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I prepared this PowerPoint slide deck to support my presentation to Institutional Shareholder Services (ISS) in connection with the 2013 proxy contest.
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Presentation to ISSJuly 12, 2013
2
Agenda
• Overview
• History
• Strategy
• Financial Performance
• Board of Directors Nominees
• Conclusion
3
Overview
4
Calloway’s Nursery, Inc.• Texas-based garden center chain
• Founded by local nurserymen, Jim Estill, John Cosby and John Peters
• 16 Calloway’s Nursery stores in the Dallas/Fort Worth market
• 2 Cornelius Nursery stores in the Houston market
5
Fun and Informative Stores• Nearly 100 of the company’s employees are
Texas Certified Nursery Professionals• Expert advice to gardeners of all levels• Weekly gardening clinics• Displays and instructions to aid gardeners
with design and color development in their yards
• Diverse product selection of plant varieties
6
Variety of Gardening Products• Flowering annual and perennial plants, trees, shrubs,
vines and interior house plants• Gardening-related products such as imported
pottery, tools, fertilizers, soil amendments, mulch and potting soil
• Largest selection of specialty pumpkins, squash and gourds
• Fresh-cut Christmas trees, living trees, premium Poinsettias, wreaths and garland
• In Houston, the Cornelius Nursery stores offer a complete gift shop including custom arrangements
7
Community Support• Good Neighbor (HOA) Program • Community Sponsorship (Donations)
Program• Callie’s Garden Circle• Garden Tours and Events• Lena Pope Home
8
Competition
Calloway’s competes with the large, well-
financed home center chains, as well as
Walmart and hundreds of local independent
nurseries
9
History
10
Inception - 1990Year Event
1986 Jim Estill, John Cosby and John Peters form Calloway’s Nursery, Inc.
1987 First four retail stores open in Dallas-Fort Worth market
1988 General Host Corporation acquires 80% ownership
1990 Calloway’s opens 10th store and achieves first profitable year
11
Initial Public Offering
1991 General Host sells its interest in IPO [June]
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1993 - 1998Year Event
1993 General Host acquires control of Wolfe Nursery (“Wolfe”) and launches competitive expansion
1994 Home Depot (NYSE:HD) expands garden centers in Texas
1997 Lowe’s (NYSE:LOW) expands into Texas market including garden centers
1998 Calloway’s acquires Miller Plant Farm growing operation (“Miller”)
13
1999 - 2002Year Event
1999
Calloway’s enters Houston market with acquisition of Cornelius NurseryCalloway’s also acquires Turkey Creek Farms (“Turkey”) and Wholesale Landscape Distributors (“WLD”)
2001 WLD sold [October]
2002 Calloway’s enters San Antonio market by leasing 8 former Wolfe stores in San Antonio market
14
2002 - 2008Year Event
2002 Home Depot opens 6 free-standing Landscape Supply stores in Dallas-Fort Worth market (“HDLS”)
2003 Turkey [March] and Miller [September] sold2004 SEC deregistration completed [May]2005 4 of 8 San Antonio stores closed [May]2007 HDLS closes all stores [November]2008 Remaining 4 San Antonio stores closed [May]
15
2008 - 2009Year Event
2008 Arson-caused fire destroys flagship Cornelius Nursery store in Houston [July]
2009 Senior lender cancels credit line and requires company to refinance other debt by December 2010 [August]
2009 Cornelius Nursery store re-opens after sixteen months rebuilding [November]
2009 String of five consecutive profitable years ends with $1.8 million net loss
16
2009 - TodayYear Event
2010 JPMorgan Chase provides short-term credit facility [January]
2010 JPMorgan Chase refinances long-term debt [December]2010 Calloway’s rebounds with $0.7 million net income2011 Second straight profitable year2012 Third straight profitable year
2013 Store expansion resumes with construction of new Dallas-Fort Worth market store [September opening]
17
Retail Revenue, 1987-2013
18
Strategy
19
Investment of ChoiceCreate long-term value for all Calloway’s shareholders by consistently and dependably delivering on our promise to be:–Provider of Choice– Employer of Choice–Partner of Choice
20
Provider of Choice - Principles• Be the first place our customers want
to shop for their living plants and garden products
• Provide excellent personal service, beauty, selection, knowledge and fun in our Calloway’s and Cornelius stores
21
Provider of Choice - Initiatives• Early this year we implemented new,
advanced technology in all of our stores, which has:– Sharply improved our customer checkout
experience– Expanded the reach and value of our garden
club program– Provided operational efficiencies and cost-
savings
22
Provider of Choice - Initiatives• In 2012 we initiated our In-Store
Experience and Presentation initiative, which enhances our customers’ shopping experience with visual décor and products for the gardening seasons
• Our floor plans have been redesigned, and are now continuously updated, to best showcase our merchandise for the benefit of our customers
23
Provider of Choice - Initiatives• Store expansion resumes after four years– Brand-new Calloway’s Nursery retail store in
Little Elm, Texas planned to open in September– This store, with an exciting new look, based on
proven operations experience, will serve the burgeoning Little Elm and Frisco communities in North Texas
• Upcoming plans to expand in the Houston market with the Cornelius brand
24
Provider of Choice - Accolades• Named 2013 Neely Alumni Business of the Year
– In presenting the award, Dean O. Homer Erekson stated– “Calloway’s represents the very best model for a values-centered
business. In addition to being a successful garden center providing exceptional customer service, Calloway’s exemplifies community relations by sponsoring neighborhood programs, vegetable gardens for homeless, and the Lena Pope Home”
• Finalist in the 2012 Greater Tarrant Business Ethics Award competition– Honors companies that– “Demonstrate a commitment to ethical business practices in their
everyday operations, management philosophies and in response to crises or challenges”
25
Employer of Choice - Principles• Our goal is to offer professional service and accurate advice
so that our customers’ visits to our store lead to success in their gardens
• That’s why we support the Texas Nursery and Landscape Association (TNLA), both monetarily and through volunteer services– Only the best and brightest garden professionals, meeting rigorous
standards, can earn the coveted Texas Certified Nursery Professional (TCNP), and more advanced Texas Master Certified Nursery Professional (TMCNP) certifications
– We are proud to be associated with these professional programs and to employ more TCNPs and TMCNPs than any other retail organization in Texas
26
Employer of Choice - TCNP• To become a TCNP, an individual must
– Have completed 2,000 hours of industry work or attained equivalent university degrees in horticultural studies and six months on the job experience
– Master the training to pass a comprehensive examination covering marketing, customer service, plant identification, pest and disease management, plant pathology, plant nutrition, irrigation methods, plant selection and the principles of landscape design
27
Employer of Choice - TMCNP• The TMCNP certification requires far more of the
professional, including extensive training by instructors and professors from Texas A&M University
• This additional training provides knowledge of the latest research and technology
• Exam is exacting, rigorous and costly
• Number of applicants is limited
• Resulting corps of professionals provides a ready source of the latest information and the best practices that our nursery industry can offer
28
Partner of Choice - Principles• To consistently and dependably offer our
customers– The very best quality
– The most innovative and exciting new living plants and garden products
• Requires close and careful partnering with the best growers and suppliers in the industry
29
Partner of Choice - Initiatives• Over the years we’ve built a solid supplier
network with reliable and mutually-beneficial relationships
• Several years ago we sold our internal growing operations so that we could– Focus on our retail customers
– Stop competing with our own suppliers
30
Partner of Choice - Initiatives• More recently, we’ve expanded our
integration with key suppliers to– Improve inventory control and gross margins
– Further enhance the freshness and variety of living plants in our retail store
31
Partner of Choice - Initiatives• This unique and advanced technology and
business process goes well beyond electronic data interchange models by providing our trusted suppliers direct access to our system to facilitate collaboration between suppliers and our corporate buyers on planning and replenishment
32
Partner of Choice - Initiatives• So far, 38 of our top living plants suppliers,
representing over 83% of our total living plants purchases, take advantage of this technology, with even more planned for the future
33
Investment of Choice – What’s Ahead
• New Dallas-Fort Worth market store
• Continued debt reduction
• Refinance existing debt to lower rates
• Sale of excess land as market improves
• Development of Houston market
• New equity issuance has already ended
34
Financial Performance
35
Five Straight Years of Profits, then…
• Calloway’s was profitable every year from 2004 through 2008– After growing operations sold– After SEC deregisration completed
• July 13, 2008 changed everything– We were awakened early Sunday morning with
news that our flagship Voss Road store in Houston had been completely destroyed by an arsonist
– Fortunately, there were no injuries
36
Voss Road Fire
• Voss Road accounted for 10% of total revenue and about $1.0 million contribution margin
• It took over 16 months and over $2.0 million to rebuild this community landmark
37
Re-opened November 25, 2009
Hard work and determination paid-off, and we proudly re-opened a new and improved facility on November 25, 2009
38
In the meantime…• While we were redesigning, receiving
approvals and letting construction contracts• The most serious recession to strike the U.S.
in decades caused retailers across the country to suffer double-digit revenue declines
• The banking crisis locked-up commercial credit
• Fire insurance proceeds were substantially frozen pending completion of construction
39
Board and Management Actions• $0.7 million administrative cost
reductions• Compensation frozen• Prior year senior management
bonuses voluntarily cancelled• Management began direct equity
investments through the stock purchase plan
40
Stock Purchase Plan• Modeled on substantially-identical plan adopted by
Pier 1 Imports, Inc. (NYSE:PIR)– Adopted in 1980– Still in use today
• Alignment of interests of management with all shareholders– There are no stock options, restricted stock, etc.
• Plan allows participants to invest after-tax pay in Calloway’s stock– Company will make taxable match of 50% to 100% of
employee investment, based on service years
41
Good for the Company, but…• Management investments in the company
gave lenders confidence in Calloway’s despite poor 2009 financial results
• However, the economics are challenging for employees– Both employee investment and company match
are considered taxable pay– For employee in 28% tax bracket, a 10% payroll
investment can reduce take-home pay by 18%
42
Challenging Employee EconomicsAssumptionsAnnual salary 130,000.00$ Employee invests 10%Marginal rate 28% Company matches 10%Medicare rate 1.45%Biweekly payroll 26
Results Don't invest Invest CostGross pay before match 5,000.00$ 5,000.00$ -$ Match 500.00$ 500.00$ Gross taxable income 5,000.00$ 5,500.00$ 500.00$ Investment (1,000.00)$ (1,000.00)$ Income tax (1,400.00)$ (1,540.00)$ (140.00)$ Medicare tax (72.50)$ (79.75)$ (7.25)$ Net pay 3,527.50$ 2,880.25$ (647.25)$
Take-home pay reduction -18%
43
Management Commitment
Management’s fully-paid investments in the company are a strong incentive to deliver long-term shareholder value
44
Improved Performance Since 2009• All key performance indicators
have improved–Greater Liquidity–Reduced Debt–Improved Book Value–Improved Debt-to-Equity Ratio
45
Greater Liquidity
Year-end cash position has improved 73%
46
Reduced Debt
Debt has been reduced 19%
47
Improved Book Value
Book value per share has risen 59%
48
Improved Debt-to-Equity Ratio
Better debt ratio lowers borrowing costs
49
Total Shareholder Return• Total Shareholder Return (“TSR”) for the – Five-year,– Three-year,– One-year, and– Six-month
• periods through May 9, 2013 (the day before Kamin announced his hostile takeover attempt)
• clearly demonstrates– how the fire impacted performance, and– the successful recovery since that period
50
Five-Year TSR
Five-Year TSR includes impact of fire early in that period
Calloway's Nursery I nc. (2.2%)S&P 500 I ndex 30.2%Russell 3000 I ndex 32.6%
51
Three-Year TSR
Three-Year TSR shows the durability of post-fire recovery
Calloway's Nursery I nc. 69.2%S&P 500 I ndex 49.6%Russell 3000 I ndex 50.0%
52
One-Year TSR
One-Year TSR is good, though indices also surged early
Calloway's Nursery I nc. 18.8%S&P 500 I ndex 22.9%Russell 3000 I ndex 23.2%
53
Six-Month TSR
Six-Month TSR has sharply outperformed
Calloway's Nursery I nc. 23.9%S&P 500 I ndex 15.7%Russell 3000 I ndex 16.1%
54
Most Recent Results• Year to date results demonstrate
continued strong results from execution of our strategic plan–Net Income–Same-store Revenue–EBITDA
55
Net Income - Up
Net income rose 50% for the second quarter and 13% for the six-month period ended June 30, 2013
56
Same-Store Revenue - Up
Same-store revenue rose 15% for the second quarter, and 5% for the six-month period ended June 30, 2013
57
EBITDA Margin - Up
EBITDA Margin reached a new high for the most recent twelve-month period ended June 30, 2013
58
Board of Directors
59
Directors• Continued strong performance requires
leadership from experienced, highly-qualified directors
• Calloway’s is led by strong, experienced directors who are focused on serving all of Calloway’s shareholders
• Two of the directors are independent of management, and these two members constitute the Audit Committee and Compensation Committee
60
Board Composition• Calloway’s currently has a five-member
Board of Directors– One independent director retired in March 2011– A value-added replacement has not yet been
recruited• Two Committees composed solely of
independent directors– Audit Committee– Compensation Committee
61
Board Meetings and Compensation• Board meetings at least quarterly– Detailed financial review– Strategy and execution– Properties and corporate development– Capital resources and liquidity
• Independent director compensation– Quarterly retainer - $5,000– Meeting fees - $700– Last increased in 2007
62
Committees• Audit Committee– Meets four times each year– Executive sessions to review performance of
independent auditors and CFO– Approves all earnings releases
• Compensation Committee– Meets four times each year– Executive sessions to set compensation for all
executive officers– Establishes all incentive plans
63
Nominating and Governance• Intent to establish a Nominating and
Governance Committee led by independent directors
• Will be responsible for regularly evaluating the Board’s composition to ensure it has the right skillset for the company
• Identify and recruit new value-added directors
64
Director Nominees
65
Dr. Stanley Block
Financial Expert
66
Dr. Stanley Block• Chartered Financial Analyst• Emeritus Professor of Finance at Texas Christian
University– Served on the faculty for 45 years; served as
Chairman of the Finance Department for 10 years– Had an Endowed Chair in finance at Texas
Christian University named for him– Selected as co-winner of the award as
outstanding professor in the University
67
Dr. Stanley Block• Author of over 30 books– His text, Block, Hirt, and Danielsen, Foundations
of Financial Management, has been used by more than one million students
• BBA from the University of Texas at Austin, MBA from Cornell University, Doctorate from LSU
• Currently chairman of the Audit Committee and serves on the Compensation Committee
68
Daniel R. Feehan
Financial/Retail Expert
69
Daniel R. Feehan• President, chief executive officer and a member of
the board of directors of Cash America International, Inc. – Joined Cash America in June of 1988 as its executive vice president
of finance and administration– Then served as Cash America's president and chief operating officer
from January 1990 until February 2000• Also serves as non-executive chairman of the
board of directors for RadioShack Corporation• Serves on the boards for AZZ incorporated and
Williamson Dickie Mfg. Co.
70
Daniel R. Feehan• Previously served on the Board of Directors of Chase Bank
of Fort Worth• Active in his community serving on charitable boards and
has also led several fund raising efforts on behalf of– United Way– YMCA– Juvenile Diabetes Research Foundation– Susan G. Komen Breast Cancer Foundation
• BBA from Texas A&M University• Currently Chairman of the Compensation Committee and
serves on the Audit Committee
71
James C. Estill
Industry/Retail Expert
72
James C. Estill• Chairman of the Board, President and Chief Executive
Officer of the Company• Along with John Cosby and John Peters, co-founded the
Company in 1986• Before founding Calloway’s, served as President and Chief
Executive Officer of Sunbelt Nursery Group, Inc.• Prior to that, he served as Director of Real Estate for Pier 1
Imports, Inc., where he started his career in retail store management
73
James C. Estill• BBA in Management from Texas Christian
University, MBA in Finance from TCU• Texas Master Certified Nursery Professional• Past Chairman of the Certification Committee for
the Texas Nursery & Landscape Association (“TNLA”)
74
James C. Estill• In 2012, the TNLA bestowed on him the Arp
Award, which is the highest honor granted to an individual by the association
• This award signifies that, as a member, he has exemplified the TNLA’s ideal including innovation, service and highly ethical behavior in both his business and personal life
75
James C. Estill• Active in the community– Member of the International Board of Visitors of the
M.J. Neeley School of Business at Texas Christian University
– Member of the Board of Governors of the Fort Worth Club
– Member of the Board of Directors of the Lena Pope Home
– Elder at the University Christian Church
76
John T. Cosby
Industry/Retail Expert
77
John T. Cosby• Vice President and Secretary of the Company• Along with Jim Estill and John Peters, co-founded the
Company in 1986• Has developed all of the Calloway’s Nursery retail
locations, including site selection, site development and lease and acquisition negotiations
• Prior to 1986, served as vice president of corporate development at Sunbelt Nursery Group
• Responsible for real estate activities at Pearle Vision Center and Pier 1 Imports, Inc., where he started in retail store management
78
John T. Cosby
• Bachelor of Business Administration from Texas Wesleyan College
• Master of Business Administration from the University of Dallas
• Certified mediator• Serves on the Board of Directors of Dispute Resolution
Services of North Texas• Past Chairman of Optical Credit Union
79
John S. Peters
Industry/Retail Expert
80
John S. Peters• Vice President of Operations of the Company• Along with Jim Estill and John Cosby, co-founded the
Company in 1986• Developed the original staff into a team of industry
professionals• Has primary responsibility for distribution, human
resources and administration• Prior to 1986, served as Senior Vice President for Sunbelt
Nursery Group, where he was responsible for operation of all subsidiaries, including more than 100 stores in five states, and two growing operations
81
John S. Peters• Served as President of Wolfe Nursery, where he started his
career in retail store management• Attended both Tarrant County College and Texas Christian
University.• Active in the TNLA, where he has served as Past Chairman
and currently serves on its Education and Research Foundation
• Certified at the highest TNLA level – Texas Master Certified Nursery Professional (TMCNP)
82
Conclusion
83
ConclusionCalloway’s is a strong company, with• The right leaders, to continue• Taking the right actions, to• Position Calloway’s for continued success,
and• Drive shareholder value over the long-term