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Module 4 – Simple Analysis and Parsimonious Forecasting

Module 4 – Simple Analysis and Parsimonious Forecasting . Wilbur Benitez February 2, 2014 . Cabela’s Overview. Was founded in 1961 and has been a leader in outdoor gear since Leading retailer in hunting, fishing and outdoor gear Went public in June 2004 Market Cap of 4.7B

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Module 4 – Simple Analysis and Parsimonious Forecasting

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  1. Module 4 – Simple Analysis and Parsimonious Forecasting

    Wilbur Benitez February 2, 2014
  2. Cabela’s Overview Was founded in 1961 and has been a leader in outdoor gear since Leading retailer in hunting, fishing and outdoor gear Went public in June 2004 Market Cap of 4.7B Total revenues of 3.1M in 2012 Two main segments Merchandise sales and financial services Currently seeking to expand with smaller stores Traditionally has operated using large “Legacy” stores
  3. Industry Risk Decline in discretionary consumer spending (non essential goods) Unseasonal weather conditions Difficult economic conditions Consumer spending, oil prices, unemployment rates, etc. Cyber security breaches (Target) Decreased consumer confidence Political and economic uncertainty in foreign countries Many vendors are located in countries such as China, Mexico and various Eastern Asian and European countries Political unrest, wars, work stoppages etc. Current and future government regulations (firearms) Laws and regulations related to hunting and fishing licenses State and Federal regulations related to items such as firearms and ammunition
  4. Product Categories
  5. Return on Net Enterprise Assets RNEA = EPAT/avg.(NEA) RNEA = (EPAT/Sales) * (Sales/avg.(NEA)) RNEA = EPM * EATO Relies on our classification of the balance sheet and income statement into enterprise and financing components Net enterprise assets (NEA) Enterprise profits after tax (EPAT)
  6. Disaggregated RNEA EPM EATO EATO = Sales/avg (NEA) Measures the productivity of enterprise assets Higher EATO is preferable EPM = EPAT/Sales Indicates how much operating profit a firm earns from each sales dollar Higher EPM is preferable
  7. Enterprise Profit Margin Consider industry risk EPM is affected by: Enterprise expenses Overhead expenses Wages Competition Product pricing
  8. EPM Computation Issues to consider: extent to which the changes in the profit margin are being driven by items directly related to sales or by peripheral items. Exclude: financial statement translation, gain/losses on cash flow hedges and impairment charges
  9. EPM From Operations
  10. Enterprise Asset Turnover Reveals the level of sales the firm realizes from each dollar invested in enterprise assets
  11. Parsimonious Forecasting We will need to make future assumptions based on historical performance and anticipated performance Revenue forecast is the most critical Revenue is directly or indirectly related to EPAT and NEA components Three step process Forecast revenues via forecast of sales growth rates Forecast EPAT via forecast of EPM and components of EPM Forecast NEA via forecast of EATO and components of EATO
  12. Historical Growth
  13. Explanation for Financial Services Growth Revenue increased due to a reduction in account write-offs Cabela’s substantially increased total credit card loans, but overdue accounts did not increase It is important to note that Cabela’s CLUB VISA cards do not have to be used at a Cabela’s. Although we see a marginal increase in merchandise sales, financial services revenue can increase at a higher rate if cardholders are utilizing their cards elsewhere.
  14. Future Growth Projections Merchandise Sales Financial Services Reduction of marketing efforts It is reasonable to assume that 2012 numbers are a better indicator of future performance Going forward we will assume growth will remain fairly constant as the reduction in marketing efforts will be offset by additional in store customers Growth rate : 8% Expansion Opened four new store in 2013 Plan to open five additional stores in 2014 Going forward we will be optimistic on the impact that new stores will have on merchandise sales Growth rate: 10%
  15. EPM Projection Future rate: 7% Expect profit margin trend to continue
  16. EATO Projection Future: 1.41 Additional stores should have higher returns but at the same time we need to consider how much this will decrease returns for existing stores Issues: Difficult to project EATO due to current expansion plans Difficult to compare with other companies due to the financial service segment
  17. Parsimonious Forecasts
  18. Questions?
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