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Investment Analysis of

Investment Analysis of. By Ray Szutu Mar 26, 2009. What do they do?. The Classic Shoe. Business. Founded in 1966 Designs, develops and markets shoes Sells wholesale to footwear retailers Sales: 42% domestic (U.S.), 58% international. Investment Thesis.

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Investment Analysis of

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  1. Investment Analysis of By Ray Szutu Mar 26, 2009

  2. What do they do? The Classic Shoe

  3. Business • Founded in 1966 • Designs, develops and markets shoes • Sells wholesale to footwear retailers • Sales: 42% domestic (U.S.), 58% international

  4. Investment Thesis • Cheap relative to long term earning power • Great balance sheet • Well managed, simple company

  5. K-Swiss Shoes Figures in US$ • $65 retail price • $26 wholesale price • $15 production cost (China) • $7.80 SG&A cost ~ 15% operating margin, historically

  6. Unit Price

  7. Volume

  8. Margins

  9. Selling, General & Admin Costs • > $10M spent on data implementation since 2007 • Increased stock option expense • Non-recurring • International expansion

  10. Earning Power Figures in US$, averages since 1997: • Net income = $33.4M • Free cash flow = $34M • Bal Sheet earnings = $41.7M Ugly near-term outlook

  11. Free Cash Flow

  12. Capital Structure • Almost no debt ($9M) • $207M in cash • $312M market cap ($8.95/sh) • $52M in lease and purchase obligations **Very conservatively financed

  13. Liquidation Value

  14. Management • CEO: Steven Nichols (since 1987) • CFO: George Powlick (since 1988) • Invested alongside shareholders • Experienced • Long-term orientated • Good capital allocation • Re-priced stock options

  15. Competition • Nike, Adidas, Skechers • Gross margins and ROE just as high • Less development costs

  16. Valuation Typical metrics: • P/E = 15.2 x • P/B = 0.96x • Div yield = 2.5% These are not applicable

  17. Valuation • EV / FCF = 3.35x • Private market valuation • “What a reasonable buyer would pay for the business in the private market in a cash financed, arms-length transaction” • Give away price = $5.50

  18. Private Market Valuation

  19. Private Market Valuation • Min @ 7.8x: $604M • Max @ 14.3x: $869M • Avg @ 11.1x: $740M Current market cap: $312M

  20. The market… “… is a voting machine in the short-term, and a weighing machine in the long-term”

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