Summary of Valuation Approaches
There are three common valuation methods that are used to value retail type businesses:
- Asset-based valuation
The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity.
- Income approach to value (capitalization of earnings)
This method is most the accurate for retail clothing companies, which usually have a constant growth of earnings.
- Income approach to value (discounted cash flow)
The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business.
- Market approach to value
This method utilizes market indications of value such as publicly traded comparable retail clothing companies company stock and acquisitions of privately held retailers.
Description of the Industry
The U.S retail clothing store industry (SIC 5611, 5621, 5632, 5641, 5651, and 5699), includes approximately 100,000 stores nationwide and accumulates a combined $150 billion in revenues each year. The retail clothing industry is very concentrated and the 50 largest companies bring in 65% of the total industry revenue. Most companies in the retail clothing industry are specialized and have found a niche market of customers to appeal to such as women’s wear, sporting apparel, maternity, men’s clothing, or children’s clothing. The size of retail clothing companies range from small independently owned boutique shops to large department stores.
Trends in the retail clothing industry have changed dramatically over the past couple years, especially in response to the recent economic turmoil. A few of the most significant for 2009 and upcoming years are:
- Reduction in Advertisement Spending
Like many companies today, retail clothing stores are looking to cut costs wherever possible. Many clothing stores are reducing their spending on advertising.
- Increase in Coupons and Sales
In an effort to help boost revenues many stores are increasingly offering coupons and sales. Retail stores are looking for any incentive to get people in the door and shopping.
- Fewer Premium-Priced Products Introduced
Since many consumers are not currently buying things that are not deemed as “necessary”, many retail clothing stores will introduce fewer premium priced products and instead focus their efforts on more affordable apparel.
Key Retail Clothing Performance Metrics
The following are performance metrics that the retail clothing industry use to benchmark their performance to others in the industry:
- Sales per Square Foot
- Same-store sales growth
- Operating cash flow
- Net Profit
- Inventory turnover
The following average benchmarking data is based on studies from various retail clothing stores:
Industry Organizations and Publications
Some organizations and websites that publish helpful information include:
- National Retail Federation
- American Apparel and Footwear Association
- American Apparel Producers’ Network
- National Association of Fashion and Accessory Designers
Availability of Publicly Traded Guideline Firms
There are approximately 69 publicly traded clothing companies in the U.S. retail clothing industry. As of 5/22/09, the retail clothing industry’s public companies have an average P/E ratio of 19.5 and an average price to free cash flow value of 8. Sales values for these 69 companies range from $1 million to $18 billion dollars. Market capitalization ranges from $80,000 to $11 billion.
The top five publicly traded retail clothing companies ranked by sales are:
- TJX Companies Inc.
- The Gap Inc.
- Limited Brands Inc.
- Nordstrom Inc.
- Ross Stores Inc.
Availability of Purchase Transactions
The size of private retail clothing companies that were bought and sold recently varies greatly, both in terms of their sales, and the purchase price paid for the companies. From 2000 to 2008, the ratio of:
- Market value of invested capital (MVIC) to Net Sales ranged from 0.1 to 2.5 times
- MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 1 to 16 times.
This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which affect retail clothing stores as investment opportunities.
Troubled Company and Industry Restructuring Considerations
With the recent economic conditions, the retail clothing industry has struggled to maintain their revenue levels. Many consumers are not shopping and are hesitant to spend their discretionary income on clothes. The recent levels of unemployment have decreased the total discretionary income of the U.S. these economic trends have forced many small privately owned clothing stores to shut their doors and have required larger stores to make budget cuts and reduce their expenses wherever possible. For now, retail clothing stores are offering sales and promotions to bring customers in the door. However, it is hard to tell how long these drops in revenues will last or how quickly the retail industry will bounce back from the current economic conditions. These industry and economic factors have had a negative impact on the value of retail clothing businesses.