990
1.000
1.010
2004 2005 2006 2007 2008
Net Sales / Cash from Sales
American GreetingsCSS Industries
67
largely due to a large fall in cash from sales. Even though this was an improvement,
the 2007 to 2008 time period made us aware of a potential red flag. During this period
American Greetings ratio dropped 1%. This was due to a steady decrease in sales,
while the cash from sales leveled out. When looking at past income statements for
American Greetings, we noticed that Net Sales has decreased steadily over the past five
years. Since American Greetings ratio is below one and net sales is steadily decreasing,
it can be concluded that revenue is being supported by past periods accounts
receivables.
Net Sales / Net Accounts Receivables
In the net sales to net accounts receivables ratio, investors are able to analyze
how much sales are consisted of credit transactions. The ratio is useful for creditors to
measure liquidity, which helps determine a firm’s credit risk. According to
Investopedia.com, the net sales to net receivables ratio is
“An accounting measure used to quantify a firm’s effectiveness in extending
credit as well as collecting debts” (investopedia.com).
A high sales to receivables ratio is sought by all firms. This is true because a high ratio
means high sales associated with low receivables. Therefore, a firms target sales to
receivables ratio should be at or above the industry level.
68
0.000
5.000
10.000
15.000
20.000
25.000
30.000
2004 2005 2006 2007 2008
Net Sales / Accounts Receivables
American Greetings
CSS Industries
Hallmark
‐20
‐15
‐10
‐5
0
5
10
2004 2005 2006 2007 2008
Sales / Acct Rec. (Change)
CSS
American Greetings
69
CSS Industries net sales to receivables ratio has generally stayed the same, while
American Greetings ratio has dramatically increased over the past 5 years. As shown
above, from 2007 to 2008 American Greetings sales to receivables ratio increased
66.63%. This means that the company’s day’s sales outstanding decreased by 8.7 days
during that period. This extreme difference has raised a red flag. We believe this is
due to a change in business activities. Within American Greetings 10-K we observed
revenue losses within many of the company’s business segments. In many of these
segments, these losses were offset by a revenue growth in an online product group.
The increasing popularity of online greeting cards and other online social expression
products seems to be the reason why the sales to receivables ratio has been
decreasing. This is because customers who purchase online social expression products
almost always pay then and there. There are no credit terms involved.
Overall, American Greetings sales to receivables ratio has risen above the
industry average because of their change in business activities. Also, CSS Industries
ratio has been almost constant for the past five years because of their exclusion of
involving their company in the online social expression product business. Until about
the beginning of 2006, American Greetings sales were mostly supported by their
accounts receivables. Ever since 2006, with the increasing popularity of online social
70
expression products, American Greetings sales have been supported less by accounts
receivables.
Net Sales / Inventory:
The sales to inventory ratio indicates the liquidity of a firm’s inventory. In other words,
it shows if a firm’s net sales are supported by their inventory. In comparison to an
industries average, firms prefer a higher ratio. A high ratio can be achieved by high
sales and low inventory. Having a low inventory indicates firms products are being
sold. It also indicates that cash flows are increasing and warehousing costs are being
spared. The social expression product industries net sales to inventory ratio results are
as shown below.
‐10
‐8
‐6
‐4
‐2
0
2
4
6
2004 2005 2006 2007 2008
Net Sales / Inventory (Change)
CSS
American Greetings
71
As the graph shows above, the industry trend has been different until 2006.
From 2006 to 2007, the sales to inventory ratio jumps around 1 point for each
company. Both firms effectively holding their sales constant while steadily decreasing
their inventories have accomplished this. Another interesting note to consider is the
drop of the sales to inventory ratio throughout the industry the year after (2007 to
2008). This occurred because both firms increased their inventories (the year after
dropping their inventories) while keeping their sales almost constant. The increase in
inventories from 2007 to 2008 was due to two things. First, American Greetings
inventories increased “primarily due to the increase in technology cards and the
inventory build related to the new Canadian product line” (American Greetings 10-K,
2008, pg. 34). Second, CSS Inventories increased their inventories due to “early
purchases made to avoid scheduled price increases” (CSS Industries 10-K, 2008,
pg.14).
A potential red flag may be raised due to American Greetings having a much
higher sales to inventory ratio than CSS Industries. American Greetings holds onto their
0.000
2.000
4.000
6.000
8.000
10.000
12.000
2004 2005 2006 2007 2008
Net Sales / Inventory
American Greetings
CSS Industries
Hallmark
72
inventory about half the time CSS Industries do. This could be due to the size and
market share differences between the firms. Since hallmark, the main major competitor
of American Greetings is privately held, it cannot be fully determined if the size of
American Greetings compared to CSS Industries is the reason for this red flag occurring.
Conclusion:
When compared to the industry, American Greetings raised a potential few red
flags that needed to be examined. The first ratio to raise a major “red flag” was the
net sales to net account receivables ratio. Within this ratio we found American
Greetings to rise far above the industry average. After examining each firm’s 10-K
report, we found that this was due to a change in business activities. American
Greetings began investing their money in online social expression product groups while
their competitors did not. This caused American Greetings net sales to account
receivables ratio to rise because there are usually no credit terms involved when
purchasing online products. The next red flag was raised using the net sales to
inventory ratio. Here we found American Greetings ratio to be much higher than the
industry average. After examining each firm, we concluded there were two reasons for
this. First, American Greetings is now making more sales with less inventory by selling
online social expression products. Second, we concluded that it might be because of
the size and market share differences between the companies. We were unable to
confirm the second reason because of the lack of publicly held companies to compare
to.
Core Expense Diagnostics Manipulation
Expense diagnostic ratios are another useful way to analyze trends and expose
any possible red flags within the company’s accounting of expenses. These ratios take a
73
closer look at the income statements and the cash flows of the companies within the
industry. Several key ratios will be used to compare American Greetings with their
competitors within the industry. Once American Greetings and its competitor’s ratios
have been taken, next will be to analyze and see whether these were company specific
or industry specific. Company specific instances are subject to investigation and will
help in determining whether there is a possibility of manipulation within the company’s
expense accounting.
74
Asset Turnover:
Asset turnover is found by dividing total net sales by total net assets of the
previous year. This ratio is useful in determining the amount of sales that are generated
from each dollar of assets, thus the higher the ratio the better. This ratio should usually
be consistent and fairly flat; since firms will acquire new assets as sales increase. Any
major deviations in the ratio from year to year need to be examined carefully to insure
firms are properly writing off or depreciating assets. If there is a failure to impair an
asset correctly, such as goodwill or PP&E, the ratio will increase dramatically which
would raise a red flag on possible manipulation of expenses.
American Greetings asset turnover ratio grew at a fairly stable rate from 2004-
2007 indicating the firm is using good accounting principles. However, after 2007 the
ratio has shown an erratic fluctuation, with a major increase after 2007. Analysts could
assume that this is because of an increase in the sales growth rate. However, American
Greetings has had a negative sales growth rate for the past 5 years. In 2007-2008,
asset turnover increased by 23%, which was contributed by a 24% decrease in total
asset with a sales decrease of only 1%, indicating there were no irregular accounting
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2004 2005 2006 2007 2008
Asset Turnover
American Greetings
CSS
75
practices. Goodwill had increased from 2006-2007 by 23% (t-1), raising a red flag on
why the asset turnover would be increasing. However, total current assets during this
time had decreased by 45%, giving reason why the asset turnover had sharply
increased. In conclusion, there are no irregular accounting practices within this ratio.
The asset turnover change represents the change in sales from one year to the
next over the change in assets from one year to the next. The asset turnover change
chart shows these figures with American Greetings and CSS. As the graph above
indicates, American Greetings has had an asset turnover that has remained consistent
and stable over the past five years. However, their competitor CSS has had an extreme
drop between 2005-2006, and 2007-2008, raising a red flag of possible manipulation of
expenses. For example, between 2005-2006, CSS assets had increased by $243
thousand. During this time their sales decreased by nearly $11 million. Also, during
2007-2008, assets increased by nearly $2 million while sales decreased by $32 million.
These small increases in assets are resulting in a dramatic drop in sales during the
same time frame. This may be because they had purchased new assets and sales
‐50
‐45
‐40
‐35
‐30
‐25
‐20
‐15
‐10
‐5
0
5
2004 2005 2006 2007 2008
Asset Turnover (Change)
CSS
American Greetings
76
haven’t been able to increase relative to the amount invested in new assets yet.
American Greetings has remained close to one throughout the past five years, showing
no sign of manipulating their expenses.
CFFO/OI:
The chart above of operating cash flow / operating income (RAW) illustrates the
relationship between cash generated by operations and operating income. The ratio
should be as close to one as possible to show that the firm’s cash flow from operations
is matched well with operating income. This trend analysis allows investors to see if the
firm maintains a consistent ratio. If there is a high variance in the trend it may have
been derived from a manipulation of expenses and accruals in order to achieve period
earning targets.
By referencing the chart above, the social expression and greeting card industry
has shown significant fluctuations for their accounting periods. While their cash flow
from operations has remained fairly constant throughout the years, their operating
income is very inconsistent with major decreases and increases from year to year. For
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
2004 2005 2006 2007 2008
CFFO / OI
American Greetings
CSS Industries
Hallmark
77
example, American Greetings had a decline in operating income from $89.5 million in
2007 compared to $128.8 million in 2008. This increase of nearly $40 million “is
attributed to higher foreign exchange rates in 2008 compared to 2007” (American
Greetings 10-k, 2008). Considering a good portion of their business is done
internationally, American Greetings is affected by exchange rate risk seeing as they do
not hedge their foreign currency. Also, according to American Greetings 10-k of 2006,
the fluctuations for the years 2004-2006 can be attributed to the corporation
experiencing LIFO liquidations in 2004 and 2006, with no liquidations in 2005. With the
inconsistencies of their CFFO/OI ratio you could assume manipulation. However,
American Greetings Corp. has consistently shown conservative accounting by explaining
any fluctuations throughout their financial statements.
If a company wants to recognize more expenses to shrink the operating income
for the period the ratio will increase. Any increases in the ratio does not mean
management has recognized extra expenses. It simply means the operating income
decreased or stayed constant relative to the operating cash flows. In truth, an increase
or decrease in OI should be followed by an increase or decrease in CFFO (meaning they
have a direct relationship) and should therefore be greater than zero. In most cases the
‐20
‐15
‐10
‐5
0
5
10
2004 2005 2006 2007 2008
CFFO/OI (Change)
CSS
American Greetings
78
fluctuations are small but in some cases the difference in the ratio can be far greater or
far lower than that of the previous year. Both American Greetings and CSS have
consistently had ratios below zero.
CSS has fluctuations throughout their changes in the ratio, having major
increases and decreases throughout the past five years, which would raise a red flag of
possible manipulation. For example, the dramatic decrease from 2004-2005 and 2007-
2008, might suggest management has either improved operating income recognition, or
expenses are not being recognized as readily as before and after this time. As you can
see from the graph above, American Greetings change in the ratio have stayed
relatively consistent over the past 5 years, having small increases and decreases,
altogether increasing closer to zero. This would indicate that no red flags can be
assumed and that they show no signs of possible manipulation of expenses.
CFFO/NOA:
Operating assets are assets used in deriving value through the day to day
function of the business. These assets include plant, property, and equipment required
0.000
0.200
0.400
0.600
0.800
1.000
1.200
2004 2005 2006 2007 2008
CFFO / NOA
American Greetings
CSS Industries
Hallmark
79
to manufacture or produce the revenue generating product. The chart above compares
each company’s net operating assets (net depreciation expense) to their cash flow from
operations to show how well the company utilizes the equipment they own to create
cash. This ratio is ideal to be 1:1 showing that a dollar invested in property, plant, and
equipment will effectively create a dollar in cash flow from operating the business.
Basically, for every dollar spent on operating assets, how much of it flows directly back
into the company. If a firm was struggling in asset affiance, and keeping the ratio high
(or above one), the company could possibly be manipulating the ratio in order to
portray better business. They would do this most likely by either inflating the cash flow
from operations or deflating their net operating assets. A possible way
to create these adjustments is to look for large sell offs of PP&E or inconsistent
variations of cash flow from operations. These would be two key signifiers of distorted
accounting numbers that have been modified in order to create a more presentable
CFFO/NOA ratio.
According to the chart above, American Greetings Corp. manages their operating
assets the best between the competition, and is getting a better return from their
operating assets with ratios closest to one. However, American Greetings does not
demonstrate a consistent ratio across the time 2004-2008. The company’s net
operating assets have seen a consistent decline for 4 of the last 5 years. This raises a
red flag of a possible manipulation of expenses. According the American Greetings 10-k
for 2008, they have sold off some of their property, plant, and equipment during these
years. However, this would make the ratio continue to rise, which isn’t the case for
American Greetings. From 2004-2005, American Greeting sold off only 5% of their
PP&E while increasing their CFFO by 29%, which explains the steep incline in the ratio
during this period. Then after 2005, they had a decline of 27% in the cash flow from
operations, explaining the steep decline after 2005. As mentioned, American Greetings
Corp. has shown no manipulation in any of its accounting methods, and explains any
fluctuations within their financial statements.
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The “change” form for this ratio shows that fluctuations tend to be erratic. In the
chart, negative values arise from decreases in CFFO or NOA and positive values arise
from increases in CFFO and NOA or decreases in CFFO and NOA (negatives cancel each
other out). By referencing the chart above, American Greeting had increased from
2004-2006, then dramatically decreasing, which would raise a red flag of possible
manipulation. However, as previously mentioned, this is due to the sell off of some of
their property, plant, and equipment, considering their NOA had decreased 12% during
this time. Also, this decline is shown to be the industry trend during this time, with CSS
declining sharply as well. Again, American Greetings has shown no signs of possible
manipulation within there expense diagnostic ratios.
Conclusion:
With a thorough investigation of key expense ratios, we can examine possibilities
of red flags and manipulation of expenses. Through investigating the raw and change
forms of asset turnover, CFFO/OI, and CFFO/NOA, there were not any instances of
potential red flags. All fluctuations between the ratios from year to year could be
explained by yearly changes of the ratio variables that would cause a mathematical
change in the analysis. Also, some of the fluctuations were seen across the industry so
no red flags could be inferred. American Greetings seems to adhere to correct
‐15
‐10
‐5
0
5
10
15
2004 2005 2006 2007 2008
CFFO/NOA (Change)
CSS
American Greetings
81
accounting principles and show no evidence of manipulation by management that can
be properly tested for by an expense diagnostic ratio.
Potential Red Flags
In order to identify potential red flags you must compare the income statement,
balance sheet, and statement of cash flows. There are many factors within these
statements that “red flags” may be hidden in. In order to have a quality accounting
analysis, one must go through and examine closely to find “red flags” and then gather
information about them.
Comparison between Accounts Receivables and Sales:
There is an unusual decrease in accounts receivable in relation to sales in the
year 2008. The sales and accounts receivables relationship was very steady from 2004
up until 2007. Then, the accounts receivable in 2008 dropped to 61,902 from 104,000
in 2007 a 40% decrease, while the sales in 2008 were 1,730,784 and 1,744,798 in
2007, only dropping by 1%. A possible explanation is the theory of “channel stuffing”
(Palepu & Healy, 3-10). The company may have relaxed their credit policies; therefore
customer defaults may cause them to have receivable write-offs in succeeding periods.
Another possibility is that they loaded up a lot of their suppliers with products to exceed
revenues in a certain period. This surplus of products can lead to a large amount of
returns, and also a drop of products in the following months. Since American Greetings
is a card company, and some of their supplies are seasonal, they could have made a
large shipment, expecting to sell all of the shipment. The actual sales could have been
overestimated, therefore resulting in a lot of returned products at the end of the
season. Also, American Greetings did sell a lot more cards through the internet. This
could have easily caused the Accounts Receivables to go down, and sales to go up.
The dramatic decrease in accounts receivable will have to be compared to many other
factors to understand why this could have occurred. Following is a chart showing the
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Accounts Receivables and Sales for the years 2004-2008 taken from American
Greeting’s 10-K:
2004 2005 2006 2007 2008
Accounts Receivables 238,473 182,084 139,384 104,000 61,902
Sales 1,953,729 1,902,727 1,875,472 1,744,798 1,730,784
Comparison between Inventories and Sales:
There is a dip in inventories between the years 2006 to 2008, it is steady up to
2006, then drops dramatically in 2007, then comes back up to normal in 2008. Although
there is a change in inventory, there is no significant change in the sales over those
years. The sales are slowly dropping from 1,895,474 in 2006, 1,744, 798, in 2007, to
1,730,784 in 2008, a very small change between the 3 years. While the inventory is
213,109 in 2006, drops to 182, 618 in 2007, then rises back to 216,671 in 2008. A
reasonable explanation for a drop in inventory is an increased demand for the good,
which should lead to an increase in sales, since it didn’t this is a potential red flag. The
inventory could have also dropped because of an increase in Work in Progress
Inventory leading to a decrease in finished goods, which is actually a good sign;
because it implies that the managers expect sales to rise. There are several different
things that need to be evaluated in order to understand why there was a rise and fall in
the inventory. The following is a chart for the Inventory and Sales for 2004-2008 taken
from American Greeting’s 10-K:
83
2004 2005 2006 2007 2008
Inventory 238,612 218,711 213,109 182,618 216,671
Sales 1,953,729 1,902,727 1,875,472 1,744,798 1,730,784
Comparison between Net Income and Cash Flow from Operating Activities:
Another rise and fall occurred when comparing the net income from the years
2006 to 2008, while the cash flow from operating activities remained stable. The net
income was 84,376 in 2006, dropped down to 42,378 in 2007, and back up to 83,003 in
2008. While the cash flow from operating activities were 267,307 in 2008, 267,730 in
2007, and 243,537 in 2008, barely any change. The company expanded into Canada in
2007 with the Carlton Cards line, which could be a factor. The company could have
overestimated their amount of sales that were going to take place with the new
Canadian line, while actually Canada’s first year of sales could have been a struggle
leading to a decrease in net income. Although there was a decrease in the revenue, the
cash flows will remain unaffected. The company most likely picked back up to normal in
2008, which is why the net income was similar in 2006 and 2008 but dropped in 2007.
The introduction of a new line could easily explain the decrease in Net Income in their
first year of sales. The following is a chart for the Net Income and Cash Flow from
Operating Activities for 2006-2008 taken from American Greeting’s 10-K:
2006 2007 2008
Net Income 84,376 42,378 83,003
Cash Flow from Operating Activities 267,307 264,730 243,537
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Large Asset Write-Offs:
In 2007 there were three different questionable large asset write-offs. The Cash,
Inventory, and Assets of Business Held for Sale remained remotely constant from 2004
to 2006, and then all three dropped in 2007, and then rose back to normal in 2008. The
inventory dropped from 213,109 down to 182,618 a 15% decrease. The Cash dropped
from 213,613 to 144,713 a 32% decrease. The Assets of Business Held for Sale
dropped from 24,903 to 2,810 a 88% decrease. Any major change in assets could have
been caused by a slow response of management to new business activities or
estimates. “Asset write-offs may also be a result of unexpected changes in business
circumstances” (Palepu & Healy, 3-11).The following is a chart for the Inventory, Cash,
and Assets for Business Held for Sale from 2004-2008 taken from American Greeting’s
10-K:
2004 2005 2006 2007 2008
Inventory 238,612 218,711 213,109 182,618 216,671
Cash 285,450 247,799 213,613 144,713 123,500
Assets for Business Held for Sale 40,815 25,415 24,903 2,810 —
Conclusion:
American Greetings, for the most part, does not have any serious potential “red flags.”
However, it does have some minor “red flags” that investors should be aware of. The
most threatening “red flag” was the asset write offs that occurred in 2007. All of these
circumstances could eventually turn into a very large accounting mishap if they are not
85
closely monitored. Also, American Greeting’s accounting is all very consistent
throughout the past five years.
Undo Accounting Distortions
Once accounting distortions are found, the final step in the accounting analysis is
to restate the financial statements as if the distortions where not present in the first
place. Company’s use numerous methods to artificially increase their financial
statements. Thus, if any “red flags” are found after analyzing a firm, the analyst will
have to undo these red flags to accurately show the financial position of that firm.
When analyzing American Greetings Corp., we found a few particular red flags that we
thought needed attention. For example, the most serious “red flag” that we identified
was the questionable large asset write-offs in 2007. The assets for business held for
sale dropped 88%. This could have been caused by poor management. Also, their
accounts receivables decreased from 2007 to 2008. The reason this probably happened
is because of the increase in their internet sales (e-cards). Aside from these key red
flags, American Greetings Corp. has shown a very conservative approach, with minimal
manipulation and highly disclosed data throughout their financial statements.
Financial Analysis, Forecast Financials, and Cost of Capital Estimation
Throughout this section we will go over the financial ratio analysis, financial
statement forecasting methodology, and cost of capital estimation for American
Greetings and the industry in which they compete. We will use ratio analysis in order to
access the liquidity, profitability, and capital structure of the firm. By creating a common
size income statement, we are able to perform ratio analysis which will aid us in
forecasting certain line items into the future and make assumptions of the possible
outcomes for the company in the next years to come. Also, in order to value the firm,
86
we will determine the inputs necessary to compute the cost of capital to see how
expensive it is for these firms to raise capital for use in their future business operations.
Financial Analysis
Financial ratios are examined by financial analysts to help in determining the
financial performance of a company as well as the entire industry. We have divided the
overall process of evaluating these ratios into four groups: 1) Liquidity analysis, which
will tell how the firm uses their cash and if they are able to meet their debt obligations;
2) Profitability Analysis, which will tell if the company is efficient in using their assets to
generate revenues and controlling costs; 3) Capital Structure Analysis, which enables us
to know if the company typically resorts to debt or equity financing for their growth
plans; 4) Growth rate analysis, which allows us to indicate if the company can grow
without the need of external financing.
Liquidity Ratio
Liquidity ratios measure the ability of a company to turn their assets into cash
and to determine if the company will be able to pay off its short term debt obligations.
Generally, the higher these ratios are, the larger the margin of safety the company has
to pay off their short term debt. Investors and creditors look at these ratios to see if in
case the company was to get into debt, what amount they would be able to pay. There
are many ratios calculated to help these investors and creditors come up with an
analysis of the company. The most commonly used of these ratios are the current ratio,
quick asset ratio, working capital turnover, accounts receivable turnover, day’s supply of
receivables, inventory turnover, day’s supply of inventory, cash to cash cycle, and days
sales outstanding. If these numbers are low it will suggest that the firm does not have
enough liquid assets to cover its obligations, but if these numbers are too high it could
mean that the firm is not using its assets properly and should expand. Also, creditors
may demand in their contracts that the company keep their ratios at certain levels to
maintain leverage and liquidity.
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Current Ratio
Current Ratio:
The current ratio is calculated by dividing current assets by current liabilities.
By dividing current assets by current liabilities, we can get a numerical indicator of a
firm’s ability to pay off short term obligations with cash or assets that can quickly be
converted to cash without losing value. It is desirable to have a high current ratio. The
higher it is, the more capable the company is at paying off its short-term debt by
liquidating most of its current assets. A ratio of equal to or greater than one is
necessary considering a ratio under one suggests that the company would be unable to
pay off its obligations if they came due at that point. While this may show that the
company is not in the best financial health, it does not necessarily mean that it will go
bankrupt. Business operations differ for each industry so it is more useful to compare
companies in the same industry. American Greetings has consistently had a current
ratio of greater than one showing no liquidity problems to date. As you can see by
referencing the graph above, since 2004, Creative Seasonal Solutions has been at the
top of the industry average. Also since this time, American Greetings has seen its
margin of safety decrease. This is because over the past five years their cash and cash
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2004 2005 2006 2007 2008
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equivalents have decreased from nearly $2billion to $700 million while keeping their
debt obligations around the same. A reduction in cash requirements leads to a
reduction in current ratio over time. American Greetings has seen a 56% decrease in
cash and a 74% decrease in accounts receivable. Inventory stayed consistent
throughout this time.
Quick Asset Ratio
Quick Asset Ratio:
The quick asset ratio helps in analysis alongside the current ratio in determining
a firm’s coverage of its current obligations. The quick asset ratio is calculated by
dividing the “quick” assets by current liabilities. These quick assets are cash and cash
equivalents, securities, and accounts receivable. This breaks it down to only the most
liquid of assets; accounts that can be turned into cash in a very short period of time,
normally a few days. The quick ratio is different than the current ratio in that it removes
inventory from the calculation. By removing inventory from the equation, a measure of
liquidity is more clearly seen because inventories may or may not be able to be
0
0.5
1
1.5
2
2.5
3
2004 2005 2006 2007 2008
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converted into cash as quick as necessary without losing value. Again, the ideal ratio
here is greater than or equal to one indicating that there are more assets than liabilities
without converting inventory to cash. We can see from the graph above that over time
American Greetings has had an increasingly hard time paying its debt obligations. Since
2004, the company has had a quick asset ratio of less than one. Considering they have
had a current ratio consistently greater than one, inventory was the asset that allowed
for the coverage of debt. Without inventory, the graph shows that American Greetings
cannot cover its current debt without leverage indicating a liquidity problem. Once
again, Creative Seasonal Solutions led the industry, never going below one.
Working Capital Turnover
Working Capital Turnover:
Working capital turnover is a measurement comparing how well a company uses
its working capital to generate their sales. It is calculated by dividing the company’s
sales by its working capital (current assets – current liabilities). Companies will use their
working capital to fund the operations of the business and also to provide inventory.
0
1
2
3
4
5
6
7
8
9
2004 2005 2006 2007 2008
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The inventory and business operations are then converted into the sales revenue for
the company, thus making the ratio more of a sales efficiency ratio based on a dollar
invested into the business. We can see that Creative Seasonal Solutions maintains
between three and four consistently over time. However, American Greetings has
continued to increase going from a ratio of one in 2004 to a present ratio around eight.
This can be contributed to having sales remain around the same (approx. avg.
$1.8billion) and having an 86% decline in working capital. Like previously mentioned,
American Greeting’s cash has declined tremendous amounts affecting its working
capital. However, this means that American Greetings is very efficient in generating
sales considering they have had less and less funds for operations and inventory, while
keeping their sales the same regardless. Compared to the industry, American Greetings
is the leader among working capital turnover.
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Accounts Receivable Turnover
Accounts Receivable Turnover:
Accounts receivable (A/R) turnover is a ratio that compares total sales to average
accounts receivables to show how quickly a firm collects on their accounts receivable.
Accounts receivable turnover is calculated by dividing sales by accounts receivable. This
turnover ratio shows how often the firm collects on accounts receivable in one year.
Again, a higher ratio is desired because it indicates the frequency of collecting cash
due. According to the graph, Creative Seasonal Solutions has maintained an accounts
receivable turnover of around fifteen. American Greetings on the other hand has
increased dramatically over the past five years, going from eight to twenty-eight in just
five years, over performing the industry average. American Greetings collects on
accounts receivable more often which inversely means that there is less cash due to
them, floating around in less time than their competitors. While American Greetings
has had their sales remain constant over time, their accounts receivable has declined by
more than 74%. They are becoming more efficient compared to the industry because
they are receiving cash from credit sales more and more quickly every year.
0
5
10
15
20
25
30
2004 2005 2006 2007 2008
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Days Supply of Receivables
Days Supply of Receivables:
Days supply of receivables is the amount of days it takes for a firm or company
to collect its accounts receivables. It is calculated by dividing 365 by the accounts
receivable turnover. This is a simple ratio that shows how quickly a company can collect
its money. While Creative Seasonal Solutions has maintained a ratio of between twenty-
five and thirty days, American Greetings has seen a dramatic decrease in the amount of
days it takes to collect its receivables going from nearly forty-five days in 2004 to
thirteen days in 2008. This is now better than the industry average and shows that
American Greetings has become very efficient in collecting there receivables. The more
efficient a firm can be at collecting their receivables, the better off they will be. It is
very important to have a quick turnaround of cash on hand. They will have less cash on
hand the more time they let customers have to pay them.
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5
10
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35
40
45
50
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Days Sales Outstanding
Days Sales Outstanding:
The Days Sales Outstanding ratio is a measure of the number of days that a
company takes to collect revenues after a sale has been made. It is calculated by
dividing 365 by the company’s days supply of receivables. In comparison to other
companies, a lower DSO means that it takes a company fewer days to collect on its
accounts receivable, which is obviously preferred. A higher DSO means that the
company is taking a longer time to collect its money and is using credit to sell its
products to customers. This takes away from the opportunity cost they would have if
they had the money on hand. This ratio is also key to calculating the cash-to-cash cycle
which will be discussed later on. American Greetings has recently outperformed its
competitor Creative Seasonal Solutions. This is because their accounts receivable
turnover has increased throughout the years.
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5
10
15
20
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35
40
45
50
2004 2005 2006 2007 2008
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Inventory Turnover
Inventory Turnover:
Inventory turnover is a ratio that shows how many times a company’s inventory
is sold and replaced over a year. It is related to accounts receivable turnover in the fact
that it measures efficiency and how often the line item is turned over in a year.
Inventory turnover is calculated by dividing cost of goods sold of a company by their
inventory. The company wants this ratio to be a high as possible considering the more
times they have to reorder and stock their inventory, the greater the possibility of
having higher sales. However, if a company has a high ratio, it could mean they don’t
keep a large amount of inventory in stock. American Greetings excels in the inventory
turnover comparison, outperforming the industry average and its competitor Creative
Seasonal Solutions. On average, American Greetings sells and replaces their inventory
on average eight times compared to CSS’s average of around four. This is impressive in
the fact that American Greetings has to hold a significant amount of inventory,
especially before the holiday selling season. Seasonal fluctuations affect their inventory
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6
7
8
9
10
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levels considering that they usually order and manufacture merchandise in advance of
peak selling periods and sometimes before new trends (American Greetings 10-k,
2008). Since American Greetings has consistently beaten the industry average having
these high amounts of inventory, they show they have a greater opportunity to
generate more sales revenue for their company.
Days Supply of Inventory
Days Supply of Inventory:
Day’s supply of inventory is one of the more simple ratios to understand. It tells
us how many days it takes a company to turnover its inventory. Companies want this
ratio to be as low as possible considering the faster the line items are sold, the faster
sales revenue is generated for the company. This is computed by dividing 365 by their
inventory turnover. American Greetings on average takes around forty-five days to
turnover its inventory compared to around ninety for Creative Seasonal Solutions. Since
American Greetings has the highest amount of inventory turnover in the industry, it
would make sense that they would have the lowest day’s supply of inventory. This
shows they have an efficient management of inventory and will help in making a better
cash-to-cash calculation.
0
20
40
60
80
100
120
2004 2005 2006 2007 2008
American Greetings
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Cash to Cash
Cash-to-Cash Cycle:
The cash-to-cash ratio is calculated by adding together days supply of accounts
receivable and days supply of inventory. What the cash to cash cycle shows is how long
it takes from when the firm invests a dollar in inventory until the firm receives a dollar
in revenue. Once again, American Greetings outperforms the industry average and its
main competitor Creative Seasonal Solutions. Also, throughout the past five years, it
has become increasingly better going from around ninety-four days to sixty days to
receive revenue from their purchases of inventory.
Conclusion:
By analyzing the numerous liquidity ratios of American Greetings and throughout
the industry, we have concluded that they are performing within the overall average of
the market or industry. While having no signs of liquidity problems, their competitor
Creative Seasonal Solutions has performed better in certain ratios such as the current
ratio and quick asset ratio. This is because American Greetings is more debt financed
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20
40
60
80
100
120
140
160
2004 2005 2006 2007 2008
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than the industry average. However, American Greetings has shown to be more
efficient with their inventory having Days Supply of Inventory and Inventory Turnover
better than that of CSS. A firm that has ratios around or above the industry average is
very appealing to an investor.
Profitability Analysis
The basis for profitability ratios is to determine how efficient a company is in
creating profit. A majority of the profitability ratios are derived by sales, which is the
basis to performance of a sales driven company. The more efficient a company is the
more profitable they become, thus attracting investors and debtors. There are six basic
profitability ratios; gross profit margin, net profit margin, asset turnover, and return on
assets, and return on equity.
Gross Profit Margin
Gross Profit Margin
Gross profit margin is the ratio between gross profit and sales. Gross profits is
recognized as sales minus cost of goods sold, then divide the gross profit by sales to
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0.25
0.3
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compute gross profit margin. Gross profit is a profitability measurement of a firm to
show the effectiveness of their cost structure. Gross profit represents money that can
be used to pay off selling, general, or administrative expenses. The gross profit margin
ratio indicates the percentage of money retained after the cost of goods being sold has
been taken out of the equation. On average, American Greetings has an average gross
profit margin of 5%, while Creative Seasonal Solutions provides an average 25%.This
indicates that American Greetings retains only 5% of revenue generated by sales after
the costs of selling the product have been subtracted. As you can see from the graph
above, American Greetings is underperforming the industry average and its main
competitor CSS. This is because American Greetings, although consistently generating
more than triple the sales of CSS, accumulates a higher percentage of costs for each
sale. For example, in 2007 American Greetings generated $1.74 billion in sales with
$1.71 billion in costs associated with these sales.
Net Profit Margin
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
2004 2005 2006 2007 2008
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Net Profit Margin:
Net profit margin is a common and important profitability measure because it
compares the most important line in business, the bottom line net income, to sales or
total revenue. This is the most commonly used profitability ratio, where bigger is better.
It is calculated by dividing net income by sales. This ratio is the indication of how many
cents per dollar a company claims as profit and will be transferred to retained earnings,
possible dividends, or invested into owner’s equity. American Greetings Net Profit
Margin average is 4.5% compared to 5% for Creative Seasonal Solutions. This means
that 4.5 cents for every dollar is claimed as profit. This is below the industry average
and may be attributed to research and development costs associated with their e-cards
and customer preferences. American Greetings net profit margin has remained fairly
consistent until 2007 when it shot down to 2.43%. This is due to a heavy drop in sales
for that year. According to American Greetings 10-k, there revenues declined due to
reductions in North American Social Expression Products primarily because of the prior
year divestiture of the candle products line and lower sales of gift packaging products.
Asset Turnover
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2004 2005 2006 2007 2008
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Asset Turnover:
Asset turnover is calculated by dividing a company’s total assets (t) by its total
assets of the previous year (t-1). This ratio is used to determine how efficient a
company is in using its assets to generate sales. It will show how much money every
dollar invested in assets produces in sales dollars. The previous year’s assets are used
in this ratio because the assets that are already owned are the ones that were used to
generate the sales for the next year. Again, a company will want this ratio to be as high
as possible which would indicate that the company utilizes its assets in the most
efficient way in driving sales. American Greetings average asset turnover is around .8
which means that 80 cents was produced for every $1.00 invested in assets. This is
significantly lower than the industry average and Creative Seasonal Solutions average of
1.5. This would indicate that American Greetings generates fewer sales for every dollar
invested in its assets compared to its competitor. Although American Greetings
generated more than triple the sales of CSS, as mentioned before, their total assets
used to generate these sales were more than the actual revenues. For example, in 2008
they used $2.2 billion in total assets to generate $1.7 billion in revenues.
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ROA
Return on Assets:
Return on assets (ROA) is calculated by dividing net income (t) by the total
assets of the previous year (t-1). Again, we use the previous year’s assets because that
will be the assets used to generate income and add profit to the firm. This ratio tells
investors how much profit a company generated for each $1 in assets. A company
would favor a high Return on Assets which would indicate that a company is efficiently
using its assets to generate sales. American Greetings has stayed fairly consistent until
2007 again where there net income declined tremendously due to the prior year
divestiture of the candle products line and lower sales of gift packaging products. Their
average of 3.5% is significantly lower than that of Creative Seasonal Solutions average
of 7.5%; it has a high number of dollars invested in assets compared to its generated
revenues. CSS seems to be considerably more efficient than American Greetings when it
comes to using their assets to generate sales and net income.
0
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0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
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ROE
Return on Equity:
The return on equity (ROE) ratio is similar to the return on assets ratio in that it
shows how profitable and efficient a company is. Return on equity is calculated by
dividing the net income of the company (t) by their total owner’s equity of the previous
year (t-1). This ratio indicates how well a company generates revenue with the money
contributed by the company’s investors. The higher the ratio the better which would
indicate that the firm’s managers are doing a good job employing the funds invested by
the firm’s shareholders to generate returns. “On average over long periods of time,
publicly traded firms in the U.S. generate ROE’S in the range of 11 to 13 percent.”
(Palepu & Healy) In reference to the graph above, American Greetings is well below this
with an average of 6.33% while its competitor Creative Seasonal Solutions has a ROE
average of just over 11%. Once again American Greetings is not as efficient when
generating profits compared to the industry average.
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
2004 2005 2006 2007 2008
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Conclusion:
After analyzing the profitability ratios, we have determined that American
Greetings performs well below both the industry average and their competitor Creative
Seasonal Solutions. In every one of the five profitability ratios, American Greetings was
highly outperformed by CSS. This would indicate that American Greetings is very
inefficient in creating their profit. They have an asset turnover consistently less than
one and implies they are very inefficient when compared to CSS who has asset turnover
greater than one every year. This would not look good to an investor and may entail
that they have a weak competitive strategy.
Capital Structure Analysis
The capital structure of a company is the way a company chooses to finance
their assets. This analysis will help determine if the firm’s assets are financed through
debt or through equity. A firm’s owner’s equity and liabilities is made up of capital
structure and therefore should be closely examined. Also, it helps an analyst determine
the method by which the company being studied is able to finance growth and
expansion. Thus, the Debt to Equity ratio being looked at indicates whether the
company needs to borrow money or increase shareholder equity to finance its capital
needs. Two other ratios that will help in this analysis are the Debt-Service Margin and
the Times Interest Earned ratio.
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Debt-Equity Analysis
The debt to equity ratio is the key to determining the capital structure of a firm.
It is calculated by dividing the total liabilities of a firm by the firms total owner’s equity.
This ratio relates to a company’s leverage which indicates if the firm uses debt financing
or equity financing. By studying the graph, we can see that American Greeting and
Creative Seasonal Solutions are both more equity financed considering their ratios are
both consistently lower than 1.0. However, American Greetings uses more debt
financing compared to CSS. This means that American Greetings is the more risky firm
considering their borrowed debt must be paid off first before any stock holders receive
dividends. Although CSS has decreased its debt financing in favor of equity financing in
the past five years, American Greetings has stayed consistent with its leverage having a
ratio between 0.8 and 1.0 for the most part. This indicates that they are content with
their capital structure and the forecast for total liabilities and owner’s equity can be
assumed to stay around the same.
0
0.2
0.4
0.6
0.8
1
1.2
2004 2005 2006 2007 2008
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Creative Seasonal Solutions
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Altman Z-Score
The Altman’s Z-Score = 1.2 (Working Capital/Total Assets) + 1.4 (Retained Earnings/Total Assets) + 3.3 (Earnings Before
Interest and Taxes/Total Assets) + .6 (Market Value of Equity/Book Value of Liabilities) +1.0
(Sales/Total Assets)
Z-Scores 2004 2005 2006 2007 2008
American
Greetings
3.183 2.902 3.183 3.4 2.63
CSS 5.49 5.832 5.82 6.875 5.173
Altman’s Z-Score weights five different variables to compute a score for a firm
that indicates the possibility bankruptcy through default risk and credit risk for a
company. This helps asses the company’s credit risk. A company is considered to be
bankrupt when their Z-score is below 1.81. A company with a score between, or equal
to, 1.81-2.67 are labeled in the gray area. A company with a Z-Score higher than 2.67
is considered to have low credit and bankruptcy risks. As the graph above shows, the
social expression and greeting card industry for the most part has high Z-Scores, with
scores higher than 2.67. This would indicate that they have low credit and bankruptcy
0
2
4
6
8
10
12
2004 2005 2006 2007 2008
CSS
American Greetings
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risks. However in 2008, American Greetings has a Z-Score of less than 2.67 (2.63) in
which they should now be on alert and should exercise caution.
Debt-Service Margin
Debt-Service Margin
2004 2005 2006 2007 2008
American
Greetings
0 0 1.529 0 5.69
CSS 470.28 114.38 2.64 5.44 4.09
Debt-Service Margin: Debt-service margin is another measure of a firm’s ability to cover their debt
through cash created by the operations of the business. A company’s debt service
margin is calculated by dividing the cash flow from operations by last year’s current
maturities of long term debt. The previous year’s debt is used here because it is the
debt that is currently being paid off. Analysts prefer this margin to be as high as
possible. The denominator varies from year to year and can be greatly different in
amounts. American Greetings for example had no current maturities of long –term debt
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due in 2004, 2005, or 2007. Also Creative Seasonal Solutions had a dramatic change in
the denominator or current maturities of long term debt due from 2004 and after going
from $338,000 to $10,169,000. American Greetings in underperforming the industry
average due to its lower profit margin. Thus, American Greetings is less pressured to
use operating cash flows to pay for long-term debt.
Times Interest Earned
Times Interest Earned: The times interest earned (TIE) ratio is a measure of a company’s ability to meet
its debt obligations. It is calculated by taking a company’s Net Income before interest
and taxes and dividing it by the interest expense. Again, before profits for stock holders
can be paid, interest expense must be paid for first. American Greetings has a Times
Interest Earned average of 3.36. This is below Creative Seasonal Solutions and the
industry average but it shows that they have the ability to pay off interest expense
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008
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without external financing. Also, by studying the graph, CSS has dramatically increased
their TIE having lowered their interest expense by 57%.
Conclusion:
In conclusion, the capital structure ratios help measure how a firm is financed,
either through debt or through equity. With both American Greetings and CSS having
less than one Debt-Equity ratios, American Greetings is more debt financed than that of
CSS. However, American Greetings has decreased their debt by 30% over the past five
years. Also, the debt-service margin and times interest earned are very different for the
firms across this industry, we concluded these two firms have a very different way of
financing debt and equity.
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Growth Rate Analysis
In order to evaluate the sustainability for future profits of a company, we must
first calculate the potential growth rates for both the company and its competitors. In
order for a firm to remain competitive in their industry, they must be able to grow and
innovate. We can estimate the future economic condition of the company and also the
industry by analyzing these prospective growth rates. The two growth rates that we will
be using are the Internal Growth Rate (IGR) and the Sustainable Growth Rate (SGR).
The Internal Growth Rate represents the highest level of growth a company can achieve
without using external financing. The Sustainable Growth rate is the max rate at which
a company can grow without the need to borrow money.
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IGR
Internal Growth Rate:
When attempting to measure potential growth within a firm, many use the
Internal Growth Rate to get a general idea of what to expect for company growth. The
internal growth rate refers to the rate at which a company can grow its total assets
using only firm generated funds such as retained earnings. It is calculated by
multiplying the company’s return on assets (ROA) by one minus the dividend payout
ratio. The dividend payout ratio is dividends paid divided by net income. By referencing
the graph above, American Greetings is well below both the industry average and
Creative Seasonal Solutions. This is because CSS has consistently had a larger Return
on Assets and has proven to be a more efficient company compared to American
Greetings.
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
2004 2005 2006 2007 2008
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SGR
Sustainable Growth Rate:
The sustainable growth rate ratio (SGR) is the rate in which a firm can grow its
assets without having to increase their financial leverage. If a firm has passed this rate,
then in order to facilitate growth they must borrow money externally. By multiplying the
internal growth rate by (1+debt to equity ratio), leverage is included and the
sustainable growth rate can be concluded. By referencing the graph above, we can see
that American Greetings performance of their SGR matches their IGR, with constant
decline until 2007-2008 when it dramatically increases. This is because their Return on
Assets went from 1.91% to 4.67% during this time. Compared to the industry,
American Greetings has held the lowest rates for sustainable growth rate until this year.
We can estimate that they presently have the most potential for future growth.
Overall, we can estimate that the potential growth for the social expression
products industry is exhibiting positive growth rates over the past five year which shows
great potential for future growth in this industry. However, by examining the graph,
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
2004 2005 2006 2007 2008
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until 2008, CSS has had more potential for future growth than that of American
Greetings.
Forecasting Financials
When analyzing a company it is important to forecast the financial statements.
The reason forecasting is important is because you really find where the value is in the
company. Also, you can see where the value for the company is going in the future.
American Greetings is on a slow decline in profits, which is on track with the rest of the
industry. This slow decline is due to the fact that other forms of media are now being
offered in place of physical cards, which we discussed in the previous pages.
Forecasted Income Statement:
Forecasting the income statement is the most predictable of the financial
statements. When looking at the income statement for American Greetings, we found
that we could easily forecast net sales, cost of goods sold, gross profit, operating
expense, operating income, interest expense, and net income. When forecasting out
net sales for American Greetings, we first went back 5 years and then decided to take a
look at sales before 2003. We thought this would be a good idea because of the
economic recession we were in at the time. Considering the present economy, we
thought it would be wise to base our forecasts on these numbers. We looked at the
increase in 2004 and decided that since our economy is about to start growing again,
we decided to grow sales in 2009 on this assumption by a 1.5% increase. Another basic
reason we decided to grow sales for the next 2 years is because we feel that people will
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be buying more greeting cards due to the slow economy. A greeting card is a cheaper
type of gift than a gift card or something else more expensive.
Over the next 3 years it has slowly declined. We forecasted out a 1.5% increase
for two years and decided that we would then decrease sales by 2% for the next six
years based on the same trend shown after 2003. We feel that the greeting card
industry as a whole is on a steady decline due to the digital media being implemented
in society. In the years following 2016 we decided that if sales would continue to grow
at a negative rate, it would in turn bankrupt the company eventually. We felt that this
would not be allowed my management. We thought an increase of 3% would be
effective based on AG Interactive, which is our digital corporation, providing alternative
sources of media.
Forecasted Statement of Cash Flows:
The statement of cash flows is the source of information that shows how the
company uses its cash that is provided from operating, financing and investing
activities. The way that we were able to come up with the forecasted numbers was by
looking at American Greetings’ past amounts of cash used from the last five years. In
order to forecast out the dividends paid to shareholders, we decided to grow the past
dividends by 2.9%. American Greetings actual dividends paid per share have been
increasing over the past five years, but they have repurchased much of their stock
back. This has caused their overall amount of dividends paid to decrease. However,
American Greetings will continue to increase its amount of dividends paid to
shareholders, this is why we increased the overall amount by 2.9% every year.
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Forecasted Balance Sheet:
When looking at the balance sheet for American Greetings, we decided it would
be necessary to forecast current assets, non-current assets, total liabilities, retained
earnings, and shareholder’s equity. In order to link the income statement to the balance
sheet you must find the total asset turnover ratio. The asset turnover ratio shows the
relationship between total sales and assets for one year. In order to forecast the
current liabilities for the next ten years, we used a current ratio of 1.47. We noticed
that current assets are decreasing each year through 2019. This trend, we thought is
due to the greeting card industry starting a slow decline due to an increase in internet
sales. In order to forecast retained earnings for the next 10 years we took the retained
earnings from 2008 and added our forecasted net income from 2009, and then
subtracted the dividends paid for 2009. As mentioned earlier, the dividends are
increasing by 2.9% each year. The forecasted retained earnings are slightly increasing
for the next ten years.
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Cost of Equity:
The cost of equity is the return an investor expects to receive from bearing the
risk of holding the shares of a company. Investors demand greater returns for bearing
greater risk. In comparison to the cost of debt, the cost of equity is greater because of
the considerably larger default risk. For example, in the event in which a company
becomes bankrupt, the persons who take the least risk are paid first (creditors).
Consequently, stockholders who bear a high investment risk are paid last. Therefore,
investors who bear a high risk demand a market risk premium to compensate. To
establish the cost of equity the Capital Asset Pricing Model, CAPM, is applied. This
model consists of the risk free rate, beta, and the market premium paid to the investor.
The CAPM model is as followed:
Cost of Equity = Risk Free Rate + Beta of the firm * (Market Risk – Risk free Rate)
The risk free rate is the 10 year U.S. Treasury Yield, which is currently 4.02. The beta
is an estimate of the systematic risk. It measures how a firm will react in relation to the
market. A beta of one means the firms stock moves directly with the market. A beta
greater than one increases the risk of the stock (volatility), while a beta less than one
does the opposite. The Market risk premium is the difference between the market risk
and the risk free rate. Together these calculate the cost of equity.
Instead of acquiring this information from other sources, we ran our own
regressions to determine American Greetings beta and cost of equity. In order to do
this, we pooled together an assortment of information. First, we collected American
Greetings closing stock prices for the past seven years. Next, we used the S&P 500 to
find the market return (Rm) over the past seven years. Subsequently, the St. Louis
Federal Reserve website provided us with the treasury rate (Rf) for 3 months, 2 years,
5 years, 7 years and 10 years. For each treasury rate, we ran regressions over five
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different investment periods (24, 36, 48, 60, 72 months) to examine the variance and
stability of our beta thru time. Since beta measures how a firm will react in relation to
the market, a steady beta is desirable. If the betas are found to be inconsistent and
have a broad fluctuation, risk is increased. Conversely, the betas calculated for
American Greetings ranged from around 1.25 to 1.55 in each period. This implies that
the beta for American Greetings is reasonably stable.
We then needed to determine the most suitable beta coefficient by evaluating
the adjusted R2 for each regression. The higher the adjusted R2 , the more desirable it
is. A higher adjusted R2 is more desirable because it tells us “the percentage of the
beta that is explained by the companies stock return and market premium” (Business
analysis & Valuation). Also, the higher the adjusted R2 , the more explanatory power
the related beta has in determining risk. Therefore, the most suitable beta coefficient is
the one with the highest adjusted R2 among the twenty-five regressions. The table
below shows the best adjusted R2 for each time period found within the regressions.
Cost of Equity
Time Period
Length of Regression (Months) Beta
Adjusted R Squared
Cost of Equity
3 Months 24 1.566 0.2900 16.55%
2 Year 24 1.558 0.2888 16.49%
5 Year 24 1.552 0.2882 16.43%
7 Year 24 1.549 0.2878 16.41%
10 Year 24 1.546 0.2876 16.39%
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As seen in the chart above, American Greetings highest adjusted R2 of 29% was
found in the 24-month regression using the 3-month treasury yield. This yielded a beta
coefficient of 1.566 and a cost of equity of 16.55%.
When examining our beta coefficient, it was compared to the beta given on
Yahoo Finance. Even though we use the same financial data, it is unsure of the method
used in determining their beta. After examining Yahoo Finance, we found their beta
coefficient to be 1.29. This number differed by .276 from the beta we calculated. This
is relatively close considering the uncertainty of the method or accuracy of Yahoo
Finance.
Next, we calculated the cost of equity to equal 16.55%. This means that a cost
of equity of 16.55% will be the best Ke in determining the return necessary for
American Greetings operations. We also examined the adjusted R2 and betas to be
reasonably consistent throughout each regression. As seen above, the adjusted R2 only
ranges from 28.76% to 29.00%. Also, the beta only ranges from 1.546 to 1.566. This
shows that the adjusted R2 and beta are relatively stable. With a stable beta, it is easier
for an investor to predict the future performance of an investment in American
Greetings.
Although the cost of equity was found using CAPM, the model is said to be
“incomplete.” In order to determine the actual cost of equity, we must take into
account the “size effect.” The size effect states that,
“Smaller firms (as measured by market capitalization) tend to generate higher
returns in subsequent periods. It could mean that smaller firms are riskier than
indicated by the CAPM or that they are underpriced to the point their market
capitalization is measured, or some combination of the two” (Palepu & Healy, 8-
3).
Therefore, a certain size adjustment must be made depending on the firm’s market cap.
In order to take into account the size effect, the size decile must be found based on the
firm’s market cap. Next, the size premium based on the size decile must be added to
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the cost of equity. This information can be found using Table 8-1 in the textbook
Business Analysis & Valuation: Using Financial Statements by Palepu and Healy. Since
American Greetings has a market cap of 541.827 Million, Table 8-1 shows that the
company lies within the second decile. This would give American Greetings a 2.7%
return in excess of CAPM. As a result, the new cost of equity including the size premium
equals 19.25%.
Ke = 16.55% + 2.7% = 19.25%
We also used a 95% confidence interval. This means that we are 95% confident
that our beta lies within the lower and upper bounds. Our regression shows that our
confidence interval (including a 2.7% size premium) has a lower bound of 12.02% and
an upper bound of 31.88%. These bounds will be used within the valuation models in
order to evaluate our company later in the report.
3 Month Rate
beta est rf MRP Cost of Equity Adjusted R Squared
72 1.253400412 4.02 8 14.047% 0.222303655
62 1.368616311 4.02 8 14.969% 0.230031016
48 1.381038968 4.02 8 15.068% 0.217075427
36 1.455032206 4.02 8 15.660% 0.23366199
24 1.565685861 4.02 8 16.545% 0.2900263712 Year Rate
beta est rf MRP Cost of Equity Adjusted R Squared
72 1.251124426 4.02 8 14.029% 0.221551427
62 1.36535001 4.02 8 14.943% 0.228888658
48 1.378355222 4.02 8 15.047% 0.216773709
36 1.450520438 4.02 8 15.624% 0.233407334
24 1.558450079 4.02 8 16.488% 0.2888121355 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.25087034 4.02 8 14.026% 0.22106172
62 1.361228631 4.02 8 14.909% 0.227610957
48 1.373936828 4.02 8 15.011% 0.21651546
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36 1.44329389 4.02 8 15.566% 0.232739013
24 1.551669691 4.02 8 16.433% 0.2881900877 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.25083688 4.02 8 14.027% 0.220857587
62 1.359519862 4.02 8 14.896% 0.227128492
48 1.372254707 4.02 8 14.998% 0.216409121
36 1.44020434 4.02 8 15.542% 0.232391937
24 1.548841079 4.02 8 16.411% 0.28785792610 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.250022018 4.02 8 14.020% 0.220586388
62 1.357361062 4.02 8 14.879% 0.226681965
48 1.369968803 4.02 8 14.979% 0.216242836
36 1.436767318 4.02 8 15.514% 0.232067193
24 1.545843156 4.02 8 16.387% 0.287597825
Backdoor Cost of Equity
After equating our adjusted cost of equity, we decided to run another equity
estimation. To find the most useful estimation, we needed to compare the backdoor
cost of equity to the size adjusted cost of equity. The backdoor cost of equity is
calculated by using the following equation:
M/B = 1 + [(ROE-Ke) / (Ke-g)]
First, the market to book ratio was calculated by multiplying the number of shares
outstanding (54,236,961) by the current stock price ($9.99). This number was then
divided by the book value of equity for American Greetings (943,411,000) to equal
0.57. Next, the return on equity equaled the ten year forecast average (7.341%) and g
equaled the earnings growth rate. Plugging these numbers into the equation yielded a
backdoor cost of equity of 11.37%. We decided to not use the backdoor cost of equity
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because we were satisfied with the explanatory power of the size-adjusted cost of
equity estimation.
Cost of Debt
The cost of debt is the interest a company pays on its current debt. As stated
above, debt is considerably less risky that equity. Therefore, the cost of debt will be
lower than the cost of equity. In order to equate the cost of debt, we followed certain
steps. First, we took the weights for each of American Greeting’s liabilities as compared
to total liabilities. Next, we multiplied the weights by the matching interest rate.
Subsequently, we added these multiplied weights to get the effective interest rate for
all debt of American Greetings.
To calculate the weighted average cost of debt, interest rates for each liability of
the firm were found. The disclosure of interest rates paid on debt was particularly poor
for American Greetings. Compared to CSS Industries, the amount of information
provided about debt activities was particularly less. For that reason, estimates had to
be made for certain debt securities.
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Cost Of Debt
Debt (In Thousands) Weight Interest Rate WACD
Current Liabilities
Debt Due Within One Year 42,790 4.97% 5.44 0.27
Accounts Payable 123,713 14.37% 3.19 0.46
Accrued Liabilities 79,345 9.22% 3.19 0.29
Accrued Compensation and Benefits 68,669 7.98% 6.5 0.52
Income Taxes Payable 29,037 3.37% 3.81 0.13
Other Current Liabilities 108,867 12.64% 4.2125 0.53
Total Current Liabilities 452,421
Long‐Term Debt 200,518 23.29% 7.375 1.72
Other Liabilities 181,720 21.11% 7.375 1.56
Deferred Income Taxes and Noncurrent Income Taxes Payable 26,358 3.06% 3.81 0.12
Total Liabilities 861,017 100.00% 5.59
The information provided by American Greetings 10-K is as follows. First,
interest rates for ‘debt due within one year’ are provided. Debt due within one year
included revolving credit facility (4.7%) and senior credit notes (6.10%). A weighted
average was calculated to receive an interest rate of 5.44% for debt due within one
year. Next, American Greetings 10-K stated that ‘accounts payable’ and ‘accrued
liabilities’ are “based on commercial paper interest rates.” According to the St. Louis
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Fed website, the 3-month AA Commercial Paper Interest Rate (at 10-01-2008) is
3.19%. Afterward, the weighted average pension plan discount rate of 6.50% was
used for ‘Accrued Compensation and Benefits’. Then, American Greetings 10-K stated
that ‘other current liabilities’ should be “based on LIBOR rates plus a 25 basis point
margin.” According to moneycafe.com, the 1-year LIBOR rate (at 10-1-2008) is 3.96%.
When adding 25 basis points, other current liabilities come out to 4.21%. Finally,
American Greetings 10-K stated that long-term debt had an interest rate of 7.375%.
Estimates were made for debt securities that were undisclosed within American
Greetings 10-K. For ‘Deferred Income Taxes and Noncurrent Income Taxes Payable’
the 10-year constant treasury rate (at 10-1-2008) of 3.81% was used. The 10-year
constant treasury rate was also used for ‘Income Taxes Payable.’ Also, since interest
rates were not provided for the ‘other liabilities section’, we used the long-term interest
rate. We believe these estimates will give the best weighted average cost of capital
considering American Greetings lack of disclosure.
Weighted Average Cost of Capital (WACC)
The weighted average cost of capital, WACC, represents the expected return of a
company’s securities. This includes both the cost of equity and cost of debt. In order
to calculate the WACC, we must know the market value of equity, the value of assets
and liabilities of the firm, and the cost of debt and equity. The formula is as follows:
WACC = (MVE / MVA) * ke + (MVL / MVA) * kd
In addition to this formula, when calculating the after tax WACC, taxes are taken into
account. Within American Greeting’s 10-K there was no disclosure of the effective tax
rate. Therefore, we calculated the effective tax rate by dividing total taxable income
from income tax expense. As a result, American Greeting’s effective tax rate was
32.8%. After successfully obtaining the tax rate we then calculated the before tax and
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after tax WACC as shown in the chart below. Through the use of the formula shown
above, we found the before tax WACC to be 10.86%, and the after tax WACC to be
9.74%.
WEIGHTED AVERAGE COST OF CAPITAL
E/(L+E) Cost of Equity L/(L+E) Cost of Debt Tax Rate WACC
WACC (BT) 541,827 / 1,402,844
19.25% 861,017 / 1,402,844
5.59% 0.000 10.86%
WACC (AT) 541,827 / 1,402,844
19.25% 861,017 / 1,402,845
5.59% 0.328 9.74%
Next, we used the 95% confidence interval to compute the upper and lower
bounds of the before tax WACC. These bounds will be used within our valuation
models later in the report. As seen in the table below, American Greetings has an
Upper WACC BT of 15.74% and a lower WACC BT of 8.07%.
WACC BT 95% C.I.
E/(L+E) Cost of Equity L/(L+E) Cost of Debt Tax Rate WACC
WACC (BT) ‐ Upper Bound 541,827 / 1,402,843
31.88% 861,017 / 1,402,843
5.59% 0.00 15.74%
WACC (BT) 541,827 / 1,402,844
19.25% 861,017 / 1,402,844
5.59% 0.00 10.86%
WACC (BT) ‐ Lower Bound 541,827 / 1,402,844
12.02% 861,017 / 1,402,845
5.59% 0.00 8.07%
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WEIGHTED AVERAGE COST OF CAPITAL
E/D+E Cost of Equity D/D+E
Cost of Debt Tax Rate WACC
WACC (BT) 0.523 16.55% 0.477 2.84% 0 10.01%
WACC (AT) 0.523 16.55% 0.477 2.84% (1 - 0.328) 7.17%
Method of Comparables
Price to Earnings (Trailing):
Price to Earnings (Trailing)
PPS EPS P/E Trailing Industry
Average
Expected
PPS
American
Greetings
9.99 1.19 8.42 10.29 12.25
CSS 22.23 2.11 10.42
The price to earnings ratio is considered by many analysts to be of great
importance when analyzing financial statements. However, this does not do a good job
at valuating a firm since the price per share is a forward looking number while the
earnings per share is a historical price. It does not make sense to use historical
information when looking forward. Price to earnings trailing is calculated by dividing the
price per share by the earnings per share. For the trailing you use the current earnings
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per share number. Each company in an industry’s price to earnings ratio is averaged
and then that average is multiplied with the price to earnings ratio of the company
being evaluated. However, in this industry, CSS is the only publicly held competitor and
therefore is the industry average. The analyst may then compare this price with the
current market price in order to see if the valued firm is over or undervalued. When
applying this model to American Greetings, a price of $12.25, higher than current
market share price of 9.99, implying the firm is undervalued.
Price to Earnings (forward):
Price to Earnings (Forward)
PPS EPS 1Year Out
P/E Forward
Industry Average
Expected PPS
American Greetings
9.99 1.54 6.40 7.78 15.39
CSS 22.23 2.35 7.78
The price to earnings forward ratio is very similar to that of the trailing, with the
only difference being you divide the price per share by the earnings per share one year
out. The price per share for each firm in the industry (only CSS) is averaged and then
multiplied by American Greetings price per share. This model produces a price for
American Greetings of $15.39, again implying they are undervalued with a price of 9.
99.
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Price to Book:
Price To Book PPS BPS P/B Industry
Average Expected PPS
American Greetings
9.99 18.5 .54 .84 15.54
CSS 22.23 26.46 .84
Another ratio used to valuate and compare a firm’s market price is the price to
book ratio. In the price-book ratio, the current price is divided by the book value of
assets for each firm in the industry. The average of these ratios is once again multiplied
by the valuated firm’s price-book ratio. This will produce a price per share value for the
firm that is derived from the book value. Once this was applied to American Greetings,
a price per share value of $15.54 was produced. Again this is higher than their This is
almost exactly in line with the $9.99 market share price meaning this comparable
implying they are undervalued.
Dividends/Price:
Dividends/Price DPS PPS D/P Industry
Average Expected PPS
American Greetings
0.48 9.99 .048 .0276 17.39
CSS .60 22.23 .0276
Another comparable ratio used is the dividends to price model. In this model, you take
the dividends per share and divide it by price per share. This gave us an industry
average of .0276. Then American Greetings dividend per share was divided by this
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industry average to equal an expected price per share for American Greetings of
$17.39, implying their current market share price is undervalued.
PEG:
PEG PE EGR (t+1) P.E.G. Industry
Average Expected PPS
American Greetings
8.4 8.3% 101.14 79.15 6.57
CSS 10.29 13% 79.15
Another model used to compare the valuated firms market price is the PEG ratio.
This ratio takes the P/E ratio and divides it by 1 year ahead earnings growth rate. In
this case the industry average is 79.15 and is then multiplied by the growth rate of
8.3% to produce a price of $6.57. This ratio comparable shows that American Greetings
is overvalued.
P/EBITDA:
P/EBITDA In Millions Market Cap EBITDA P/EBITDA Industry
Average Expected PPS
American Greetings
541.827 139.62 3.88 4.20 $586.40
CSS 216.32 51.53 4.20
EBITDA stands for earnings before interest, taxes, depreciation, and
amortization. Therefore after we divided the price per share by EBITDA for CSS, to get
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the industry average of 4.20, and multiplied it by American Greetings EBITDA to get a
share price for American Greetings of $586.40. This ratio signifies that American
Greetings is a extremely undervalued and could be due to any estimation errors that
should be taken into account.
P/FCF per Share:
P/FCF In Millions Market Cap FCF P/FCF Industry
Average Expected PPS
American Greetings
541.827 1.51 6.62 14.28 21.56
CSS 216.32 1.52 14.28 The price over free cash flows model is calculated by dividing, once again, the
market cap by the free cash flows. Your free cash flows are calculated by cash flow
from operations plus or minus cash flow from investments. CSS was again used as the
industry average, being the only public competitor. After the multiplying the industry
average by American Greetings free cash flow per share, the expected price per share
for American Greetings was $21.56. This implies that American Greetings is
undervalued.
EV/EBITDA:
EV/EBITDA In Millions EV EBITDA EV/EBITDA Industry
Average Expected PPS
American Greetings
801.84 139.62 5.743 6.453 12.63
CSS 332.52 51.53 6.453
In the enterprise value to EBITDA model the enterprise value is first computed
by adding the market value of equity, plus the book value of liabilities, plus cash, plus
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the investments. After computing that number, you divide that by EBITDA. CSS had an
industry average of 6.453. The expected price per share for this model was $12.63
implying that American Greetings is fairly valued.
Conclusion:
After computing all of the ratios in the method of comparables, it is easy to see
that they do not do an excellent job at representing the company’s value. Due to the
lack of publicly traded companies, therefore American Greetings could not get a true
industry value. Overall, these comparable ratios concluded that American Greetings
current market price per share is undervalued, while most of the intrinsic models,
including Residual Income, claim they are overvalued.
Residual Income
The residual income model is considered one of the most reliable models used to
estimate the value of a firm. This model has an advantage over other models in the
sense that it is not overly sensitive to total value perpetuity and growth rate
assumptions. The residual income model is also less sensitive to changes in the cost of
equity relative to the discounted dividends or free cash flows models. It has a
reasonably high explanatory power of about 45-50%, far exceeding the other models
such as free cash flow (10-15%) and the discounted dividends (5%).
The RI model relies primarily on the present value of residual income and book
value of equity rather than perpetuities. However, the initial book value of equity is an
accounting assumption made by the firm’s managers, perhaps the only potential flaw
within this model. To calculate the Residual Income Model, the book value of equity,
cost of equity, total dividends, net income, and a negative growth rate are needed. The
reason for using a negative growth in this model is to meet back to equilibrium. The
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more of the firm’s value that is being destroyed over time is due to the increasing
growth rates.
For the equity valuation of American Greetings, using the Residual Income Model, the
normal income was the first item found in each of the ten years. This is calculated by
taking the previous year’s book value of equity and multiplying it by the estimated cost
of equity. This number is used as a benchmark for earnings and is subtracted from the
net income to derive an annual residual income value. This value then has to be
discounted back to give a year by year present value residual incomes. The next step is
to create a terminal value perpetuity by using the following formulas:
Continuous Terminal Value Perpetuity=
Annual Residual Income in Year 11/ (Ke-growth rate)
<221,285.01>/(.1925+.10) = <756,529.95>
PV of terminal value of perpetuity = Cont. TV perpetuity X PV Factor yr. 10
= <756,529.95> X .17196 = <130,089.50>
This PV of terminal perpetuity is then added to the sum of the year by year
annual residual income and the initial book value of equity to obtain the market value of
equity. The total market value of equity is then divided by 54236.961 which is the
number of shares outstanding for American Greetings to acquire the price for the
beginning of 2008 as 4.54. Compared to the observed price of 9.99, American Greetings
is overvalued.
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-0.1 -0.2 -0.3 -0.4 -0.5
12.02% $10.08 11.03 11.52 11.83 12.03
14.43% 7.95 8.85 9.35 9.66 9.88
16.84% 6.40 7.22 7.68 7.98 8.19
19.25% 5.26 5.97 6.39 6.67 6.86
23.46% 3.89 4.43 4.76 4.99 5.16
27.67% 3.02 3.42 3.67 3.86 3.99
31.88% 2.45 2.74 2.93 3.07 3.18
Ke
Overvalued < $6.99 Fairly Valued = $ 6.99-$
12.99 Undervalued = > $12.99
By closely examining the sensitivity analysis, we can see that a majority of the
figures point to the firm being overvalued. There are no possibilities of this firm being
undervalued within this model. Perhaps the most important fact is that our estimated
cost of equity of 19.25% was consistently in overvalued range; thus indicating that
American Greetings is not meeting market expectations.
Abnormal Earnings Growth
When it comes to using different models to value a firm, the abnormal earning
growth model is the next best model after residual income, although is one of the most
difficult to calculate. The inputs required to perform this model include net income, cost
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of equity, and dividends. To calculate this model we needed to calculate the DRIP or
indirect income. To do this we took the dividends in year 1 and multiplied by the cost of
equity. This DRIP income is then used to find the cumulative Dividend income by
adding the net income and the DRIP. The normal benchmark income is then computed
by taking the net income in the year before and multiplying it by one plus cost of
equity. The benchmark number is then compared to the cumulative dividend income to
see if the company destroyed or created valued. For American Greetings, the
benchmark income for year 2009 was $109461 and their cumulative dividend income
was $99530 for year 2009. This means that they did not beat their benchmark and are
destroying value.
The annual AEG is then calculated by subtracting the two incomes to see
how much the company beat the benchmark by. American Greetings AEG was
-9930 for 2009 and therefore did not beat their benchmark for that year. This is done
for each of the ten years. The present value factor is then calculated to find the present
value of the annual AEG. To find the adjustment to the perpetuity, the annual AEG in
year eleven is divided by the cost of capital less the growth rate, all times the present
value factor in year ten. The total forward adjustment to the earnings perpetuity is the
sum of the core, adjustment to the core, and adjustment to the perpetuity. This value
divided by the cost of equity results in the market value of equity which can then be
divided by the total shares outstanding to arrive at an intrinsic market price. As with all
of the other models, the intrinsic price has to be discounted back. With the assumed
cost of capital of 19.25%, American Greetings has a time consistent price of $1.68
which would imply they are highly overvalued.
The best part of this model is the fact that there is a check figure built into the
model. The change in the residual income is the same as the abnormal earnings
growth. Therefore, you can compare the residual income model to the abnormal
earnings growth model to make sure you have the most accurate statistics.. Therefore,
this model says that American Greetings stock is overvalued.
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A.E.G. Model
Growth Rate
Ke
0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6
12.02% $7.49 6.86 6.22 5.56 4.89 4.20 3.49
14.43 5.68 5.20 4.71 4.21 3.70 3.18 2.64
16.84 4.47 4.09 3.71 3.32 2.92 2.51 2.08
19.25% 3.63 3.32 3.01 2.69 2.38 2.03 1.69
23.459 2.67 2.44 2.21 1.98 1.75 1.49 1.24
27.67 2.08 1.90 1.72 1.54 1.35 1.16 0.96
31.8762 1.6 1.54 1.39 1.25 1.10 0.94 0.78
Fairly Value: $ 6.99- $ 12.99
Overvalued < $6.99 Undervalued > $12.99
When looking at the chart, you can see that all but one price is overvalued. We
took into consideration different growth rates as well as cost of equity to get a value of
the firm. Using this model it would be apparent that American Greetings stock is
extremely overvalued since stock prices go as low as $.78 and only as high as $6.86.
When comparing this price at the beginning of 2008, there is a large difference and
according to these values, American Greetings is extremely overvalued.
Free Cash Flow
While the free cash flow model has more explanatory power than the discounted
dividends model or the method of comparables, its explanatory power is still only about
7.5% to 15%. This model has the greatest sensitivity to the terminal value growth rate.
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For example, a 2% increase in growth (from 6-8%) with a 8.07% WACC(BT) resulted in
a $1648 jump in the price. However, the sensitivity decreases when the WACC
increases. The inputs needed for this model include: cash flow from operations, cash
flow from investing activities, the weighted average cost of capital before tax, and the
market value of liabilities. We use the before tax WACC rather than the cost of capital is
that because both equity and debt holders have claim to the firm. Also, the before tax
WACC is used since the free cash flows are stated in an after tax manner; meaning that
in order to avoid double taxation or the lack of taxation at all, the before tax WACC has
to be used.
In the valuation of American Greetings using this model, annual free cash flow
from the firm is the first item to be calculated. This is done by adding cash flow from
operations to cash flow from investing activities. These values are then discounted back
by multiplying them by the present value factor. To start the perpetuity which shows
the continually growing free cash flows to the firm, the free cash flow in year eleven is
divided by the weighted average cost of capital less the growth rate. Once this
perpetuity is discounted back it is then added to the sum of the year by year free cash
flows. The book value of liabilities (BV of debt and liabilities) and is then subtracted
from this value to obtain the market value of equity. To attain the intrinsic price of
American Greetings, the market value of equity is divided by the total number of shares
outstanding (54236.961M). This intrinsic price then has to be discounted back in order
for all the models to have a consistent evaluation date. At this date, American Greetings
estimated value is $9.46, which would be fairly valued .
Since our calculated WACC was at 10.86%, we assumed reasonable WACC’s
ranging from 8%-15% for this model. In doing so we found the corresponding cost of
equity required to obtain each WACC, and used these
in our valuation.
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0 0.02 0.04 0.06 0.08 0.1 0.12
8.07% 12.83 17.71 27.37 55.71 1703.37
9.00 9.68 13.18 19.49 34.20 107.77
9.93 7.11 9.70 14.04 22.80 49.72
10.86% 4.96 6.92 10.03 15.70 29.30 106.14
12.49 1.94 3.20 5.06 8.06 13.74 28.52 164.03
14.12 0.44 1.62 3.38 6.30 12.04 28.63
15.74% 0.20 1.88 4.75 10.68
Overvalued < 6.99
6.99 - 12.99 = Fairly Valued
Undervalued > 12.99
The chart shown above is the sensitivity analysis of the discounted free cash flow
valuation model for American Greetings. By substituting different WACC and Growth
rates for the model we can see that the stock price fluctuates greatly. This model
portrays American Greetings to be fairly valued.
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Method of Comparables
Price to Earnings (Trailing):
Price to Earnings (Trailing)
PPS EPS P/E Trailing Industry
Average
Expected
PPS
American
Greetings
9.99 1.19 8.42 10.29 12.25
CSS 22.23 2.11 10.42
The price to earnings ratio is considered by many analysts to be of great
importance when analyzing financial statements. However, this does not do a good job
at valuating a firm since the price per share is a forward looking number while the
earnings per share is a historical price. It does not make sense to use historical
information when looking forward. Price to earnings trailing is calculated by dividing the
price per share by the earnings per share. For the trailing you use the current earnings
per share number. Each company in an industry’s price to earnings ratio is averaged
and then that average is multiplied with the price to earnings ratio of the company
being evaluated. However, in this industry, CSS is the only publicly held competitor and
therefore is the industry average. The analyst may then compare this price with the
current market price in order to see if the valued firm is over or undervalued. When
applying this model to American Greetings, a price of $12.25, higher than current
market share price of 9.99, implying the firm is undervalued.
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Price to Earnings (forward):
Price to Earnings (Forward)
PPS EPS 1Year Out
P/E Forward
Industry Average
Expected PPS
American Greetings
9.99 1.54 6.40 7.78 15.39
CSS 22.23 2.35 7.78
The price to earnings forward ratio is very similar to that of the trailing, with the
only difference being you divide the price per share by the earnings per share one year
out. The price per share for each firm in the industry (only CSS) is averaged and then
multiplied by American Greetings price per share. This model produces a price for
American Greetings of $15.39, again implying they are undervalued with a price of
9.99.
Price to Book:
Price To Book PPS BPS P/B Industry
Average Expected PPS
American Greetings
9.99 18.5 .54 .84 15.54
CSS 22.23 26.46 .84
Another ratio used to valuate and compare a firm’s market price is the price to
book ratio. In the price-book ratio, the current price is divided by the book value of
assets for each firm in the industry. The average of these ratios is once again multiplied
by the valuated firm’s price-book ratio. This will produce a price per share value for the
firm that is derived from the book value. Once this was applied to American Greetings,
a price per share value of $15.54 was produced. Again this is higher than their This is
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almost exactly in line with the $9.99 market share price meaning this comparable
implying they are undervalued.
Dividends/Price:
Dividends/Price DPS PPS D/P Industry
Average Expected PPS
American Greetings
0.48 9.99 .048 .0276 17.39
CSS .60 22.23 .0276
Another comparable ratio used is the dividends to price model. In this model,
you take the dividends per share and divide it by price per share. This gave us an
industry average of .0276. Then American Greetings dividend per share was divided by
this industry average to equal an expected price per share for American Greetings of
$17.39, implying their current market share price is undervalued.
PEG:
PEG PE EGR (t+1) P.E.G. Industry
Average Expected PPS
American Greetings
8.4 8.3% 101.14 79.15 6.57
CSS 10.29 13% 79.15
Another model used to compare the valuated firms market price is the PEG ratio.
This ratio takes the P/E ratio and divides it by 1 year ahead earnings growth rate. In
this case the industry average is 79.15 and is then multiplied by the growth rate of
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8.3% to produce a price of $6.57. This ratio comparable shows that American Greetings
is overvalued.
P/EBITDA:
P/EBITDA In Millions Market Cap EBITDA P/EBITDA Industry
Average Expected PPS
American Greetings
541.827 139.62 3.88 4.20 $586.40
CSS 216.32 51.53 4.20
EBITDA stands for earnings before interest, taxes, depreciation, and
amortization. Therefore after we divided the price per share by EBITDA for CSS, to get
the industry average of 4.20, and multiplied it by American Greetings EBITDA to get a
share price for American Greetings of $586.40. This ratio signifies that American
Greetings is a extremely undervalued and could be due to any estimation errors that
should be taken into account.
P/FCF per Share:
P/FCF In Millions Market Cap FCF P/FCF Industry
Average Expected PPS
American Greetings
541.827 1.51 6.62 14.28 21.56
CSS 216.32 1.52 14.28
The price over free cash flows model is calculated by dividing, once again, the market
cap by the free cash flows. Your free cash flows are calculated by cash flow from
operations plus or minus cash flow from investments. CSS was again used as the
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industry average, being the only public competitor. After the multiplying the industry
average by American Greetings free cash flow per share, the expected price per share
for American Greetings was $21.56. This implies that American Greetings is
undervalued.
EV/EBITDA:
EV/EBITDA In Millions EV EBITDA EV/EBITDA Industry
Average Expected PPS
American Greetings
801.84 139.62 5.743 6.453 12.63
CSS 332.52 51.53 6.453
In the enterprise value to EBITDA model the enterprise value is first computed
by adding the market value of equity, plus the book value of liabilities, plus cash, plus
the investments. After computing that number, you divide that by EBITDA. CSS had an
industry average of 6.453. The expected price per share for this model was $12.63
implying that American Greetings is fairly valued.
Conclusion
After computing all of the ratios in the method of comparables, it is easy to see
that they do not do an excellent job at representing the company’s value. Due to the
lack of publicly traded companies, therefore American Greetings could not get a true
industry value. Overall, these comparable ratios concluded that American Greetings
current market price per share is undervalued, while most of the intrinsic models,
including Residual Income, claim they are overvalued.
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Appendices
Rivalry Among Existing Firms High
Threat of New Entrants Low
Threat of Substitute Products High
Bargaining Power of Buyers Moderate
Bargaining Power of Suppliers Low
Liquidity Analysis
Current Ratio 2004 2005 2006 2007 2008
American Greetings 4.71 2.69 2.09 2.14 1.48
CSS 4.07 3.28 3.59 4.36 3.13
Quick Asset Ratio 2004 2005 2006 2007 2008
American Greetings 1.23 .9 .63 .67 .41
CSS 2.18 1.42 1.5 2.45 1.05
Working Capital T/O 2004 2005 2006 2007 2008
American Greetings 1.24 2.37 3.09 4.10 7.98
CSS 2.87 3.53 3.25 2.82 3.66
A/R T/O 2004 2005 2006 2007 2008
American Greetings 8.19 10.45 13.46 16.78 27.96
CSS 13.33 14.39 14.77 14.28 12.73
Days Supply of Receivables 2004 2005 2006 2007 2008
American Greetings 44.55 34.93 27.13 21.76 13.05
CSS 27.38 25.36 24.71 25.56 28.67
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Inventory T/O 2004 2005 2006 2007 2008
American Greetings 7.41 8.29 8.29 9.36 7.61
CSS 4.17 3.9 3.85 4.8 3.42
Days Supply of Inventory 2004 2005 2006 2007 2008
American Greetings 49.26 44.05 44.02 39 47.96
CSS 87.53 93.59 94.81 76.04 106.73
Cash to Cash Cycle 2004 2005 2006 2007 2008
American Greetings 93.81 78.98 71.15 60.76 61.01
CSS 114.91 118.95 119.52 101.6 135.4
Days Sales Outstanding 2004 2005 2006 2007 2008
American Greetings 44.55 34.93 27.13 21.76 13.05
CSS 27.38 25.36 24.71 25.56 28.67
Profitability Analysis
Gross Profit Margin 2004 2005 2006 2007 2008
American Greetings .1 .05 .06 .02 .05
CSS .27 .26 .24 .26 .28
Net Profit Margin 2004 2005 2006 2007 2008
American Greetings .05 .05 .05 .02 .05
CSS .06 .06 .04 .05 .05
Asset Turnover 2004 2005 2006 2007 2008
American Greetings .76 .77 .74 .79 .97
CSS 1.54 1.44 1.57 1.58 1.45
Return on Assets 2004 2005 2006 2007 2008
American Greetings .04 .04 .03 .02 .05
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CSS .09 .08 .07 .07 .07
Return on Equity 2004 2005 2006 2007 2008
American Greetings .1 .04 .06 .03 .08
CSS .14 .12 .1 .1 .1
Capital Structure Analysis
Debt-to Equity Analysis 2004 2005 2006 2007 2008
American Greetings .96 .82 .81 .76 .91
CSS .49 .54 .44 .31 .32
Debt-Service Margin 2004 2005 2006 2007 2008
American Greetings 0 0 1.53 0 5.69
CSS 470.28 114.38 2.64 5.44 4.09
TIE 2004 2005 2006 2007 2008
American Greetings 1.86 1.36 4.6 2.56 6.44
CSS 12.61 18.85 8.98 15.1 38.87
Z-Scores 2004 2005 2006 2007 2008
American Greetings 3.183 2.902 3.183 3.4 2.63
CSS 5.49 5.832 5.82 6.875 5.173
Growth Rate Analysis
SGR 2004 2005 2006 2007 2008
American Greetings .08 .06 .05 .02 .07
CSS .08 .07 .05 .06 .06
IGR 2004 2005 2006 2007 2008
American Greetings .04 .04 .03 .01 .03
CSS .08 .07 .05 .06 .06
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Method of Comparables
Price to earnings (trialing)
PPS EPS P/E trailing Industry Avg. Exp. PPS
AM 9.99 1.19 8.42 10.29 12.25
CSS 22.23 2.11 10.42
Price to earning (forward)
PPS EPS(1 year out) P/E Forward Industry Avg Exp. PPS
AM 9.99 1.54 6.40 7.78 15.39
CSS 22.23 2.35 7.78
Price to Book
PPS BPS P/B Industry Avg Exp. PPS
AM 9.99 18.5 .54 .84 15.54
CSS 22.23 26.46 .84
Dividends to Price
DPS PPS D/P Industry Avg. Exp. PPS
AM .48 9.99 .048 .0276 17.39
CSS .60 22.23 .0276 .
PEG
PE EGR (t+1) P.E.G Industry Avg. Exp. PPS
AM 8.4 8.3 101.14 79.15 6.57
CSS 10.29 13 79.15
P/EBITDA
148
MKT.CAP EBITDA P/EBITDA Industry Avg. Exp. PPS
AM 541.827 139.62 3.88 4.2 586.40
CSS 216.31 51.53 4.2
P/FCF Per Share
MKT CAP FCF P/FCF Industry Avg. Exp PPS
AM 541.827 1.51 6.62 14.28 21.56
CSS 216.332 1.52 14.28
EV/EBITDA
EV EBITDA EV/EBITDA Industry Avg Exp PPS
AM 801.84 139.62 5.743 6.453 12.63
CSS 332.52 51.53 6.453
Cost Of Debt
Debt (In
Thousands) Weight Interest Rate WACD
Current Liabilities Debt Due Within One Year 42,790 4.97% 5.44 0.27 Accounts Payable 123,713 14.37% 3.19 0.46
Accrued Liabilities 79,345 9.22% 3.19 0.29 Accrued Compensation and Benefits 68,669 7.98% 6.5 0.52
Income Taxes Payable 29,037 3.37% 3.81 0.13 Other Current Liabilities 108,867 12.64% 4.2125 0.53 Total Current Liabilities 452,421 Long-Term Debt 200,518 23.29% 7.375 1.72
Other Liabilities 181,720 21.11% 7.375 1.56 Deferred Income Taxes and Noncurrent Income Taxes Payable 26,358 3.06% 3.81 0.12 Total Liabilities 861,017 100.00% 5.59
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WEIGHTED AVERAGE COST OF CAPITAL
E/(L+E) Cost of Equity L/(L+E) Cost of Debt Tax Rate WACC
WACC (BT) 541,827 / 1,402,844 19.25% 861,017 /
1,402,844 5.59% 0.00 10.86%
WACC (AT) 541,827 / 1,402,844 19.25% 861,017 /
1,402,845 5.59% 0.33 9.74%
WACC BT 95% C.I.
E/(L+E) Cost of Equity L/(L+E) Cost of Debt Tax Rate WACC
WACC (BT) - Upper Bound 541,827 / 1,402,843 31.88% 861,017 /
1,402,843 5.59% 0.00 15.74%
WACC (BT) 541,827 / 1,402,844 19.25% 861,017 /
1,402,844 5.59% 0.00 10.86%
WACC (BT) - Lower Bound 541,827 / 1,402,844 12.02% 861,017 /
1,402,845 5.59% 0.00 8.07%
3 Month Rate
beta est rf MRP Cost of Equity Adjusted R Squared
72 1.253400412 4.02 8 14.047% 0.222303655
62 1.368616311 4.02 8 14.969% 0.230031016
48 1.381038968 4.02 8 15.068% 0.217075427
36 1.455032206 4.02 8 15.660% 0.23366199
24 1.565685861 4.02 8 16.545% 0.2900263712 Year Rate
beta est rf MRP Cost of Equity Adjusted R Squared
150
72 1.251124426 4.02 8 14.029% 0.221551427
62 1.36535001 4.02 8 14.943% 0.228888658
48 1.378355222 4.02 8 15.047% 0.216773709
36 1.450520438 4.02 8 15.624% 0.233407334
24 1.558450079 4.02 8 16.488% 0.2888121355 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.25087034 4.02 8 14.026% 0.22106172
62 1.361228631 4.02 8 14.909% 0.227610957
48 1.373936828 4.02 8 15.011% 0.21651546
36 1.44329389 4.02 8 15.566% 0.232739013
24 1.551669691 4.02 8 16.433% 0.2881900877 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.25083688 4.02 8 14.027% 0.220857587
62 1.359519862 4.02 8 14.896% 0.227128492
48 1.372254707 4.02 8 14.998% 0.216409121
36 1.44020434 4.02 8 15.542% 0.232391937
24 1.548841079 4.02 8 16.411% 0.28785792610 Year Rate
beta est. rf MRP Cost of Equity Adjusted R Squared
72 1.250022018 4.02 8 14.020% 0.220586388
62 1.357361062 4.02 8 14.879% 0.226681965
48 1.369968803 4.02 8 14.979% 0.216242836
36 1.436767318 4.02 8 15.514% 0.232067193
24 1.545843156 4.02 8 16.387% 0.287597825
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Works Cited
American Greetings 10-K 4/9/2008
"American Greetings Files Suit Against D/C Entertainment." Wall Street Journal 28 July 2008.
"AmericanGreetings.com Licenses Tumbleweed Patents for Online Greeting Card Delivery." Tumbleweed Press Releases. 14 Dec. 2001. Tumbleweed. 10 Sep. 2008 <http://www.tumbleweed.com/news/press_releases/2001/2001-12-14.html>.
"Cookie Jar Entertainment To Acquire American Greetings' Strawberry Shortcake and Care Bears Properties." Press Release. 23 July 2008. American Greetings Corporation. 10 Sep. 2008 <http://biz.yahoo.com/prnews/080723/clw068.html?.v=101>.
Dorman, Shirleen. "American Greetings' Net Falls ." Wall Street Journal 26 June 2008
Findlay , Andrea M. "To Pay or Not to PayHow card sites’ new approaches reflect the evolving Internet medium." Apr. 2002. 16 Sep. 2008. Http://www.internetretailer.com/internet/marketing-conference/06330-pay-or-not-pay.html.
Skidmore, Sarah. "Now on the Hallmark aisle: Gay marriage cards." 21 Aug. 2008. 16 Sep. 2008 <http://biz.yahoo.com/ap/080821/gay_wedding_cards.html?.v=12>.