Maxwell Shoe Company, Inc.Maxwell Shoe Company, Inc.

John Spiteri & Raj JoshiJohn Spiteri & Raj Joshi

May 19, 2006May 19, 2006

THE ULTIMATE GOALTHE ULTIMATE GOAL

Our goal today…. Our goal today….

Present some of the underlying aspects of… Present some of the underlying aspects of…

Developing a… Developing a…

………….FORECAST MODEL…..FORECAST MODEL….

Maxwell Shoe Company, Inc.Maxwell Shoe Company, Inc.

Public CompanyPublic Company

Incorporated:1949Incorporated:1949

Employees: 149Employees: 149

Sales 1998: $165.92 Million US Sales 1998: $165.92 Million US

Stock Price 1998: $10.94Stock Price 1998: $10.94

Stock Exchange: NASDAQStock Exchange: NASDAQ

Ticker Symbol: MAXSTicker Symbol: MAXS

Company HistoryCompany History

The Maxwell Shoe Company designs and The Maxwell Shoe Company designs and makes women’s footwear.makes women’s footwear.

The company produces casual and dress The company produces casual and dress footwear for women under the following brand footwear for women under the following brand names: Mootises Tootsies, Sam & Libby, Jones names: Mootises Tootsies, Sam & Libby, Jones New YorkNew York

The company also designed and developed The company also designed and developed private label footwear for selected retailersprivate label footwear for selected retailers

All products are manufactured off-shoreAll products are manufactured off-shore

Product LinesProduct Lines

Mootsies&Tootsies: Mootsies&Tootsies: Moderate, priced in the Moderate, priced in the $25-$40 range$25-$40 range

Sam&Libby: Sam&Libby: Upper Moderate, priced in Upper Moderate, priced in the $35-$50 rangethe $35-$50 range

Jones New York: Jones New York: Upscale, priced in the Upscale, priced in the $65-$80 range$65-$80 range

Private Label:Private Label: Budget, priced in the $12-Budget, priced in the $12-$20 $20 rangerange

Sales ChannelsSales Channels

Department StoresDepartment Stores

Specialty StoresSpecialty Stores

Catalogue RetailersCatalogue Retailers

Cable television shopping channelsCable television shopping channels

1997 JV with GE Capital to operate 130 1997 JV with GE Capital to operate 130 retail Sam & Libby and Jones New York retail Sam & Libby and Jones New York stores through SLJ Retailstores through SLJ Retail

Factors for SuccessFactors for Success

Strong brand recognitionStrong brand recognition

Solid manufacturing relationshipsSolid manufacturing relationships

Low costs through high volumeLow costs through high volume

Good price points to customersGood price points to customers

Good relationships through EDIGood relationships through EDI

Salient DataSalient Data

Category 1995 1996 1997 1998

Revenues 101,870 104,300 134,200 165,900

Sales growth - 2.39% 28.67% 23.62%

Net Income 5,834 6,000 9,100 13,300

Gross Margin 23.5% 23.4% 26.8% 27.1%

         

Cash & Equiv 6,685 10,400 3,100 18,700

A/R 17,834 16,900 28,600 35,700

Inventory 12,394 12,200 20,100 22,900

         

CPTD 100 100 100 100

LTD 605 500 300 200

         

3 Steps to Forecasting3 Steps to Forecasting

1. Accounting Analysis1. Accounting Analysis

2. Strategy Analysis2. Strategy Analysis

3. Financial Analysis3. Financial Analysis

1. Accounting Analysis1. Accounting Analysis

Read financial notes in detail Read financial notes in detail

Ensure accounting policies correspond to Ensure accounting policies correspond to industry practices i.e. look at revenue industry practices i.e. look at revenue recognition policies across competitors to recognition policies across competitors to ensure consistencyensure consistency

Look for inconsistencies i.e. how do they Look for inconsistencies i.e. how do they treat JV revenuetreat JV revenue

Look for ‘noise’Look for ‘noise’

2. Strategy Analysis2. Strategy AnalysisPorter’s Five-Forces Model Porter’s Five-Forces Model

Competition Among Existing

Firms

Competition Among Existing

Firms

Threat of Potential Entrants

Threat of Potential Entrants

Bargaining Power of

Customers

Bargaining Power of

Customers

Threat of SubstituteProducts

Threat of SubstituteProducts

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Figure 5.3

Class ExerciseClass Exercise

5 minute class exercise5 minute class exercise

Each group will be assigned one of the Each group will be assigned one of the five forces and asked to determine the five forces and asked to determine the elements that need to taken into account elements that need to taken into account when developing Maxwell Shoe’s forecast when developing Maxwell Shoe’s forecast modelmodel

Competitive RivalryCompetitive Rivalry

Fairly high competitive rivalry in this Fairly high competitive rivalry in this industryindustry

Large number of firmsLarge number of firms

High fixed & storage costsHigh fixed & storage costs

Low levels of product differentiationLow levels of product differentiation

No real sustainable competitive advantage No real sustainable competitive advantage

Threat of New EntrantsThreat of New Entrants

Ease of entry into the industryEase of entry into the industry

Common technologyCommon technology

Access to many distribution channelsAccess to many distribution channels

Low exit costsLow exit costs

No real asset specificityNo real asset specificity

Supplier PowerSupplier Power

Moderate to LowModerate to Low

Many suppliers in the industry Many suppliers in the industry

Less concentration of powerLess concentration of power

Purchasing commodity productsPurchasing commodity products

Low switching costs however quality may Low switching costs however quality may suffersuffer

Long standing relationships may have Long standing relationships may have significant impact on pricing concessionssignificant impact on pricing concessions

Buyer PowerBuyer Power

LowLow

Manufacturers sell directly to Manufacturers sell directly to wholesale/retail markets which threatens wholesale/retail markets which threatens forward integrationforward integration

No concentrated power by any one buyerNo concentrated power by any one buyer

Many suppliersMany suppliers

Low switching costsLow switching costs

Substitutes ProductsSubstitutes Products

High level of substitute productsHigh level of substitute products

Similar in natureSimilar in nature

50% of sales come from the 18-34 age 50% of sales come from the 18-34 age group which has low loyalty, move with group which has low loyalty, move with trends – could be influenced by a trends – could be influenced by a substitute product quite easilysubstitute product quite easily

Difficult to raise pricesDifficult to raise prices

3. Financial Analysis3. Financial Analysis

US in the year 1999US in the year 1999

DOT COMS are still very ‘hot’DOT COMS are still very ‘hot’Estimated GDP Growth rate of 5%Estimated GDP Growth rate of 5%Inflation rate of 4%Inflation rate of 4%Unemployment rate of 4%Unemployment rate of 4%General economic attitude: Still positiveGeneral economic attitude: Still positiveIndustry is growing at an average rate of 17% Industry is growing at an average rate of 17% over last 5 yearsover last 5 years

Maxwell’s Key RatiosMaxwell’s Key Ratios

 

$000’s1995 1996 1997 1998

Revenues 101,870 104,300 134,200 165,900

Sales growth - 2.39% 28.67% 23.62%

Net Income 5,834 6,000 9,100 13,300

Gross Margin 23.5% 23.4% 26.8% 27.1%

EPS 0.76 0.72 1.06 1.44

Cash & Equiv 6,685 10,400 3,100 18,700

A/R 17,834 16,900 28,600 35,700

Inventory 12,394 12,200 20,100 22,900

CPTD 100 100 100 100

LTD 605 500 300 200

Maxwell Growth PlanMaxwell Growth Plan

Build on competitive advantage by:Build on competitive advantage by:

Enhance current brandsEnhance current brands

Increase Private Label brandsIncrease Private Label brands

Acquire New BrandsAcquire New Brands

Diversification of brands is designed to Diversification of brands is designed to appeal to a different market segment of appeal to a different market segment of the footwear industry.the footwear industry.

Revenue BreakdownRevenue Breakdown

Mootsies & Tootsies Line: 50% of sales Mootsies & Tootsies Line: 50% of sales appeal to women aged 18-34 appeal to women aged 18-34

Sam & Libby Line: 10% of sales, appeal to Sam & Libby Line: 10% of sales, appeal to women aged 21-35women aged 21-35

Jones New York: 25% of sales, appeal to Jones New York: 25% of sales, appeal to women > 30women > 30

Private Label: account for 15% of salesPrivate Label: account for 15% of sales

FORECASTSFORECASTS

INCOME STATEMENTINCOME STATEMENT

What are key drivers of each of these items:What are key drivers of each of these items:RevenueRevenueCost of SalesCost of SalesSelling ExpensesSelling ExpensesThese items all have a direct impact to These items all have a direct impact to EARNINGSEARNINGS

FORECASTSFORECASTS

BALANCE SHEETBALANCE SHEET

What are the key drivers:What are the key drivers:

Levels of InventoryLevels of Inventory

Collection periodCollection period

PayablesPayables

Debt servicingDebt servicing

FORECASTSFORECASTS

CASH FLOWCASH FLOW

Income statement assumptions drive Income statement assumptions drive revenue however historical balance sheet revenue however historical balance sheet performance will drive the cash flowperformance will drive the cash flow

Sensitivity AnalysisSensitivity Analysis

3 typical scenarios:3 typical scenarios:Optimistic – grow at historical approx.26%Optimistic – grow at historical approx.26%

Probable – grow at Industry approx. 17%Probable – grow at Industry approx. 17%

Pessimistic – grow at GDP or Inflation Pessimistic – grow at GDP or Inflation approx. 4-5%approx. 4-5%

Financial ModellingFinancial Modelling

10 minute class exercise10 minute class exercise

Please open up Maxwell Shoe Company Please open up Maxwell Shoe Company spreadsheet that was sent by Bill spreadsheet that was sent by Bill

Assignment – look at the 3 scenarios Optimistic, Assignment – look at the 3 scenarios Optimistic, Probable and PessimisticProbable and Pessimistic

Try to determine the growth for each scenarios Try to determine the growth for each scenarios and view the effects on the financial statementsand view the effects on the financial statements

What actually happenedWhat actually happened

Reported 48 cents per share for the first Reported 48 cents per share for the first six months of fiscal 1999, below analysts six months of fiscal 1999, below analysts expectations of 61 cents per share.expectations of 61 cents per share.

Disappointing performance was due to Disappointing performance was due to lower than expected sales, attributed to lower than expected sales, attributed to the ‘softness in the footwear market’.the ‘softness in the footwear market’.

In July 1999, Maxwell sold the license for In July 1999, Maxwell sold the license for $25 million to the Jones Apparel Group.$25 million to the Jones Apparel Group.

Financial Results post 1999Financial Results post 1999Category 1999 2000 2001 2002 2003

Revenues 150.3 158.2 182.2 204.4 225.0

Sales growth -9.4% 5.2% 15.2% 12.2% 10.1%

Net Income 18.9 9.9 12.1 13.2 14.9

Gross Margin 24.3% 26.0% 28.9% 27.4% 27.6%

EPS 1.99 1.04 .84 .89 .98

Cash & Equiv 28.9 48.1 58.3 70.5 97.1

A/R 29.8 34.2 37.4 40.7 42.4

Inventory 11.3 12 18.3 18.3 14.2

CPTD 100 0 0 0 0

LTD 0 0 0 0 0

Maxwell Shoe CompanyMaxwell Shoe Company

In 2004, Jones Apparel Group acquired all In 2004, Jones Apparel Group acquired all the outstanding stock of Maxwell Shoe the outstanding stock of Maxwell Shoe Company for $23.25 per share in cash for Company for $23.25 per share in cash for a total value of $369 million.a total value of $369 million.