We have assessed the total value of Teuer Furniture to be $253. 03M and the value per share to be $25. 44 per share.
We arrived at this conclusion using a valuation method based on a discounted cash flow analysis. This method involved forecasting free cash flow for the period 2013-2018 and also forecasting the terminal value of the firm for 2019 and beyond. In order to forecast free cash flows for each year we had to construct a forecasted income statement and balance sheet for those respective years.
Please refer to Exhibit 3 for forecasted income statement, Exhibit 4 for forecasted balance sheet and Exhibit 7 for the overall cash flow analysis.
. We aggregated the individual store forecasts to come up with a total company income statement and balance sheet forecast. In the following sections, we will explain our assumptions in detail and methodology in constructing the income statement, balance sheet and the cash flow statement. Income Statement Projections To forecast sales and cost for the total company from 2013 to 2018, we needed to forecast sales and cost for all stores opened to date as well as new stores opened in the future.
Based on our current plans, we know that we are planning to open three new stores in 2012 and two every year from 2013 to 2015. We assumed this trend would continue in 2016 to 2018 and modeled two new stores opening in these years as well. The square feet of these new stores was calculated based on the average square feet per store for stores that were opened in 2008 to 2015, 7,713 square feet per store.Based on the average adjusted sales growth, we projected that every new store opened exhibited sales growth of 70.
1% after the first year and trails off to 1. % in the sixth year and 0. 3% in the seventh year. We assumed that sales growth would continue at 0.
3% every year thereafter for all stores. We believe this assumption is reasonable because customers are well aware of the store locations past the 7 year mark and the growth is in a mature state as opposed to new store which see rapid growth in the initial few years.We utilized the average costs as a percent of sales figure to forecast cost incurred by each store from 2013 to 2018. New stores start with a high CGS as a percent of sales at 70.
9% in the first year, but declines to 39. % by the fourth year, we assumed the percentage remains constant at that ratio from the fifth year onward. Advertising expenses followed a similar pattern, starting at 11. 6% of sales in the first year, decreasing to 7.
2% of sales by the fourth year and remaining constant at that ratio every year after.Depreciation expense is based on the capital expenditure on the initial cost of building out the interior and refresh expenditure incurred every 8 years, straight-lined over 5 years. The lease expense is based on a 6 year renewal rate. Using a 2013 rate of $20.
8/square foot as the baseline, we forecasted the renewal rate for years 2014 and onwards by adding a 2% lease adjustment year-over-year.Please refer to Exhibit 5 Row 119 for a lease rate forecast for years 2013-2018. We assumed the rate is locked in for the 6 year term and for any subsequent renewals we use the corresponding renewal rate as show in Exhibit 5. For example, stores in the 2008 cohort renew their lease in 2015 at a renewal rate of $21.
72/square foot. To calculate the total company income statement for the above line items was a simple sum across all stores for the forecasted years 2013 to 2018.Corporate expenses were forecasted at 5% of sales for future years. Lastly, we applied a 40% tax rate to the operating income to arrive at the net income.
Balance Sheet Projections The initial investment expenditure for each store opened from 2003 to 2012 is known. In order to estimate the expenditure associated with new showrooms opening from 2013 to 2018, we took the cost per square foot in 2012, which was $26. 44/square foot, adjusting for inflation projected in the future year and multiplied that by the total square footage of showrooms opening in future years.For example, the CPI2013/CPI2012 = 233.
46/229. 60 = 1. 0168. The estimated CapEx in 2013 was therefore $26.
44/square foot x 16,000 square feet/store x 2 stores x 1. 0168 = $860. 35K. Per Kim’s guidelines, we expect stores to be refreshed every 8 years.
To estimate the refresh cost, we calculated the nominal refresh cost for showrooms that were opened 2004 and afterwards assuming this 8-year refresh cycle. To estimate the nominal refresh cost, we used 70% of the initial capex cost as the baseline real refresh cost and added an inflation adjustment for the prior 8-year period for the respective cohort.We calculated the 8-year inflation using the inflation (CPI) data given in Exhibit 2. For example, for the 2005 cohort, we used 70% as baseline real cost and added an inflation adjustment for 18.
63% (CPI2013/CPI2005 = 233. 5/196. 8 = 1. 1862) to arrive at a nominal refresh cost of 70%*1.
1863=83. 04%. The 70% real cost is based on an average of real refresh costs for the prior year stores. Please refer to Exhibit 9 for nominal refresh cost projections for all cohorts starting 2005.
We calculated the accounts receivable balances for stores in 2013 to 2018 by taking the prior year’s sales multiplied by 32. %, which was the average accounts receivables to sales ratio from 2004 to 2012. Inventory and accounts payables balances were calculated in a similar fashion, by multiplying the following year’s CGS by 47. 6%, average inventory to CGS balance, and 16.
3%, average accounts payable to CGS balance.Accrued expenditures were forecasted based on the current year’s SGA and Advertising multiplied by 4. 8%, the average SGA and Advertising expense to Accrued Expense ratio. To calculate the total company balance sheet, we summed the accounts receivable, inventory, accounts payable and accrued expenses for all stores.
Calculating PPE required a slightly different approach. We started with the 2012 PPE balance and added current year (2013) capital expenditures and subtracted the current year (2013) depreciation to arrive at the current year PPE balance. PPE balances for 2014 to 2018 were calculated the same way, by taking the prior year PPE balance adding current year CapEx and subtracting current year depreciation. Lastly, we calculated Equity by taking the difference between total Assets and total Liabilities.
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