Posts tagged " apparel "

Vera Bradley Inc (VRA) Graph Analysis

April 28th, 2017 Posted by Graph Analysis No Comment yet

Vera BradleyVera Bradley Inc (VRA) is a leading designer of luggage, handbags, accessories, travel and gift items. Founded by Barbara Bradley Baekgaard and Patricia R. Miller in 1982.  The company was incorporated on June 23, 2010, and headquartered in Fort Wayne, Indiana, United States. The company is listed on NASDAQ with company symbol VRA on October 2010.          

            

A. VRA CASH FLOW

VRA CASH FLOW

B. VRA BALANCE SHEET

VRA BS

C. VRA INCOME AND MARKET

VRA INC

D. VRA RATIOS

VRA RATIOS

E. VRA KEY EXECUTIVE COMPENSATION

VRA COMPENSATION

F. VRA FINANCIAL STRENGTH

VRA STRENGTH

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michael kors

Michael Kors: Does Investors Need To Be Fashionable In Life And Portfolio?

October 15th, 2015 Posted by Deep Analysis No Comment yet

Michael Kors Inc  (KORS) is a luxury lifestyle brand, company around the globe.

Michael Kors (KORS) Company Research

KORS Logo2

KORS Company Profile

Michael Kors Inc  (KORS) is a luxury lifestyle brand, company around the globe. KORS operates its business through three segments namely, the retail, wholesale and licensing. The company has a distribution network in other parts of the globe of company-operated retail stores, leading department stores, specialty stores, and select licensing partners. The company’s retail segment contributed nearly 50 percent of their total revenue in their Fiscal 2015. The company’s retail segment includes 343 North American retail stores, including concession and their U.S. e-commerce site. And, the 183 international retail stores, including arrangements in Europe and Japan.

Significant collections

KORS offers two significant collections, the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. The company has also collections that offer accessories, footwear, and apparel. The licensing segment is committed to providing licenses to third parties, which include some production, sales, and/or distribution rights. The company also sells fragrances in its retail stores and by Estee Lauder to wholesale customers. In addition, the company also sells beauty products like nail lacquers, lip products, powers and a collection of body and sun products.

KORS PRODUCTS

The company’s products are accessories, apparel, footwear, and licensed product. Accessories include handbags and high quality and exotic skins small leather goods. “The Company has engagement with Fossil Partners, LP, (Fossil), which help them create a line of watches and jewelry. The company’s product licensees, in addition to “Fossil”, are the “Aramis” and Designer Fragrances division of The Estee Lauder Companies Inc. (Estee Lauder) for fragrance and beauty, and Luxottica Group (Luxottica) for eyewear, among others. Fossil has been the company’s exclusive watch licensee since April 2004, which is sold in the company’s retail stores.

Jewelry, Eyewear

In addition, Fossil has been the exclusive fashion jewelry licensee since December 2010. Moreover, Luxottica became the company’s exclusive eyewear license in January 2015. It is sold in the company’s retail stores, which serve as the key category. Prior to January 2015, “Marchon” was their exclusive eyewear license. The jewelry product line is bracelets, necklaces, rings, and earrings.

Beauty Products

In addition, the company also sells beauty products like nail lacquers, lip products, powders and a collection of body and sun products. Through its retail and wholesale sections, KORS sells its products in three principal geographic markets: North America, Europe, and Asia. Through its licensing section, KORS enters into agreements that license to third parties. They used the company’s brand name and trademarks, other production, and sales and/or distribution rights. Moreover, revenues generated in these agreements are initially earned in North America and Europe.

Competitors

The Company competes with:

  • Coach, Burberry,
  • Ralph Lauren,
  • Hermes,
  • Louis Vuitton,
  • Gucci,
  • Marc Jacobs,
  • Chloe,
  • Tori Burch,
  • Prada.

2. Date of Incorporation

Michael Kors Holdings Limited (MKHL and its subsidiaries, the Company) was incorporated in the British Virgin Islands (BVI) on December 13, 2002.

3. Place/Head Office

The corporate office of Michael Kors Holding Limited is in 33 Kingsway, London, WC2B 6UF, United Kingdom.

Phone: 44 2076 328 600

Website: http://www.michaelkors.com

4. Founder/Founding

In 1981, Michael David Kors, an American designer established Michael Kors Holdings Ltd., known for handbags and accessories and is based in London, United Kingdom.

5. Company Sector/Industry

Company Sector:    Consumer Discretionary

Industry:                 Textiles, Apparel, and Luxury Goods

Sub-industry:          Apparel, Footwear, and Accessory Design

6. Date of IPO

The company’s initial public offering (IPO) was on December 15, 2011, with its ordinary shares traded on the New York Stock Exchange (NYSE) under the symbol “KORS”. During IPO the stocks were then traded at $24.20 per shares.

7. Other Significant Company Information

  • The company has a total of 9,184 employees.
  • And the company has no unresolved staff comments.
  • On March 28, 2015, there were 199,656,833 common shares outstanding at a closing sale price of $66.97. Further, the company has 303 common shareholders at the record as of March 28, 2015.
  • During fiscal 2013, KORS completed its secondary offerings of 25,000,000 ordinary shares at $47.00 per share. An additional 3,750,000 shares at $47.00 per share were offered because the underwriters exercised their additional shares purchase option.

More Information

  • In September 2012, KORS completed its secondary offering of 23,000,000 ordinary shares at $53.00 per share. An additional 3,450,000 shares at $53.00 per share were offered in October 2012 because the underwriters exercised their purchase option.
  • And on February 2013, completed a secondary offering of 25,000,000 ordinary shares at $61.50 per share.
  • The company did not receive proceeds from the sale of the secondary offerings, which they incurred $1.7 million fees and were charged to selling, general and administrative expenses in Fiscal 2013.

8. Material Events Affecting the Numbers

Ms. Cathy Marie Robinson, executive officer of Michael Kors Holdings Limited was reappointed on August 27, 2015, as executive officer of Michael Kors Holdings Limited with a new title of Senior Vice President of corporate strategy and Chief Operations Officer, after her resignation on the same date, August 27, 2015.

Moreover, Ms. Robinson will receive a grant of restricted share units valued at around $1.5 million under the Michael Kors Holding Limited Amended and Restated Omnibus Incentive Plan. Likewise, the employment agreement was effective May 12, 2014, between Ms. Robinson and Michael Kors (USA), Inc. and it remains in effect without modification.

KORS MAIN ACTIVITY

How Does the Company Make Money

Michael Kors Ltd is a global luxury lifestyle brand led by a world-class management team and an award-winning fashion designer.  The company’s products are handbags, footwear, accessories, apparel, watches, and others.

Products

KORS ProductsA1

The Market

As of March 29, 2014, the company managed 405 retail stores, including concessions. In addition, the store sales growth increased by 26 percent from fiscal 2013 due to increases in sales on accessories line and watches during fiscal 2014. Further, the sales in a comparable store had increased by $255.3 million in fiscal 2014 due to an opening of 101 new stores since March 30, 2013.

What do People Think about the Company’s Products or Services?

Here is one of the comments from the customers of Michael Kors Holding Limited.

What is this lawsuit about?

The lawsuit alleges that Michael Kors deceptively and misleadingly labeled and marketed merchandise that it sells at its Michael Kors Outlet Stores, including by using allegedly misleading price tags on its Michael Kors Outlet Products, which Plaintiffs claim resulted in damages to Plaintiffs and the Settlement Class. Michael Kors maintains that its marketing and labeling is not deceptive or misleading and is entirely proper and permitted by law. (source: https://www.michaelkorsoutletsettlement.com/Content/Documents/Long%20Form%20Notice.pdf )

Who is running the Business?

Person-in-charge of the Company

Michael David Kors, Honorary Chairman and Chief Creative Officer of MKHL

KORS Michael Kors

Michael Kors is a New York-based fashion designer of American sportswear. He was the first women ready-to-wear designer for the French house Celine, from 1997 to 2003. He was born Karl Anderson, Jr. on August 9, 1959, in Long Island, New York, USA. Kors was married to Lance LePere on August 16, 2011. His parents were Karl Anderson and Joan Hamburg, a former model. His mother remarried Bill Kors when he was five and choose to change his name to Michael David Kors.

Further, Michael Kors graduated from John F. Kennedy High School and studied at Fashion Institute of Technology in New York City. Michael Kors started from a small-time sportswear designer to the head of the company.

Employment

On May 20, 2015, Michael Kors (USA), Inc. (the Company) and Michael Kors Holding Limited (MKHL) has entered into an amended and restated employment agreement with each Michael Kors, the Honorary Chairman, and Chief Creative Officer (“the Kors Agreement”), and John D. Idol, Chairman and Chief Executive Officer (“the Idol Agreement”), as required under the terms thereof.

The Kors Agreement is a continuation of terms in prior agreements. The Mr. Kors’ employment agreement will terminate upon his death, permanent disability or for “Cause”, defined in Kors Agreement. The Kors Agreement gives Mr. Kors imaginative and artistic control over the products produced and sold under the MICHAEL KORS trademarks and related marks, including exclusive control of the design of such products, so long as the control is commercially reasonable. Source: SEC filings

Intellectual Property

All intellectual property generated by or at Mr. Kors’ order in the course of his employment is the exclusive property of the Company. Mr. Kors is obliged to retain the confidentiality of the Company’s proprietary information. In addition, the Company has agreed that they will not enter into any new line of business without Mr. Kors’ consent, if he is reasonable, determines that such line of business is detrimental to the company’s trademarks.

Benefits

The Company provides health and medical insurance to Mr. Kors at its own cost without contribution from him. The whole life insurance premium policy and the $500,000 term life insurance policy. The Company provides automobile and chauffeur for transport to and from the Company’s offices and for other business purposes. Upon termination of the agreement, he will be allotted to a pro-rate of his bonus, however, if Mr. Kors terminates his employment without the consent of the Company, he will be an independent and exclusive design consultant for the Company with an annual fee of $1.0 million and will not challenge with the Company, for the remainder of his lifetime. Source: SEC filings

KORS Salary

In addition, Kors was entitled to a salary of not less than $1.0 million annually, under the new Agreement. Mr. Kors’ total basic compensation in the last fiscal year was $15.13 million USD, out of which, 17 percent were the total annual compensation and 32 percent was restricted stock awards.

Special events:

He was discovered by Dawn Mello, Fashion Director of Bergdorf. He turned the fashion house with successful accessories and a critically acclaimed ready-to-wear line. The MICHAEL line includes women’s handbags and shoes and ready to wear apparel. The KORS line is footwear and jeans. He was honored by the Couture Council of The Museum at the Fashion Institute of Technology (FIT) with the 2013 Couture Council Award for Artistry of Fashion.

As a teen, He starts designing clothes and selling them.
1977 He enrolled at Fashion Institute of Technology, after dropping out after nine months, got a job in Bergdorf Goodman boutique and was able to sell his design in a small space given to him.
1981 Kors launched Michael Kors womenswear line at Bloomingdale’s, Bergdorf Goodman, Lord & Taylor, Neiman Marcus, and Saks Fifth Avenue.

1984 – 1999

1984 Michael Kors first runway show for the Michael Kors fall collection and was successful in making the Company into a global luxury lifestyle brand.
1993 Forced him to discontinue the Kors line because of bankruptcy.
1997 He was able to recover and launched a lower-priced line and was named the first women’s ready-to-wear designer for French house Celine.
1998 – 2004 Serve as Creative Director of Celine, the French luxury brand.
1999 Mr. Kors was the recipient of numerous industry awards, including the CFDA Womenswear Designer of the year 1999 and Menswear Designer of the Year 2003.

2003 – 2009

2003 Kors left Celine
2002 Kors launched his menswear line.
2004 The MICHAEL Michael Kors and KORS Michael Kors lines were launched.
2006 Awarded as the Accessories Council ACE Award for Designer of the Year 2006.
2009 Fashion Group International’s Star Honoree at its annual Night of Stars Awards in 2009.

2010 – 2013

2010 The CFDA acknowledge Mr. Kors with their most prestigious honor, the Lifetime Achievement Award.
2010 At age 50, Michael Kors became the youngest person ever to receive a lifetime achievement award from the Council of Fashion Designers of America.
2011 Marked Kors thirtieth year in business. He received the Award of Courage from the American Foundation for AIDS Research (amfAR).
2013 Kors was selected for The Time 100, the magazine’s annual list of the 100 most influential people in the world.

2014 – Present

January 2014 Forbes reported that KORS has a personal fortune of more than $1 billion, making him the latest fashion industry billionaire.
Present Michael Kors has full collection boutiques in New York, Beverly Hills, Palm Beach, Manhasset, and Chicago

Further, Mr. Michael Kors is a renowned award-winning designer and is instrumental in defining the brands and designing the company’s collections. His unique role as the founder, Chief Creative Officer and the namesake behind the brand provides the Board of Directors with valuable leadership and insight into the company’s design, marketing, and publicity strategy.

John D. Idol, Chairman of Michael Kors, and Chief Executive Officer (CEO) and a Director

December 2003 to Present

KORS John Idol

 

 

 

 

 

Special events:

July 1, 2001 – July 2003 Chairman and Chief Executive Officer and a director of Kasper ASL, Ltd., whose lines included the Anne Klein brand.
July 1997 – July 2001 Chief Executive Officer and a director of Donna Karan International Inc.
1994 – 1997 Ralph Lauren’s Group President and Chief Operating Officer of Product Licensing, Home Collection, and Men’s Collection.

Employment Agreement

It is required in the terms, John D. Idol has entered into an amended and restated employment agreement with Michael Kors Holding Limited, (“the Idol Agreement”). The conditions under the Idol Agreement extend Until March 31, 2018, and will be automatically renewed for an additional one-year term, unless there is an advance written notification of non-renewal by either Mr. Idol or the Company. Mr. Idol will serve as Chairman and Chief Executive Officer of the Company and MKHL, reporting to MKHL Board.

Regarding Retirement and Fringe Rights

Mr. Idols’ employee retirement and fringe rights remain the same under the Idol Agreement. The company will pay the premium up to a maximum of $50,000 per annum, for his $5.0 million whole life insurance policy. He was likewise supplied with an auto and driver for transportation to and from the Company’s offices and for business purposes as provided in the Agreement.

Idol Agreement

The Idol Agreement will terminate upon a change of control and upon his death or total impairment. Mr. Idol can terminate the agreement without good reason upon 10 days advance written notice, subject to his having certain rights to meet with the MKHL Board, and a majority of the MKHL Board approves his dismissal. Moreover, a pro rata portion of his bonus will be given upon the termination of the agreement. Plus severance equal to double the sum of his current base salary and the annual bonus paid or payable to him during the last fiscal year. And payable in a single lump sum within 30 days after the termination.

New Agreement

Mr. Idol agreed, that all rights to the Company’s intellectual property will remain the sole and sole property of the Company and he will remain bound to preserve the confidentiality of the Company’s proprietary information. Under the new agreement, Mr. Idol is entitled to receive not less than $1.0 million annual salaries. Likewise, John D. Idol totals basic compensation was $15.01 million USD, of which 17 percent were the total annual compensation and 32 percent was restricted stock award.

Special Events:

July 3, 2007, President 2007, Secretary of Global Brands Acquisition Corporation
Since September 2011 Chairman of Michael Kors Holding Limited.
January 2003 Chief Executive Officer of Michael Kors Corporation
Since December 2003 Chief Executive Officer and Director of Michael Kors Holdings Limited.
July 2001 to July 2003 Chief Executive Officer of Kasper ASL Ltd.
July 1997 to July 2001 Chief Executive Officer and Director of Donna Karan International, Inc.
1994 to 1997 Group President and Chief Operating Officer of product licensing, home collections and men’s collection at Ralph Lauren.
1984 to 1990 Vice President at Ralph Lauren
July 2001 Chairman of Kasper ASL Ltd.
1980 Mr. Idol began his career at J.P. Stevens.

Key Executive Compensation 2015

KORS Executive compensation graph

The graph above shows the compensation for fiscal 2015. It shows the total amount of compensation for each executive from the highest to the lowest with the percentages against the total key executive compensation. Also, it includes all other benefits received by the executives.

The Historical Key Executive Compensation

KORS Executive compensation

Facts:

  • The key executive compensation in Fiscal 2015 was $39 million and it represents 3 percent of the total sales, general and administrative expenses.
  • Michael Kors’ total annual compensation was $15.1 million in Fiscal 2015, it represents 39 percent of the total key executive compensation.
  • And also, John D. Idol has $15.08 million total annual compensation in Fiscal 2015 and it represents 38.8 percent of the total key executive compensation.
  • In addition, Joseph B. Parsons has a total annual compensation of $3.0 million and it represents 8 percent of the total key executive compensation.
  • Moreover, Cathy Marie Robinson, Senior Vice President Global Operations has a total annual compensation of $3.6 million, equivalent to 9 percent of the total key executive compensation.
  • Finally, Pascale Meyran, Senior Vice President, and Chief Human Resources Officer have total annual compensation of $$2.0 million and it represents 13.6 percent of the total key executive compensation.

 Explanation

  • The composition of the total compensation was: salary, restricted stock award, securities options, non-equity compensation, and other compensation.
  • Moreover, Mr. Michael Kors and Mr. John Idol have the same amount of salary, restricted stock award, securities options, and non-equity compensation as follows, $2.5, $4.9, $2.6 and $5 million, respectively.

KORS Numbers Analysis

1. Equity and Retained EarningsKORS Historical SHE REFacts:

  • Shareholders’ equity growth in 5 years was 1,567 percent, from $125 million to $2.1 billion, Fiscal 2011 until the trailing twelve months.
  • The year over year growth was increasing or trending up yearly at an average rate of 97 percent.
  • And the retained earnings growth in the last five years was 2,783 percent.
  • The year over year growth was increasing at an average rate of 107 percent.

Explanation

  • In the fiscal year 2015, a net income of $881 million was added to the shareholders’ equity.
  • And the foreign currency adjustments of $91 million were deducted from stockholders’ equity.
  • A net gain on derivatives amounting to $31 million was added.
  • The exercise of an employee share option, equity compensation expense, and tax benefit on exercise of share options in the amount of $15, $49 and $45 million recorded as additional paid-in capital were added, respectively.
  • Also, the purchase of treasury shares in the amount of $495.3 million of 6,800,101 shares was deducted in 2015.

Interpretation

The shareholders’ equity had increased by 24 percent due to an increase in net earnings by 33 percent in the fiscal year 2015 from the fiscal year 2014.

The Equity and Retained Earnings Graph

KORS SHE RE Graph

The graph above shows that the shareholders’ equity and the retained earnings are trending upward from fiscal 2011 to fiscal 2015. In addition, the trailing twelve month shows that retained earnings have a slight increase, no more than 10 percent. Nevertheless, the shareholders’ equity falls down by no more than 10 percent.

Shares Outstanding

The number of shares outstanding is the company’s stock currently held by all its stockholders.

KORS Shares outstanding

Facts:

  • Fiscal 2015 and the trailing twelve months shares outstanding was 206 and 196.4 million shares.
  • And the growth from Fiscal 2011 to Fiscal 2015 was 10 percent.
  • The trailing twelve months shows a decreased of 5 percent or $9.55 million.

Explanation:

  • The number of shares increases year over year due to an issuance of restricted shares at 18,541, 250,654 and 413,108 shares in 2013, 2014 and 2015, respectively.
  • And the exercise of employee share options at 8.7, 2.6 and 1.8 million shares in 2013, 2014 and 2015, respectively.
  • In addition, in the trailing twelve months, there was a forfeiture of restricted shares at 8,252 shares which were deducted from the total number of shares.
  • Likewise, the exercise of employee share options in the trailing twelve months was 706,343 shares.

Interpretation

The company’s outstanding shares were increasing year over year due to the exercise of employee share options and the issuance of restricted shares.

Details on Share Repurchase Program

  • On October 30, 2014, the Board of Directors of KORS authorized a $1.0 billion shares repurchase program.
  • While, on May 20, 2015, The Board of Directors authorized an additional $500 million under the existing share repurchase program and extended the program through May 2017.
  • In the three months ended June 27, 2015, the company repurchased 6,960,352 shares at a cost of $350.0 million through open market transactions.
  • As of June 27, 2015, the remaining available under the repurchase programs was $658.1 million.

Share Repurchase Program

  • The company has also a “withhold to cover” repurchase program, which allows the company to withhold common shares from certain executive officers to satisfy maximum tax withholding obligations relating to the vesting of their restricted share awards.
  • Moreover, in the three month period ended June 27, 2015, and June 28, 2014, KORS withheld 22,500 shares and 11,022 shares, respectively at a cost of $1.1 million and $1.0 million, respectively, in satisfaction of maximum tax withholding obligations relating to the vesting of restricted share awards.

2. The Valuation Model

Using the valuation model, the following results were summarized in the table below.

KORS Value Model

Facts:

  • Book value growth rate in 5 years was 47 percent.
  • And the book value in 5 years is $74.29 per share.
  • Also, the average return on equity is 45.62 percent.
  • In addition, the return on book value in 5 year period was $33.89.
  • While stock price in 5 years is $335.51.
  • The present value of the stock was $145.05.
  • Dividend yield was zero percent.
  • On the other hand, the risk that was used was 15 percent.
  • Current price as of October 1, 2015, was $43.53
  • Intrinsic value was $87.03 per share.
  • A share price of Michael Kors Holdings Limited was undervalued by 50 percent.

Explanation

Using the Value Model, the market price of KORS as of October 5, 2015, was undervalued 51 percent because the intrinsic value or the true value of the stock was higher than the market price.

Detailed Financial Analysis

A. BALANCE SHEET

Financial Health Ratios

KORS Liquidity

Facts:

  • The current ratio was averaging 4.66 and the trailing twelve months ratio was 5.35.
  • And the quick ratio was averaging 2.96 and the trailing twelve months ratio was 3.19.
  • While the financial leverage was averaging 1.59 and the trailing twelve months ratio was 1.22.
  • Moreover, the debt to equity ratio was averaging 0.16 and there was zero debt to equity ratio from 2013 to the trailing twelve months.
  • And debt to assets ratio was averaging 0.05 and there was zero debt to assets ratio from 2013 to the trailing twelve months.

Explanation

  • The current ratio is a financial health ratio that proves the ability of the company in meeting its financial current obligations using its current assets. KORS is very capable of meeting its current obligations using its current assets because the current assets are 5 times more than its current liabilities. Cash represents 45 percent of the total current assets for the trailing twelve months.
  • While the quick ratio is a financial health ratio, which tests the ability of the company in paying its current financial obligation using only its quick assets. Quick assets are current assets minus inventory. KORS has the ability to pay its current obligations using its quick assets because its quick assets are three times greater than its current liabilities.

Further,

  • Financial leverage is the total assets divided by the total shareholders’ equity. For every $1 in equity that was invested, KORS had $1.59 in total assets.
  • While the Debt to Equity ratio is a measure of how much is financed by debt or creditors compared with its owners. KORS has zero debt to equity ratio of 2013 for the trailing twelve months, meaning, the operation of the business is financed solely by the stockholders.
  • Moreover, the Debt to Assets ratio is a measure of how much of the total assets are financed by creditors. KORS has a zero debt to equity ratio of 2013 to the trailing twelve months, meaning, the company’s total assets are financed by the stockholders.   

Interpretation

The liquidity and solvency ratios tell us that KORS is capable of meeting its current and long-term financial obligations on its due date using its current assets. In addition, the company is capable of paying its current financial obligation using only its quick assets.

Efficiency Ratios

KORS Efficiency

Facts 

  • The day’s sales outstanding were averaging 31.97 or 32 days in a period.
  • And the day’s inventory was averaging 105 days in a period.
  • While the payables period was averaging 36 days in a period.
  • On the other hand, the cash conversion cycle (CCC) was averaging 101 days in a period.
  • The receivables turnover was averaging 12 times in a period.
  • Likewise, the inventory turnover was averaging 4 times in a period.
  • Similarly, the fixed asset turnover was averaging 9 times in a period.
  • The asset turnover was averaging 2 times in a period.

Explanation

  • Days sales outstanding or average collection period or days sales in receivables, measure the average number of days a business takes to collect its average receivables in a period. It measures the liquidity and efficiency of sales collection activities.
  • The day’s inventory is the average number of days that it took to sell the average inventory in a period.
  • Payable Period measures the number of days the company takes to pay its suppliers, or it is the average payment period that the company set in making payments to its creditors.
  • The cash conversion cycle (CCC) measures the number of days, cash is tied up in the production, in the sales process of its operations and the benefits, it gets in payment terms from creditors.

More Explanation

  • Receivables turnover measures how many times a firm collects its average accounts receivable balance during a certain period. In other words, it measures the efficiency of the business to collect credit sales. Higher results are favorable and a lower result is unfavorable.
  • While the inventory turnover is the number of times per year that inventory turns over.
  • In addition, the fixed assets turnover ratio or the sales to fixed assets ratio. This ratio measures how efficient is the company in utilizing its fixed assets to generate revenue. The ratio is calculated by dividing net sales over average fixed assets.
  • Moreover, asset turnover measures the management efficiency in utilizing its average total assets in generating sales or revenue.

Interpretation

  • The day’s sales outstanding tells us that, it will take an average of 32 days for the sales or services to be converted into cash.
  • And the days’ sales in inventory tell us, that, it will take 105 days for the average inventory to be sold during a period.
  • Moreover, the payable period indicates that the average period for the company to pay its suppliers is 36 days from the date of purchase.
  • Likewise, the cash conversion cycle (CCC) indicates, that it takes 101 days for the company to turn assets into cash. It also indicates that the company is efficient in managing its working capital and the ability to pay off its current liabilities.

More of Interpretation

  • The receivables turnover ratio shows that the company collects its average accounts receivables 12 times in a year.
  • Likewise, the fixed asset turnover tells us that the company generates $9.28 of revenue for every $1 investment in net fixed assets over the year.
  • And the asset turnover ratio, tells us, that KORS is generating $2.02 of sales for every $1 invested in average total assets. In other words, net sales of KORS is equal to average total assets. This ratio looks at revenue and not profit.

Condensed Balance Sheet

KORS Condensed BSFacts:

  • In the trailing twelve months,
    • Total cash was 32 percent of the total assets, a decreased of 4 percent in 2015.
    • And the current assets were 71 percent of the total assets, a decreased of 4 percent in 2015.
    • On the other hand, current liabilities represent 13 percent of the total liabilities and stockholders’ equity.
    • Similarly, total liabilities represent 18 percent of the total liabilities and stockholders’ equity, a one percent increase from 2015.

Explanation

  • Cash was increasing year over year at an average rate of 167 percent in five years. Cash and cash equivalents are highly liquid investments with original maturities of three months or less.
  • And the total current assets were increasing year over year at an average rate of 57 percent in the last five years.
  • Moreover, net property, plant, and equipment were increasing year over year at an average rate of 40 percent in the last five years. The property is stated at cost less accumulated depreciation and amortization.
  • Total assets increased year over year at an average rate of 50 percent in the last five years.
  • On the other hand,  current liabilities are increasing year over year at an average rate of 25 percent in the last five years.
  • Likewise, the total liabilities increase year over year at an average rate of 15 percent in five years.
  • Lastly, stockholders’ equity increases year over year at an average rate of 97 percent in the last five years.

Interpretation

Michael Kors Holdings Ltd is a fast developing company. The company has seen 3,738 percent growth in cash, its total assets have seen 540 percent growth and the shareholders’ equity has seen 1,567 percent growth in the last five years.

 

B. INCOME STATEMENT

Profitability Ratios

KORS Profitability

Facts:

  • The gross margin was averaging 59 percent and the trailing twelve months ratio was 60 percent.
  • Operating margin was averaging 25 percent and the trailing twelve months ratio was 28 percent.
  • Net margin was averaging 16 percent and the trailing twelve months ratio was 20 percent.
  • Return on assets was averaging 31.07 percent and the trailing twelve months ratio was 36 percent.
  • Return on equity was averaging 46 percent and the trailing twelve months ratio was 42 percent.

Explanation

  • Gross profit margin is the percent of profit after deducting the cost of sales from the total sales.
  • Operating margin is the percent of profit after deducting the operating expenses from gross profit.
  • Net margin is the percent of profit after deducting interest, income tax expenses from the operating income.
  • Return on assets ratio is the ratio of net income to average total assets. It measures the efficiency of the management in using the company’s assets in generating net earnings. It indicates the number of cents for every dollar of average total assets.
  • Return on equity or return on capital is the ratio of the company’s net income over its stockholders’ equity during a period. It evaluates the profitability of the stockholders’ investment to the company. A higher ratio is better.

Interpretation

The company generates revenue in its divisions or segments around the world. In the 2015 fiscal period, KORS generated $2.13 and $2.1 billion, and $172 million in retail net sales, wholesale net sales, and licensing revenue, respectively. Its highest sales were in North America, followed by Europe.

The gross, operating and net margin increases in 2013 has remained stable going forward at a rate of 60, 29 and 20 percent, respectively. Return on assets tells us that the management is efficient in managing its assets. The return on equity ratio indicates that the company is capable of generating a decent return on the shareholders’ investment in the company.

The Profitability Graph

KORS Profitability Graph

Facts:

  • The graph shows that gross margin was between 50 to 60 percent in the last five years.
  • Operating margin was ranging from 15 to 30 percent in the last five years.
  • Net margins have not seen negative and it was ranging from 7 to 20 percent in the last five years

Explanation

  • The company’s gross margins remain stable in the last five years.
  • Operating profit of KORS had increased by 52 percent in 2013 and remain stable at an average 29 percent going forward.
  • Net income had increased by 61 percent in 2013 and remain stable at 20 percent going forward.

Interpretation

The graph above shows that the management is efficient and capable of generating decent revenue year over year.

The Earnings Growth Rate

KORS Profitability and Growth

Facts:

  • Gross profit growth in the last five years was 452.5 percent, or from $803 million to $4.4 billion.
  • Growth in the trailing twelve months was 2 percent from 2015.
  • Operating income growth in the last five years was 798 percent, from $137 million to $1.2 billion.
  • The trailing twelve months growth was negative 2 percent from 2015.
  • Net earnings growth in the last five years was 1,097 percent, from $72 million to $868 million.
  • The trailing twelve months growth was negative 2 percent from 2015.

Explanation

  • Gross profit increases year over year at an average rate of 43 percent in the last five years.
  • The net sales from retail stores in Fiscal 2015 represent 49 percent of the total revenue, at $2,134,578,000, a 34 percent increase from Fiscal 2014.
  • The net sales from wholesale in Fiscal 2015 represent 47 percent of the total revenue, at $2,065,088,000, a 31 percent increase from Fiscal 2014.
  • Revenue from licensing in Fiscal 2015 represents 4 percent of the total revenue, at $171,803,000, a 22 percent increase from Fiscal 2014.
  • Total revenue in Fiscal 2015 was $4, 4 billion, compared to the total revenue of $3.3 in Fiscal 2014, having a 32 percent increase.

Interpretation

The company’s revenue was running in three segments, which is the retail, wholesale and licensing. In Fiscal 2015, Accessories contribute the highest sales equivalent to 68 percent of the total sales, Apparel had total sales equivalent to 13 percent, and footwear had total sales equivalent to 11 percent of the total sales. The total revenue from licensed products was equivalent to 8 percent of the total sales.

The Earnings Growth

KORS Earnings Growth Graph

The graph indicates that the earnings of Michael Kors Holdings Limited were trending up from 2011 for the trailing twelve months. Nevertheless, in the trailing twelve months, the development remains stable from Fiscal 2015. The operating income and the bottom-line show that earnings are getting higher year over year.

C. STATEMENT OF CASH FLOWS

KORS Statement of Cash Flows

Facts:

  • The cash from operating activities has a growth of 730 percent in the last 5 years, from $110 million to $915 million.
  • The capital expenditures were $421 million in the trailing twelve months.
  • Free Cash Flows have a growth of 841 percent in the last five years, from $52.47 million to $494 million.

Explanation

  • The cash from operating activities was increasing year over year at an average rate of 67 percent.
  • Capital expenditures are investments in property, plant, and equipment and it is increasing year over year.
  • The free cash flow is trending up year over year at an average rate of 158 percent. The growth rate in 2013 was 841 percent.

Interpretation

The cash from operating activities and the free cash flows were impressive. The management has the capability of generating sufficient cash from the company’s resources to be utilized for the business operations and for future investments and for paying dividends to its stockholders.

INVESTMENT VALUATION

The Enterprise Value (EV) Approach

Enterprise Value (EV) is the present value of the whole company. EV takes into account the balance sheet, so in my own opinion, it is a much more definite measure of a company’s true market value than market capitalization. It assesses the value of the productive resources that are capable of producing products or services, both equity capital (market capitalization) and debt capital. Market capitalization is the value of the whole company’s equity shares.

EV is a company’s presumed takeover price because the buyer would have to purchase all of the stock and pay off existing debt while taking all the remaining cash. This gives the buyer a strong case for making its offer.

The table below shows us the summary of the historical enterprise value.

KORS EV

Facts:

The trailing twelve months show that,

  • Market capitalization was $8.4 billion USD.
  • The share price as of October 5, 2015, was $43.53.
  • Total debt was zero.
  • Cash and cash equivalent were $809 million.
  • Calculated enterprise value was $7.6 billion.
  • Calculated enterprise value per share was $39.35.
  • Total shares outstanding were 193,421,990 million shares.

Explanation

  • Market capitalization growth of KORS was 64 percent in the last five years.
  • The company has zero debt from 2013 to the trailing twelve months.
  • Cash and cash equivalent represent 11 percent of the enterprise value for the trailing twelve months.

Interpretation 

In purchasing the entire business of KORS as of October 5, 2015, the investor would be paying t $7.6 billion at $39.35 per share. The equation in buying would be 100 equity and zero debt.

 

The Discounted Cash Flow (DCF) Approach on KORS

Discounted Cash Flow is a method employed in defining the worldwide value of the stock of a company (or asset). In other terms, the discounted cash flow approach estimates the worth of the entire company today, based on future projections of all of the cash that the company could generate and be available to investors in the future. It is described as “discounted” cash flow because of the principle of “time value of money”. In other words, the amount of cash that the company will receive in the future is worth less than the cash today.

DCF Formula

Where:

  • Vo is the value of the equity of a business today.
  • CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n. The discounted cash flow model is based on time periods of time of equal length. Because forecasts are often made on an annual basis in practice, we use the terms “periods” and “years” almost interchangeably for purposes of this theoretical discussion.
  • r is the discount rate that converts future dollars of CF into present dollars of value.

The Historical Cash Inflows

KORS Historical CF

The EBITDA growth was 759 percent in the last five years, from $162 million to $1.4 billion. In addition, the EBITDA was increasing year over year at an average rate of 75.69 percent.

The Projected Cash Inflows

KORS Projected Cash Inflows

Facts:

  • The projected cash inflows in Year –
  • 1 or in the year 2016 was $1,534,937,800 billion.
  • 2 or in the year 2017 was $1,688,431,580 billion.
  • 3 or in the year 2018 was $1,857,274,738 billion.
  • 4 or in the year 2019 was $2,043,002,212 billion.
  • 5 or in the year 2020 was $2,247,302,433 billion.
  • The calculated terminal value was $13,829,828,353 billion.
  • The estimated present value discounted using the calculated required rate of return in Year –
  • 1 or in the year 2016 was $1,312,374,785.
  • 2 or in the year 2017 was $1,234,291,275.
  • 3 or in the year 2018 was $1,160,853,567.
  • 4 or in the year 2019 was $1,091,785,248.
  • 5 or in the year 2020 was $1,026,826,346.
  • The present value of the terminal value was $6,319,056,975.
  • The future enterprise value was $12,145,188,196 at $62.79 per share.

Explanation

  • The current growth rate of cash inflows in Fiscal 2015 was 28 percent, however, this is less than the growth in fiscal 2014 by 31 percent. And, from 2013 to fiscal 2014, the growth diminished by 81 percent.
  • The present value of the projected cash inflows was calculated utilizing the required rate of return (RRR) (shown in the table below), with the following formula:

 Present Value = Projected Cash Inflows ^n / (1+ discount rate) ^n

  • The enterprise value was the sum of the present value at year 1 to year 5 plus the present value of the terminal value. In other words,

Enterprise Value = PV^1 + PV^2 + PV^3 + PV^4 + PV^5 + PV (terminal value)

Interpretation

The present downswing of the luxury wholesale and retail sales globally might continue in the coming more years, due to this, the historical current cash inflow growth rate is not applied.

The Terminal Value

KORS Terminal Value

Facts:

  • The calculated Terminal Value using the Gordon Growth model was $13.8 billion.
  • The final projected year cash flows of $2,247,302,433.
  • The long-term cash flows growth rate of 0.61%.
  • And the calculated discount rate or the required rate of return of 16.9588 percent.

Explanation

Terminal value or continuing value is the value of the firm beyond the projected period. In other words, it is the future discounted value of all future cash inflows beyond a given date.

Interpretation

It needed to come up with a terminal value of cash inflows after projecting the future cash inflows at year 5. If the terminal value or the value of future long term value is not considered, it will be assumed that KORS stopped operating at the end of 5 year projection period.

The Fair Value or Intrinsic Value and the Margin of Safety

KORS Fair Value

Facts

  • Intrinsic Value or Fair Value was $11.17 billion at $57.73 per share.
  • The net debt was -$978,922,000.
  • Net Debt = Short term liability + Long term liability – cash and cash equivalent
  • Share price as of October 5, 2015, was $43.53.
  • The margin of safety was $14.20 per share or 25 percent of the intrinsic value.
  • The stock of KORS is undervalued.

The Discount Rate or the Required Rate of Return (RRR)

KORS RRR

Facts:

  • The calculated required rate of return or the discount rate was 16.9588 percent.
  • The risk-free rate was 7.17 percent.
  • The long-term cash flow growth, which is the average long term Gross Domestic Product (GDP) in the United Kingdom was 0.61 percent from 1955 until 2015.

Explanation

  • Risk-Free Rate is the rate of return from an investment with zero risks over a specified period.
  • Market Risk Premium is the return expected over and above the risk-free rate.
  • Beta is a measure of the stock volatility in the stock price fluctuations in the overall market.
  • GDP Growth Rate represents the overall market value of all the goods and services that a country produces over a specific time period – you can think of it as the size of the economy.

Interpretation

The required rate of return (RRR) is the minimum annual return that an investment must provide to support or justify the purchase of an investment. The investor’s decision to invest in a new project depends on their risk tolerance.

Present Value

This method of valuation tries to work out the value today of the projected cash flows in the future, now let us walk through the calculation of the present value of the projected cash inflow in year 5.  I will walk you through by the following formula:

PV

or PV = FV (1+r) n

Where:

PV = Present Value

FV = Future Value

r    = Rate of Return

n   = Number of Periods

Present Value at year 5:

PV = $2,247,302,433 / (1 + 16.9588%) ^5

= $2,247,302,433 / (1.169588) ^5

= $ 1,026,826,346 

Therefore:

PV = $1,026,826,346

FV = $2,247,302,433

r    = 16.9588%

n   = 5

Present Value of Terminal Value

PV = $13,829,828,353 / (1 + 16.9588%) ^5

= $13,829,828,353 / (1.169588) ^5

= $6,319,056,975

Therefore:

PV = $6,319,056,975

FV = $13,829,828,353

r    = 16.9588%

n   = 5

The present value of the future projected cash inflows at year 5 is $1,026,826,346. On the other hand, the present value of the terminal value was $6,319,056,975.

KORS Monthly Stock Trends

What is the stock trends? Stock trends are the general direction in which a market is heading, it is the movements of the highs and lows.  The stock trend is a significant factor in technical analysis.

KORS Stock Trend

Facts

  • The chart above illustrates a descending price movement from September 30, 2014, until April 30, 2015.
  • Then followed by a horizontal or sideways price movement from May 31, 2015
  • Until the trailing twelve months. The sideways pattern has a small price move.
  • As a result, a break of a trendline usually indicates a strong trending characteristic either up or downwards.
  • Moreover, the chart shows a little price movement in either direction and the chance to get an opportunity for profit is little, for a short term investor.

Explanation

The trend line shows a descending one-year movement from September 30, 2014, until the trailing twelve months at an average of negative 3.8 percent. Further, the one-year price growth of KORS is negative 40 percent, from $71.39 to $43.07, therefore, the price has a descending trend in a period of one year.

Historical Market Data

KORS Historical Market Data

Facts:

  • The Price to Earnings in the trailing twelve months was 10.63.
  • Earnings per Share for the trailing twelve months was $4.24 and it has a growth of 1185 percent in the last five years. Likewise, EPS is increasing year over year at an average rate of 77 percent in the last five years.
  • Price to Book value in the trailing twelve months was $4.10 per share.
  • Book Value per share in the trailing twelve months was $10.80 and it has a growth of 588 percent in the last 4 years.
  • EV/EBITDA in the trailing twelve months was 6 times.
  • The Share Price in the trailing twelve months was $45.12 and it has a growth of 60 percent in the last five years.
  • EV/EBITDA in the trailing twelve months was 6 times.
  • Market capitalization in the trailing twelve months was $8.4 billion and it has a growth rate of 63 percent.
  • The computed price target of KORS using the Price to Earnings was 45.84.

Explanation:

  • Price to Earnings (P/E) is the most popular metrics in stock analysis. It calculates the market value of the stocks relative to the earnings of the company. Likewise, it tells us what the market is willing to pay for the earnings of the company. The higher the P/E, the more the market is willing to pay for the earnings of the company.
  • In addition, Earnings per Share is a measure of profitability and how the management is handling the business operation. Moreover, it is a number of profits that accrue to each shareholders’ based on a number of shares they owned.
  • Moreover, Price to Book ratio is a financial ratio that compares the market price to the book value of the stock.

More Explanation

  • Book Value per share is the amount of shareholders’ equity over the number of outstanding shares, it is an indicator of the value of the company’s stock.
  • While the Enterprise Value/Earnings before Interest, Tax, Depreciation, and Amortization (EV/EBITDA), determines the value of the company.
  • Price Target forecast what the company is worth and compare to market price. It is a function of risk tolerance and the length of time in holding the security.

Interpretation

The financial ratios of KORS were improving year over year and the increase was acceptable. It indicates, that the management was efficient in handling the operation of the business.

In conclusion,

The stock trend graph has a descending trend and has a little movement. It is either up or down and a chance for a profit is small, for a short term investor. Hence, KORS stock is a good BUY for a long-term asset.

CITATION

https://www.sec.gov/Archives/edgar/data/1530721/000119312515201923/d900571d10k.htm#tx900571_13

http://www.michaelkors.com

https://www.michaelkorsoutletsettlement.com/Home/FAQ

https://www.michaelkorsoutletsettlement.com/Content/Documents/Long%20Form%20Notice.pdf

https://en.wikipedia.org/wiki/Michael_Kors

Researched and Written by Criselda

Twitter: criseldarome

cherokee-inc-chke

Cherokee Inc (CHKE) Investment Valuation

November 24th, 2012 Posted by Investment Valuation No Comment yet

Cherokee Inc (CHKE) is an American based global apparel and footwear company, headquartered in Sherman Oaks, California. Cherokee was established in 1973 and are available in 110 countries in 12,000 retail locations and on digital commerce.

CHKE Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. In addition, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

CHKE EV

Explanation

The market capitalization for Cherokee Inc, as shown in the table above, was erratic in movement at a rate of 7 percent average. The total debt was 0.8 percent average and the cash and cash equivalent was a 7 percent average. As a result, the enterprise value was lesser by 6 percent against the market value. So, if you plan on purchasing the entire business of Cherokee Inc, you will be paying 100 percent of its equity and no debt.

The costs of buying CHKE to date, November 12, 2012is $119 at $14.88 per share.  While the market price to date, on the other hand, was $14.58 per share.

Net Current Asset Value (NCAV) Approach  

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method  

CHKE NCAVPS

The net current asset value approach shows that the stock of CHKE was at overvalued prices from 2007 up to the trailing twelve months because the market value was greater than the 66 percent ratio. So, 66 percent represents only one percent of the market value. To analyze it more, the data show that Cherokee Inc stocks were expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of VSEC passed the test.

   CHKE MC EPS

Then MC/NCAV valuation tells us that the stock price was overvalued from 2007 to 2012 because the result of the ratio exceeded the 1.2 ratios and the price was considered expensive.

 The Margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

CHKE MOS

Explanation

The margin of safety for CHKE was 7 percent on average.  There was no margin of safety from 2007 to 2010 and the trailing twelve months 2012. In 2011, the MOS was 40 percent. I’m wondering why the margin of safety was zero from 2007 to 2010.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

CHKE IV

The intrinsic value factors earning per share and the sustainable growth rate. The sustainable growth rate of Cherokee Inc was negative all throughout except in 2011.

The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

  EPS

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR) shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

   CHKE SGR

The ROE of Cherokee was a 56 percent average, the payout ratio was 138 percent and the average SGR was negative 20 percent. The sustainable growth rate was negative because the payout ratio was greater than the return on equity.

Return on Equity (ROE)

Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.

  ROE

 There are two approaches in calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach.

CHKE Relative

The relative approach has a higher margin of safety against the average approach. CHKE Graph

Explanation

As we can see in the graph, the intrinsic value line is under the enterprise value line, except in 2011 where the IV line rises up a little above the EV line by 40 percent, then it went down again in 2012.  The space between these two lines is the margin of safety and we can get this by subtracting the difference between these two lines.

ITG Relative Valuation Methods  

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)   

This method will determine whether the stocks are undervalued or overvalued. By multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS). And comparing it to the enterprise value per share, we can determine the status of the stock price.

  CHKE PE EPS

The stock was trading overvalued in 2007 and 2010, while in 2008, 2009 and 2011 the price was undervalued. The P/E*EPS rate was 89 percent of the enterprise value. Thus the overall price was overvalued. It means that the price was expensive.

The other approach for calculating this valuation is by using the average price to earnings ratio. CHKE Relative PE

The percentage P/E*EPS ratio using a relative approach was greater by one percent against the average approach.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)   

The use of this ratio is, to separate price and earnings in the enterprise value.

  CHKE EV EPS

In the EV/EPS valuation, it tells us that the price (P/E) was 86 percent and the earnings (EPS) was a 14 percent average.  On the other hand, the stock price was overvalued because the price to earnings percentage was greater than 50 percent.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)         

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

CHKE EV EBITDA

The EV/EBITDA valuation tells us that it will take 9 years to cover the costs of buying Cherokee. In other words, it will take 9 times the cash earnings of the company to cover the cost of the purchase price. A very long period of waiting.

This valuation also tells us about the profitability of the company. The company’s EBITDA represents 12 percent of the enterprise value and its net earnings were 33 percent average.

In conclusion, 

The market capitalization for Cherokee Inc was erratic in its movement at a rate of 7 percent average.  While the total debt was 0.8 percent and the cash and cash equivalent were a 7 percent average. Thus, the enterprise value was lesser by 6 percent against the market value.  Buying the entire business of CHKE would be paying 100 percent of its equity.

The total costs of buying CHKE to date, November 12, 2012, was $119 million at $14 per share. While the market price to date was $14.58 per share.

Current Asset Value Approach

The net current asset value approach shows that the stock price was overvalued from 2007 to 2012. Because the market value was greater than the 66 percent ratio of NCAV. Further, it indicates that the stock was trading above the liquidation value of CHKE. On the other hand, MC/NCAV shows price was overvalued from 2007 to 2012. Because the ratio exceeded the 1.2 ratios, thus the price expensive.

The margin of safety for CHKE was a 7 percent average. There was a zero margin of safety from 2007 to 2010 and the ttm2012.  The sustainable growth rate and the annual growth rate of CHKE were negative all throughout except in 2011. The ROE was 56 percent.

Relative Valuation

Moreover, the relative valuation method shows that the stock was trading at overvalued prices in P/E*EPS valuation. While in the EV / EPS method shows the price (P/E) 86 percent and the earnings (EPS) was 14 percent.  This indicates that the price was overvalued.

It will take 9 times of the cash earnings of CHKE to cover the cost of buying the business.

Overall, it shows that the stock of CHKE was trading at an overvalued price and expensive. There was only a 7 percent margin of safety. Therefore, a SELL is recommended in the stock of Cherokee Inc.

Researched and Written by Cris

Interested to learn more about the company? Here’s company research to know more about its background and history; and value investing guide for the financial status.

cherokee-inc-chke

Cherokee Inc (CHKE) Shows Sustainable Net Margin

July 6th, 2012 Posted by Company Research Report No Comment yet

Cherokee Inc Balance Sheet

Cherokee Financial Liquidity and Leverage

Cherokee Inc. cash position starts with higher working capital and current ratio for the first four years (2007-2011). The company has greater ability to pay its short-term debts or obligations using short-term cash. It was decreasing yearly and this big leap in 2011 leaves the company with no sufficient cash to pay current obligations wherein it shows -$6.56.

Working capital (current assets less current liabilities); the current ratio (current assets over current liabilities); and quick ratio(total asset divided by total liabilities) computations were used to check the company’s ability to meet current obligations to pay bills, meet payroll and make loan payments.

  • The working capital of in dollars was 27.66, 18.21, 12.61, 10.36, and 2.79 respectively with an average of 14.33. This tells us that their working capital was declining and serves as the basis of their operating cycle.
  • Their current ratio was 2.06:1, 2.37:1, 2.40:1, 2.28:1 and 1.17:1 respectively. Average of 2.06:1.
    It means the company has $2.06, 2.37, 2.40, 2.28 and 1.17 of current assets for every $1 of current liabilities.
  • Their cash & cash equivalent minus current liabilities in dollars was 18.40, 8.70, 4.65, 1.31 and -6.56 respectively. Shows that it was decreasing to the point in 2011 cash; a negative amount was not sufficient to pay for their current obligations.

Cherokee’s working capital against total assets and total revenue was also declining. The year 2011 marked the effect in their declining operations, thus, management was inefficient in handling their cash and other resources. In checking the composition of the company’s working capital against the total asset and total revenue from 2007 to 2011, computation as well as computed working capital per share was stated below:

  • The networking capital ratio was 0.44, 0.43, 0.40, 0.38, and 0.10. This shows the decreasing trend in the working capital against total assets.
  • Working capital per dollar revenue was 0.36, 0.44, 0.35, 0.32 and 0.09. This shows a decreasing trend in the working capital against total revenue.
  • While their working capital per share in dollars was 3.13, 2.04, 1.43, 1.18 and 0.33 respectively. Average of $1.62. This represents that 2007 and 2008 were good, and 2009 to 2011 was below the yearly average of $1.62 per share.

Cherokee Cash Efficiency

Cherokee Inc’s accounts receivable turnover, it began with 10.57 times in 2007, a good start with only 34.52 days. But with the following years, it falls to only 4.64 times thus increasing the number of days receivable. If terms are net 30 days net, receivable balance equals to more than 40 days sale would indicate slow collections. For the longer accounts carried, the smaller will be the percentage return realized on invested capital. Hence, their days payable started also with 4.4 days in 2007 ends up 22.2 days in 2011. This means it takes longer to pay their payables to their debtors. Their cash conversion cycle takes longer too, from one month to almost two months, as well as their accounts receivables to be converted to cash to pay accounts payable.

  • This will provide a rough scale on how well receivables was turning into cash, so, accounts receivable turnover was 10.57, 5.65, 6.61, 4.69 and 4.64 from 2007 to 2011 respectively. Average of 6.43 times. And the average collection period was 34.52, 64.5, 55.2,77.8, and 78.7 days. Average of 62.14 days. This measure the movement of accounts receivables or the average time it takes to collect an account and depends on the credit terms the company is offering to its customers.
  • Days payable was 4.4, 7.2, 9.6, 10.9, and 22.2. Average of 10.86 days. This tells us that the company takes 4.4, 7.2, 9.6, 10.9 and 22.2 with an average of 10.86 days to pay its debtors.
  • Cash conversion cycle was 30.1, 57.4, 45.7, 66.9, and 56.6 days respectively. Average of 51.34 days. This was computed as days receivable fewer days payable and this means the length of time for cash to complete the operating cycle.

Total utilization of asset tells us that asset turnover was 1.23, 0.97 times, 1.14 times, 1.20 times and 1.13 times a year. Furthermore, the up and down trend means the company was not generating a favorable revenue against the utilization of total assets.

Debt ratio shows how the company was levered. In 2009, it fell down to 28 percent, then increased by 59 percent in 2011 with the average of 38 percent of the total assets being supplied by creditors or short-term liabilities; and that they were not relying on external sources for financing their assets. Debt to worth ratio is used in determining the debt ceiling but vary from company to company and industry to industry. Only in 2011 and 2007, they showed a higher ratio that is more than the yearly average of 69 percent because it fell down in 2008-2009.

Data below show the more detailed values:

  • Debt ratio was 0.42, 0.31, 0.28, 0.30 and 0.59 from 2007 to 2011 respectively with an average of 0.38 or 38 percent.
  • Debt to worth ratio was 0.72, 0.45, 0.40, 0.43, and 1.46 from 2007 to 2011 respectively. Average of 69 percent.

To check the ability of the company in paying short-term liabilities, solvency ratio was 1.37, 1.34, 1.75, 1.73 and 0.57 from 2007 to 2011 respectively with an average of 135.2 percent. In the first four years, the company illustrates that they were solvent but in 2011 it declined rapidly to 57 percent which was very low. If Cherokee’s operation will not increase, revenues, as well as its net income for the coming year, will be in trouble financially because they will not be capable of meeting its obligation in the long run.

This show that management operating performance in 2007 return was 56 percent in utilizing their total assets, in 2008 due to economic crises returns decrease to 38%, in 2009 and 2010 it increased to 45 percent and 46 percent respectively. But in 2011 it decreases down to 28% for net income is only $7.72 from $12.57 in 2010. It is mainly due to decrease revenues. To verify their general earning power, their return of assets in percentage was 56, 38, 45, 46 and 28 from 2007 to 2011 respectively. This shows the rate of return on their total assets, that for every $1 of money invested in capital they generate in dollars 0.56, 0.38, 0.45, 0.46, and 0.28 of revenue from 2007 to 2011 respectively.

In totality, the relationship of ownership of the company’s total assets was 38 percent claimed by creditors and 62 percent claimed by shareholders. The company did not have long-term liabilities or debts; they are financed with current capital. The data below further interpret this:

  • Total liabilities to total assets in percentage was 42, 31, 28, 30 and 59 claims to their total assets. Average of 38 percent.
  • Stockholders’ equity to total assets in percentage was 58, 69, 72, 70 and 41 claim to their total assets. Average of 62 percent.

Return on equity indicates the profitability of the company to their stockholders. The return was up and down trend in 2007 and 2008 but it went up in 2009, 2010 and 2011. Thus, ending a return of 70 percent is not bad for their stockholders. This show the rate of return of their stockholder’s equity; that for every $1 of money invested, they generate 0.964, 0.556, 0.631, 0.659 and 0.70 of revenue in dollars from 2007 to 2011 respectively.

Trend ratio is used to study the movement of selected items in the balance sheet in yearly horizontal growth or decrease using the earlier year. Below is the summary of data using 2007 as the base year.

  • Cash & cash equivalent in percentage was 100, 49, 30.6, 21 and 21.5. This shows a declining trend from 2007 to 2010, except in 2011 it increased 0.5 percent compared to 2010.
  • Their current assets movement in percentage was 100, 58, 40, 34 and 35.
  • Total assets in percentage were 100, 68.7, 51, 43.61 and 43.62.
  • Current liabilities or total liabilities in percentage was 100, 50.6, 34, 31, and 61.7. This illustrates that the company does not have any long-term debts; only current liabilities; which tells us that it is also decreasing yearly until 2010. In the following year, the amount was doubled.
  • Stockholders’ equity in percentage was 100, 81.8, 62.9, 52.7 and 30.5. This shows that the capital is decreasing yearly.

Looking at the above analysis, it tells us that all their accounts go down yearly with a minimal increase in 2011. Management is not doing their part in the company’s operation. For the past years, they did not rely on getting long-term liabilities to increase operating cash flow as well as to increase revenue and net profits.

Cherokee Inc Income Statement

Cherokee Revenue

The revenue of the company had an average of 43.56 for five years, thus, the trend was alarming because it is continuously decreased by 15, 11 and 6 percent. Gross profit was 100 percent huge of revenue and the company has no direct cost. Below was the result:

  • Revenue in billion dollars was 76.63, 41.62, 36.22, 32.57 and 30.78, an average of 43.56
  • Gross profit in percentage was 100 straight for five years.

The operating income and income before tax had an average difference of 46 percent, meaning there was no unusual expense acquired in five years. The income after tax was decreasing but in 2008 and 2009 was maintained by 40 percent. The net margin was also decreasing the same results of income after tax; it means there is no extraordinary item. The details are:

  • Gross profit in percentage was 100 straight for five years.
  • Operating income in percentage was 74, 63, 63, 63 and 42, an average of 27.88 percent.
  • Income before tax in percentage was 76, 66, 64, 63 and 42, an average of 28. 34 percent.
  • Income after tax in percentage was 45, 40, 40, 39 and 25
  • Net margin in percentage was 45, 40, 40, 39 and 25, an average of 38 percent.

After deducting all the expenses, the income of the company was profitable with an average of 38 percent for five years but was not progressive. The movement was downward because the revenue also went down for five years.

Cherokee Profitability

To determine the net margin, we consider the cost and expenses. Does the company manage its cost efficiently? How much the total expense incurred for the year? Then, was the company profitable? Below are the results:

  • No direct cost of revenue.
  • The selling & general administrative expense in percentage was 24, 34, 33, 33 and 53.
  • Depreciation in percentage was 1, 3, 4, 4 and 5.
  • The income tax in percentage was 30, 26, 24, 24 and 17.
  • Total expense incurred in percentage was 56, 63, 61, 61 and 75.
  • The net margin in percentage was 45, 40, 40, 39 and 25.

Based on the above data, the expenses were managed efficiently; there was no direct cost of revenue. The selling and general expense had an increased margin of 10 percent in 2008 and down to 1 percent in 2009 and 2010. It jumped by 20 percent in 2011. Thus, the net margin from 2007 to 2011 was profitable but due to the increase in expenses in 2011 it was affected, resulting in 25 percent net. Overall the net margin was still sustainable.

  • In analyzing, the return on asset, equity and investment were used to measure management effectiveness. The results are:
  • Return on the asset in percentage was 56, 38, 45, 46 and 28, an average of 43.
  • Return on equity in percentage was 96, 56, 63, 66 and 70, an average of 70.
  • Return on investment in percentage was -161, -3937, 176, 147 and 70.

The management was effective in handling their resources, in terms of their asset and equity; for their five years of operation, the return for every $1, it had .43 and .70 dollars, respectively. The return on investment was not quite good and they still need to work it on. For the last two years (2007 to 2008) it had a negative return, though in 2009 it recovered to 176 percent it went down from 2010 to 2011.

Cherokee Cash Flow

Cherokee Cash Flow From Operating Activities

Cash from operating activities is the cash available for the operation. By using this, we can determine if the company had enough funds for the operation and know what are the key accounts affected, how much are the changes in working capital. Below were the results for the company:

  • Net income/starting line was 34.79, 16.44, 14.35, 12.57 and 7.72
  • Changes in working capital were 17.86, -14.19, -0.57, -0.98 and 2.63
  • Cash from operating activities was 53.96, 4.9, 15.96, 13.74 and 12.51

The cash from operating activities had a positive result but the movement was decreasing. It had a bulk decrease in 2008 by 91 percent and in 2009 slightly recovered by 69 percent; it had decreased again in 14 and 8 percent in 2010 and 2011, respectively. This was due to the net income going down continuously.

Cherokee Cash Flow from Investing

  • Purchase of fixed assets was $-0.03, -0.04, -0.08, -0.05 and -0.06
  • Purchase/acquisition of intangibles was $-0.26, -1.39, -0.34, -0.29 and -0.32
  • Cash from investing activities was $-0.29, -1.43, -0.42,-0.35 and -0.38

Data show they had invested more in the acquisition of intangibles; the total average for five years is -2.6; compared to a fixed asset with a total average of –.26. This means that total cash from investing in 2008 had increased by 1.14 and from 2009 to 2010, decreased by 1.01 and .7 respectively.

Cherokee Cash Flow from Financing

We can determine if the company had raised additional funds through cash from financing. What was unique about this company is that they issue stocks of cash dividends. Below are the results:

  • Financing cash flow items was 0.21, 0.19, 0.15, 0 and 0.
  • Total cash dividends paid was -22.43, -26.69, -22.24, -17.63 and -13.46, average for five years -20.49.
  • Cash from financing activities was -20.99, -26.08, -23.84, -17.63 and -11.96.
  • The Free cash flow was 76.68, 33.02, 38.62, 31.72 and 26.35
  • Free cash flow per share was 8.71, 3.71, 4.39, 3.60 and 3.10

After deducting the capital expenditure and dividend, the results had a positive free cash flow. It was in a sideways movement that in 2008, it decreased by 57 percent and 2009 increased by 5.6 percent.

Cherokee Cash Flow Efficiency

  • Cash flow from sales to sales ratio 54.79, 5.94, 16.88, 14.42 and 13.01.
  • Cash flow solvency 6.65, 0.72, 2.62, 1.91 and 0.77
  • Cash flow margin 0.70, 0.12, 0.44, 0.42 and 0.41

It indicates that in 2007 it has a greater amount of cash generated from sales in every $1; it had 5.48 compared in 2008 wherein it only had .06. The cash flow solvency was also in sideways as well as the cash flow margin.

Written by Nelly, Rio, and Dyne
Edited by Cris

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