dsw report final (1)

Covering Analysts: Phoebe Hsieh

[email protected]

1

University of Oregon Investment Group

February 27, 2015

Consumer Goods

Investment Thesis

Being the only company in the industry that operates a designer shoe

warehouse store with their level of quality and variety, DSW is in a unique

position to capture and maintain market share in this industry.

DSW’s shortcomings in 2013 with regards to predicting women’s trends

and failed experiments may have weakened consumer confidence in their

products.

DSW Omni-channel strategies and recent changes made to accelerate

women’s footwear will help drive revenue going forward

DSW’s success is dependent on its ability to predict trends and its failure to

do so will deteriorate consumer confidence in their brand.

B

u

s

i

n

e

s

s

DSW, Inc. Ticker: DSW

Current Price: $37.35

Recommendation: Hold

Price Target: $29.68

Five-Year Stock Chart One-Year Stock Chart

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

2/1/2010 2/1/2011 2/1/2012 2/1/2013 2/1/2014 2/1/2015

Adjusted Close 50-Day Avg 200-Day Avg Volume

Key Statistics

52 Week Price Range

50-Day Moving Average

Estimated Beta

Dividend Yield

Market Capitalization

3-Year Revenue CAGR

Trading Statistics

Diluted Shares Outstanding 9.047mm

Average Volume (3-Month) 1.12mm

Institutional Ownership 86.00%

Insider Ownership 100.00%

EV/EBITDA (Forward Comps) 11.0x

Margins and Ratios

Gross Margin (Forward Comps) 32.99%

EBITDA Margin (Forward Comps) 10.66%

Net Margin (Forward Comps) 5.27%

Debt to Enterprise Value -

6.25%

$23.45 - $41.11

$36.22

1.01

2.00%

3.30B

February 27, 2015

UOIG 2

February 27, 2015


Overview

Jerome Schottenstein and the Nacht family founded the Schonac Corporation in

1969. Their original goal was to manage leased shoe departments in different

retail operations. From there, they opened the first DSW store in July of 1991 in

Dublin, Ohio. They wanted to create a place where brand name shoes could be

bought at an everyday value price, or in their words, “designer shoes at

warehouse prices.”

In 1998, Value City Department Stores, owned by the Schottenstein family,

purchased DSW. In December of 2004, Retail Ventures, Inc consolidated many

of Value City’s subsidiary brand and later, Retail Ventures retained 60% of

DSW’s outstanding shares. DSW went public in 2005, after changing their name

from Schonac Corporation to DSW, Inc. In 2011, RVI Merged with DSW and

they have been operating as DSW ever since. Today, they operate in 433 stores,

431 in the United States and 2 in Puerto Rico.

DSW Designer shoe warehouse is the primary operation that DSW conducts. This

segment provides designer shoes at great values in over 400 stores nationwide

and in Puerto Rico. Their goal is to provide a vast selection of shoes that cater to

ever consumer base at an everyday price. They also bring to the market a vast

selection of accessories and handbags for consumers to enjoy.

Women’s

DSW’s women’s shoe department is their largest portion of their revenue. In

2013, women’s shoes accounted for 65% of revenue. Recently, women’s retail

has declined slightly, but has been compensated by the increase in men’s shoe

sales. In the future, women’s sales will remain the main driver of revenue for

DSW but the men’s retail is expected to increase their contributions. After a

dismal year for DSW Women’s, its corporate governance decided to make some

pivotal changes in management structure and assortment in an effort to turn

sales around in this segment.

Men’s

DSW Men’s has historically made up about 15% of total revenue. Recently,

men’s shoes has had increasingly positive response in the industry, boosting that

number up to about 17%. As men increasingly view DSW as an optimal place to

purchase footwear, I predict that men’s shoes will be a growing revenue driver

going forward.

Athletic Shoes

Athletic footwear typically makes up about 12% of DSW’s revenue. As DSW

focuses on becoming a more premier footwear brand for everyday wear shoes, I

predict this segment to decline slightly to accommodate higher end footwear.

Their strong competitors in the athletic footwear industry, such as Nike and Foot

Locker will also stand to draw customers from this segment.

Accessories and Handbags

Accessories and handbags are DSW’s clever footwear counterparts, making up

about 7% of revenue annually. After a failed luxury accessory test online in

2013, DSW will be continuing their experiments in their other sub segments.

Their failed test is a strong indication that their accessories are not quite ready

for expansion and I have reflected this in my model by decreasing revenue

contribution from this segment slightly in the future.

Source: Google Images

Figure 1: DSW Store

Source: DSW 10-K

Figure 2: 2013 Revenue Breakdown by Segment

65%

7%

12%

16%

February 27, 2015

UOIG 3

February 27, 2015


Affiliated Business Group A sub segment of DSW is the Affiliated Business Group (ABG). Their directive

is to enhance shoppers’ experiences by partnering with other retailers to help

build and promote their individual businesses. They conduct operations

including product supply and in-store experience enhancement in order to

extend DSW’s reach past their own doors. Although they do not directly break

out the ABG segment in their financial statements, ABG accounts for roughly 3-

5% of sales year over year.

Industry

Overview The footwear and shoe industry is a vast and highly concentrated industry. They

can retail items from running shoes to gladiator sandals and can be located

within a larger retailer, or in their own establishment. As per capita disposable

income increases and unemployment continues to decline, the industry is in an

optimal position to grow and strengthen. As an industry that is heavily impacted

by changes in consumer spending and consumer confidence, macroeconomic

factors pose challenges and sometimes increased risks as these factors can be

largely unpredictable.

Macro factors

Consumer Confidence:

Consumer confidence is one of the main economic drivers impacting retail

today. As spending generally relies on consumer expectation of future

economic conditions, consumer confidence is an important measure to consider

when evaluating retail companies. Consumer confidence is expected to increase

at a decreasing rate going forward, which could stand to slow growth in the shoe

retail industry.

Disposable Income/Consumer Spending:

Shoes in many cases, can be considered a luxury item. Disposable income and

consumer spending, therefore, can greatly affect customers’ ability to afford new

shoes on a recurring basis. As per capita disposable income continues to rise,

people may be more inclined to purchase more pairs of shoes. This can

adversely or conversely affect DSW depending on how strong their brand equity

is. Consumers who have a higher disposable income may prefer to buy higher

end shoes from more premium retailers such as Tory Burch. However, if DSW

can achieve its goal of increasing their brand awareness and customer loyalty,

customers, even with a higher disposable income, will shop at DSW but at a

higher capacity.

Competition Although DSW is a unique shoe retailer with innovative ideas, there is strong

competition in this industry from online retailers and large department stores.

Recently, an increase in online shoe and clothing retailers has shifted a lot of the

market towards digital. In an industry that is already heavily saturated with

competition, online merchandisers only further deteriorate market share from

those already in the industry. Some may argue that in store retailers offer the

invaluable choice of trying on shoes before buying them, but many online

retailers counter this by providing free returns or exchanges to customers.

The strongest competitors in the footwear industry include DSW, Brown Shoe

Company, Payless, and Foot Locker. Although those competitors dominate as

4.8%

7.1%

6.1%

11.6%

Figure 3: Shoe Retail Market Share

Source: IBIS World

70.4%

Source: IBIS World

Figure 4: Percent Change in Per Capita Change in

Disposable Income

Figure 5: Competitor Revenue Growth

Source: Financial Statements

February 27, 2015

UOIG 4

February 27, 2015


standalone shoe retailers, the industry also faces tough competition with retailers

who sell more than just shoes, including Nordstrom, Macy’s and J.C. Penny.

Online retailers are arguably DSW’s strongest adversaries at this time. Online

retailers have the unique capability of supplying a wide variety of shoes and

facing small set up costs because they do not have to build physical brick and

mortar stores. This eliminates the largest barrier to entry facing the market,

enabling those retailers to decrease costs.

Much of DSW’s future success will be greatly dependent on its ability to

maintain market share and predict trends accurately.

Strategic Positioning

Strong Supplier Relationships DSW prides itself in its strong supplier relationships. They merchandise directly

from around five hundred domestic and foreign vendors. Most of their domestic

vendors import merchandise from overseas and their top three vendors make up

around 19% of net sales. These relationships are the main way that DSW is able

to control costs in order to maximize their margins. These relationships will put

them in an optimal position for negotiations and cost reduction going forward.

Brand Recognition DSW is known nationally for selling high quality designer shoes at extremely

affordable prices. They use this as a tool to provide value to their customers as

well as retain customers. As men’s footwear gains traction, DSW hopes to use

their already strong foothold in the women’s department to boost sales and

expand of their men’s shoe department. Their effective branding strategy has led

them to hold a significant portion of the market share in this industry.

Wide Product Offering The intention of DSW is to provide the widest assortment of footwear to their

customers in order to fulfill each individual’s tastes and preferences. They want

to cater to every consumer in every market, offering brand name, designer, and

private brand footwear. Many of their competitors such as Nordstrom and

Macys carry a healthy selection of footwear, however, neither have the variety

of selection that DSW does. A typical DSW store carries up to 23,000 pairs of

shoes in 1,600 styles as well as a healthy assortment of handbags and

accessories.

Accurate Trend Prediction DSW history is indicative of the company’s competence when it comes to

predicting trends. The fact that they provide shoes of every variety, catering to

every consumer, lowers the risk that they will be unsuccessful as a whole. When

they have fallen short of expectations in any way, management has been

proactive with finding ways to mitigate pit falls. They struggled in this area in

2013, but are optimistic that they will be able to more accurately predict trends

going forward.

DSW Rewards The DSW Rewards Program is designed to incentivize customers to make DSW

their primary footwear destination. Points are correlated to dollars spent and

accumulated points can be converted into discounts. 90% of DSW’s sales were

conducted by DSW card holders in 2013. Their hope is to increase customer Source: Google Images

Figure 8: DSW Men’s Ad

Figure 6: DSW Store


Figure 7: Customer Revenue Contribution

Source: DSW 10-K

February 27, 2015

UOIG 5

February 27, 2015


retention rates through increased discounts and rewards for their most loyal

customers.

Business Growth Strategies

DSW Men’s DSW men’s has historically made up around 16% of DSW’s total revenue.

Recently, there has been increased demand for men’s footwear at DSW and they

hope to capitalize on this opportunity to expand further into this segment. The

response to trends and the various products offered in the men’s department has

been increasingly positive and if this continues, the men’s department may be

poised to become a strong driver of revenue going forward. This segment has

enormous potential for growth and DSW could stand to benefit from this shift in

the long run.

DSW App/Online Realizing that ecommerce is expanding rapidly, especially in the retail industry,

DSW intends to follow the trend by focusing more of their efforts on their online

retail. They launched an expansive online luxury accessory test in 2013, but it

proved to be unsuccessful. Since then, they have made efforts to sell more

online and even create a smartphone application where customers can track their

purchases, make new ones, and track their rewards points all from their mobile

device. They want to bring the most optimal shopping experience to their

customers and at this point, consumers are interested in ecommerce. In order to

accommodate this request, DSW is bringing customers free shipping and

returns, as well as in store fulfillment through their Omni-channel distribution.

Although this is a step in the right direction, most other retailers are already

invested in ecommerce and smartphone applications, begging the question of

whether DSW is a little late to the game.

Omni-channel Distribution DSW is launching a new Omni-channel strategy with fresh new ways to deliver

their products to consumers. They recently launched shoephoria, a system that

provides them the ability to fulfill out-of-stock orders from their fulfillment

center. They also launched a new charge-send drop ship capabilities allowing

them to sell product online while fulfillment takes place out of their suppliers’

warehouse. If proven successful, these methods could prove to be pivotal as it

allows DSW to control inventory in a more efficient way than ever before.

Management and Employee Relations

Michael R. MacDonald, President and CEO Michael MacDonald has over 30 years of business experience in retail,

enhancing various spaces including merchandising, marketing, operations, and

finance functions. He served in various roles at Shopko Stores from 1998 to

2009, including Chairman and Chief Executive Office from May 2007 to March

2009. He then left when he was appointed President and CEO of DSW, Inc.

Jay L. Schottenstein, Chairman of the Board Mr. Schottenstein serves as the Chairman of the Board of Directors. He served

in many executive roles at Schottenstein Stores Corporation since 1976 and

served as CEO of Retail Ventures from 1991 to 1997. He also serves as

Chairman of the Board of directors at American Eagle Outfitters, and

Schottenstein Stores Corporation. He was CEO of DSW from 2005 to 2009 and

Figure 10: Omni-channel Distribution


Figure 9: Men’s Revenue Contribution

Source: UOIG Projections

Figure 11: Michael MacDonald Executive Salary

Source: Morning Star

February 27, 2015

UOIG 6

February 27, 2015


now serves as a director at American Eagle Outfitters in addition to his present

position at DSW.

James O’Donnell, Inside Director James O’Donnell has an extensive background in retail and consumer goods. He

was a member of the Board of Directors of The Gap from 1987 to 1992 and

holds various other executive positions at Coleman Capital Advisors, Computer

AidedSystems and Lyte. He also served as CEO, and COO at American Eagle

Outfitters. Today, O’Donnell is an inside director and member of the

Technology Committee at DSW and a strategic advisor for American Eagle

Outfitters.

Joseph A. Schottenstein, Inside Director Joseph Schottenstein has served in many executive capacities at the

Schottenstein Property Group, a privately held company that develops shopping

centers in the United States. He has also served as a Manager of Indigo Nation

until 2004 and currently serves as an inside director and member of the

Technology Committee at DSW.

Management Guidance

Management guidance has been rather scarce historically. However, the seldom

times that they do set expectations, they usually achieve or surpass them.

Although their projections to grow stores by about 3% every year for the next

five years may seem bullish, they have not closed any stores in the past two

years and do not anticipate doing so in the future. Management predicts that

with the positive response to men’s footwear this past year, the men’s section as

DSW will continue to grow and expand with potential to become a strong driver

of revenue.

Portfolio Strategy

Because I believe DSW is not a strong investment at this time, I will not be

pitching DSW to any portfolios.

Recent News

“DSW Announces Management Changes”

01/29/2015

This article discuss the new management changes that DSW has put in place as

of February 2, 2015. They decided to promote several key executives in order to

“strengthen company organization, establish a single pyramid in charge of all

customer touch points, increase bench strength, and balance workload in those

parts of the organization that are undergoing significant change.” Carrie

McDermott, current Executive Vice President was appointed Executive Vice

President and Chief Operating Officer. Ms. McDermott has been an employee of

DSW for over eight years. She will add to her responsibilities, DSW site

operations, the Shoephoria call center, and marketing, making the customer

service experience more streamlined throughout the business. Bill Jordan,

current Executive Vice President and General Counsel was appointed Executive

Vice President and Chief Administrative Officer. He has been with DSW for

nine years and will add Information Technology to his responsibilities. Finally,

Harris Mustafa, Executive Vice President of Supply Chain, was appointed

Figure 12: Joseph Schottenstein Executive Salary

Source: Morning Star

Figure 13: Revenue Projections


February 27, 2015

UOIG 7

February 27, 2015


Executive Vice President and Chief Supply Chain Officer. After eight years at

DSW, the company believes Mustafa is best suited for their new omi-channel

initiative and extra responsibilities as the company evolves.

“DSW Enhances Shareholder Returns”

02/18/2015

DSW has increased their quarterly dividend by 6.7% to 20 cents from 18.75

cents per share, in an effort to enhance shareholder returns. The new dividend

will go into effect on March 31, 2015.

Catalysts

Upside Continued growth in DSW’s men’s department could be a strong driver

in revenue going forward

Omni-channel strategies focused on making shopping more convenient

for customers could increase incentive to shop at DSW as opposed to

less convenient retailers

Reorganization of executive roles may serve to strengthen leadership

Everyday value prices and strong quality assurance will increase

customer retention

Downside Inability to accurately predict trends will have an adverse effect on

revenue and stock price

Merchandise manufactured abroad proses risks such as economic

and/or political instabilities; international discourse could increase

shipping costs, delays, or stoppages.

Increased consumer spending could drive customers to purchase higher

end shoes from higher end specialty retailers rather than DSW

Deceleration in consumer confidence could slow growth in the retail

industry

Comparable Analysis

Overview Comparable companies were screened for a variety of different metrics,

specifically focusing on companies with similarities to DSW in terms of product

offering, markets, market cap, growth rates, capital structure, margins, and

shared risk factors. After these metrics were evaluated, I assigned weightings

based upon which companies I felt like satisfied the various criteria the best.

Foot Locker (FL) - 40% Foot Locker Inc., is an American sport and footwear retailer in about twenty

countries worldwide. A household name when it comes to athletic shoes, Foot

Locker is the ultimate sports footwear destination for those looking for a wide

variety of choices.

Foot Locker operates in a different segment of the footwear industry with a

different focus, however Foot Locker offers the strongest value in terms of a

comparable. It is similar to DSW in terms of the fact that it has a similar market

cap, little debt, and rather similar margins as well. They have similar growth

Figure 16: Steve Madden Logo


Figure 15: Foot Locker Logo


Figure 14: One Year Stock Price

Source: Yahoo Finance

February 27, 2015

UOIG 8

February 27, 2015


rates and are susceptible to similar risks as DSW, including accuracy of trend

predictions, and supplier relationships.

Steve Madden (SHOO) - 35%

Steve Madden is a large shoe retailer for men, women, and children online, in

stores, and through wholesale. They sell a variety of shoes from sandals to

stilettos, but they do not sell athletic footwear. Their main objective is to offer

the most fashionable style shoes to the market.

Steve Madden is one of the strongest comparable companies to DSW

quantitatively and qualitatively. Not only do they offer arguably identical value

to customers and cater to the same consumer base, but they also operate stores

extremely similarly to DSW, with less variety and a bit higher price. The two

companies are also extremely in line with regards to margins, share a similar

capital structure and risk as well. They do not have the same objectives in terms

of offering shoes at an everyday price, but they do price their shoes at a

reasonably cost for the average middle class American. Although their growth

expectations and plans for growth differ quite a bit from DSW’s, I believe Steve

Madden is a strong comparable to DSW.

Brown Shoe Co (BWS) - 20% Brown Shoe Company is a global footwear company that owns and operates a

variety of brands. They are the shoe conglomerate responsible for the brands

Famous Footwear, Naturalizer, Life Stride, Dr. Scholl’s, Ryka, Via Spiga, Sam

Edelman, Vince, Franco Sarto, Fergie, and Carlos.

Brown Shoe Company is an interesting comparable because it caters to much of

the same consumer base that DSW does- mid to high end shoes that are

affordable and comfortable. They are a small cap company with similar product

offering but they do vary from DSW a bit in terms of margins. All things

considered, I do believe that qualitatively they are a very beneficial comparable

to DSW.

Sketchers (SKX) - 5% Sketchers is an American shoe company that operates over 731 stores globally.

Sketchers offers a variety of shoes ranging from athletic to work shoes, however

they only retail their own brand of shoes unlike Brown Shoe Company or DSW.

Recently, Sketchers has been trying to increase their customer base by widening

their product offering and catering to consumers with special footwear needs,

such as orthopedics.

I wanted to evaluate Sketchers as a comparable because they have similar

market caps and they both operate in the footwear industry. They are however,

expected to grow faster than DSW and have a bit higher margins. That being

said, I believed it to be reasonable to give Sketchers a 5% weighting in my

analysis.

Phillip Van Heusen (PVH) – 0% Phillip Van Heusen is a large cap American clothing and accessory company

which owns various brands such as Tommy Hilfiger, Calvin Klein, and Heritage

and licenses various other brands such as BCBG Max Azria and Geoffrey

Beene.

Although PVH is not a shoe retailer, they do cater to a similar consumer base. I

originally saw this company as an interesting comparable to evaluate. However,


Figure 19: PVH Logo

Figure 17: Brown Shoe Co Logo


Figure 18: Sketchers Logo


February 27, 2015

UOIG 9

February 27, 2015


upon further research I realize that quantitatively they do not offer any

significant value, and qualitative value is minimal as well.

Discounted Cash Flow Analysis

Revenue Model Because DSW is in the retail industry, revenue per year for DSW is calculated

based on revenue per square foot and total square footage. For 2014-2023,

management guidance was used to project total stores. Management has

previously spoken about their average square feet per store to be favorable

around 22,000 square feet per store and I anticipate that they will continue to

keep average square feet per store around that number. I project revenue per

square foot to increase at a constant rate of 3% from 2016 into perpetuity

because despite the lack of guidance or historical consistency, I believe that 3%

is a reasonable estimate based upon correlations between historical increase in

revenue and store openings. When DSW opened a great amount of stores one

year, their increase in revenue was much less than when they focused their

attention on their current stores rather than rapid expansion. For my second

revenue model, I wanted to project sales by segment in order to give the other

analysts an idea of what DSW plans to do in each segment going forward. This

was largely based on conversations had during earnings call transcripts and

historical performance. Due to lack of management guidance and information, I

decided to take a relatively bearish stance with regard to revenue, having it

increase at a decreasing rate going forward.

Operating Expense Operating expenses consist of expenses relating to store management and

payroll costs, advertising, ABG operations, new store advertising and other costs

as well as corporate expenses. DSW is actively engaged in making revenue

boosting improvements in their company. In 2013, they experimented with

expanding their luxury accessory line online and were unsuccessful. They have

spoken about doing more product line experimenting and making other potential

improvements that would increase operating expense. 2014’s operating expense

was projected based on management guidance and I predict that going forward,

these experiments will yield results and operating expense will marginally

decline into perpetuity.

Capital Expenditures Capital expenditures are connected with DSW expansion, improving

ecommerce, remodeling existing stores, and growing infrastructure. Capital

expenditures are set to increase this year as DSW is projected to open 39 new

stores and continue to open stores at a strong rate going forward. DSW is also

investing in their ecommerce, ramping up their smart phone application, in an

effort to increase customer retention.

Beta DSW’s beta was calculated using various linear regressions in comparison with

the S&P 500. I also used the Hamada and Vasicek methods to compare DSW

against its comparable companies in order to obtain a series of betas to evaluate.

I placed the most emphasis on my three and five-year daily betas because of

Figure 20: Cost of Goods Sold Projections


WFM Beta SE Weighting

1 Year Daily 0.75 0.19 0.00%

1 Year Daily Hamada-Comps 1.13 0.00%

3 year daily 1.03 0.08 40.00%

3 year weekly 0.95 0.18 0.00%

3 Year Daily Vasicek- Comps 0.93 5.00%

3 Year Daily Vasicek-ETF 0.70 5.00%

3 Year Daily Hamada 0.93 0.00%

3 Year Daily Hamada- Comps 1.04 5.00%

3 Year Daily Hamada-ETF 0.68 5.00%

3 Year Weekly Hamada 1.08 0.00%

5 year daily 1.07 0.08 40.00%

5 Year Daily Hamada 1.46 0.00%

Weight Average Unlevered Beta Beta 1.01

Figure 21: Beta Calculations


Figure 22: Beta Sensitivity Table


Implied Price Undervalued/(Overvalued)

Terminal Growth Rate

31 2.0% 2.5% 3.0% 3.5% 4.0%

0.82 34.93 36.66 38.74 41.28 44.45

0.92 31.12 32.41 33.93 35.75 37.96

1.02 28.00 28.99 30.13 31.47 33.06

1.12 25.41 26.17 27.05 28.06 29.24

1.22 23.22 23.82 24.50 25.28 26.18Ad

just

ed

Beta

February 27, 2015

UOIG 10

February 27, 2015


their low standard of error and the five-year reflected a longer period of time. I

took out of consideration betas with standard errors above 0.1 and weighted my

ETF betas 5% each.

Cost of Goods Sold DSW’s cost of goods sold are set to go up in 2015 due to their experimenting

with product lines. Management has not been very forthcoming with

information pertaining to their experimentation unless it has failed or succeeded.

I anticipate that their experiments will run through 2014-2015 and eventually

slow down. Because much of their footwear is manufactured abroad, they have

opportunities to decrease cost of goods sold even further by increasing their

overseas manufacturing.

Tax Rate DSW’s tax rate has been relatively consistent historically, ranging from about

38%-40%. They have not disclosed information regarding whether or not they

will be doing anything to decrease their tax rate going forward, nor have not put

any international expansion plans into place, so they will not have the

opportunity to take advantage of a lower tax rate. For those reasons, I took the

average of the historical tax rates and standardized them into perpetuity.

Recommendation

Given DSW’s slowing growth and unsuccessful product tests, a reasonable

overvaluation has been identified in both the DCF Assumptions and Forward

Comparable Analysis. For those reasons, I recommend a HOLD for all

portfolios.

Figure 23: Final Valuation

Final Implied Price Price Target Weight

DCF $30.56 50.00%

Forward Comparable Analysis $28.79 50.00%

Price Target $29.68

Current Price $37.35

Overvalued (20.54%)


February 27, 2015

February 27, 2015


UOIG 11

Appendix 1 – Relative Valuation

Comparables Analysis DSW Fl SHOO BWS SKX PVH

($ in millions) DSW Foot Locker Steve Madden Brown Shoe Co Sketchers PVH Corporation

Stock Characteristics Max Min Median Weight Avg. 40.00% 35.00% 20.00% 5.00% 0.00%

Current Price $110.26 $28.39 $53.22 $42.00 $37.35 $53.22 $34.34 $28.39 $60.35 $110.26

Beta 1.38 1.01 1.09 1.09 1.01 1.01 1.01 1.38 1.19 1.09

Size

Short-Term Debt 0.09 - - 0.00 - - - - 0.09 -

Long-Term Debt 199.01 - 136.00 101.09 - 136.00 - 199.01 137.75 85.00

Cash and Cash Equivalent 858.00 82.50 372.00 441.40 112.02 858.00 180.28 82.50 372.00 593.00

Non-Controlling Interest 127.80 - - 45.04 - - 127.80 - 6.10 -

Preferred Stock - - - - - - - - - -

Diluted Basic Shares 151.67 48.81 67.38 96.61 94.59 151.67 67.38 48.81 51.86 83.13

Market Capitalization 9,079.01 1,251.66 3,114.03 4,405.82 3,460.46 8,012.95 2,270.29 1,251.66 3,114.03 9,079.01

Enterprise Value 8,571.01 1,368.17 2,885.97 4,110.55 3,348.44 7,290.95 2,217.82 1,368.17 2,885.97 8,571.01

Growth Expectations

% Revenue Growth 2014E 20.80% (1.10%) 2.80% 4.98% 7.62% 9.40% (1.10%) 2.80% 20.80% 1.10%

% Revenue Growth 2015E 11.74% 2.30% 4.10% 6.34% 11.74% 4.10% 9.80% 3.70% 10.60% 2.30%

% EBITDA Growth 2014E 20.40% (15.70%) 3.10% 0.47% 10.92% 10.80% (15.70%) 3.10% 20.40% 1.40%

% EBITDA Growth 2015E 12.00% 2.00% 4.70% 6.44% 8.28% 4.70% 8.80% 4.40% 12.00% 2.00%

% EPS Growth 2014E 43.20% (13.00%) 19.30% 10.84% (13.00%) 21.40% (10.70%) 19.30% 43.20% 3.40%

% EPS Growth 2015E 22.70% 7.60% 12.20% 12.13% 15.00% 9.40% 12.20% 14.80% 22.70% 7.60%

Profitability Margins

Gross Margin 52.67% 32.99% 40.62% 35.94% 32.99% 33.48% 34.89% 40.62% 44.29% 52.67%

EBIT Margin 12.06% 5.17% 11.15% 10.21% 8.28% 11.15% 12.06% 5.17% 9.94% 11.41%

EBITDA Margin 14.34% 7.26% 13.33% 12.12% 10.66% 13.54% 13.33% 7.26% 11.78% 14.34%

Net Margin 8.11% 3.10% 7.30% 6.74% 5.27% 7.30% 8.11% 3.10% 7.16% 7.62%

Credit Metrics

Interest Expense - - - - - - - - - -

Debt/EV 0.15 - 0.02 0.04 - 0.02 - 0.15 0.05 0.01

Leverage Ratio 1.03 - 0.14 0.28 - 0.14 - 1.03 0.40 0.07

Interest Coverage Ratio - - - - - - - - - -

Operating Results

Revenue $8,366.10 $1,409.20 $2,913.73 $4,081.15 $2,848.29 $7,276.14 $1,409.20 $2,658.96 $2,913.73 $8,366.10

Gross Profit $4,406.45 $491.67 $1,290.59 $1,427.07 $939.76 $2,436.16 $491.67 $1,079.94 $1,290.59 $4,406.45

EBIT $954.70 $137.50 $289.60 $425.93 $235.77 $811.20 $169.93 $137.50 $289.60 $954.70

EBITDA $1,199.49 $187.89 $343.31 $515.57 $303.69 $985.11 $187.89 $192.99 $343.31 $1,199.49

Net Income $637.44 $82.52 $208.52 $279.29 $149.98 $530.90 $114.28 $82.52 $208.52 $637.44

Capital Expenditures $288.33 $20.04 $53.19 $106.84 $113.93 $216.91 $20.04 $52.00 $53.19 $288.33

Multiples

EV/Revenue 1.6x 0.5x 1.0x 1.1x 1.2x 1.0x 1.6x 0.5x 1.0x 1.0x

EV/Gross Profit 4.5x 1.3x 2.2x 3.1x 3.6x 3.0x 4.5x 1.3x 2.2x 1.9x

EV/EBIT 14.2x 9.0x 10.0x 10.7x 14.2x 9.0x 13.1x 10.0x 10.0x 9.0x

EV/EBITDA 11.8x 7.1x 7.4x 8.9x 11.0x 7.4x 11.8x 7.1x 8.4x 7.1x

EV/(EBITDA-Capex) 17.6x 9.4x 9.7x 10.9x 17.6x 9.5x 13.2x 9.7x 9.9x 9.4x

Market Cap/Net Income = P/E 23.1x 14.2x 15.1x 16.8x 23.1x 15.1x 19.9x 15.2x 14.9x 14.2x

Multiple Implied Price Weight

EV/Revenue $34.43 0.00%

EV/Gross Profit $32.39 0.00%

EV/EBIT $27.73 50.00%

EV/EBITDA $29.85 50.00%

EV/(EBITDA-Capex) $22.97 0.00%

Market Cap/Net Income = P/E $26.59 0.00%

Price Target $28.79


Overvalued (22.91%)

February 27, 2015

February 27, 2015


UOIG 12

Appendix 2 – Discounted Cash Flows Valuation

Discounted Cash Flow Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

($ in Millions) 2008A 2009A 2010A 2011A 2012A 2013A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1

% YoY Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% (0.40%) 4.45% 5.83% 21.13% 7.62% 17.13% 20.92% 7.22% 3.67% 11.74% 7.35% 6.34% 6.23% 6.13% 5.03% 4.79% 4.76% 4.35%

Cost of Goods Sold 1,047.5 1,088.4 1,208.4 1,319.1 1,475.3 1,565.3 394.6 398.3 434.5 457.5 1,684.9 463.0 475.6 466.9 503.0 1,908.5 2,044.9 2,170.4 2,301.3 2,437.9 2,555.6 2,672.9 2,794.8 2,910.7

% Revenue 71.60% 67.91% 66.31% 65.16% 65.34% 66.08% 65.88% 67.85% 64.86% 66.00% 66.10% 66.00% 67.00% 65.00% 70.00% 67.01% 66.88% 66.75% 66.63% 66.50% 66.38% 66.25% 66.13% 66.00%

Change in Fair Value of Derivative Instruments - (6.6) (4.9) (5.4) (6.1) - - - - - - - - - - - - - - - - - - -

Gross Profit $415.4 $507.6 $609.0 $699.8 $776.4 $803.4 $204.4 $188.8 $235.4 $235.7 $864.2 $238.5 $234.3 $251.4 $215.6 $939.8 $1,012.6 $1,080.9 $1,152.6 $1,227.9 $1,294.5 $1,361.6 $1,431.7 $1,499.4

Gross Margin 28.40% 31.67% 33.42% 34.57% 34.39% 33.92% 34.12% 32.15% 35.14% 34.00% 33.90% 34.00% 33.00% 35.00% 30.00% 32.99% 33.12% 33.25% 33.37% 33.50% 33.62% 33.75% 33.87% 34.00%

Operating Expenses 336.3 440.8 396.1 448.6 481.8 497.9 126.8 118.6 138.9 144.4 528.6 157.1 142.0 165.2 171.7 636.1 679.6 719.3 760.5 803.4 839.8 875.8 913.1 948.2

% Revenue 22.99% 27.51% 21.74% 22.16% 21.34% 21.02% 21.16% 20.20% 20.73% 20.83% 20.74% 22.40% 20.00% 23.00% 23.90% 22.33% 22.23% 22.12% 22.02% 21.92% 21.81% 21.71% 21.60% 21.50%

Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.4 17.2 17.3 17.3 17.6 67.9 76.7 84.7 92.6 100.6 107.3 114.1 120.3 125.8

% Revenue 2.48% 2.92% 2.65% 2.53% 2.56% 2.71% 2.73% 2.99% 2.51% 1.89% 2.25% 2.45% 2.43% 2.41% 2.45% 2.38% 2.51% 2.60% 2.68% 2.74% 2.79% 2.83% 2.85% 2.85%

% Net PP&E 13.07% 18.47% 18.77% 18.12% 17.80% 18.61% 4.63% 4.92% 4.59% 3.57% 16.76% 4.37% 3.88% 3.48% 3.20% 17.28% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47% 17.47%

Earnings Before Interest & Taxes $42.8 $20.0 $164.7 $200.0 $236.8 $241.4 $61.3 $52.6 $79.7 $78.2 $278.2 $64.2 $75.0 $68.9 $26.2 $235.8 $256.3 $276.9 $299.5 $324.0 $347.4 $371.6 $398.3 $425.4

% Revenue 2.93% 1.25% 9.04% 9.88% 10.49% 10.19% 10.23% 8.96% 11.90% 11.28% 10.92% 9.15% 10.57% 9.59% 3.65% 8.28% 8.38% 8.52% 8.67% 8.84% 9.02% 9.21% 9.42% 9.65%

Interest Expense 0.8 13.6 13.5 11.8 0.9 0.6 0.1 0.1 0.2 - 0.4 - - - - - - - - - - - - -

% Revenue .05% .85% .74% .58% .04% .03% .01% .02% .03% - .01% - - - - - - - - - - - - -

Interest Income 3.4 2.3 3.2 2.6 4.7 3.2 1.0 0.7 0.8 1.1 3.7 1.2 1.1 1.1 0.9 4.2 4.9 5.2 5.5 6.2 0.1 6.9 7.2 7.5

% Revenue .23% .14% .18% .13% .21% .14% .17% .12% .12% .16% .14% .17% .15% .15% .12% .15% .16% .16% .16% .17% .00% .17% .17% .17%

Income from Discontinued Ops - 59.88 6.63 (4.86) 1.25 - - - - - - - - - - - - - - - - - - -

% Revenue 0.00% 3.74% .36% (.24%) .06% - - - - - - - - - - - - - - - - - - -

Non-Operating Income (1.13) (2.37) 1.50 - - - - - - - - - - - - - - - - - - - - -

% of Revenue (.08%) (.15%) .08% - - - - - - - - - - - - - - - - - - - - -

Earnings Before Taxes 44.3 66.2 162.5 185.9 241.9 244.0 62.2 53.2 80.3 79.3 281.5 65.4 76.1 69.9 27.1 240.0 261.2 282.1 305.0 330.2 347.5 378.5 405.5 432.9

% Revenue 3.03% 4.13% 8.92% 9.19% 10.71% 10.30% 10.39% 9.07% 11.99% 11.44% 11.04% 9.32% 10.72% 9.74% 3.77% 8.42% 8.54% 8.68% 8.83% 9.01% 9.03% 9.38% 9.59% 9.82%

Less Taxes (Benefits) 17.38 12.06 59.97 (58.07) 95.43 92.71 23.57 20.82 31.79 31.8 108.0 22.5 22.5 22.5 22.5 90.0 98.0 105.8 114.4 123.8 130.3 141.9 152.1 162.3

Tax Rate 39.25% 18.22% 36.90% 31.23% 39.45% 37.99% 37.89% 39.12% 39.59% 37.00% 38.35% 34.40% 29.57% 32.17% 83.07% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50% 37.50%

Net Income $26.90 $54.12 $102.56 $244.01 $146.44 $151.30 $38.64 $32.40 $48.50 $47.49 $173.57 $42.91 $53.59 $47.44 $4.58 $149.98 $163.26 $176.34 $190.63 $206.39 $217.17 $236.56 $253.45 $270.58

Net Margin 3.38% 5.63% 12.05% 6.49% 6.39% 6.45% 5.52% 7.24% 6.85% 6.81% 6.12% 7.55% 6.60% 0.64% 5.27% 5.34% 5.42% 5.52% 5.63% 5.64% 5.86% 6.00% 6.14%

Add Back: Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.4 17.2 17.3 17.3 17.6 67.9 76.7 84.7 92.6 100.6 107.3 114.1 120.3 125.8

Add Back: Interest Expense*(1-Tax Rate) 0.5 11.1 8.5 8.1 0.5 0.4 0.0 0.1 0.1 - 0.2 - - - - - - - - - - - - -

Operating Cash Flow $63.71 $112.00 $159.34 $303.36 $204.78 $215.77 $55.03 $50.04 $65.46 $60.61 $231.14 $60.07 $70.85 $64.77 $22.20 $217.90 $239.96 $261.00 $283.22 $306.94 $324.49 $350.69 $373.72 $396.42

% Revenue 4.36% 6.99% 8.74% 14.99% 9.07% 9.11% 9.19% 8.52% 9.77% 8.74% 9.07% 8.56% 9.98% 9.02% 3.09% 7.65% 7.85% 8.03% 8.20% 8.37% 8.43% 8.69% 8.84% 8.99%

Current Assets 297.5 317.6 381.9 492.2 508.6 476.6 507.5 516.8 562.8 523.8 590.0 599.2 604.1 577.5 543.2 618.2 663.6 704.7 747.7 793.6 832.4 872.3 913.8 953.5

% Revenue 20.34% 19.82% 20.96% 24.31% 22.53% 20.12% 84.74% 88.02% 84.02% 75.57% 23.15% 85.41% 85.10% 80.40% 75.58% 21.70% 21.70% 21.68% 21.65% 21.65% 21.62% 21.62% 21.62% 21.62%

Current Liabilities 156.0 223.1 261.3 275.9 273.7 283.6 306.8 350.7 343.5 337.5 337.5 291.9 320.5 360.3 393.7 393.7 404.0 422.9 442.1 461.7 484.0 506.2 529.3 551.2

% Revenue 10.67% 13.92% 14.34% 13.63% 12.12% 11.97% 51.23% 59.73% 51.28% 48.70% 13.24% 41.61% 45.15% 50.16% 54.78% 13.82% 13.21% 13.01% 12.80% 12.59% 12.57% 12.55% 12.52% 12.50%

Net Working Capital $141.50 $94.52 $120.61 $216.27 $234.92 $192.92 $200.73 $166.08 $219.33 $186.25 $252.46 $307.30 $283.59 $217.20 $149.47 $224.49 $259.54 $281.85 $305.62 $331.93 $348.48 $366.13 $384.56 $402.32

% Revenue 9.67% 5.90% 6.62% 10.68% 10.41% 8.14% 33.51% 28.29% 32.74% 26.87% 9.90% 43.80% 39.95% 30.24% 20.80% 7.88% 8.49% 8.67% 8.85% 9.05% 9.05% 9.08% 9.10% 9.12%

Change in Working Capital 113.2 (47.0) 26.1 95.7 18.7 (42.0) 7.8 (34.6) 53.2 (33.1) 59.5 54.8 (23.7) (66.4) (67.7) (28.0) 35.0 22.3 23.8 26.3 16.6 17.7 18.4 17.8

Capital Expenditures 81.0 21.8 52.3 76.9 99.8 83.8 25.2 21.6 26.6 34.7 108.1 35.1 35.5 35.9 28.7 113.9 122.3 130.1 138.2 139.3 146.3 149.3 152.2 154.4

% Revenue 5.54% 1.36% 2.87% 3.80% 4.42% 3.54% 4.20% 3.68% 3.97% 5.00% 4.24% 5.00% 5.00% 5.00% 4.00% 4.00% 4.00% 4.00% 4.00% 3.80% 3.80% 3.70% 3.60% 3.50%

Unlevered Free Cash Flow ($130.5) $137.2 $81.0 $130.8 $86.4 $174.0 $22.0 $63.1 ($14.4) $59.0 $63.5 ($29.8) $59.1 $95.2 $61.2 $131.9 $82.6 $108.6 $121.3 $141.3 $161.6 $183.8 $203.1 $224.3

Discounted Free Cash Flow 57.84 (28.65) 55.57 87.82 55.28 68.82 83.44 85.89 92.28 97.31 102.00 103.96 105.84

EBITDA $79.14 $66.74 $212.93 $251.21 $294.60 $305.49 $77.60 $70.17 $96.54 $91.29 $335.60 $81.38 $92.29 $86.19 $43.84 $303.69 $333.02 $361.60 $392.07 $424.54 $454.73 $485.77 $518.60 $551.27

EBITDA Margin 5.41% 4.16% 11.68% 12.41% 13.05% 12.90% 12.96% 11.95% 14.41% 13.17% 13.17% 11.60% 13.00% 12.00% 6.10% 10.66% 10.89% 11.12% 11.35% 11.58% 11.81% 12.04% 12.27% 12.50%

EBITDA Growth (35.23%) (15.68%) 219.07% 17.98% 17.27% 3.70% (74.60%) (9.58%) 37.58% (5.43%) 267.62% (75.75%) 13.40% (6.60%) (49.14%) 592.79% 9.66% 8.58% 8.43% 8.28% 7.11% 6.83% 6.76% 6.30%

February 27, 2015

February 27, 2015


UOIG 13

Appendix 3 – Revenue Model

Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

($ in Millions) 2008A 2009A 2010A 2011A 2012A 2013A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Total Stores 298.0 305.0 311.0 326.0 364.0 394.0 408.0 410.0 431.0 433.0 433.0 438.0 443.0 448.0 448.0 448.0 463.0 478.0 493.0 508.0 518.0 527.0 536.0 543.0

% Growth 15.06% 2.35% 1.97% 4.82% 11.66% 8.24% 3.82% 0.49% 5.12% 0.46% 9.90% 1.15% 1.14% 1.13% 0.00% 3.46% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%

Total Square Feet 6.7 6.8 7.0 7.3 8.1 8.7 9.0 9.0 9.5 9.5 9.5 9.6 9.7 9.9 9.9 9.9 10.2 10.5 10.8 11.2 11.4 11.6 11.8 11.9

% Growth 9.88% 1.34% 1.93% 4.55% 11.40% 6.98% 3.82% 0.49% 5.12% 0.46% 0.46% 1.15% 1.14% 1.13% 0.00% 0.00% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%

Average Square Feet Per Store 22.6 22.4 22.4 22.4 22.3 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0 22.0

% Growth (4.50%) (.99%) (.04%) (.26%) (.23%) (1.16%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Revenue Per Square Foot 216.7 234.3 261.4 277.7 278.1 272.7 66.7 65.1 70.6 72.8 275.2 72.8 72.8 72.9 72.9 291.4 300.2 309.2 318.5 328.0 337.8 348.0 358.4 369.2

% Growth 22.80% 8.10% 11.56% 6.25% 0.12% (1.94%) (3.41%) (2.46%) 8.54% 3.00% 0.94% 0.05% 0.05% 0.05% 0.05% 5.89% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Stores Opened 41.0 9.0 9.0 17.0 39.0 30.0 14.0 2.0 21.0 2.0 39.0 5.0 5.0 5.0 0.0 15.0 15.0 15.0 15.0 15.0 10.0 9.0 9.0 7.0

Stores Closed 2.00 2.00 3.00 2.00 1.00 - - - - - - - - - - - - - - - - - - -

Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1

% Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% 0.28% (1.98%) 14.10% 3.48% 7.62% 1.21% 1.19% 1.18% 0.05% 11.74% 7.35% 6.34% 6.23% 6.13% 5.03% 4.79% 4.76% 4.35%

Revenue Model

($ in Millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Women's Shoes 965.5 1,057.7 1,202.8 1,336.1 1,467.6 1,656.9 1,822.9 1,956.8 2,080.8 2,141.4 2,272.8 2,348.6 2,501.4 2,620.4 2,734.3

% of Sales 66.00% 66.00% 66.00% 66.00% 65.00% 65.00% 64.00% 64.00% 64.00% 62.00% 62.00% 61.00% 62.00% 62.00% 62.00%

% Growth 0.00% 9.55% 13.71% 11.08% 9.84% 0.00% (1.54%) 0.00% 0.00% (2.00%) 0.00% (1.00%) 1.00% 0.00% 0.00%

Men's Shoes 219.4 240.4 273.4 303.6 361.2 433.3 512.7 580.9 650.3 759.9 806.5 885.5 927.9 972.1 1,014.3

% of Sales 15.00% 15.00% 15.00% 15.00% 16.00% 17.00% 18.00% 19.00% 20.00% 22.00% 22.00% 23.00% 23.00% 23.00% 23.00%

% Growth 0.00% 0.00% 0.00% 0.00% 1.00% 1.00% 1.00% 1.00% 1.00% 2.00% 0.00% 1.00% 0.00% 0.00% 0.00%

Athletic Shoes 190.2 208.3 236.9 242.9 270.9 305.9 218.7 215.3 208.1 214.1 227.3 234.9 250.1 262.0 273.4

% of Sales 13.00% 13.00% 13.00% 12.00% 12.00% 12.00% 12.00% 11.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%

% Growth (1.00%) 0.00% 0.00% (1.00%) 0.00% 0.00 0.00% (1.00%) (1.00%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accessories and Other 87.8 96.2 109.3 141.7 158.0 152.9 109.4 117.4 124.8 128.5 136.4 140.9 125.1 131.0 136.7

% of Sales 6.00% 6.00% 6.00% 7.00% 7.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 5.00% 5.00% 5.00%

% Growth 1.00% 0.00% 0.00% 1.00% 1.00% 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% (1.00%) 0.00% 0.00%

Total Stores 298.0 305.0 311.0 326.0 364.0 433.0 448.0 463.0 478.0 493.0 508.0 518.0 527.0 536.0 543.0

% Growth 15.06% 2.35% 1.97% 4.82% 11.66% 18.96% 3.46% 3.35% 3.24% 3.14% 3.04% 1.97% 1.74% 1.71% 1.31%

Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,549.1 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1

% Growth 4.08% 9.55% 13.71% 11.08% 11.53% 4.91% .28% (1.98%) 14.10% 3.48% 7.62% 1.21% 1.19% 1.18% .05%

February 27, 2015

February 27, 2015


UOIG 14

Appendix 4 – Working Capital Model

Working Capital Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

( $ in millions) 2009A 2010A 2011A 2012A 2013A 2014A 5/3/2014A 8/2/2014A 11/2/2014A 2/1/2015E 2014E 2015E 2015E 2015E 2015E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Total Revenue $1,462.9 $1,602.6 $1,822.4 $2,024.3 $2,257.8 $2,368.7 $598.9 $587.1 $669.9 $693.2 $2,549.1 $701.5 $709.9 $718.3 $718.6 $2,848.3 $3,057.5 $3,251.3 $3,453.9 $3,665.8 $3,850.1 $4,034.5 $4,226.5 $4,410.1

Current Assets

Accounts Receivable 6.9 5.4 12.4 16.9 26.8 26.6 22.8 27.9 26.5 31.6 31.6 31.3 33.2 27.3 23.4 32.0 34.3 35.6 36.9 39.2 40.1 42.0 44.0 45.9

Days Sales Outstanding A/R 1.7 1.2 2.5 3.0 4.3 4.1 3.5 4.4 3.6 4.2 4.5 4.1 4.3 3.5 3.0 4.1 4.1 4.0 3.9 3.9 3.8 3.8 3.8 3.8

% of Revenue 0.47% 0.34% 0.68% 0.83% 1.19% 1.12% 3.80% 4.74% 3.96% 4.00% 1.24% 4.46% 4.67% 3.80% 3.26% 1.12% 1.12% 1.10% 1.07% 1.07% 1.04% 1.04% 1.04% 1.04%

Inventory 244.0 262.3 309.0 334.4 393.8 397.8 420.0 415.0 486.3 450.6 450.6 498.1 496.9 502.8 464.6 478.2 513.4 545.9 579.9 615.5 646.4 677.4 709.6 740.5

% of Revenue 16.68% 16.37% 16.96% 16.52% 17.44% 16.79% 70.12% 70.68% 72.59% 65.00% 17.68% 71.00% 70.00% 70.00% 64.65% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79% 16.79%

Prepaid Expenses 24.8 20.8 29.9 24.4 20.6 34.1 44.4 51.6 26.6 34.7 34.7 52.6 56.8 30.2 37.9 39.0 41.9 44.5 47.3 50.2 52.7 55.3 57.9 60.4

Days Prepaid Expense Outstanding 26.9 17.2 27.6 19.9 15.6 25.0 32.2 40.0 17.6 7.1 23.9 30.8 36.8 16.8 20.3 22.4 22.5 22.6 22.7 22.8 22.9 23.0 23.1 23.3

% of Revenue 1.69% 1.30% 1.64% 1.21% 0.91% 1.44% 7.41% 8.79% 3.97% 5.00% 1.36% 7.50% 8.00% 4.20% 4.00% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37% 1.37%

Deferred Income Taxes 21.9 29.1 30.5 116.5 67.4 18.1 20.4 22.3 23.5 6.9 73.1 17.2 17.2 17.2 17.2 68.9 74.0 78.7 83.6 88.7 93.2 97.6 102.3 106.7

% of Revenue 1.50% 1.82% 1.68% 5.75% 2.99% 0.77% 3.40% 3.80% 3.51% 1.00% 2.87% 2.46% 2.43% 2.40% 2.40% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42%

Total Current Assets $297.5 $317.6 $381.9 $492.2 $508.6 $476.6 $507.5 $516.8 $562.8 $523.8 $590.0 $599.2 $604.1 $577.5 $543.2 $618.2 $663.6 $704.7 $747.7 $793.6 $832.4 $872.3 $913.8 $953.5

% of Revenue 20.34% 19.82% 20.96% 24.31% 22.53% 20.12% 84.74% 88.02% 84.02% 75.57% 23.15% 85.41% 85.10% 80.40% 75.58% 21.70% 21.70% 21.68% 21.65% 21.65% 21.62% 21.62% 21.62% 21.62%

Long Term Assets

Net PP&E Beginning 233.4 278.0 253.1 257.1 282.8 324.7 344.4 353.3 357.3 367.1 344.4 394.8 447.1 499.9 553.2 394.8 440.5 485.8 531.0 576.4 615.0 653.9 688.9 720.7

Capital Expenditures 81.0 21.8 52.3 76.9 99.8 83.8 25.2 21.6 26.6 34.7 108.1 35.1 35.5 35.9 28.7 113.9 122.3 130.1 138.2 139.3 146.3 149.3 152.2 154.4

Depreciation and Amortization 36.3 46.7 48.3 51.2 57.8 64.1 16.4 17.6 16.8 13.1 57.7 17.2 17.3 17.4 17.7 68.2 77.0 84.9 92.8 100.7 107.4 114.2 120.4 125.9

Net PP&E Ending 278.0 253.1 257.1 282.8 324.7 344.4 353.3 357.3 367.1 388.6 394.8 447.1 499.9 553.2 599.7 440.5 485.8 531.0 576.4 615.0 653.9 688.9 720.7 749.2

Total Current Assets & Net PP&E $575.5 $570.6 $639.0 $775.0 $833.3 $821.0 $860.8 $874.0 $929.9 $912.4 $984.8 $1,046.3 $1,104.0 $1,130.7 $1,142.8 $1,058.7 $1,149.4 $1,235.8 $1,324.1 $1,408.6 $1,486.3 $1,561.2 $1,634.5 $1,702.7

% of Revenue 19.00% 15.79% 14.11% 13.97% 14.38% 14.54% 58.98% 60.86% 54.80% 56.06% 15.49% 63.73% 70.42% 77.02% 83.45% 15.46% 15.89% 16.33% 16.69% 16.78% 16.98% 17.08% 17.05% 16.99%

Current Liabilities

Accounts Payable 92.9 119.1 148.2 148.9 150.5 167.9 148.5 192.3 185.2 198.9 198.9 151.0 191.3 208.1 218.7 218.7 219.2 232.6 246.7 261.3 273.9 286.5 299.5 312.0

Days Payable Outstnading 32.4 39.9 44.8 41.2 37.2 39.2 34.6 44.4 39.2 40.0 43.1 30.0 37.0 41.0 40.0 41.8 39.1 39.1 39.1 39.1 39.1 39.1 39.1 39.1

% of Revenue 6.35% 7.43% 8.13% 7.36% 6.66% 7.09% 24.79% 32.76% 27.64% 28.70% 7.80% 21.52% 26.95% 28.97% 30.43% 7.68% 7.17% 7.15% 7.14% 7.13% 7.11% 7.10% 7.09% 7.07%

Accrued Charges 63.1 104.0 113.1 127.0 123.2 115.7 158.3 158.3 158.3 138.6 138.6 140.9 129.2 152.2 175.0 175.0 184.9 190.3 195.5 200.4 210.0 219.7 229.7 239.2

Days Charges Outstanding 22.0 34.9 34.2 35.1 30.5 27.0 36.9 36.6 33.5 27.9 30.0 28.0 25.0 30.0 32.0 32.0 33.0 32.0 31.0 30.0 30.0 30.0 30.0 30.0

% of Revenue 4.31% 6.49% 6.21% 6.27% 5.46% 4.88% 26.43% 26.97% 23.64% 20.00% 5.44% 20.09% 18.21% 21.20% 24.35% 6.14% 6.05% 5.85% 5.66% 5.47% 5.46% 5.45% 5.43% 5.42%

Dividends Payable - - - 98.86 98.86 98.86 - - - - - - - - - - - - - - - - - -

% of Revenue - - - 4.88% 4.38% 4.17% - - - - - - - - - - - - - - - - - -

Total Current Liabilities $156.0 $223.1 $261.3 $275.9 $273.7 $283.6 $306.8 $350.7 $343.5 $337.5 $337.5 $291.9 $320.5 $360.3 $393.7 $393.7 $404.0 $422.9 $442.1 $461.7 $484.0 $506.2 $529.3 $551.2

% of Revenue 10.67% 13.92% 14.34% 13.63% 12.12% 11.97% 51.23% 59.73% 51.28% 48.70% 13.24% 41.61% 45.15% 50.16% 54.78% 13.82% 13.21% 13.01% 12.80% 12.59% 12.57% 12.55% 12.52% 12.50%

February 27, 2015

February 27, 2015


UOIG 15

Appendix 5 – Discounted Cash Flows Valuation Assumptions

S

Discounted Free Cash Flow Assumptions Considerations

Tax Rate 37.50% Terminal Growth Rate 3.00%

Risk Free Rate 1.96% Terminal Value 4,968

Beta 1.01 PV of Terminal Value 1,416

Market Risk Premium 6.45% Sum of PV Free Cash Flows 1,475

% Equity 100.00% Firm Value 2,891

% Debt 0.00% Total Debt 0

Cost of Debt 0.00% Cash & Cash Equivalents 112

CAPM 8.46% Market Capitalization 2,891

WACC 8.46% Fully Diluted Shares 95

Terminal Risk Free Rate 2.71% Implied Price $30.56

Terminal CAPM 9.21% Current Price $37.35

Terminal WACC 9.21% Overvalued (18.17%)

Final Implied Price Price Target Weight

DCF $30.56 50.00%

Forward Comparable Analysis $28.79 50.00%

Price Target $29.68


Overvalued (20.54%)

February 27, 2015

February 27, 2015


UOIG 16

Appendix 6 – Sensitivity Analysis


Terminal Growth Rate Terminal Growth Rate

31 2.0% 2.5% 3.0% 3.5% 4.0% (0) 2.3% 2.3% 3.0% 3.8% 4.5%

0.82 34.9 36.7 38.7 41.3 44.5 0.81 (2.71%) (2.71%) 5.59% 16.89% 33.15%

0.92 31.1 32.4 33.9 35.8 38.0 0.91 11.26% 11.26% 22.94% 39.60% 65.26%

1.02 28.0 29.0 30.1 31.5 33.1 1.01 11.26% 11.26% 22.94% 39.60% 65.26%

1.12 25.4 26.2 27.1 28.1 29.2 1.11 (2.71%) (2.71%) 5.59% 16.89% 33.15%

1.22 23.2 23.8 24.5 25.3 26.2 1.21 (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)



High growth rate going into terminal year, possibly consider doing an intermediate growth rate31 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%

7.0% 30.5 30.5 32.2 34.4 37.3 7.5% (19.76%) (19.76%) (15.17%) (9.34%) (1.64%)

7.5% 29.9 29.9 31.6 33.8 36.7 8.0% (18.15%) (18.15%) (13.57%) (7.73%) (0.03%)

8.0% 29.4 29.4 31.1 33.2 36.1 8.5% (18.15%) (18.15%) (13.57%) (7.73%) (0.03%)

8.5% 28.8 28.8 30.5 32.7 35.6 9.0% (19.76%) (19.76%) (15.17%) (9.34%) (1.64%)

9.0% 28.3 28.3 30.0 32.2 35.1 9.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)



31 2.3% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%

4.5% 42.3 42.3 46.9 53.4 63.6 4.5% 13.25% 13.25% 25.47% 43.01% 70.32%

5.5% 34.4 34.4 37.1 40.7 45.8 5.5% (7.86%) (7.86%) (0.63%) 9.03% 22.61%

6.5% 34.4 34.4 37.1 40.7 45.8 6.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

7.5% 24.7 24.7 25.9 27.3 29.1 7.5% (33.74%) (33.74%) (30.69%) (26.94%) (22.20%)

8.5% 21.6 21.6 22.4 23.3 24.5 8.5% (42.19%) (42.19%) (40.09%) (37.56%) (34.47%)



31 2.2% 2.3% 3.0% 3.8% 4.5% (0) 2.3% 2.3% 3.0% 3.8% 4.5%

57.5% 28.8 28.9 30.6 32.8 35.6 57.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

47.5% 28.8 28.9 30.6 32.8 35.6 47.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

37.5% 28.8 28.9 30.6 32.8 35.6 37.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

47.5% 28.8 28.9 30.6 32.8 35.6 47.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

57.5% 28.8 28.9 30.6 32.8 35.6 57.5% (22.73%) (22.73%) (18.15%) (12.32%) (4.62%)

Tax Rate

Tax

Rate

Ad

just

ed

Beta

Adjusted Beta

WA

CC

WA

CC

Market

Risk

Premium

Mark

et

Ris

k

Pre

miu

m

February 27, 2015

February 27, 2015


UOIG 17

Appendix 7 – Sources

BWS Filings

Damodoran

DSW Earnings call transcripts

DSW Filings

FactSet

FL Filings

Google Images

IBIS World

Market Watch

Morning Star

Press Releases

PVH Filings

SHOO Filings

SKX Filings

Yahoo! Finance

February 27, 2015

February 27, 2015


UOIG 18

dsw report final (1)

Documents