December 6, 2016 Border-adjusted tax changes could materially impact Retail earnings

Transcription

1 EQUITY RESEARCH December 6, 2016 Border-adjusted tax changes could materially impact Retail earnings RBC Capital Markets, LLC Scot Ciccarelli, CFA (Analyst) Michael Lehrhoff (AVP) (212) (212) Robert Iannarone, CFA (AVP) (212) New tax plan proposals could have a severely adverse impact on most retailers In June 2016, Republicans, led by Speaker of the House, Mr. Paul Ryan, published a tax proposal titled A Better Way; Our Vision for a Confident America. Kevin Brady, the Texas Republican who chairs the House tax-writing panel, referred to President-elect Donald Trump s tax proposal as kissing cousins with the Republican plan. While most of the media coverage has focused on potential tax rate changes, the biggest alteration in our view is the potential shift to using a Border-Adjusted or Destination-Based cash flow tax. Based on our direct conversations with the Tax Foundation, the leading independent tax policy research organization, this is a key part of the current tax proposals. For some companies (exporters and those that sell domestically produced goods), the changes could be significantly positive, but for others, such as companies that primarily sell imported goods (Hello Retail), it could be substantially negative. IF the US moves to a border-adjusted tax system, most of our Retailers would be forced to raise prices (and revenues) or meaningfully change their import/domestic sourcing mix, or their earnings would be materially reduced. The biggest proposed changes in the tax code (two good, one not good, and one potentially really bad) include: 1. Lower corporate tax rates (Trump s proposal is 15%; The Better Way s proposal is 20%); 2. The immediate write-off of capital expenditures; 3. Eliminating deductions on net interest expense; 4. Using a border-adjusted or destination-based tax system. Implications of the proposals for Retailers: Lower tax rates would be a positive for nearly all of our companies. The immediate write-off of capital expenditures would likely have the biggest positive benefit on growth-oriented companies, since they are investing more in their business, with the least benefit accruing to more mature companies that have reduced store growth. The loss of interest deductions would have little impact on un-leveraged companies, but would be a net negative for many of the companies in our space. However, all of these impacts would pale in comparison to the potential shift towards using a border-adjusted tax system. What does this border-adjustment mean? In short, sales outside of the US would not be subject to taxation in the US (with international companies and exporters being the largest relative winners), while companies that sell imported goods in the US (you know, like almost all retailers) would NOT be able to deduct their imported COGS from sales. Said another way, companies that sell imported products would be taxed on the full SALE amount of such a transaction, rather than on the PROFIT. In some cases, the taxes due would exceed the company s existing profit. Individual company comments at the end of the report (see Appendix 2). Disseminated: Dec 6, :45ET; Produced: Dec 5, :04ET Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Required Conflicts Disclosures, see Page 49.

2 In the example we show below, a retailer with a 40% GM and 30% pretax margin would have its Net Income cut by nearly 40% if all of its COGS were imported. Example 1 The way our tax system works today To create a baseline, we show a very simplistic example of how today s tax system works. In this example, a company has $100 in sales and $60 of COGS (regardless of where the goods were created), which would yield $40 of GP. Further assuming SG&A of $10, this would result in pretax income of $30. At today s 35% corporate tax rate (we are ignoring state/local taxes for simplicity sake), it would create a tax liability of $10.50 and yield net income of $19.5. Thus, in Example 1 (today s system), this company would pay $10.50 in tax, its effective tax rate (on a % of sales basis) would be 10.5% and its net income would be $ This is pretty straightforward and seems intuitive to almost all US investors today. Exhibit 1: Example 1 Current tax system (35% Corporate Tax Rate) Today's corporate tax system $s % of Sales Sale % COGS 60 60% GP 40 40% SGA 10 10% Pretax 30 30% 35% Tax on Taxable Income % Net Income % Source: RBC Capital Markets For imported goods, however, taxes would be paid on the SALE PRICE rather than the PROFIT of the transaction Example 2 Border-adjusted system (All imported goods) For Example 2, we used the same base assumptions as in Example 1. The company sells $100 of product and has COGS of $60, but here we assume that all of the COGS are imports. This would still yield $40 of GP and with $10 of SG&A, the company s pretax earnings would still be $30. However, the company s taxable income in this scenario is not GP less SG&A, with tax applied to the profit, as we are used to. Rather, the tax would be calculated on the full sale price ($100), less SG&A, since imported COGS would not be deducted from the calculation. In Example 2, the company s taxable income would be $90 rather than $30. As a result, even with a lower tax rate (20% vs. 35%), the company would have to pay $18 (vs. $10.50) of tax, incur an effective tax rate of 18% (on a % of sales basis) rather than 10.5%, and Net Income (you know, the stuff payable to shareholders) would fall ~40% to $12 from $ December 6,

3 Exhibit 2: Example 2 Border adjusted system (All imported goods) Border-adjusted system (All imported goods) $s % of Sales Sale % COGS 60 60% GP 40 40% SGA 10 10% Pretax 30 30% Sales 100 Less Domestic COGS 0 Less SGA 10 Taxable Income 90 20% Tax on Taxable Income 18 Pretax 30 30% Tax at 20% 18 18% Net Income 12 12% Source: RBC Capital Markets However, sellers of domestically-produced goods would benefit Under the border adjustment system, a company would get a tax deduction for domestically sourced product. In Example 3, we use the same basic assumptions as in the prior examples, but assume that all of the company s COGS were domestically produced. We again start with a transactional pretax figure of $30, but for taxable income purposes, the company would be able to deduct all of its COGS and SG&A from its sales, leaving it with $30 of taxable income (rather than the $90 when it was all foreign sourced). Thus, in Example 3, the seller of domesticallyproduced goods would only pay $6 of tax, its effective tax rate would drop to 6% (on a % of sales basis), and its Net Income would rise nearly 25% to $24 vs. today s $19.50 base case. Interestingly, net profits would double if the company were to source domestically rather than purchasing imports. December 6,

4 Exhibit 3: Example 3 Border adjusted system (All domestic goods) Border-adjusted system (All domestic goods) $s % of Sales Sale % COGS 60 60% GP 40 40% SGA 10 10% Pretax 30 30% Sales 100 Less domestic COGS 60 Less SGA 10 Taxable income 30 20% Tax on Taxable Income 6 Pretax Tax at 20% 6 6% Net Income 24 24% Source: RBC Capital Markets December 6,

5 Tax plan would accomplish many campaign policy goals Assuming nothing else changes, the border adjustment plan would provide incentives for companies to: (1) expand and sell more goods internationally (no tax on those earnings in the US), thereby likely increasing US exports (check). Further (2), it would discourage the sale of imports (given the lack of tax deductibility on those goods) and, in a way, almost act as a tariff if there were no offsetting changes to the value of the US dollar (check). Finally, (3) it would encourage companies to buy more domestically produced goods (i.e., boost manufacturing activity once again, check). US Retailers seem like they would be one of the biggest losers in such a scenario given the high % of goods that are typically imported and their relative lack of exports/international operations. Rising US dollar could counter some of the negative impact Based on our conversations with members of the Tax Foundation and RBC s FX Strategist, Elsa Lignos, the expectation is that the US dollar would appreciate to reflect some of these policy changes. A strong dollar would potentially enable retailers to boost their buying power and reduce their effective COGS, since they would be purchasing goods with a more valuable currency. However, secondary effects such as Fed policy changes may blunt the expected rise in the US dollar. Thus, our examples show what would happen to a company s net profit from a transactional basis, if nothing else changed economically. Real life example with Home Depot Lots of variables at play We know that the devil is in the details and a final tax plan could take lots of different shapes. Nevertheless, the border-adjustment concept seems to be a highlight in the Republican plan and, with that backdrop, we have attempted to take a first cut at what the earnings impact could be to companies in our universe from these proposals. Of course, real life situations are far more complex than the simplistic example shown above, and entail more moving pieces that will require additional assumptions. First, companies will lose their interest deductions, but they will be able to deduct capital expenditures. Second, companies embed certain costs in their COGS line, making it more difficult to calculate merchandise costs and margins. Third, it is challenging to assess what portion of a company s sales come from domestic goods vs. imported goods (which is an absolutely critical estimate in this exercise). Fourth, changes in the US dollar could change the effective cost of purchasing goods. Finally, many domestic retailers have at least some international operations, even if they are not disclosed in great detail, and those earnings would not be taxed. Taking a cut at the earnings impact on our universe Despite the challenges mentioned above, the examples below show the estimated impact on Home Depot s Net Income based on the current proposals (hint: it s pretty negative). We also show two different ways for the companies to get back to Break Even on the Net Income line vs. today s profit. First, they will need revenue increases (think rising prices). It is not currently clear if retailers would be able to add a tax at the end of a transaction, the way other countries do with their VAT tax, as every company would have a different mix of imports vs. domestically sourced goods. Second, they could shift more of their mix towards domestic sourcing and away from imports. Today s P&L using today s assumptions Below, we show our current P&L estimates for Home Depot for We estimate ~80% of the company s COGS are actually the cost of things that it sells (widgets) and ~20% are other costs, such as distribution, that gets rolled up into the COGS line. We further estimate that ~50% of the goods that it sells are domestic and 50% imported (this is a critical estimate in our earnings sensitivity analysis and, unfortunately, most of our companies provide little in the way of data on this statistic). Based on today s tax system, with $94 billion in sales, $32 billion in GP, and $13.3 billion in EBIT, we estimate that Home Depot will generate ~$7.8 billion in net income, yielding $6.34 in EPS. December 6,

6 Exhibit 4: Home Depot 2016 P&L ($M) Sales $ 94,124.4 COGS 61,928.7 Cost of Goods (Widgets) 49, % Other COGS Exp (distribution, etc.) 12, % Implied merchandise margin 47.4% Imported Goods 24, % Domestically Produced Goods 24, % GP/GM 32, % SG&A 17, % D&A/Other 1, % EBIT 13, % Interest, Net % Pretax 12, % Tax 4, % NI $ 7, % Shares 1,232.8 EPS $ 6.34 Border-Adjusted/Destination-Based CF P&L Below, we show our estimates of how Home Depot s P&L would change using the proposed tax reforms. As in the earlier set of examples, we get to the same EBIT figure of $13.3 billion. Then we calculate Taxable Income, which now excludes both imported goods and interest. The company can also now deduct capital expenditures. However, rather than being taxed at 35% (plus state taxes) on $12.3 billion of pretax profit, as exists under today s system, Home Depot would be taxed on $36.5 billion because it loses the deduction related to imported goods. This would increase its new tax bill to ~$7.3 billion from today s $4.5 billion. We also assumed the company generates about 5% of its EBIT from international operations (thus receiving what we think of as a tax credit of 20% on $665 million, or ~$130 million). Thus, after subtracting net interest expense of $943 million, the much-higher new tax amount of $7.3 billion, and giving credit back for international profits, we estimate Home Depot s Net Income would drop to ~$5.2 billion from $7.8 billion or ~34%. This would represent a staggering reduction for one of the biggest retailers in America, if the company failed to react by raising prices, charging customers an incremental tax (if allowed), or materially shifting its mix of domestic vs. imported goods. December 6,

7 Exhibit 5: Home Depot New Destination CF Based Plan ($M) Sales $ 94,124.4 COGS 61,928.7 Cost of Goods (Widgets) 49, % Other COGS Exp (distribution, etc.) 12, % Implied merchandise margin 47.4% Imported Goods 24, % Domestically Produced Goods 24, % GP/GM 32, % SG&A 17, % D&A/Other 1, % EBIT 13, % Sales $ 94,124.4 Less Other COGS 12,385.7 Less Domestic Goods 24,771.5 Less SG&A 17,142.2 Less D&A 1,761.0 Less Cap Ex 1,590.0 Taxable Income $ 36, % Tax on Taxable Income $ 7,294.8 EBIT from Domestic Operations $ 12, % EBIT from International Ops $ % EBIT 13,292.5 Less Interest, Net (943.0) Less Tax Expense (7,294.8) , , ,819.8 Net Income change $ (2,632.18) Implied Reduction vs. Today (33.7%) New Implied EPS $ 4.21 December 6,

8 Home Depot would need to increase its Revenue by 3.5% (and GP by ~10%) just to get Net Income back to Break Even with today s levels In the example below, we show that Home Depot would need to raise prices enough to increase total revenue by 3.5% to counteract this pending tax law change. For Home Depot, it would equate to 350 bps of additional comp growth to get back to breakeven if it wasn t allowed to formally charge a tax on imported good transactions. With the additional sales, assuming no change in COGS, GP$s would increase by ~10%, and the new structure would enable the company to get its Net Income back to breakeven vs. today s tax structure. December 6,

9 Exhibit 6: Revenue increases needed to offset tax changes ($M) Sales $ 97, % COGS 61,928.7 Cost of Goods (Widgets) 49, % Other COGS Exp (distribution, etc.) 12, % Implied merchandise margin 49.1% Imported Goods 24, % Domestically Produced Goods 24, % GP/GM 35, % SG&A 17, % D&A/Other 1, % EBIT 16, % Sales $ 97,418.8 Less Other COGS 12,385.7 Less Domestic Goods 24,771.5 Less SG&A 17,142.2 Less D&A 1,761.0 Less Cap Ex 1,590.0 Taxable Income 39, % Tax on Taxable Income 7,953.7 EBIT from Domestic Operations $ 15, % EBIT from International Ops $ % EBIT 16,586.9 Less Interest, Net (943.0) Less Tax Expense (7,953.7) , , ,819.8 Net Income change $ Implied Reduction vs. Today 0.5% Revenue increases needed to offset tax change 3.5% December 6,

10 Shifting the mix towards more domestically sourced goods The other way that retailers could offset the change in tax structure would be to increase their mix of domestically sourced goods (which would obviously align with a stated goal of the incoming administration). We estimate Home Depot would need to source ~77% of its goods domestically (vs. our estimate of 50% today) to reduce the tax burden enough (you do get a tax deduction on domestic products, just not on imports) to get back to breakeven vs. today s structure. December 6,

11 Exhibit 7: Domestic mix needed to offset tax changes ($M) Sales $ 94,124.4 COGS 61,928.7 Cost of Goods (Widgets) 49, % Other COGS Exp (distribution, etc.) 12, % Implied merchandise margin 47.4% Imported Goods 11, % Domestically Produced Goods 38, % GP/GM 32, % SG&A 17, % D&A/Other 1, % EBIT 13, % Sales $ 94,124.4 Less Other COGS 12,385.7 Less Domestic Goods 38,148.1 Less SG&A 17,142.2 Less D&A 1,761.0 Less Cap Ex 1,590.0 Taxable Income 23, % Tax on Taxable Income 4,619.5 EBIT from Domestic Operations $ 12, % EBIT from International Ops $ % EBIT 13,292.5 Less Interest, Net (943.0) Less Tax Expense (4,619.5) , , , Net Income change $ Implied Reduction vs. Today 0.6% Domestic mix needed to offset tax change 77.0% December 6,

12 CarMax would be the biggest winner from these tax policy changes Since CarMax is still growing its store base at a relatively high rate and it sources all of its goods domestically, we believe it would be, by far, the biggest beneficiary of such tax policy changes. The company would be able to deduct its capex and all of its physical COGS and take advantage of the lower 20% assumed tax rate. We estimate earnings could rise nearly 60% from the proposed tax changes (again, keeping everything else consistent). We would also note that since new car prices would likely need to rise to battle the effects of these tax changes, the relative value of CarMax s used product would also likely increase. Everyone else would be a loser As we showed above, assuming Home Depot sources ~50% of its goods domestically, its net income would drop by a hard-to-fathom ~35% without the benefit of increasing price or materially changing its domestic vs. import mix. However, Home Depot is in relatively good shape vs. most of the other companies in our universe, as its earnings would only drop by ~35% with no change and its revenues would only need to increase by ~3.5% to get back to whole. For companies like Williams-Sonoma and Dick s Sporting Goods, we calculate their earnings base would largely be wiped out. However, we estimate it would be even more onerous for Best Buy, Costco, Dollar Tree, Genuine Parts and Walmart all of which would essentially incur a tax bill that would exceed their operating profit. Net/net We believe it would be premature to change estimates and ratings given that we don t know if the border-adjustment plan will be implemented as currently contemplated. We also don t know what time frame such a plan would be implemented over due to the significant changes that would likely occur to most company s supply chains. However, if the plan is rolled out, we would expect consumer prices to increase given the magnitude of revenue increases that would likely be needed to offset the tax plan proposals. Our general observation is that this policy would be net negative for the Retail industry with the biggest impacts on companies with the lowest merchandise margins, since they would need the largest increases in volume to offset the tax proposals. How to use our Interactive Tax Model We have created an Interactive Tax Model, which includes four P&L models for each company, as shown in the Home Depot example above and attached for each company in our universe (see Appendix 2). Our 2016 P&L represents today s base case scenarios, utilizing today s tax policy (very straightforward). Our second model shows what the company s P&L would look like under the Destination based (border-adjusted) plan and compares it to each company s net profit under today s tax system. THE ONLY INPUTS NEEDED FOR SENSITIVITY ANALYSIS ARE IN RED. The rest of the model flows through from the base. Our third model shows the revenue increase needed to get a company back to break-even vs. today s system (Red Input at Bottom of Sheet for sensitivity analysis). Finally, our fourth model goes back to our base assumptions and shows what mix the company would need of Domestically produced goods to get back to break-even (Red Input at Bottom of Sheet for sensitivity analysis). Please contact your RBC Sales Representative to receive an interactive model. December 6,

13 Appendix 1: Valuation snapshot Exhibit 8: Valuation snapshot for Home Depot HD Current Price $ Assigned P/E Valuation 2017 Valuation Historical 1-year forward P/E for S&P 500 (3 year median) 17.3 Historical 2-year forward P/E for S&P 500 (3 year median) 15.5 Historical 1-year forward P/E for HD (3 year median) 21.1 Historical 2-year forward P/E for HD (3 year median) 18.4 Historical Premium vs. Market 22% Historical Premium vs. Market 18% Current P/E Ratio of S&P 500 on 2016 EPS Estimates 18.6 Current P/E Ratio of S&P 500 on 2017 EPS Estimates 16.6 Premium of Assigned P/E to Current Market Multiple 13% Premium of Assigned P/E to Current Market Multiple 26% 2015 EPS $5.41 RBC's 2016 EPS Estimate $ Estimated EPS Growth Rate (RBC Base Case) 17.4% 2017 Estimated EPS Growth Rate (RBC Base Case) 12.7% Current P/E Based on RBC's 2016 EPS Estimate 20.4 Current P/E Based on RBC's 2017 EPS Estimate 18.1 Current PEG Ratio 118% Current PEG Ratio 143% PEG Ratio using Assigned P/E 121% PEG Ratio using Assigned P/E 166% Price Target: 2016 Scenario Analysis Price Target: 2017 Scenario Analysis Base Case Upside Downside Base Case Upside Downside 2015 Sales $88,519.0 Estimated 2016 Sales $94,124.4 New Store/Other Sales Growth 1.3% 2% 0% New Store/Other Sales Growth 0.1% 1% 0% Comp Growth 5.1% 6% 4% Comp Growth 4.3% 6% 2% Estimated 2016 Sales $94,124.4 $95,157.9 $92,059.8 Estimated 2017 Sales $98,260.3 $100,713.2 $96, Operating Margin 13.4% 2016 Operating Margin 14.1% 2016 Operating Margin 14.1% 14.3% 13.9% 2017 Operating Margin 14.7% 15.0% 14.4% Estimated Operating Profit 13, , ,796.3 Estimated 2017 Operating Profit 14, , ,825.0 Interest expense/income (943.0) (943.0) (943.0) Interest expense/income (1,024.0) (1,024.0) (1,024.0) Tax rate 36.7% 36.7% 36.7% Tax rate 37.0% 37.0% 37.0% Estimated 2015 net income 7, , ,505.6 Estimated 2017 net income 8, , , year-end share count 1, year-end share count 1, Share Buyback 3.8% 4% 3% 2017 Share Buyback 4.4% 6% 3% Estimated 2016 Share Count 1, , ,239.5 Estimated 2017 Share Count 1, , ,195.8 Implied 2016 EPS $6.34 $6.54 $6.06 Implied 2017 EPS $7.15 $7.66 $6.74 Assigned P/E Assigned P/E Implied PT from Scenario $ $ $96.89 Implied PT from Scenario $ $ $ Range of Valuations 3% 26% -25% Range of Valuations 16% 48% -17% 12 Month Forward Price Target (25% 2016 & 75% 2017 Base Case Scenarios): $146 Implied Upside from Current Price 12% 12 Month Forward Upside (25% 2016 & 75% 2017 Upside Scenarios): $184 Implied Upside from Current Price: 42% 12 Month Forward Downside (25% 2016 & 75% 2017 Downside Scenarios): $105 Implied Downside from Current Price: -19% Source: RBC Capital Markets estimates, FactSet and Company reports; Priced as of market close on 12/01/16 Valuation Our price target of $146 is based on a 21.0x P/E multiple applied to a blend of our 2016 EPS estimate of $6.34 and our 2017 EPS estimate of $7.15, supportive of our Outperform rating. This multiple is only modestly below the company s historical market relative premium of 23%, which we believe is warranted given the company's strong leverage to a U.S. housing market that continues to improve, the likelihood that earnings estimates will continue to be revised higher over time, and investors' increased willingness to pay higher multiples for companies with leverage to U.S. housing. December 6,

14 Price target impediments Housing market deterioration Various housing market metrics, including home prices, existing home sales, and new home construction could potentially decline from current levels. A material decline in these metrics could have an impact on home improvement retailers leveraged to the overall health of the housing market. Margin deterioration/price war While the company's operating costs de-leveraged during the housing downturn due to the negative comp environment, gross margins remained relatively stable. We believe that investors have largely banked on stable gross margins, and if Home Depot (or one of its competitors) attempts to gain market share and stimulate sales through major discounts, then we believe it could adversely impact Home Depot's shares. December 6,

15 Appendix 2: Current P&L and Border-Adjusted Impacts Exhibit 9: Advance Auto Parts Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 9,516.7 COGS 5,278.2 New Destination CF Based Plan Sales $ 9,516.7 COGS 5,278.2 Cost of Goods (Widgets) 3, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 58.4% Cost of Goods (Widgets) 3, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 58.4% Imported Goods 3, % Domestically Produced Goods % Imported Goods 3, % Domestically Produced Goods % GP/GM 4, % SG&A 3, % EBIT % Interest, Net % Pretax % Tax % NI $ % Shares 73.9 EPS $ 7.25 GP/GM 4, % SG&A 3, % EBIT % Sales $ 9,516.7 Less Other COGS 1,319.5 Less Domestic Goods Less SG&A 3,321.6 Less Cap Ex Taxable Income $ 4, % Tax on Taxable Income $ EBIT from Domestic Operations $ % EBIT from International Ops $ % EBIT Less Interest, Net (52.5) Less Tax Expense (840.5) Net Income change $ (507.63) Implied Reduction vs. Today (94.9%) New Implied EPS $ 0.37 December 6,

16 Exhibit 10: Advance Auto Parts Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 10, % COGS 5,278.2 Domestic Mix Sales $ 9,516.7 COGS 5,278.2 Cost of Goods (Widgets) 3, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 61.0% Cost of Goods (Widgets) 3, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 58.4% Imported Goods 3, % Domestically Produced Goods % Imported Goods % Domestically Produced Goods 2, % GP/GM 4, % SG&A 3, % EBIT 1, % GP/GM 4, % SG&A 3, % EBIT % Sales $ 10,154.3 Less Other COGS 1,319.5 Less Domestic Goods Less SG&A 3,321.6 Less Cap Ex Sales $ 9,516.7 Less Other COGS 1,319.5 Less Domestic Goods 2,969.0 Less SG&A 3,321.6 Less Cap Ex Taxable Income 4, Taxable Income 1, % Tax on Taxable Income % Tax on Taxable Income EBIT from Domestic Operations $ 1, % EBIT from International Ops $ % EBIT from Domestic Operations $ % EBIT from International Ops $ % EBIT 1,554.5 Less Interest, Net (52.5) Less Tax Expense (968.0) EBIT Less Interest, Net (52.5) Less Tax Expense (325.9) Net Income change $ Net Income change $ 7.00 Implied Reduction vs. Today 0.9% Implied Reduction vs. Today 1.3% Revenue increase needed to offset tax change 6.7% Domestic mix needed to offset tax change 75.0% December 6,

17 Exhibit 11: AutoZone Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 10,831.6 COGS 5,112.0 New Destination CF Based Plan Sales $ 10,831.6 COGS 5,112.0 Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 61.3% Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 61.3% Imported Goods 3, % Domestically Produced Goods % Imported Goods 3, % Domestically Produced Goods % GP/GM 5, % SG&A 3, % EBIT 2, % Interest, Net % Pretax 1, % Tax % NI $ 1, % Shares 29.7 EPS $ GP/GM 5, % SG&A 3, % EBIT 2, % Sales $ 10,831.6 Less Other COGS Less Domestic Goods Less SG&A 3,614.7 Less Cap Ex Taxable Income $ 5, % Tax on Taxable Income $ 1,071.7 EBIT from Domestic Operations $ 1, % EBIT from International Ops $ % EBIT 2,104.9 Less Interest, Net (151.8) Less Tax Expense (1,071.7) ,261.9 Net Income change $ (351.09) Implied Reduction vs. Today (27.8%) Note: AutoZone 2016 P&L calendarized to February year-end New Implied EPS $ December 6,

18 Exhibit 12: AutoZone Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 11, % COGS 5,112.0 Domestic Mix Sales $ 10,831.6 COGS 5,112.0 Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 62.8% Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 61.3% Imported Goods 3, % Domestically Produced Goods % Imported Goods 2, % Domestically Produced Goods 2, % GP/GM 6, % SG&A 3, % EBIT 2, % GP/GM 5, % SG&A 3, % EBIT 2, % Sales $ 11,264.9 Less Other COGS Less Domestic Goods Less SG&A 3,614.7 Less Cap Ex Sales $ 10,831.6 Less Other COGS Less Domestic Goods 2,179.8 Less SG&A 3,614.7 Less Cap Ex Taxable Income 5, Taxable Income 3, % Tax on Taxable Income 1, % Tax on Taxable Income EBIT from Domestic Operations $ 2, % EBIT from International Ops $ % EBIT from Domestic Operations $ 1, % EBIT from International Ops $ % EBIT 2,538.1 Less Interest, Net (151.8) Less Tax Expense (1,158.4) ,263.5 EBIT 2,104.9 Less Interest, Net (151.8) Less Tax Expense (719.6) , , ,261.9 Net Income change $ , , Net Income change $ 1.02 Implied Reduction vs. Today 0.1% Implied Reduction vs. Today 0.1% Revenue increases needed to offset tax change 4.0% Domestic mix needed to offset tax change 52.0% December 6,

19 Exhibit 13: Best Buy Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 39,456.6 COGS 30,271.7 New Destination CF Based Plan Sales $ 39,456.6 COGS 30,271.7 Cost of Goods (Widgets) 27, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 31.0% Imported Goods 20, % Domestically Produced Goods 6, % GP/GM 9, % SG&A 7, % EBIT 1, % Interest, Net % Pretax 1, % Tax % NI $ 1, % Shares EPS $ 3.30 Cost of Goods (Widgets) 27, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 31.0% Imported Goods 20, % Domestically Produced Goods 6, % GP/GM 9, % SG&A 7, % EBIT 1, % Sales $ 39,456.6 Less Other COGS 3,027.2 Less Domestic Goods 6,811.1 Less SG&A 7,480.4 Less Cap Ex Taxable Income $ 21, % Tax on Taxable Income $ 4,297.0 EBIT from Domestic Operations $ 1, % EBIT from International Ops $ % EBIT 1,704.4 Less Interest, Net (47.0) Less Tax Expense (4,297.0) 17.0 (2,622.5) (2,622.5) 1,061.3 Net Income change $ (3,683.76) Implied Reduction vs. Today (347.1%) New Implied EPS $ (8.17) December 6,

20 Exhibit 14: Best Buy Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 44, % COGS 30,271.7 Domestic Mix Sales $ 39,456.6 COGS 30,271.7 Cost of Goods (Widgets) 27, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 38.1% Cost of Goods (Widgets) 27, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 31.0% Imported Goods 20, % Domestically Produced Goods 6, % Imported Goods 1, % Domestically Produced Goods 25, % GP/GM 13, % SG&A 7, % EBIT 6, % GP/GM 9, % SG&A 7, % EBIT 1, % Sales $ 44,033.6 Less Other COGS 3,027.2 Less Domestic Goods 6,811.1 Less SG&A 7,480.4 Less Cap Ex Sales $ 39,456.6 Less Other COGS 3,027.2 Less Domestic Goods 25,337.5 Less SG&A 7,480.4 Less Cap Ex Taxable Income 26, Taxable Income 2, % Tax on Taxable Income 5, % Tax on Taxable Income EBIT from Domestic Operations $ 5, % EBIT from International Ops $ % EBIT from Domestic Operations $ 1, % EBIT from International Ops $ % EBIT 6,281.4 Less Interest, Net (47.0) Less Tax Expense (5,212.4) ,084.8 EBIT 1,704.4 Less Interest, Net (47.0) Less Tax Expense (591.7) , , ,061.3 Net Income change $ , , Net Income change $ Implied Reduction vs. Today 2.2% Implied Reduction vs. Today 2.0% Revenue increases needed to offset tax change 11.6% Domestic mix needed to offset tax change 93.0% December 6,

21 Exhibit 15: CarMax Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 15,584.5 COGS 13,454.7 New Destination CF Based Plan Sales $ 15,584.5 COGS 13,454.7 Cost of Goods (Widgets) 13, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 14.5% Cost of Goods (Widgets) 13, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 14.5% Imported Goods - 0% Domestically Produced Goods 13, % Imported Goods - 0% Domestically Produced Goods 13, % GP/GM 2, % SG&A 1, % D&A/Other (396.2) -2.5% EBIT 1, % Interest, Net % Pretax 1, % Tax % NI $ % Shares EPS $ 3.26 GP/GM 2, % SG&A 1, % D&A/Other (396.2) -2.5% EBIT 1, % Sales $ 15,584.5 Less Other COGS Less Domestic Goods 13,320.2 Less SG&A 1,467.6 Less D&A Less Cap Ex Taxable Income $ % Tax on Taxable Income $ 8.7 EBIT from Domestic Operations $ 1, % EBIT from International Ops $ - 0% EBIT 1,058.4 Less Interest, Net (51.5) Less Tax Expense (8.7) Net Income change $ Implied Increase vs. Today 59.9% New Implied EPS $ 5.20 December 6,

22 Exhibit 16: CarMax Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 15, % COGS 13,454.7 Domestic Mix Sales $ 15,584.5 COGS 13,454.7 Cost of Goods (Widgets) 13, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 11.9% Cost of Goods (Widgets) 13, % Other COGS Exp (distribution, etc.) % Implied merchandise margin 14.5% Imported Goods - 0% Domestically Produced Goods 13, % Imported Goods 1, % Domestically Produced Goods 11, % GP/GM 1, % SG&A 1, % D&A/Other (396.2) -2.6% EBIT % GP/GM 2, % SG&A 1, % D&A/Other (396.2) -2.5% EBIT 1, % Sales $ 15,117.0 Less Other COGS Less Domestic Goods 13,320.2 Less SG&A 1,467.6 Less D&A Less Cap Ex Sales $ 15,584.5 Less Other COGS Less Domestic Goods 11,455.4 Less SG&A 1,467.6 Less D&A Less Cap Ex Taxable Income (424.20) Taxable Income 1, % Tax on Taxable Income (84.8) 20% Tax on Taxable Income EBIT from Domestic Operations $ % EBIT from International Ops $ - 0% EBIT from Domestic Operations $ 1, % EBIT from International Ops $ - 0% EBIT Less Interest, Net (51.5) Less Tax Expense EBIT 1,058.4 Less Interest, Net (51.5) Less Tax Expense (381.6) Net Income change $ (0.21) Net Income change $ 0.86 Implied Increase vs. Today 0.0% Implied Increase vs. Today 0.1% Revenue increases needed to offset tax change -3.0% Domestic mix needed to offset tax change 86.0% December 6,

23 Exhibit 17: Costco Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 118,719.0 COGS 102,901.0 New Destination CF Based Plan Sales $ 118,719.0 COGS 102,901.0 Cost of Goods (Widgets) 92, % Other COGS Exp (distribution, etc.) 10, % Implied merchandise margin 22.0% Imported Goods 41, % Domestically Produced Goods 50, % GP/GM 15, % SG&A 12, % D&A/Other % EBIT 3, % Interest, Net % Pretax 3, % Tax 1, % NI $ 2, % Non-controlling Int -26 Shares EPS $ 5.33 Cost of Goods (Widgets) 92, % Other COGS Exp (distribution, etc.) 10, % Implied merchandise margin 22.0% Imported Goods 41, % Domestically Produced Goods 50, % GP/GM 15, % SG&A 12, % D&A/Other % EBIT 3, % Sales $ 118,719.0 Less Other COGS 10,290.1 Less Domestic Goods 50,936.0 Less SG&A 12,068.0 Less D&A 78.0 Less Cap Ex 2,649.0 Taxable Income $ 42, % Tax on Taxable Income $ 8,539.6 EBIT from Domestic Operations $ 2, % EBIT from International Ops $ 1, % EBIT 3,672.0 Less Interest, Net (53.0) Less Tax Expense (8,539.6) (4,648.9) (4,648.9) 2,376.0 Net Income change $ (7,024.85) Implied Reduction vs. Today (295.7%) Note: Costco 2016 P&L reflects FY16 actuals New Implied EPS $ (10.54) December 6,

24 Exhibit 18: Costco Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 126, % COGS 102,901.0 Domestic Mix Sales $ 118,719.0 COGS 102,901.0 Cost of Goods (Widgets) 92, % Other COGS Exp (distribution, etc.) 10, % Implied merchandise margin 27.0% Cost of Goods (Widgets) 92, % Other COGS Exp (distribution, etc.) 10, % Implied merchandise margin 22.0% Imported Goods 41, % Domestically Produced Goods 50, % Imported Goods 6, % Domestically Produced Goods 86, % GP/GM 23, % SG&A 12, % D&A/Other % EBIT 11, % GP/GM 15, % SG&A 12, % D&A/Other % EBIT 3, % Sales $ 126,791.9 Less Other COGS 10,290.1 Less Domestic Goods 50,936.0 Less SG&A 12,068.0 Less D&A 78.0 Less Cap Ex 2,649.0 Sales $ 118,719.0 Less Other COGS 10,290.1 Less Domestic Goods 86,128.1 Less SG&A 12,068.0 Less D&A 78.0 Less Cap Ex 2,649.0 Taxable Income 50, Taxable Income 7, % Tax on Taxable Income 10, % Tax on Taxable Income 1,501.2 EBIT from Domestic Operations $ 7, % EBIT from International Ops $ 4, % EBIT from Domestic Operations $ 2, % EBIT from International Ops $ 1, % EBIT 11,744.9 Less Interest, Net (53.0) Less Tax Expense (10,154.2) ,406.9 EBIT 3,672.0 Less Interest, Net (53.0) Less Tax Expense (1,501.2) , , ,376.0 Net Income change $ , , Net Income change $ Implied Reduction vs. Today 1.3% Implied Reduction vs. Today 0.6% Revenue increases needed to offset tax change 6.8% Domestic mix needed to offset tax change 93.0% December 6,

25 Exhibit 19: Dick s Sporting Goods Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 7,948.8 COGS 5,529.7 New Destination CF Based Plan Sales $ 7,948.8 COGS 5,529.7 Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 46.4% Imported Goods 2, % Domestically Produced Goods 1, % GP/GM 2, % SG&A 1, % D&A/Other % EBIT % Interest, Net (4.0) -0.1% Pretax % Tax % NI $ % Shares EPS $ 3.12 Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 46.4% Imported Goods 2, % Domestically Produced Goods 1, % GP/GM 2, % SG&A 1, % D&A/Other % EBIT % Sales $ 7,948.8 Less Other COGS 1,271.8 Less Domestic Goods 1,490.2 Less SG&A 1,823.2 Less D&A 36.2 Less Cap Ex Taxable Income $ 2, % Tax on Taxable Income $ EBIT from Domestic Operations $ % EBIT from International Ops $ - 0% EBIT Less Interest, Net 4.0 Less Tax Expense (596.4) - (32.7) (32.7) Net Income change $ (382.66) Implied Reduction vs. Today (109.3%) New Implied EPS $ (0.29) December 6,

26 Exhibit 20: Dick s Sporting Goods Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 8, % COGS 5,529.7 Domestic Mix Sales $ 7,948.8 COGS 5,529.7 Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 49.5% Cost of Goods (Widgets) 4, % Other COGS Exp (distribution, etc.) 1, % Implied merchandise margin 46.4% Imported Goods 2, % Domestically Produced Goods 1, % Imported Goods % Domestically Produced Goods 3, % GP/GM 2, % SG&A 1, % D&A/Other % EBIT 1, % GP/GM 2, % SG&A 1, % D&A/Other % EBIT % Sales $ 8,425.7 Less Other COGS 1,271.8 Less Domestic Goods 1,490.2 Less SG&A 1,823.2 Less D&A 36.2 Less Cap Ex Sales $ 7,948.8 Less Other COGS 1,271.8 Less Domestic Goods 3,406.3 Less SG&A 1,823.2 Less D&A 36.2 Less Cap Ex Taxable Income 3, Taxable Income 1, % Tax on Taxable Income % Tax on Taxable Income EBIT from Domestic Operations $ 1, % EBIT from International Ops $ - 0% EBIT from Domestic Operations $ % EBIT from International Ops $ - 0% EBIT 1,036.7 Less Interest, Net 4.0 Less Tax Expense (691.8) EBIT Less Interest, Net 4.0 Less Tax Expense (213.2) Net Income change $ (1.12) Net Income change $ 0.54 Implied Reduction vs. Today -0.3% Implied Reduction vs. Today 0.2% Revenue increases needed to offset tax change 6.0% Domestic mix needed to offset tax change 80.0% December 6,

27 Exhibit 21: Dollar General Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 21,966.0 COGS 15,217.5 New Destination CF Based Plan Sales $ 21,966.0 COGS 15,217.5 Cost of Goods (Widgets) 12, % Other COGS Exp (distribution, etc.) 2, % Implied merchandise margin 43.2% Cost of Goods (Widgets) 12, % Other COGS Exp (distribution, etc.) 2, % Implied merchandise margin 43.2% Imported Goods 6, % Domestically Produced Goods 5, % Imported Goods 6, % Domestically Produced Goods 5, % GP/GM 6, % SG&A 4, % EBIT 2, % Interest, Net % Pretax 1, % Tax % NI $ 1, % Shares EPS $ 4.35 GP/GM 6, % SG&A 4, % EBIT 2, % Sales $ 21,966.0 Less Other COGS 2,739.1 Less Domestic Goods 5,615.2 Less SG&A 4,717.2 Less Cap Ex Taxable Income $ 8, % Tax on Taxable Income $ 1,661.4 EBIT from Domestic Operations $ 2, % EBIT from International Ops $ - 0% EBIT 2,031.3 Less Interest, Net (96.3) Less Tax Expense (1,661.4) ,228.5 Net Income change $ (954.88) Implied Reduction vs. Today (77.7%) New Implied EPS $ 0.97 December 6,

28 Exhibit 22: Dollar General Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 23, % COGS 15,217.5 Domestic Mix Sales $ 21,966.0 COGS 15,217.5 Cost of Goods (Widgets) 12, % Other COGS Exp (distribution, etc.) 2, % Implied merchandise margin 46.2% Cost of Goods (Widgets) 12, % Other COGS Exp (distribution, etc.) 2, % Implied merchandise margin 43.2% Imported Goods 6, % Domestically Produced Goods 5, % Imported Goods 1, % Domestically Produced Goods 10, % GP/GM 7, % SG&A 4, % EBIT 3, % GP/GM 6, % SG&A 4, % EBIT 2, % Sales $ 23,174.1 Less Other COGS 2,739.1 Less Domestic Goods 5,615.2 Less SG&A 4,717.2 Less Cap Ex Sales $ 21,966.0 Less Other COGS 2,739.1 Less Domestic Goods 10,481.8 Less SG&A 4,717.2 Less Cap Ex Taxable Income 9, Taxable Income 3, % Tax on Taxable Income 1, % Tax on Taxable Income EBIT from Domestic Operations $ 3, % EBIT from International Ops $ - 0% EBIT from Domestic Operations $ 2, % EBIT from International Ops $ - 0% EBIT 3,239.5 Less Interest, Net (96.3) Less Tax Expense (1,903.0) - 1,240.1 EBIT 2,031.3 Less Interest, Net (96.3) Less Tax Expense (688.1) - 1, , ,228.5 Net Income change $ , , Net Income change $ Implied Reduction vs. Today 0.9% Implied Reduction vs. Today 1.5% Revenue increases needed to offset tax change 5.5% Domestic mix needed to offset tax change 84.0% December 6,

29 Exhibit 23: Dollar Tree Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 20,717.4 COGS 14,324.6 New Destination CF Based Plan Sales $ 20,717.4 COGS 14,324.6 Cost of Goods (Widgets) 11, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 46.1% Cost of Goods (Widgets) 11, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 46.1% Imported Goods 7, % Domestically Produced Goods 3, % Imported Goods 7, % Domestically Produced Goods 3, % GP/GM 6, % SG&A 4, % EBIT 1, % Interest, Net % Pretax 1, % Tax % NI $ % Shares EPS $ 3.88 GP/GM 6, % SG&A 4, % EBIT 1, % Sales $ 20,717.4 Less Other COGS 3,151.4 Less Domestic Goods 3,910.6 Less SG&A 4,607.1 Less Cap Ex Taxable Income $ 8, % Tax on Taxable Income $ 1,685.8 EBIT from Domestic Operations $ 1, % EBIT from International Ops $ - 0% EBIT 1,785.7 Less Interest, Net (336.3) Less Tax Expense (1,685.8) - (236.4) (236.4) Net Income change $ (1,155.36) Implied Reduction vs. Today (125.7%) New Implied EPS $ (1.00) December 6,

30 Exhibit 24: Dollar Tree Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 22, % COGS 14,324.6 Domestic Mix Sales $ 20,717.4 COGS 14,324.6 Cost of Goods (Widgets) 11, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 49.6% Cost of Goods (Widgets) 11, % Other COGS Exp (distribution, etc.) 3, % Implied merchandise margin 46.1% Imported Goods 7, % Domestically Produced Goods 3, % Imported Goods 1, % Domestically Produced Goods 9, % GP/GM 7, % SG&A 4, % EBIT 3, % GP/GM 6, % SG&A 4, % EBIT 1, % Sales $ 22,167.6 Less Other COGS 3,151.4 Less Domestic Goods 3,910.6 Less SG&A 4,607.1 Less Cap Ex Sales $ 20,717.4 Less Other COGS 3,151.4 Less Domestic Goods 9,720.7 Less SG&A 4,607.1 Less Cap Ex Taxable Income 9, Taxable Income 2, % Tax on Taxable Income 1, % Tax on Taxable Income EBIT from Domestic Operations $ 3, % EBIT from International Ops $ - 0% EBIT from Domestic Operations $ 1, % EBIT from International Ops $ - 0% EBIT 3,235.9 Less Interest, Net (336.3) Less Tax Expense (1,975.9) EBIT 1,785.7 Less Interest, Net (336.3) Less Tax Expense (523.8) Net Income change $ Net Income change $ 6.66 Implied Reduction vs. Today 0.5% Implied Reduction vs. Today 0.7% Revenue increases needed to offset tax change 7.0% Domestic mix needed to offset tax change 87.0% December 6,

31 Exhibit 25: Five Below Current P&L and Border-Adjusted Impacts 2016 P&L Sales $ 1,005.3 COGS New Destination CF Based Plan Sales $ 1,005.3 COGS Cost of Goods (Widgets) % Other COGS Exp (distribution, etc.) % Implied merchandise margin 51.7% Cost of Goods (Widgets) % Other COGS Exp (distribution, etc.) % Implied merchandise margin 51.7% Imported Goods % Domestically Produced Goods % Imported Goods % Domestically Produced Goods % GP/GM % SG&A % EBIT % Interest, Net (0.3) 0.0% Pretax % Tax % NI $ % Shares 55.1 EPS $ 1.32 GP/GM % SG&A % EBIT % Sales $ 1,005.3 Less Other COGS Less Domestic Goods Less SG&A Less Cap Ex 46.7 Taxable Income $ % Tax on Taxable Income $ 77.0 EBIT from Domestic Operations $ % EBIT from International Ops $ - 0% EBIT Less Interest, Net 0.3 Less Tax Expense (77.0) Net Income change $ (33.42) Implied Reduction vs. Today (46.1%) New Implied EPS $ 0.71 December 6,

32 Exhibit 26: Five Below Revenue Increase and Domestic Mix Necessary to Offset Tax Changes Revenue Increase Sales $ 1, % COGS Domestic Mix Sales $ 1,005.3 COGS Cost of Goods (Widgets) % Other COGS Exp (distribution, etc.) % Implied merchandise margin 53.5% Cost of Goods (Widgets) % Other COGS Exp (distribution, etc.) % Implied merchandise margin 51.7% Imported Goods % Domestically Produced Goods % Imported Goods % Domestically Produced Goods % GP/GM % SG&A % EBIT % GP/GM % SG&A % EBIT % Sales $ 1,045.5 Less Other COGS Less Domestic Goods Less SG&A Less Cap Ex 46.7 Sales $ 1,005.3 Less Other COGS Less Domestic Goods Less SG&A Less Cap Ex 46.7 Taxable Income Taxable Income % Tax on Taxable Income % Tax on Taxable Income 44.9 EBIT from Domestic Operations $ % EBIT from International Ops $ 7.8 5% EBIT from Domestic Operations $ % EBIT from International Ops $ 5.8 5% EBIT Less Interest, Net 0.3 Less Tax Expense (85.0) EBIT Less Interest, Net 0.3 Less Tax Expense (44.9) Net Income change $ Net Income change $ (0.20) Implied Reduction vs. Today 0.4% Implied Reduction vs. Today (0.3%) Revenue increases needed to offset tax change 4.0% Domestic mix needed to offset tax change 68.0% December 6,