wfm-final report (1)
TRANSCRIPT
1
University of Oregon Investment Group
December 5, 2014
Consumer Goods
Covering Analysts: Phoebe Hsieh
Key Statistics
52 Week Price Range $36.08-$59.70
50-Day Moving Average $41.66
Estimated Beta 0.98
Dividend Yield 1.27%
Market Capitalization 17.90B
3-Year Revenue CAGR 12.10%
Trading Statistics
Diluted Shares Outstanding (mm) 378.00
Average Volume (3-Month) (mm) 5.43
Institutional Ownership 86.00%
Insider Ownership 1.00%
EV/EBITDA (Forward Comps) 14.61
Margins and Ratios
Gross Margin (Forward Comps) 35.67%
EBITDA Margin (Forward Comps) 6.67%
Net Margin (Forward Comps) 1.71%
Debt to Enterprise Value 0.00
Investment Thesis
Increasing entrants in the organic food industry will create market
fragmentation, lower market share, and drive down profits in the long run
Despite Whole Foods’ investment in new campaigns and promotions, they
will only be effective in retaining customers rather than generating new
leads
Whole Foods’ newly implemented growth strategy of loyalty rewards
(Affinity Program), home delivery and sustainability labeling will elicit
strong responses from current customers, but do little to convert competitor
customers
Increasing price of Cost of Goods Sold (COGS) will drive down margins,
making Whole Foods Market more susceptible to shocks in the market
Whole Foods Market
Ticker: WFM
Current Price: $48.19
Recommendation: Sell
Price Target: $39.97
Five-Year Stock Chart
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Figure 3: Per Capita Fruit and
Vegetable Consumption
Source: IBIS World
615
625
635
645
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2010 2012 2014 2016 2018 2020
Volume
US Canada UK
Figure 2: Whole Foods Market Store Allocation
Source: Whole Foods Market 10-K
Business Overview
Whole Foods Market has been the largest natural and organic food retailer since
going public in January 1992. Originally named SaferWay, Whole Foods’ CEO
John Mackey and Renee Lawson borrowed $45,000 from family and friends in
1978 to open the first “Certified Organic” natural foods store in Austin, Texas.
Their goal was to open an all-natural and organic grocery store that would inspire
customers to eat healthier and become more aware of where their food came from.
In 1984, after merging with another natural grocer, Whole Foods began
expansion by acquiring other natural food chains and building its store base
nationwide. Since acquiring seven Fresh and Wild stores in the United Kingdom
and expanding into Canada, today, Whole Foods has 400 stores, 10 in Canada, 9
in the United Kingdom and 381 throughout the United States.
Natural and Organic Supermarkets Whole Foods is one of a few supermarkets in America to provide only organic
food to its consumers. Although they sell product categories that you can typically
find in a conventional grocery store, their products are organic and marketed to
emphasize its health benefits and quality.
Whole Foods prides itself as a company with higher quality and stronger values
than other grocery stores, differentiating them in a highly competitive market.
They hold themselves to a higher organic standard through employment of
USDA’s Organic Rule policy - supporting healthy ecosystems, humane animal
treatment, and non-GMO foods. As a company with strong morals, they strive to
maximize employee and customer satisfaction through large employee discounts
and team oriented bonus compensations.
Industry
Overview Grocery stores make up a very unique subset of the consumer goods industry.
Supermarkets and grocery stores retail a variety of household good and foods.
Over the past five years, growth has been strong in this industry due to the
strengthening economy and increasing per capita disposable income. Because of
this, many consumers have opted for higher quality, organic foods. This increase
in demand has brought increased revenue for organic grocery stores, but also
increased competition as more companies attempt to penetrate the market. Capital structures vary greatly within this industry, with some companies like
Whole Food Market financed solely through equity and others taking out large
sums of debt. Growth rates also vary between companies as this industry is
innovative and quick to change with consumer habits. Stores become outdated as
new eating habits form, forcing stores to stay current with the industry.
Although advertising is done primarily through word of mouth, some grocery
chain may also employ the use of television advertisement.
Macro factors Per Capital Fruit and Vegetable Consumption:
Per capita fruit and vegetable consumption is predicted to slowly increase over
the next six years. Whole Foods’ new initiative to lower its produce prices in order
to attract a wider customer base coupled with an increasing demand for fruits and
vegetables may spark an uptick in customers for Whole Foods.
Figure 1: Original SaferWay Market
Source: Whole Foods Market Media
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Per Capital Meat Consumption:
Per capita meat consumption is predicted to decline slightly in the short term
before experiencing a slight increase beginning in 2016. With Whole Foods
increasing its meat prices to offset its aggressive cut in produce prices, it will not
be surprising for Whole Foods to see a decline in meat sales in the upcoming
quarters.
Disposable Income/Consumer Spending:
Organic food being considered a luxury item, consumer spending and disposable
income will greatly affect consumers’ ability to afford these expenses. As per
capita disposable income continues to rise into 2020, people may be more inclined
to splurge on their groceries, paying the premium for Whole Foods’ quality
groceries.
Healthy Eating Index:
The healthy eating index is a measure of how much of the USDA’s recommended
diet that the general public consumes. Over the past few decades, the healthy
eating index has been increasing marginally. In the future, the index is shown to
be relatively stable, but with a slight decline going into 2020. Whole foods is a
strongly health conscious company who may be negatively impacted by society’s
stagnant eating habits and face an uphill battle to educate the public.
Competition Competition is very aggressive in the grocery industry and growing rapidly in the
organic food industry. It is the largest issue facing Whole foods and recently seen
to be stunting its growth. As more and more entrants penetrate the Organic food
market and larger grocers stock more aisles with organic food, Whole Foods will
continue to lose more market share.
Price competition is arguably Whole Foods Market’s biggest adversary as their
prices are notoriously high. Although Whole Foods has a strong brand equity and
market share in organic foods, smaller organic food chains are growing rapidly
and fighting for Whole Food’s customers. Smaller organic retailers such as The
Fresh Market, Sprouts, and Trader Joes, which all cater to Whole Foods’ customer
base, market more competitive prices for identical goods.
As big box stores such as Walmart and Kroger also begin to shelf their stores with
increasing amounts of organic goods, these stores are sure to offer a far lower
price than Whole Foods, driving many consumers to these big box retailers for
their grocery and organic food needs.
Much of Whole Food’s future success will be greatly dependent on their ability
to retain their current customers as well as increase their customer base.
Strategic Positioning
Price Cuts In addition to their marketing campaign, Whole Foods is has started testing price
reductions in 5 stores throughout the nation in an effort to evaluate how the market
responds to their lowered prices. In an effort to reduce prices on produce, they are
increasing prices on meat and seafood as well as expanding their corporate “365”
brand in an attempt to offset the cost.
Figure 4: Per Capita Disposable Income
30000
35000
40000
45000
2010 2012 2014 2016 2018 2020
Dollars
Source: IBIS World
Source: IBIS World
KrogerSafeway
Whole Foods Market
The Fresh Market
Figure 5: Competitor Revenue and Growth
Source: Company 10-Ks
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Source: FactSet
Walmart SafewayKroger Supervalue
Walmart 25%
Safeway 8%
Kroger 17%
Super
Value
5%
Other 45%
Figure 8: Grocery Market
Responsibly Grown To educate consumers and emphasize the concept of “responsibly grown”, Whole
Foods is in the beginning stages of a labeling project, which ranks produce and
flowers on a good, better, best scale. These ranks are determined by the
sustainability practices behind each type of produce and reiterate Whole Foods’
passion for the ecosystem and responsible business practices.
Affinity Program In September, Whole Foods began their first ever rewards program. Their goal is
to strengthen customer loyalty and drive new customers to shop at Whole Foods.
Once enrolled, customers will have the choice of using a rewards card or a mobile
app to collect points that can later be converted into rewards such as cooking
classes and discounts. Not only beneficial to consumers, this program will also
allow Whole Foods to begin tracking customer shopping habits, enabling them to
better cater to their customers’ needs.
Apple Pay Among one of the first retailers to accept Apple Pay, Whole Foods hopes to stay
modern and adapt to technological innovation in order to speed up checkouts and
provide customers a fast and easy way to grab their morning coffee or make quick
purchases.
Business Growth Strategies
Sales and Marketing Whole Foods Market has historically claimed itself to be a strong believer in
word-of-mouth marketing, claiming that their quality and values are represented
in their products and customer loyalty. Historically, marketing has only consumed
.4% of their total revenue, but on October 20th Whole Foods launched its first
ever national marketing campaign to encourage consumers to place emphasis on
values and food sustainability.
Whole Foods decided to launch this campaign in an effort to boost their dismal
stock price and falling consumer base in 2013, hoping to gain back market share
and generate consumer awareness. Trying to shed their reputation as “Whole
Paycheck”, they have emphasized the idea that their food is worth the price.
Geographic Currently, Whole Foods Market has not made any plans to expand outside of the
US, Canada, and UK. However, they do have plans to increase their reach in the
US and continue establishing stores throughout Canada. Whole is planning to for
a total of 500 stores by 2017.
Market Share As the demand for organic food continues to increase, Whole Foods hopes to gain
a stronger market share in the grocery industry through store expansions.
However, this is becoming increasingly challenging due to the vast amounts of
entrants into the organic industry as well as market share cannibalization by
conventional grocers who are moving into the organic industry and able to sell
organic products for a fraction of what Whole Foods charges.
Organic Growth Whole Foods Market strives to reach as wide of a consumer base as possible
through organic growth. New store openings have historically been successful and
they strive to replicate their strategy as they move into new areas.
Figure 6: Whole Foods Ad Campaign
Source: Google Images
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Delivery With many national grocery chains providing home delivery to customers, Whole
Foods Market has recently joined the movement through a partnership with
Instacart. Whole Foods hopes to target busy, health conscious shoppers who
would benefit from the convenience of home delivery. This program was piloted
in Boston, Austin, and Portland, with plans for expansion to the rest of the nation
in the near future.
Management and Employee Relations
Whole Foods prides itself as a company with 100% of their employees
independent of unions, as it believes that unions will damage their historically
strong employee relations. Although in the past Whole Foods has been rated
among the best companies to work for, there has been a recent increase in
dissatisfaction among employees in various areas.
John P. Mackey, Co- Founder and Co-CEO John Mackey has been with the CEO of Whole Foods since its inception in 1980.
A strong advocate for free market economics, Mackey has worked hard to create
a company in which no employee is part of a union.
Mackey served as President from 2001-2003 and Chairman of the Board from
1978-2009.
With a passion for philanthropy, Mackey announced in 2006 that he would be
reducing his salary to $1 per year in order to donate his stock portfolio to charity.
Walter Robb, Co-CEO Walter Robb joined the Whole Foods Market team in 1991 where he operated the
Mill Valley store in California. He worked his way up, becoming president of the
Northern Pacific Region in 1993, executive vice President of Operations in 2000,
COO in 2001, and Co-President in 2004. Robb is on various environmental impact
boards around the country and also shares an enthusiasm for organic.
A.C. Gallo, President and Chief Operating Officer A.C. Gallo has been with Whole Foods Market since 1992 when the company he
previously worked for, Bread and Circus, was acquired by Whole Foods. He
worked first as the Northeast region’s vice president and then, in 1996, became
regional president. In 2010, A.C. Gallo began his role as President and COO.
Gallo is very dedicated to sustainable agriculture, taking on the quality standards
initiatives within the company, including animal welfare and sustainable seafood
practices. An advocate of non-GMO foods, Gallo has gone to great lengths in
order to ensure full GMO transparency within the company.
Management Guidance
Management guidance has been strong in the past with regards to giving relatively
accurate guidance to investors. Although they were overly bullish in 2013, leading
to a large decrease in stock price, their estimates have been much more
conservative for 2014.
As their stock price continues to rise, management believes that Whole Foods
Market will continue to grow over the next few years, estimating 500 stores by
2017. Though management has historically done an exceptional job growing
Whole Foods from one store in Austin Texas to now 400 stores in 3 countries,
Source: Google Images
Figure 7: Instacart Logo
Figure 9: Executive Compensation
Source: Company Proxy Statement
Figure 10: Number of Stores
Source: Company 10-K
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they have been operating predominantly in a niche market with very little direct
competition. Now that there are increasing entrants, management will have to
adapt and change its growth strategy in order to innovate alongside the ever-
changing organic industry.
Portfolio Strategy
Whole Foods Market is a large cap company held in the Svigals’ and Tall Firs
Portfolios. Svigals’ is currently overweight large cap as well as consumer goods
while Tall Firs is underweight large cap and consumer goods. The group
purchased Whole Foods Market at $32.49 per share. Because Whole Foods’
growth and revenue will be slowing down in the future, I believe more value could
be potentially found in a different company, especially for Svigals which is
overweight in both of the categories that Whole Foods is in.
Recent News
“The Unmarketing and Remarketing of Whole Foods”
10/23/2014
In this article, the author, Joe Dobrow, evaluates Whole Foods Market’s new
branding campaign and discusses how it may affect the success of Whole Foods
going forward. Dobrow assesses the implications of “values” as portrayed in the
company’s commercial and discusses how the theme contradicts what Whole
Food says it is trying to do. Whole Foods Market is trying tirelessly to shed its
image as an expensive food retailer by lowering prices, meanwhile airing a
commercial that essentially justifies its high prices as an indicator of value. Whole
Foods’ management, as a result, is sending its customers mixed signals as to
which direction it want to take this company. Also reviewed in this article is John
Mackey’s sudden desire for an ad campaign after vocalizing how much he
believes advertising in media is a waste of money.
“Whole Foods Rolls Out Loyalty Cards”
10/30/2014
This article discusses Whole Foods Market’s new loyalty (Affinity) cards that its
customers have been asking for quite a period of time now. They are testing this
rewards program in their Princeton store and if it proves successful, will begin
implementing it in their other stores nationwide. The loyalty cards are being
offered in hopes of increasing customer loyalty and incentivize new customers to
shop at Whole Foods. The main distinguisher between Whole Foods’ loyalty
program and that of other groceries lies in the fact that the points accumulated
using the Whole Foods loyalty card can be converted into discounts or other
rewards such as free yoga or cooking classes.
Catalysts
Upside Steady increases in disposable income may drive consumers to buy more
expensive, healthier foods.
Figure 12: One Year Stock Prices
Source: Yahoo Finance
Source: Google Images
Figure 11: “Values Matter” Ad Campaign
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Branding campaign may increase customer loyalty and expand the
portion of current customer wallets spent on Whole Foods
Increase in per capita fruit and vegetable consumption will increase sales
in the grocery market
Downside Strained employee relations and increasing desire to unionize among
employees may serve as a detriment to Whole Foods Market’s reputation
and serve as a distraction to team members
Stagnation in the healthy eating index will slow growth and sales in the
organic industry
Oversaturation of the organic food market will make it more difficult for
Whole Foods to maintain their current customer base and attract new
ones
Increasing entrants will drive prices and gross margins down in the
market.
Comparable Analysis
Overview Comparable companies were screened for a variety of different metrics,
specifically focusing on companies with similarities to Whole Foods in terms of
markets, market cap, growth rates, capital structure, margins, and shared risk
factors. Though weighting gross margins are uncommon, I believe it is an
important metric to evaluate because margins are generally small in the grocery
industry compared to others and decreasing gross margins specifically with
regards to organic, can make companies more sensitive to changes in the industry.
Capital structures were taken into account because higher levered companies are
susceptible to different market risks. Growth rates are important to evaluate
because some companies are growing at faster rates than others, indicating the
direction of Whole Foods compared to its competitors and comparable companies.
The Fresh Market (TFM) - 40%
The Fresh Market is a fresh and organic food retailer who operates in the same
market and offers a similar product mix to what is offered by the Whole Foods
Market. They currently operate 129 stores in the United States.
I weighted the Fresh Market 40% because they have very similar product
offerings and the shopping experience is almost identical between The Fresh
Market and Whole Foods Market. Quantitatively, their growth rates and beta are
very similar and their capital structures are well in line. Their gross, EBIT, EBITA
margins, and beta are relatively the same as well, leading me to believe
quantitatively and qualitatively, The Fresh Market is the most comparable to
Whole Foods Market.
Kroger (KR) - 25% Kroger is the largest national supermarket chain and second largest general
retailer in the country. They offer a wide variety of products ranging from produce
to pharmaceuticals in 2,638 supermarkets throughout the United States.
While Kroger’s capital structure is extremely different than Whole Foods, Kroger
also has a large market cap. Kroger also caters towards the same market as Whole
Foods now as Kroger expands their organic and natural food offerings. Although
their growth rates are not as strong as Whole Foods, all of their margins line up
well with Whole Foods. For these reasons, Kroger was given a 25% weighting.
Figure 14: The Fresh Market Logo
Source: Google Images
Figure 15: Kroger Logo
Source: Google Images
Figure 13: Healthy Eating Index
Source: IBIS World
63
64
65
66
67
68
69
70
2010 2012 2014 2016 2018 2020
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Safeway (SWY) - 25% Safeway is a large player in food and drug retailing throughout the United States.
They offer a wide variety of goods such as floral, seafood, pharmacy and food.
Operating 2,400 stores, Safeway is the second largest supermarket chain in North
America.
Although Safeway’s growth and capital structure is not compatible with Whole
Foods, their market caps are in line and their EBITA’s, Net Incomes, and Capital
Expenditures are extremely similar as well. I believe that it is an important
company to look at when evaluating Whole Foods Market as their margins are
pretty similar and they operate in the same industry. Using Safeway as a
comparable offers the valuation of a traditional grocery store that also includes
fresh organic foods in their offering. Because of these reasons, I have given
Safeway a 25% weighting.
Chipotle Mexican Grill (CMG) - 5% Chipotle Mexican Grill is a restaurant chain with over 1,600 stores in the United
States, United Kingdom, Germany, and France that specializes in personalized
burritos, tacos, and quesadillas.
Chipotle is an interesting comparable because it caters to the same consumer base
as Whole Food - a strongly value centered set of customers who appreciate quality
and humanely raised food. Although Chipotle operates in a different business
segment with much larger margins, their capital structures are very similar and
are both large cap companies. Because of their fundamental differences, I gave
Chipotle a mere 5% weighting.
B&G Foods Inc. (BGS) – 5% B&G Foods is a manufacturer, seller, and distributor of shelf stable foods in the
United States, Canada, and Puerto Rico. They market goods such as hot cereals,
chips, and dressings while also offering products via independent brokers and
distributors to supermarket chains, warehouse clubs, and other outlets.
B&G Foods is company who shares very similar gross margins, volatility, and
return on equity. Although B&G Foods operates in a very different industry than
Whole Foods with very different capital structure, some of their products end up
on Whole Foods’ shelves. Those things considered, I gave B&G Foods a 5%
weighting.
Discounted Cash Flow Analysis
Revenue Model Because Whole Foods is in the retail industry, revenue per year for Whole Foods
is calculated based on revenue per square foot and total square footage. For 2014-
2017, management guidance was used to project total stores. Management
previously projected 575 stores through 2018, but later revised that estimate to
500 stores by 2017. Although total square feet is increasing, I projected revenue
per square foot to trend downward due to the increasing competition and Whole
Foods’ potential inability to retain market share and expand their consumer base.
Source: Google Images Source: Google Images
Figure 16: Safeway Logo
Figure 17: Chipotle Logo
Source: Google Images
Figure 18: B&G Foods Logo
Source: Google Images
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Figure 21: Cost of Goods Sold Projections
Source: UOIG Projections
WFM Beta SE Weighting
1 Year Daily 0.75 0.19 0.00%
1 Year Daily Hamada-Comps 0.64 0.00%
3 year daily 1.03 0.08 40.00%
3 year weekly 0.95 0.18 0.00%
3 Year Daily Vasicek- Comps 0.66 5.00%
3 Year Daily Vasicek-ETF 0.62 5.00%
3 Year Daily Hamada 0.59 0.00%
3 Year Daily Hamada- Comps 0.62 5.00%
3 Year Daily Hamada-ETF 0.59 5.00%
3 Year Weekly Hamada 0.45 0.00%
5 year daily 1.07 0.08 40.00%
5 Year Daily Hamada 0.64 0.00%
Whole Foods Market Beta 0.96
Selling General and Administrative Expense Whole Foods Market recently launched its new marketing campaign that is set to
run through 2016. To represent this $20 million expenditure that has never
previously taken place, I projected what their SG&A would be without the ad
campaign and added $10 M to that for 2015 and 2016 to account for their
marketing costs. This expense is projected to trend back down in the future as
management has not discussed plans for any additional branding campaigns in the
future.
Direct Store Expenses Direct Store expenses are comprised of salaries, supplies, and local marketing
efforts. Although these expenses have declined slightly year over year, I
projected them to rise by a small amount during the ad campaign and then trend
back down into the terminal year.
Other Expenses Other expenses consist of Pre-Opening expenses and relocation, store closure, and
lease termination costs. These two line items are projected to increase marginally
when Whole Foods opens more new stores in the next couple of years, as they
will have to spend more money on pre- opening expenses. These expenses involve
training new employees, cost of rent, and construction on new buildings.
Capital Expenditures Capital expenditures are set to increase as Whole Foods expects to open 100 new
stores in the next three years and remodel all stores older than 10 years. I project
that as they begin to decrease the number of store openings in 2018, their capital
expenditures will trend down but remain a little higher than they were historically
as they continue to remodel stores in order to try to keep up with an innovative
market.
Beta Whole Food Market’s beta was calculated using various linear regressions in
comparison with the S&P 500. I also used the Hamada and Vasicek methods to
compare Whole Foods against its comparable companies in order to obtain a
series of betas to evaluate. I placed the most emphasis on my three and five-year
daily betas because of their low standard of error and the five-year reflected a
longer period of time. I took out of consideration betas with standard errors above
0.1 and did not weight my ETF betas because they returned small and negative
numbers.
Cost of Goods Sold Whole Foods’ costs of goods sold are predicted to go up in the future based on
management guidance and as the cost of meat and produce in the industry are
predicted to rise slightly over the years. While cost of goods sold increases each
year on an absolute basis, it will decrease marginally in 2015 as a percentage of
revenue due to Whole Foods’ emphasis on expanding its 365 brand, lessening
shelf space of other brands’ product offerings. Following the 2015 “365” brand
expansion, COGS as a percentage of revenue is estimated to increase slightly and
continue to hover around 63%.
Figure 19: Revenue Projections
Source: UOIG Projections
Source: UOIG Projections
Figure 20: Final Beta
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Final Implied Price Price Target Weight
DCF $42.11 50.00%
Forward Comparable Analysis $38.68 50.00%
Price Target $40.40
Current Price $48.19
Overvalued (16.17%)
Tax Rate Whole Foods Market’s tax rate is significantly higher than most other companies
at this time but has been slowly decreasing over the past few years. As Whole
Foods management predicts more store openings in Canada, I have projected a
downward trend in tax rate into the terminal year with the assumption that Whole
Foods will be able to take advantage of Canada’s lower tax rate.
Recommendation
Given Whole Food Market’s unfocused direction, increasing competition, and
decreasing margins, a strong overvaluation has been identified in both the DCF
Assumptions and Forward Comparable Analysis. For those reasons, I recommend
a SELL for both the Tall Firs and Svigals’ Portfolios.
Figure 22: Implied Price
Source: UOIG Projections
December 5, 2014
University of Oregon Investment Group
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Comparables Analysis WFM TFM KR SWY CMG BGS
($ in millions)
Whole Foods
Market The Fresh Market Kroger Safeway
Chipotle
Mexican Grill B&G Foods Inc.
Stock Characteristics Max Min Median Weight Avg. 40.00% 25.00% 25.00% 5.00% 5.00%
Current Price 658.56 28.54 39.51 73.30 48.19 39.51 57.71 34.86 658.56 28.54
Beta 1.05 0.21 0.86 0.82 0.98 1.00 0.75 0.70 1.05 0.21
Size
Short-Term Debt 1,657.00 0.00 14.13 512.24 2.00 0.00 1,657.00 386.70 0.00 26.25
Long-Term Debt 9,653.00 0.00 452.30 3,428.33 60.00 0.24 9,653.00 3,891.00 0.00 844.60
Cash and Cash Equivalent 323.00 12.00 29.35 31.54 290.00 12.00 17.00 17.00 323.00 41.70
Non-Controlling Interest 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Preferred Stock 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Diluted Basic Shares 529.00 32.72 155.05 220.14 378.00 48.33 529.00 257.10 32.72 53.00
Market Capitalization 30,122.33 1,512.56 11,330.83 11,555.21 14,105.42 1,900.31 30,122.33 8,556.25 20,996.21 1,512.56
Enterprise Value 41,427.33 1,888.55 13,347.18 15,467.23 13,877.42 1,888.55 41,427.33 12,816.95 20,673.21 2,341.71
Growth Expectations
% Revenue Growth 2015E 15.34% 1.13% 15.34% 46.99% 8.13% 14.26% 4.52% 1.13% 15.34% 3.60%
% Revenue Growth 2016E 14.16% 2.73% 4.61% 35.64% 14.16% 14.14% 4.61% 2.73%
% EBITDA Growth 2015E 18.68% -24.06% 18.68% 21.46% -24.06% 14.81% 5.56% 1.39% 18.68% 5.08%
% EBITDA Growth 2016E 32.34% 5.40% 6.27% 56.91% 32.34% 12.90% 6.27% 5.40%
% EPS Growth 2015E 29.77% 0.00% 14.65% 92.07% 0.00% 14.65% 11.25% 15.97% 20.44% 29.77%
% EPS Growth 2016E 12.78% 0.00% 10.38% 30.81% 0.00% 12.78% 10.38% 7.65%
Profitability Margins
Gross Margin 37.88% 20.72% 26.59% 27.64% 37.88% 34.02% 20.72% 23.66% 26.59% 32.14%
EBIT Margin 21.85% 1.72% 5.84% 5.40% 6.20% 5.84% 2.83% 1.72% 16.76% 21.85%
EBITDA Margin 25.17% 4.33% 10.82% 8.81% 8.89% 10.82% 4.60% 4.33% 19.74% 25.17%
Net Margin 10.17% .63% 4.35% 3.14% 3.56% 4.35% 1.50% 0.63% 10.17% 7.22%
Credit Metrics
Interest Expense 444.00 0.00 41.81 182.85 0.00 3.78 444.00 273.00 0.00 41.81
Debt/EV 0.37 0.00 0.14 0.17 0.00 0.00 0.27 0.33 0.00 0.37
Leverage Ratio 4.77 0.00 1.16 1.49 0.05 0.00 2.27 2.74 0.00 4.77
Interest Coverage Ratio 50.00 0.00 5.05 24.46 0.00 50.00 11.23 5.73 0.00 4.36
Operating Results
Revenue 108,497.00 725.00 8,726.50 37,054.40 14,238.00 1,746.00 108,497.00 36,139.00 3,215.00 725.00
Gross Profit 22,482.00 233.00 855.00 8,050.00 5,393.50 594.00 22,482.00 8,550.00 855.00 233.00
EBIT 3,068.00 102.00 579.35 997.66 883.23 102.00 3,068.00 620.00 538.70 158.40
EBITDA 4,986.00 182.50 949.94 1,753.97 1,265.07 189.00 4,986.00 1,564.00 634.80 182.50
Net Income 1,624.00 52.34 278.10 512.67 506.47 76.00 1,624.00 229.20 327.00 52.34
Capital Expenditures 2,828.00 14.65 461.28 953.88 722.65 111.00 2,828.00 767.00 199.90 14.65
Multiples
EV/Revenue 6.43x 0.35x 1.08x 1.10x 0.97x 1.08x 0.38x 0.35x 6.43x 3.23x
EV/Gross Profit 24.18 1.50 3.18 3.82 2.57 3.18 1.84 1.50 24.18 10.05
EV/EBIT 38.38 13.50 18.52 18.61 15.71 18.52 13.50 20.67 38.38 14.78
EV/EBITDA 32.57 8.19 9.99 10.39 10.97 9.99 8.31 8.19 32.57 12.83
EV/(EBITDA-Capex) 47.54 13.95 19.20 21.58 25.58 24.21 19.20 16.08 47.54 13.95
Market Cap/Net Income = P/E 64.21 18.55 28.90 28.63 27.85 25.00 18.55 37.33 64.21 28.90
Multiple Implied Price Weight
EV/Revenue 42.03 20.00%
EV/Gross Profit 55.09 10.00%
EV/EBIT 44.08 0.00%
EV/EBITDA 35.39 70.00%
EV/(EBITDA-Capex) 31.57 0.00%
Market Cap/Net Income = P/E 38.36 0.00%
Price Target $38.68
Current Price $48.19
Overvalued (19.73%)
Appendix 1 – Relative Valuation
December 5, 2014
University of Oregon Investment Group
UOIG 12
Discounted Cash Flow Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in millions) 2009A 2010A 2011A 2012A 2013A 1/19/2014A 4/13/2014A 07/07/2014A 09/29/2014E 2014E 01/31/2015E 04/30/2015E 07/31/2015E 10/31/2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Revenue 8,032.00 9,006.00 10,108.00 11,699.00 12,917.00 4,239.00 3,322.00 3,377.00 3,300.00 14,238.00 3,686.05 3,780.47 3,902.42 4,027.17 15,396.12 17,576.13 19,062.33 20,007.33 20,736.87 21,250.01 21,747.14 22,224.94 22,681.65
% YoY Growth .98% 12.13% 12.24% 15.74% 10.41% 9.93% 9.75% 10.43% 7.91% 10.23% 11.70% 2.56% 3.23% 3.20% 8.13% 14.16% 8.46% 4.96% 3.65% 2.47% 2.34% 2.20% 2.05%
Cost of Goods Sold 5,010.30 5,001.40 4,990.00 4,966.00 4,938.00 2,643.00 2,044.00 2,118.75 2,038.75 8,844.50 2,359.07 2,427.06 2,505.36 2,585.44 9,876.93 11,316.06 12,316.95 12,973.77 13,494.74 13,877.75 14,252.65 14,617.13 14,969.89
% Revenue 62.38% 55.53% 49.37% 42.45% 38.23% 62.35% 61.53% 62.74% 64.00% 62.12% 64.00% 64.20% 64.20% 64.20% 64.15% 64.38% 64.61% 64.85% 65.08% 65.31% 65.54% 65.77% 66.00%
Gross Profit $3,021.70 $4,004.60 $5,118.00 $6,733.00 $7,979.00 $1,596.00 $1,278.00 $1,258.25 $1,261.25 $5,393.50 $1,326.98 $1,353.41 $1,397.07 $1,441.73 $5,519.18 $6,260.07 $6,745.38 $7,033.56 $7,242.13 $7,372.26 $7,494.49 $7,607.82 $7,711.76
Gross Margin 37.62% 44.47% 50.63% 57.55% 61.77% 37.65% 38.47% 37.26% 38.22% 37.88% 36.00% 35.80% 35.80% 35.80% 35.85% 35.62% 35.39% 35.15% 34.92% 34.69% 34.46% 34.23% 34.00%
Selling General and Administrative Expense 244.00 272.00 311.00 372.00 397.00 132.00 107.00 102.00 108.90 449.90 124.13 124.13 124.13 124.13 496.52 566.61 590.93 600.22 622.11 637.50 652.41 666.75 680.45
% Revenue 3.04% 3.02% 3.08% 3.18% 3.07% 3.11% 3.22% 3.02% 3.30% 3.16% 3.37% 3.28% 3.18% 3.08% 3.22% 3.22% 3.10% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Depreciation and Amortization 266.70 275.60 287.00 311.00 339.00 111.00 87.00 89.57 94.27 381.84 115.64 119.32 122.92 126.80 484.68 578.12 644.31 713.51 777.64 832.07 879.38 920.47 955.96
% Revenue 3.32% 3.06% 2.84% 2.66% 2.62% 2.62% 2.62% 2.65% 2.65% 2.68% 3.14% 3.16% 3.15% 3.15% 3.15% 3.29% 3.38% 3.57% 3.75% 3.92% 4.04% 4.14% 4.21%
% of Net PP&E 14.04% 14.52% 15.22% 15.57% 15.46% 4.57% 3.47% 3.49% 3.55% 13.92% 3.75% 3.75% 3.75% 3.75% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Direct Store Expenses 2,147.00 2,377.00 2,629.00 2,983.00 3,285.00 1,077.00 840.00 849.00 844.80 3,610.80 958.37 982.92 1,014.63 1,018.87 3,974.80 4,321.93 4,453.47 4,428.73 4,335.76 4,182.29 4,013.27 3,828.72 3,629.06
% Revenue 26.73% 26.39% 26.01% 0.25497906 25.43% 25.41% 25.29% 25.14% 25.60% 25.36% 26.00% 26.00% 26.00% 25.30% 25.82% 24.59% 23.36% 22.14% 20.91% 19.68% 18.45% 17.23% 16.00%
Other 80.00 49.00 49.00 57.00 64.00 21.00 13.00 17.23 16.50 67.73 18.43 21.55 23.02 24.16 87.17 100.18 108.66 100.04 103.68 106.25 108.74 111.12 113.41
% Revenue 1.00% .54% .48% .49% .50% .50% .39% .51% .50% .48% .50% .57% .59% .60% .57% .57% .57% .50% .50% .50% .50% .50% .50%
Earnings Before Interest & Taxes $284.00 $1,031.00 $1,842.00 $3,010.00 $3,894.00 $255.00 $231.00 $200.45 $196.78 $883.23 $110.41 $105.49 $112.36 $147.76 $476.02 $693.23 $948.01 $1,191.06 $1,402.95 $1,614.15 $1,840.69 $2,080.76 $2,332.88
% Revenue 3.54% 11.45% 18.22% 25.73% 30.15% 6.02% 6.95% 5.94% 5.96% 6.20% 3.00% 2.79% 2.88% 3.67% 3.09% 3.94% 4.97% 5.95% 6.77% 7.60% 8.46% 9.36% 10.29%
Interest Expense 37.00 33.00 4.00 - - - - - - - - - - - - - - - - - - - -
% Revenue .46% .37% .04% - - - - - - - - - - - - - - - - - - - -
Investment and Other Income 4.00 7.00 8.00 8.00 11.00 4.00 2.00 4.00 3.30 13.30 3.69 3.40 3.51 2.82 13.42 15.82 17.16 18.01 18.66 19.13 19.57 20.00 20.41
% Revenue .05% .08% .08% .07% .09% .09% .06% .12% .10% .09% .10% .09% .09% .07% .09% .09% .09% .09% .09% .09% .09% .09% .09%
Earnings Before Taxes 251.00 412.00 552.00 752.00 894.00 251.00 229.00 196.45 193.48 869.93 106.72 102.09 108.85 144.94 462.60 677.41 930.85 1,173.06 1,384.29 1,595.03 1,821.12 2,060.76 2,312.47
% Revenue 3.13% 4.57% 5.46% 6.43% 6.92% 5.92% 6.89% 5.82% 6.90% 6.11% 2.90% 2.70% 2.79% 3.60% 3.00% 3.85% 4.88% 5.86% 6.68% 7.51% 8.37% 9.27% 10.20%
Less Taxes (Benefits) 104.00 166.00 209.00 286.00 343.00 101.00 91.00 96.00 75.46 363.46 41.09 38.79 41.25 55.37 176.50 264.19 358.38 445.76 519.11 590.16 692.03 781.03 869.49
Tax Rate 41.43% 40.30% 37.90% 38.10% 38.40% 39.00% 39.00% 39.00% 39.00% 39.00% 38.50% 38.00% 37.90% 38.20% 38.20% 39.00% 38.50% 38.00% 37.50% 37.00% 38.00% 37.90% 37.60%
Net Income $147.00 $246.00 $343.00 $466.00 $551.00 $150.00 $138.00 $100.45 $118.02 $506.47 $65.63 $63.30 $67.59 $89.57 $286.10 $413.22 $572.48 $727.30 $865.18 $1,004.87 $1,129.09 $1,279.73 $1,442.98
Net Margin 1.83% 2.73% 3.39% 3.98% 4.27% 3.54% 4.15% 2.97% 3.58% 3.56% 1.78% 1.67% 1.73% 2.22% 1.86% 2.35% 3.00% 3.64% 4.17% 4.73% 5.19% 5.76% 6.36%
Add Back: Depreciation and Amortization 266.70 275.60 287.00 311.00 339.00 111.00 87.00 89.57 94.27 381.84 115.64 119.32 122.92 126.80 484.68 578.12 644.31 713.51 777.64 832.07 879.38 920.47 955.96
Add Back: Interest Expense*(1-Tax Rate) 21.67 19.70 2.48 - - - - - - - - - - - - - - - - - - - -
Operating Cash Flow $435.37 $541.30 $632.48 $777.00 $890.00 $261.00 $225.00 $190.02 $212.29 $888.31 $181.27 $182.61 $190.52 $216.37 $770.77 $991.34 $1,216.79 $1,440.80 $1,642.81 $1,836.94 $2,008.48 $2,200.20 $2,398.94
% Revenue 5.42% 6.01% 6.26% 6.64% 6.89% 6.16% 6.77% 5.63% 6.43% 6.24% 4.92% 4.83% 4.88% 5.37% 5.01% 5.64% 6.38% 7.20% 7.92% 8.64% 9.24% 9.90% 10.58%
Current Assets 626.00 1,029.00 1,241.00 2,014.00 1,690.00 1,779.00 1,782.00 1,475.00 1,443.25 1,401.84 1,561.83 1,703.72 1,723.36 1,768.78 1,790.43 2,176.85 2,440.38 2,634.29 2,806.44 2,954.38 3,104.36 3,255.74 3,408.08
% Revenue 1.00% 11.43% 12.28% 17.22% 13.08% 41.97% 53.64% 43.68% 43.73% 9.85% 42.37% 45.07% 44.16% 43.92% 11.63% 12.39% 12.80% 13.17% 13.53% 13.90% 14.27% 14.65% 15.03%
Current Liabilities 684.39 747.41 880.47 977.00 1,088.00 1,166.00 1,229.00 1,282.00 1,232.36 1,154.57 1,316.06 1,362.65 1,405.59 1,485.09 1,490.53 1,556.54 1,703.07 1,734.21 1,808.67 1,827.42 1,840.18 1,897.39 1,878.77
% Revenue 8.52% 8.30% 8.71% 8.35% 8.42% 27.51% 37.00% 37.96% 37.34% 8.11% 35.70% 36.04% 36.02% 36.88% 9.68% 8.86% 8.93% 8.67% 8.72% 8.60% 8.46% 8.54% 8.28%
Net Working Capital ($58.39) $281.59 $360.53 $1,037.00 $602.00 $613.00 $553.00 $193.00 $210.89 $247.27 $245.77 $341.07 $317.77 $283.70 $299.90 $620.30 $737.32 $900.08 $997.77 $1,126.96 $1,264.18 $1,358.35 $1,529.31
% Revenue (.73%) 3.13% 3.57% 8.86% 4.66% 14.46% 16.65% 5.72% 6.39% 1.74% 6.67% 9.02% 8.14% 7.04% 1.95% 3.53% 3.87% 4.50% 4.81% 5.30% 5.81% 6.11% 6.74%
Change in Working Capital 415.00 339.98 78.94 676.47 (435.00) 11.00 -60.00 (360.00) 17.89 (354.73) (1.49) 95.30 (23.30) (34.07) 52.64 320.40 117.01 162.77 97.69 129.19 137.22 94.16 170.96
Capital Expenditures 315.00 257.00 365.00 456.00 537.00 219.00 143.00 179.15 181.50 722.65 213.79 215.49 226.34 233.58 889.19 1,019.42 1,105.61 1,141.03 1,140.53 1,147.50 1,153.27 1,157.06 1,134.08
% Revenue 3.92% 2.85% 3.61% 3.90% 4.16% 5.17% 4.30% 5.31% 5.50% 5.08% 5.80% 5.70% 5.80% 5.80% 5.78% 5.80% 5.80% 5.70% 5.50% 5.40% 5.30% 5.21% 5.00%
Acquisitions - 14.50 - - - - - - - - - - - - - - - - - - - - -
% Revenue - .16% - - - - - - - - - - - - - - - - - - - - -
Unlevered Free Cash Flow ($294.63) ($70.18) $188.54 ($355.47) $788.00 $31.00 $142.00 $370.87 $12.90 $520.40 ($31.03) ($128.17) ($12.52) $16.87 ($171.06) ($348.48) -$5.84 $137.00 $404.60 $560.24 $717.99 $948.97 $1,093.89
Discounted Free Cash Flow 12.66 (29.86) (121.00) (11.60) 15.32 (293.19) -4.55 98.86 270.36 346.70 411.48 503.66 537.66
EBITDA 550.70 1306.60 2129.00 3321.00 4233.00 366.00 318.00 290.02 291.05 1265.07 226.04 224.81 235.28 274.56 960.70 1271.34 1592.32 1904.57 2180.58 2446.22 2720.08 3001.23 3288.84
EBITDA Margin 6.86% 14.51% 21.06% 28.39% 32.77% 8.63% 9.57% 8.59% 8.82% 8.89% 6.13% 5.95% 6.03% 6.82% 6.24% 7.23% 8.35% 9.52% 10.52% 11.51% 12.51% 13.50% 14.50%
EBITDA Growth 137.26% 62.94% 55.99% 27.46% NA (13.11%) (8.80%) .36% (70.11%) (22.33%) (82.23%) 4.09% 22.13% (24.06%) 32.34% 25.25% 19.61% 14.49% 12.18% 11.20% 10.34% 9.58%
Appendix 2 – Discounted Cash Flows Valuation
December 5, 2014
University of Oregon Investment Group
UOIG 13
Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in Thousands) 2009A 2010A 2011A 2012A 2013A 1/19/2014A 4/13/2014A 07/06/2014A 09/29/2014E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Stores 284.00 299.00 311.00 335.00 362.00 372.00 379.00 387.00 400.00 400.00 408.25 416.50 424.75 433.00 433.00 466.00 500.00 520.00 535.00 545.00 555.00 565.00 575.00
% Growth 3.27% 5.28% 4.01% 7.72% 8.06% 8.14% 1.88% 2.11% 3.36% 3.36% 2.06% 2.02% 1.98% 1.94% 8.01% 7.62% 7.30% 4.00% 2.88% 1.87% 1.83% 1.80% 1.77%
Total Square Feet 10,566.00 11,231.00 11,832.00 12,735.00 13,779.00 14,155.00 14,247.00 14,714.44 14,800.00 14,800.00 15,106.76 15,416.66 15,733.04 16,043.44 16,454.00 17,283.40 18,559.26 19,315.14 19,884.23 20,266.03 20,650.27 21,030.75 21,409.40
% Growth 6.73% 6.29% 5.35% 7.63% 8.20% 8.23% .65% 3.28% 3.10% 3.10% 2.07% 2.05% 2.05% 1.97% 8.15% 5.04% 7.38% 4.07% 2.95% 1.92% 1.90% 1.84% 1.80%
Average Square Feet Per Store 37,204.23 37,561.87 38,045.02 38,014.93 38,063.54 38,051.08 37,591.03 38,021.81 37,000.00 37,000.00 37,003.70 37,014.80 37,040.71 37,051.82 37,051.80 37,088.85 37,118.52 37,144.51 37,166.79 37,185.38 37,207.69 37,222.57 37,233.74
% Growth 3.35% .96% 1.29% (.08%) .13% .09% (1.21%) 1.15% (2.69%) (0.03) .01% .03% .07% .03% .14% .10% .08% .07% .06% .05% .06% .04% .03%
Revenue Per Square Foot 760.17 801.89 854.29 918.65 937.44 299.47 233.17 234.13 222.97 989.74 244.00 245.22 248.04 251.02 988.28 1016.94 1027.11 1035.84 1042.88 1048.55 1053.12 1056.78 1059.43
% Growth (5.38%) 5.49% 6.54% 7.53% 2.05% 1.57% (22.14%) .41% 1.00% 5.58% 1.01% .50% 1.15% 1.20% 3.86% 2.90% 1.00% .85% .68% .54% .44% .35% .25%
Stores Opened 15.00 15.00 12.00 24.00 27.00 10.00 7.00 8.00 13.00 38.00 8.25 8.25 8.25 8.25 33.00 33.00 33.00 20.00 15.00 10.00 10.00 10.00 10.00
Total Revenue $8,032,000.00 $9,006,000.00 $10,108,000.00 $11,699,000.00 $12,917,000.00 $4,239,000.00 $3,322,000.00 $3,377,000.00 $3,300,000.00 $14,238,000.00 $3,686,049.57 $3,780,474.51 $3,902,424.26 $4,027,168.24 $15,396,116.57 $17,576,126.36 $19,062,327.40 $20,007,326.80 $20,736,870.23 $21,250,012.12 $21,747,137.99 $22,224,943.81 $22,681,653.86
% Growth .98% 12.13% 12.24% 15.74% 10.41% 9.96% 9.75% 10.43% 7.91% 10.23% 11.70% 2.56% 3.23% 3.20% 8.13% 14.16% 8.46% 4.96% 3.65% 2.47% 2.34% 2.20% 2.05%
Appendix 3 – Revenue Model
December 5, 2014
University of Oregon Investment Group
UOIG 14
Working Capital Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
($ in millions) 2009A 2010A 2011A 2012A 2013A 1/19/2014A 4/13/2014A 07/07/2014A 09/29/2014E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Total Revenue 8,032.00 9,006.00 10,108.00 11,699.00 12,917.00 4,239.00 3,322.00 3,377.00 3,300.00 14,238.00 3,686.05 3,780.47 3,902.42 4,027.17 15,396.12 17,576.13 19,062.33 20,007.33 20,736.87 21,250.01 21,747.14 22,224.94 22,681.65
Current Assets
Accounts Receivable 105.00 133.00 175.00 197.00 188.00 209.00 205.00 130.00 161.41 120.00 180.30 191.15 190.88 196.98 196.98 255.21 287.24 301.48 312.47 320.21 327.70 334.90 341.78
Days Sales Outstanding A/R 4.77 5.39 6.32 6.15 5.31 4.54 5.49 3.54 4.50 3.08 4.50 4.50 4.50 4.50 4.67 5.30 5.50 5.50 5.50 5.50 5.50 5.50 5.50
% of Revenue 1.31% 1.48% 1.73% 1.68% 1.46% 4.93% 6.17% 3.85% 4.89% .84% 4.89% 5.06% 4.89% 4.89% 1.28% 1.45% 1.51% 1.51% 1.51% 1.51% 1.51% 1.51% 1.51%
Merchandise Inventory 311.00 323.00 337.00 374.00 414.00 429.00 443.00 429.00 363.00 363.00 405.47 453.66 468.29 483.26 483.26 604.62 655.74 688.25 713.35 731.00 748.10 764.54 780.25
Days Inventory Outstanding 22.66 23.57 24.65 27.49 30.60 59.25 79.11 73.90 64.99 14.98 62.73 68.22 68.22 68.22 17.86 19.50 19.43 19.36 19.29 19.23 19.16 19.09 19.02
% of Revenue 3.87% 3.59% 3.33% 3.20% 3.21% 10.12% 13.34% 12.70% 11.00% 2.55% 11.00% 12.00% 12.00% 12.00% 3.14% 3.44% 3.44% 3.44% 3.44% 3.44% 3.44% 3.44% 3.44%
Prepaid Expenses 51.00 55.00 74.00 77.00 93.00 109.00 89.00 109.00 111.00 111.00 95.84 109.63 124.88 108.73 108.73 $105.46 114.37 120.04 124.42 127.50 130.48 133.35 136.09
Days Prepaid Expense Outstanding 76.29 73.81 86.85 75.55 85.50 75.97 74.03 98.31 93.77 90.1 71.03 78.61 92.55 80.59 79.9 67.93 70.65 73.00 73.00 73.00 73.00 73.00 73.00
% of Revenue .63% .61% .73% .66% .72% 2.57% 2.68% 3.23% 3.36% .63% 2.60% 2.90% 3.20% 2.70% .52% .60% .60% .60% .60% .60% .60% .60% .60%
Restricted Cash 71.00 87.00 92.00 103.00 111.00 111.00 109.00 109.00 114.84 114.84 106.16 117.57 119.80 134.10 134.10 158.19 171.56 180.07 186.63 191.25 195.72 200.02 204.13
% of Revenue .88% .97% .91% .88% .86% 2.62% 3.28% 3.23% 3.48% .81% 2.88% 3.11% 3.07% 3.33% .87% .90% .90% .90% .90% .90% .90% .90% .90%
Cost of Goods Sold 88.00 431.00 563.00 1263.00 884.00 921.00 936.00 698.00 693.00 693.00 774.07 831.70 819.51 845.71 867.35 $1,053.37 $1,211.46 $1,344.45 $1,469.57 $1,584.43 $1,702.35 $1,822.93 1945.83
Days COGS Outstanding 6.41 31.45 41.18 92.83 65.34 127.19 167.14 120.25 1121.72 28.60 1209.49 1295.49 1276.49 1317.30 32.05 33.98 35.90 37.82 39.75 41.67 43.60 45.52 47.44
% of Revenue 1.10% 4.79% 5.57% 10.80% 6.84% 21.73% 28.18% 20.67% 21.00% 4.87% 21.00% 22.00% 21.00% 21.00% 5.63% 5.99% 6.36% 6.72% 7.09% 7.46% 7.83% 8.20% 8.58%
Total Current Assets $626.00 $1,029.00 $1,241.00 $2,014.00 $1,690.00 $1,779.00 $1,782.00 $1,475.00 $1,443.25 $1,401.84 $1,561.83 $1,703.72 $1,723.36 $1,768.78 $1,790.43 $2,176.85 $2,440.38 $2,634.29 $2,806.44 $2,954.38 $3,104.36 $3,255.74 $3,408.08
% of Revenue 7.79% 11.43% 12.28% 17.22% 13.08% 41.97% 53.64% 43.68% 43.73% 9.85% 42.37% 45.07% 44.16% 43.92% 11.63% 12.39% 12.80% 13.17% 13.53% 13.90% 14.27% 14.65% 15.03%
Long Term Assets
Net PP&E Beginning 1900.00 1898.00 1886.00 1997.00 2193.00 2428.00 2510.00 2566.00 2655.58 2742.81 3083.61 3181.77 3277.94 3381.36 3488.13 3854.11 4295.41 4756.71 5184.24 5547.13 5862.56 6136.44 6373.04
Capital Expenditures 315.00 257.00 365.00 456.00 537.00 219.00 143.00 179.15 181.50 722.65 213.79 215.49 226.34 233.58 889.19 1019.42 1105.61 1141.03 1140.53 1147.50 1153.27 1157.06 1134.08
Acquisitions 0.00 14.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Depreciation and Amortization 266.70 275.60 287.00 311.00 339.00 111.00 87.00 89.57 94.27 381.84 115.64 119.32 122.92 126.80 523.22 578.12 644.31 713.51 777.64 832.07 879.38 920.47 955.96
Net PP&E Ending 1898.00 1886.00 1997.00 2193.00 2428.00 2510.00 2566.00 2655.58 2742.81 3083.61 3181.77 3277.94 3381.36 3488.13 3854.11 4295.41 4756.71 5184.24 5547.13 5862.56 6136.44 6373.04 6551.16
Total Current Assets & Net PP&E $2,524.00 $2,915.00 $3,238.00 $4,207.00 $4,118.00 $4,289.00 $4,348.00 $4,130.58 $4,186.06 $4,485.45 $4,743.60 $4,981.66 $5,104.72 $5,256.92 $5,644.54 $6,472.26 $7,197.09 $7,818.53 $8,353.57 $8,816.94 $9,240.80 $9,628.78 $9,959.25
% of Revenue 31.42% 32.37% 32.03% 35.96% 31.88% 101.18% 130.89% 122.32% 126.85% 31.50% 128.69% 131.77% 130.81% 130.54% 36.66% 36.82% 37.76% 39.08% 40.28% 41.49% 42.49% 43.32% 43.91%
Current Liabilities
Accounts Payable 190.00 213.00 237.00 247.00 247.00 277.00 271.00 269.00 212.25 212.25 258.53 219.43 219.65 212.50 217.94 257.24 288.20 312.21 333.74 352.47 371.49 390.73 410.13
Days Payable Outstanding 13.84 15.54 17.34 18.15 18.26 38.25 48.39 46.34 38.00 8.76 40.00 33.00 32.00 30.00 8.05 8.30 8.54 8.78 9.03 9.27 9.51 9.76 10.00
% of Revenue 2.37% 2.37% 2.34% 2.11% 1.91% 6.53% 8.16% 7.97% 6.43% 1.49% 7.01% 5.80% 5.63% 5.28% 1.42% 1.46% 1.51% 1.56% 1.61% 1.66% 1.71% 1.76% 1.81%
Accrued Charges 208.00 244.00 282.00 307.00 367.00 384.00 377.00 395.00 396.00 396.00 368.60 453.66 487.80 531.59 531.59 $612.96 671.44 711.74 744.99 770.94 796.70 822.14 847.16
Days Charges Outstanding 15.15 17.81 20.63 22.56 27.13 53.03 67.32 68.05 70.90 16.34 57.03 68.22 71.07 75.05 19.64 19.77 19.90 20.02 20.15 20.28 20.40 20.53 20.66
% of Revenue 2.59% 2.71% 2.79% 2.62% 2.84% 9.06% 11.35% 11.70% 12.00% 2.78% 10.00% 12.00% 12.50% 13.20% 3.45% 3.49% 3.52% 3.56% 3.59% 3.63% 3.66% 3.70% 0.04
Capital Lease Obligations 0.39 0.41 0.47 1.00 1.00 1.00 2.00 2.00 2.31 2.31 2.95 3.02 3.51 3.62 3.62 4.39 5.72 6.00 6.22 7.01 6.52 6.67 6.80
% of Revenue .00% .00% .00% .01% .01% .02% .06% .06% .07% .02% .08% .08% .09% .09% 0.02% .03% .03% .03% .03% .03% .03% .03% .03%
Dividends Payable 8.00 0.00 18.00 26.00 37.00 45.00 45.00 44.00 52.80 52.80 59.35 62.76 67.12 68.86 68.86 $80.85 93.41 100.04 103.68 106.25 108.74 111.12 113.41
% of Revenue .10% 0.00% .18% .22% .29% 1.06% 1.35% 1.30% 1.60% .37% 1.61% 1.66% 1.72% 1.71% .45% .46% .49% .50% .50% .50% .50% .50% .50%
Other Liabilities 278.00 290.00 343.00 396.00 436.00 459.00 534.00 572.00 569.00 491.21 626.63 623.78 627.51 668.51 668.51 $601.10 644.31 604.22 620.03 590.75 556.73 566.74 501.26
% of Revenue 3.46% 3.22% 3.39% 3.38% 3.38% 10.83% 16.07% 16.94% 17.24% 3.45% 17.00% 16.50% 16.08% 16.60% 4.34% 3.42% 3.38% 3.02% 2.99% 2.78% 2.56% 2.55% 2.21%
Total Current Liabilities $684.39 $747.41 $880.47 $977.00 $1,088.00 $1,166.00 $1,229.00 $1,282.00 $1,232.36 $1,154.57 $1,316.06 $1,362.65 $1,405.59 $1,485.09 $1,490.53 $1,556.54 $1,703.07 $1,734.21 $1,808.67 $1,827.42 $1,840.18 $1,897.39 $1,878.77
% of Revenue 8.52% 8.30% 8.71% 8.35% 8.42% 27.51% 37.00% 37.96% 37.34% 8.11% 35.70% 36.04% 36.02% 36.88% 9.68% 8.86% 8.93% 8.67% 8.72% 8.60% 8.46% 8.54% 8.28%
Appendix 4 – Working Capital Model
December 5, 2014
University of Oregon Investment Group
UOIG 15
Discounted Free Cash Flow Assumptions
Tax Rate 37.60% Terminal Growth Rate 3.00%
Risk Free Rate 2.35% Terminal Value 33,530
Beta 0.97 PV of Terminal Value 11,341
Market Risk Premium 5.75% Sum of PV Free Cash Flows 4,577
% Equity 100.00% Firm Value 15,918
% Debt 0.00% Total Debt 0
Cost of Debt 0.00% Cash & Cash Equivalents 290
CAPM 7.90% Market Capitalization 15,918
WACC 7.90% Fully Diluted Shares 378
Implied Price $42.11
Current Price $48.19
Overvalued (12.62%)
Final Implied Price Price Target Weight
DCF $42.11 50.00%
Forward Comparable Analysis $38.68 50.00%
Price Target $40.40
Current Price $48.19
Overvalued (16.17%)
Appendix 5 – Discounted Cash Flows Valuation Assumptions
December 5, 2014
University of Oregon Investment Group
UOIG 16
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
43 2.0% 2.5% 3.0% 3.5% 4.0% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
0.83 46.08 49.70 54.20 59.94 67.52 0.78 7.33% 7.33% 23.09% 46.51% 85.01%
0.93 39.97 42.67 45.94 49.99 55.14 0.88 27.22% 27.22% 49.99% 86.39% 153.87%
1.03 35.04 37.09 39.54 42.50 46.15 0.98 27.22% 27.22% 49.99% 86.39% 153.87%
1.13 30.98 32.58 34.45 36.67 39.34 1.08 7.33% 7.33% 23.09% 46.51% 85.01%
1.23 27.59 28.85 30.31 32.01 34.02 1.18 (20.09%) (20.09%) (11.69%) (0.30%) 15.98%
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
High growth rate going into terminal year, possibly consider doing an intermediate growth rate 43 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
0.07 45.9 45.9 51.8 60.2 73.1 0.07 2.97% 2.97% 17.38% 38.47% 72.33%
0.08 40.5 40.5 45.0 51.2 60.2 0.07 18.78% 18.78% 38.38% 68.76% 122.13%
0.08 36.0 36.0 39.5 44.2 50.8 0.08 18.78% 18.78% 38.38% 68.76% 122.13%
0.09 32.3 32.3 35.1 38.7 43.6 0.08 2.97% 2.97% 17.38% 38.47% 72.33%
0.09 29.1 29.1 31.3 34.2 37.9 0.09 (20.09%) (20.09%) (11.69%) (0.30%) 15.98%
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
43 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
25.75% 2.75 2.75 2.77 2.79 2.81 25.75% -0.94 -0.94 -0.94 -0.94 -0.94
15.75% 1.05 1.05 1.05 1.05 1.06 15.75% -0.98 -0.98 -0.98 -0.98 -0.98
5.75% 1.05 1.05 1.05 1.05 1.06 5.75% -0.98 -0.98 -0.98 -0.98 -0.98
15.75% 0.34 0.34 0.34 0.34 0.34 15.75% -0.99 -0.99 -0.99 -0.99 -0.99
25.75% -0.16 -0.16 -0.16 -0.16 -0.16 25.75% -1.00 -1.00 -1.00 -1.00 -1.00
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
43 2.2% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%
0.58 38.31 38.54 42.59 48.08 55.94 0.58 -20.1% -20.1% -11.7% -0.3% 16.0%
0.48 38.31 38.54 42.59 48.08 55.94 0.48 -20.1% -20.1% -11.7% -0.3% 16.0%
0.38 38.31 38.54 42.59 48.08 55.94 0.38 -20.1% -20.1% -11.7% -0.3% 16.0%
0.48 38.31 38.54 42.59 48.08 55.94 0.48 -20.1% -20.1% -11.7% -0.3% 16.0%
0.58 38.31 38.54 42.59 48.08 55.94 0.58 -20.1% -20.1% -11.7% -0.3% 16.0%
Adjusted Beta
WACC
Adjusted Beta
WACC
Market Risk Premium
Tax Rate Tax Rate
Market Risk Premium
Appendix 6 – Sensitivity Analysis
December 5, 2014
University of Oregon Investment Group
UOIG 17
Appendix 7 – Sources
BGS Filings
CMG Filings
Courrier Post
Damodoran
Factcoexist.com
FactSet
Google Images
IBIS World
KR Filings
Press Releases
SWY Filings
TFM Filings
WFM Earnings call transcripts
WFM Filings
Yahoo! Finance