Download GAP, INC

CONSUMER SECTOR PRESENTATION
4/3/2002
Brian Price
John Wilson
sector head
associate sector head
Arianne Obering
Mary Whitehouse
senior analyst
research analyst
PRESENTATION OUTLINE
 State of the Sector
 Valuation Models, the future of the investment
fund (Wal-Mart example)
 Recommendation: Sell GPS (Gap)
 Future opportunities in the sector
STATE OF CONSUMER SECTOR
Limited Inc LTD
Pepsico Inc PEP
Walmart WMT
Gap Inc GPS
Price:
4-Sep-2001
13.94
47.30
48.95
19.68
2-Jan-2002
15.52
49.15
58.05
14.1
1-Apr-2002
16.92
51.43
59.56
14.93
Beta:
1.44
0.7
0.94
1.55
PE:
20.6
30.7
42
88.5
EPS:
1.19
1.66
1.4
0.18
Debt/Capital:
17%
35%
36%
39%
SECTOR PERFORMANCE 9/4/01-4/1/02
 ND Consumer:
11.55%
 IYK (consumer index):7.64%
 S&P 500: -.34%
SECTOR BETA
1-Apr
GPS
160
$14.93
$2,388.80
7.31%
LTD
218
$16.92
$3,688.56
11.28%
1.44 0.162489
PEP
170
$51.43
$8,743.10
26.75%
0.7 0.187227
WMT
300
$59.56 $17,868.00
54.66%
0.94 0.513818
$32,688.46
1.55
Beta
Portfolio
0.113271
0.976805
Sector Stock Weights
9/4/01
4/1/02
11%
11%
7%
GPS
11%
LTD
PEP
50%
28%
WMT
55%
27%
GPS
LTD
PEP
WMT
VALUATIONS: The Fund’s Future
Applied Investment Management, aka AIM, is a senior
and graduate level class for finance majors/MBA
concentrators
 Like professional management funds, they run valuation
models to come up with their dollar estimate of the price
per share
 This makes decisions fairly simple: if the stock’s present
share price is under the estimated value, buy, if above,
sell.

VALUATIONS, cont.
 The problem: I have no clue how to run these
valuation models
 The solution: perhaps we could schedule either
professor Reilly, Langley, or Malpass for a quick
lecture on this, or bring in some senior AIM
alumni for help
VALUATION EXAMPLE


Check out www.nd.edu/~aim and click on AIM Alumni link (AIM
XIII) to see valuations. Some valuations of interest include WalMart, Caterpillar, Amgen, EMC, and Enron
Valuation is, of course, not an exact science. The Enron
valuation placed its value at $58.72.
“ Based on the previous reports, the industry is prime for the taking and Enron has the financial
strength and the expertise to operate in such high volume, low margin market. Technical analysis
had a very bearish outlook on the stock, but the latest trough may well have been the bottom, as
the stock has risen in the past few weeks. My estimated price is greater than 25% of the current
price and thus is a ‘strong buy’.” Frederick VonMering 10/15/01
The Moral: Don’t listen to Grad Students. Only take valuations from
undergrads who aren’t named Jason King.
VALUATION TECHNIQUES
WAL-MART

Book Value Technique
61.38

Dividend Discount
48.46

Discounted Cash Flow
64.75
*DCF determined to be best for Wal-Mart, and since stock traded
at $52.90, it was rated as a BUY. In this example, a very good
call, and good valuation (today’s price about $59.00)
GAP, INC
THE PROBLEMS AND THE SOLUTION
GAP, INC.
 Banana Republic
 Gap
 Old Navy
 All three lost money in 2001—Old Navy and
Banana Republic lost less that Gap
MARKETING PROBLEMS
 “We changed too much, too quickly, in ways that
weren’t consistent with our brands”
 “Gap stores became unfocused, trying to attract
too many different customers”
 Comments from Gap’s CEO
INVENTORY PROBLEMS
 Started in early 2000
 Show no signs of stopping
 Already discounting new Spring merchandise
 Customers do not like what they see so far from
Gap this Spring
THE EFFECT
 Loss of $0.01 per share in 2001
 Very small gain in Revenue (1.27%)
 Worst performing year that I can find since 1985
GAP, NOW . . .
 No PE—lost money in 2001
 Dividend growth rate is –2%
 Industry avg. Div. growth rate is +5%
 Credit downgraded to “junk” status
 Gap Debt/Equity is 67%
 Limited’s Debt/Equity is 17%
 Financially weak compared to industry
GAP, FUTURE . . .
 Priced at 56 times 2002 est. EPS
 Priced at 29 times 2002 est. EPS
 Industry avg. PE is 21
 Note: It is hard to predict Gap’s earnings in
future years, due to its cyclical nature
GAP, INC.
GAP, INC.
CONCLUSION
 Not a quick turnaround
 Already own Limited, which is a better company
right now
 Sell all of our shares of GAP, INC
Why Sell GPS Continued
We want to increase our return in the short-term.
GAP will more than likely increase over the next couple
of years. However, for our purposes holding on to this
stock while the company figures its way out of the web it
has weaved is not wise. Instead, the money lost in GAP
and the portfolio as a whole may produce better results
by diversifying and investing in better opportunities.
There are many stocks that we feel are strong
companies with high growth potential, perhaps a bit
more risk and/ or both short-term and long-term gains.
Future Possibilities
 The Interpublic Group Company
 Steak-n-Shake
 Papa John’s Pizza
 Linens-n-Things
 Limited (add to holdings)
 Backyard Burgers
IPG
SNS
PZZA
LIN
LTD
BYB
For next time…..
Please take some time to look into these
stocks and we will make a presentation in the
near future as to which we feel would be most
beneficial to our sector. Bear in mind how heavily
weighted we currently are in Wal-Mart, and how
few stocks the consumer sector holds.
In Closing…
"99% of fund
managers
demonstrate no
evidence of skill
whatsoever."
1%