LUXURY RETAILERS. Neal Sangani & Dina Model

Transcription

1 LUXURY RETAILERS Neal Sangani & Dina Model

2 Agenda Investment Thesis Luxury Retail Nordstrom (JWN) Saks (SKS) Q&A

3 How We Outperformed

4 The Sky Is Not Falling Trailing earnings yields of 8% to 12% across the retail sector Superior vs. 3.50% in Treasuries Absurdly cheap unless there is a massive decline in earnings or cash flow We believe both JWN and SKS will continue to grow earnings and cash flow Though luxury retailers are not immune to recession, as usual, the market has grossly overdiscounted shares

5 The Sky Is Not Falling Nordstrom FY 08 Same store sales: down 2% to flat Saks FY 08 Same store sales: midsingle digit increase Gross margin: 30bp to 60bp decrease Gross margin: modest decline SG&A margin: 60bp to 80bp increase SG&A margin: modest leverage EPS: $2.75 to $2.90 (8% earnings yield) Est. EPS: $0.50 (4% earnings yield)

6 Luxury Fares Best Sales and margins weather recession JWN 2000A 2001A 2002A 2003A 2004A Cash flow analysis Sales 5,529 5,634 5,975 6,449 7,131 growth 1.91% 6.05% 7.93% 10.59% Gross margin 38.7% 37.9% 38.4% 39.4% 40.8% change -0.8% 0.4% 1.0% 1.4% Stores growth 10.72% 10.08% 4.31% 2.75%

7 Luxury Fares Best Merchandise buying targets true luxury customers Aspirational vs. High-end Gross margin benefit of higher ticket items Ideally offsets lower traffic and markdowns for lower segments New store openings can offset weakness in comparable store sales

8 Luxury Fares Best Tight inventory and expense controls Commission-based employees Growing direct-to-customer businesses Inventory turns 5x-6x per year beat peers JWN 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A SG&A margin 31.6% 30.6% 30.4% 29.4% 28.4% 27.2% 26.8% 26.7% Inventory Inventory/ square foot

9 Thesis Nordstrom (JWN) The best positioned luxury retailer with a healthy cash flow yield and solid growth potential Current multiples represent trough valuation Saks (SKS) A major turnaround play due to massive potential for margin improvement Small size creates ideal takeover target for a foreign retail buyer

10 Thesis Play ahead of the cycle for fast money Maximum returns tend to be accrued if department store stocks are bought early within an recession downturn produced gains of 55% by buying two months into recession 2001 recession produced gains of 25% by buying two months into the recession

11 Nordstrom Overview Stores 103 Full-line 50 Rack discount 2 Jeffrey boutiques 2 Last Chance clearance Direct Catalog and Internet 7% of sales for FY 07, 16% growth

12 Nordstrom Overview Share price: $35.00 Market capitalization: $7.64bn Net debt: $1.87bn Net sales: $8.82bn

13 JWN Growth On Track Aggressive new store openings and remodels of existing stores 8 new full-line stores, 6 remodels New stores the most productive use of capital available High-priced designer goods continues to outpace the store average No evidence of trading down good early response of spring merchandise cropped jackets and non-denim bottoms

14 JWN Growth On Track Low private label penetration is opportunity Only estimated to be 13% of inventory Nordstrom's Classiques Entier line for women Recently launched Public Opinion label for men New inventory management software Will enable employees to view inventories at full line stores and the direct business on one platform More insight into consumer trends

15 JWN At Trough Valuation Average low valuation for JWN is 15x forward earnings Currently 13x forward earnings Spiked to 30x forward earnings by January 2002 after 2001 recession 80% gain in 3 months On average since 1987, JWN has risen 16.6% in the 12 months following the initial interest rate reduction by the FOMC

16 Our Cash Flow Model Modest sales growth driven by new store openings Modest near-term pressure on gross margins and SG&A Gradual capex reductions due to fewer new openings

17 Saks Overview Stores 54 Saks Fifth Avenue 20% of revenue from flagship store in New York 49 Off Fifth Successful with no evidence of cannibalization Expect 3-4 new stores in Club Libby Lu

18 Saks Overview Divestments Saks DSG to Belk in Proffitt s and McRae s stores Northern DSG to Bon-Ton in stores under the Bergner's, Boston Store, Carson Pirie Scott, Herberger's, and Younkers nameplates Other Stores to Belk in Parisian stores that were renamed Belk

19 Saks Overview Share Price: $12.41 Market capitalization: $1.74bn Net debt: $.47bn Net sales: $3.28bn

20 It s All About Margins Set for operating margin improvement Saks 4.2% vs. 10%-12% for Neiman Marcus, Bloomingdale s, Nordstrom Still cost-cutting following discontinued operations Implementation of planning, allocating, markdown management and point-of-sale technology Consolidation of buying and planning groups Renewed Saks private label

21 Bauger Will Buy SKS Icelandic private investment group Stakes in about 20 retailers 3,900 outlets in 35 countries Sales topping $19 billion Baugur needs to expand its British high-end brands into the US market Karen Millen (currently in 10 US stores)

22 Bauger Will Buy SKS Bauger had set aside 1 billion for investments (possible LBO of Saks) Already own 8.5% stake Weak dollar and lower share price means Saks may be bought outright $2.01bn raised vs. $2.06bn + premium remaining

23 Valuable Real Estate Real estate sale can provide cash for buyout Saks owns 55% of its real estate, including the flagship store At $244/sqft, Saks real estate is worth $1bn Est. total real estate value between $500mn to $2bn Bear Stearns

24 Multiples Justify LBO Typical retail buyouts occur at around 10x EBITDA while SKS trades at 8x Competitor Barney s was taken out at 14x EBITDA (though in a better climate)

25 For the Newbies & Todd A leveraged buyout (LBO) is when a company is purchased using mostly debt financing Ideally, the cash flows generated by the company offset the interest payments and repayment of principal the buyer must make The low equity the buyer must commit allows for high returns on the investment

26 Our LBO Assumptions Purchase price: $16.50 (~30% premium) Financing: 40% equity, 60% debt Required rate of return: 10% Interest rate: 8.00% Sustainable growth (post 2010): 4.50%

27 Questions?