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Consumer Discretionary Company Presentation

Consumer Discretionary Company Presentation

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Consumer Discretionary Company Presentation

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  1. Consumer DiscretionaryCompany Presentation Arshan Ameen Brian Beck Josh Bernath Ryan Calloway Bryan Chard March 10, 2009 – FIN 724/824

  2. Agenda • Review of Sector Presentation • Proposal • Abercrombie & Fitch • Best Buy • McDonald’s • Summary

  3. Sector Presentation Review • Current SIM portfolio weighting is 10.84% • S&P’s weight is 8.31% • Currently overweight 253 bps • We recommended reducing the weight in the SIM portfolio by 303 bps to 7.81% (or 50 bps underweight) • Why underweight? • Sector is cheap, and rightfully so, as it has underperformed the S&P 500 for the past 10 years • Relative to market, we still expect lower returns for sector • Sole bright spot for sector is that oil prices stay at current levels • Risks going forward: • Unemployment rises (high probability) • Further deterioration in consumer spending (high probability) • Consumer confidence and sentiment remain at historical lows

  4. Current SIM Composition • Class voted to reduce our position by 303 bps or 50 bps underweight the S&P 500

  5. Our Proposal

  6. Abercrombie & Fitch (ANF) • ANF offers casual sportswear apparel under Abercrombie & Fitch, abercrombie, Hollister, and RUEHL brands. The company also operates Gilly Hicks branded stores for women • ANF targets teenagers and young adults through 1,035 stores in the U.S., Canada, and the United Kingdom, as well as websites and catalogue

  7. Business Analysis: ANF • Upsides • 4Q results demonstrate that management is actively managing expenses, while at the same time protecting the brand for the long term • On the doorstep of becoming a truly international brand • U.K. expansion is posting strong results • Do not drive business with promotion, it is driven by fashion and in-store experience  Preserves brand • Downsides • Visibility is low with no sales or EPS guidance from 4Q earnings call • Selling and macro environment remains weak • Opened 90 new domestic stores in 2008 and seven internationally; and is only planning nine new domestic stores and six international in 2009 • U.S. malls are suffering • Management’s focus is on long-term positioning, while sacrificing short-term performance  Sell

  8. Financial Analysis: ANF

  9. Financial Analysis: ANF • Trend is down for every metric, which we expect to continue through 2009

  10. Valuation Analysis: ANF Discounted Cash Flow Analysis Slight upside, but there are better opportunities in the sector over the next twelve months

  11. Best Buy (BBY) • BBY is the leading consumer electronics retailer in the U.S. • It operates 923 Best Buy stores, 19 Pacific Sales showrooms, 13 Magnolia Audio Video stores, nine Best Buy Mobile stand-alone stores and seven Geek Squad stand-alone stores in the U.S. • The Company also operates 51 Canada Best Buy stores, 131 Future Shop stores in Canada, 160 Five Star stores in China, and one Best Buy China store

  12. Business Analysis: BBY • Upsides • Best-of-class U.S. consumer electronics retailer with knowledgeable sales staff and digital product focus • Circuit City bankruptcy will likely increase market share • Opening stores in Europe, which will bear long-term fruit • Initiatives, such as Geek Squad, Best Buy Mobile and Apple Store within-a-store differentiate BBY in a competitive marketplace • Downsides • Consumer spending and Disposable personal income are correlated to stock price, these are likely to get worse before they get any better • Management is taking action to cut back investment spending in business, specifically by approximately 50 percent vs. previous year  Fewer new store openings both domestically and internationally

  13. Financial Analysis: BBY Mean EPS expectations indicate contraction in 2009 and 2010 Leverage is an unfavorable method of increasing ROE, unless you’re KKR Unfavorable trend given that sales may remain under pressure

  14. Financial Analysis: BBY • BBY shows strong returns when consumers are spending and the economy is doing well • This will occur, just not in the near-term, thus we are reducing our exposure

  15. Valuation Analysis: BBY Discounted Cash Flow Analysis

  16. Valuation Analysis: BBY • 12-Month Target Price Calculation • DCF: $34.41 • Multiples: $40.73 $37.57 44.4 percent Upside Equal Weighting

  17. McDonald’s (MCD) • MCD franchises and operates McDonald’s restaurants in more than 100 countries globally. The restaurants are either operated by the Company or by franchisees • Current focus is on alignment around five factors known as “Plan to Win” • (1) Menu Variety and Beverage Choice; (2) Better Restaurant Operations; (3) Customer Convenience; (4) Everyday Predictable Low Prices; and (5) Ongoing Restaurant Reinvestment

  18. Business Analysis: MCD • Upsides • Resilience • One of only two names within the Dow 30 to experience stock price appreciation in 2008 • In November 2008, opened one-thousandth store in China – fastest market to reach that number of stores • Opening 1,000 new stores in 2009 in a weak real estate market • 165 in United States; 245 in Europe; 475 in Asia-Pacific, Middle East and Africa • Large portion of capital expenditures are being spent on store re-imaging, which is improving customer perceptions and driving sales • 7,000 McCafe’s by mid-2009 and these investment projects are meeting management’s expectations • Negative correlation with Consumer Confidence and Consumer Sentiment; and no correlation with Unemployment and Disposable Personal Income • Downsides • Commodity markets are volatile, which could impact suppliers’ prices • FX volatility has made it nearly impossible to predict the potential impact with much certainty • FX negatively impacted fourth quarter 2008 EPS by 7 cents – all due to the strengthening dollar McDonald’s Comparable-Store Sales and Operating Income Growth

  19. Financial Analysis: MCD Mean expectations indicate a 3-Year EPS CAGR of 8.5 percent ROE increases largely driven by expanding profit margins MCD is generating more earnings from its assets

  20. Financial Analysis: MCD • Metrics are all trending upwards • Profit margins and Earnings-per-share are hitting 10-year highs amidst the economic slowdown

  21. Valuation Analysis: MCD Discounted Cash Flow Analysis

  22. Valuation Analysis: MCD Sensitivity Table for DCF

  23. Valuation Analysis: MCD Comparative Multiples Analysis • 12-Month Target Price Calculation • DCF: $70.00 • Multiples: $63.70 $66.85 27.3 percent Upside Equal Weighting

  24. Summary • Buy: • 238 bps of McDonald’s • Sell: • Entire position in Abercrombie & Fitch • 275 bps of Best Buy

  25. What questions do you have?

  26. GameStop (GME) GameStop is the world's largest video game and entertainment software retailer, offering new and used video games The company operates 6,207 retail stores in 17 countries worldwide. The company also operates two e-commerce sites, and, and publishes Game Informer magazine, a leading multi-platform video game publication

  27. Business Analysis: GME Upsides New hardware sales grew 29 percent in January, led by Nintendo’s WII, DS and Microsoft’s Xbox 260 Business model set up so consumers trade in old video games and immediately purchase new games  GameStop provides the currency, attractive in tough economy Recently acquired Micromania, the largest retailer of video games in France with 332 stores and now have an extremely well positioned company in the second largest European market Based on GameStop's view that the U.S. and European markets each have a potential to absorb approximately 7,000 stores, we believe the market is far from saturated Downsides Amazon just announced it will be introducing a competing trade-in video game platform via the internet GameStop’s CEO says, "...While customers wanted to buy a new game, say, Killzone 2, they weren't going to wait the week or two weeks it took to get the credit, then buy Killzone 2. They want Killzone 2 the day it comes out. They need the money and the credit right now." Consumers have an immediacy for currency when they want a video game, Amazon’s platform does not provide that Potential impact of lower consumer spending, although correlation is only .09 with Disposable Personal Income Analysis of New Used-Game Competition

  28. Financial Analysis: GME ROE is growing, mostly driven by profit margins and higher turnover Leverage is declining, which is good in a tough economic environment Mean EPS expectations are increasing steadily through 2011

  29. Financial Analysis: GME • Profit margin increasing as revenue shifts towards used games • Total return trending upward • Return on equity and Earnings-per-share have stayed strong during the recession

  30. Valuation Analysis: GME Discounted Cash Flow Analysis

  31. Valuation Analysis: GME Average Upside 34.7% Upside 13% Terminal Discount with 2.5% Terminal FCF Growth 21.2% Upside

  32. MCD 5-Yr Price Performance