BSIC - Equity Research Corporate Finance Team December 2014 www.bsic.it Geox breathes again The new business plan is back on track Geox is an Italian footwear and apparel company that focuses on the medium to high price category. Founded in 1991, it soon differentiated itself as an innovator in this industry. Its breathable shoe patent ensured its initial success that was developed by appealing designs, reasonable prices and geographical diversification. Through a wide array of stores and franchises across the globe, Geox ensures solid market positioning. At the end of Q3 2014, it owned 1,248 stores, of which 781 were managed as franchises and 467 were directly operated (DOS). After a period of turmoil, Geox management proposed an ambitious three-year Business plan in November 2013. The main idea is to restructure operations, firstly focusing on efficiency and organisation (2013-2014) and then on solid and profitable growth (2014 2016), lifting sales up to EUR 1bn by 2016 and EBIT to 7% of sales. As of Q3 2014, Geox performance is in line with the business plan, yielding a net sales increase of 8.1% compared to Q3 2013, and positive EBIT of EUR 15.6m and NI of EUR 4.5m. Margins remained steady compared to Q3 2013, with COGS improving from 53.7% of sales in Q3 2013 to 52.6% in Q3 2014 and G&A increasing by 1% of sales mainly because of the restructuring costs of stores. Although the Business plan is ambitious, especially in light of Geox performance in 2013, management has hit its targets for Q3 2014. Going forward, we believe that the plan will be fulfilled, with sales reaching EUR 1bn by 2016 and without weakening of efficiency. We have run a DCF model relying on the Business plan for the 2014-2016 period, including detailed estimates and forecasted results for the extrapolation period up to 2023, assuming that at the end of the forecast period Geox achieves constant growth of 2%. We reached a valuation of EUR 3.12 per share. Market multiples suggest a wide range of values reflecting the restructuring period in the firm operations. Still, triangulation with EV/EBITDA gives support to our analysis. Even though management has been consistent in achieving the projections in the Business plan, and we expect it to reach the EUR 1bn by the end of 2016, the upside is small and deviations from both growth forecasts and operational efficiency create a range of values that limit upside potential. We restate the educational purpose of this work. Company: Geox Ticker: GEO.MI Current stock price: 2.55 Target stock price: 3.12 Source: Yahoo Finance, BSIC Stock Data # Shares (m) 259.2 Free Float 28.9% Main Shareholder LIR S.r.l. (71.1%) Average daily trading volume (LTY) (m) 0.439 Source: Company data, BSIC Key Financials ( m) 13A 14E 15E 16E Revenues 754 822 908 1,016 EBITDA 11 61 77 91 EBIT -35 20 34 47 Net Income -30 13 21 30 EPS n.m. 0.05 0.08 0.12 Free Cash Flow -38 12 23 14 Capex 39 45 42 42 Net Debt 20 68 60 65 Equity 355 312 322 337 Source: Company data, BSIC To contact the authors of this analysis, please write to: as.investmentclub@unibocconi.it
BUSINESS DESCRIPTION...3 COMPANY ANALYSIS...4 VALUATION...6 Absolute Valuation - DCF... 6 Relative Valuation - Market Multiples... 6 APPENDIX - FORECASTED FINANCIALS...7 Income Statement... 7 Balance Sheet... 8 Statement of Cash Flows... 9 DISCLAIMER... 10 2
BUSINESS DESCRIPTION Geox is an Italian footwear and apparel company that focuses on the medium to high price category. Founded in 1991, it soon differentiated itself as an innovator in this industry. Its breathable shoe patent ensured its initial success that was developed by appealing designs, reasonable prices and geographical diversification. Even though it focuses mainly on the footwear industry, Geox is also doing business in apparel and sells its products through three main channels: DOS, franchise and wholesale. Incorporating the idea of breathable clothes has helped Geox increase net sales by EUR 98.05m, which currently stand at 12% of total sales. Considering the Strategic Plan 2014 2016, the growth of apparel is constant vis-à-vis the growth of footwear, which implies that management has no intention to change its business focus. Production is mainly shifted to the Far East under the strict supervision of Geox. To improve its efficiency, particular focus is given to their production and supply chain. Even though it plans to rationalize its number of stores in the coming years, Geox is currently building another factory in Republic of Serbia that plans to employ additional 1,250 workers. This explains further growth projections implicit in the business plan described in the following section. R&D of the firm is its main competitive advantage with respect to competitors. Among their most recent innovations, the "Amphibiox" a waterproof breathable shoe stands out as a major sales point. This enables the company to penetrate geographical areas with volatile weather conditions, particularly the Scandinavian region. Geox is also working on the production of technical footwear for Formula One drivers that could additionally bolster brand awareness and serve as a strong advertising opportunity. Sales by product line - Q3 2014 12% 88% Footware Apparel Sales by channel - Q3 2014 19% 43% 38% Franchising DOS Wholesale Stores by geography - Q3 2014 33% 36% 3% 28% Italy Europe North America Other Countries STRENGTHS WEAKNESSES Breathable technology Brand recognition Family Brand Vast range of footwear products R&D expertise Unsatisfactory 2013 results Inefficient stores High concentration on Italian market Dividend policy draining cash OPPORTUNITIES THREATS International expansion Improvements in product and supply chain Innovation US market penetration Low demand for apparel business Inadequate implementation of the restructuring plan Exchange rate risk impacting sales Source: BSIC 3
COMPANY ANALYSIS The below financial data shows the overall dire situation that Geox was before the Business plan was implemented, and continues to influence performance amidst restructuring. (Amounts in EUR million where no differently stated) 2009 2010 2011 2012 2013 9m 2014 PROFITABILITY Revenue 865.0 850.0 887.0 808.0 754.0 668.4 EBIT 117.0 93.0 82.0 20.0-35.0 15.6 EBIT margin 13.5% 10.9% 9.2% 2.5% n.m. 2.3% Net Income 67.0 58.0 50.0 10.0-30.0 4.5 Diluted normalised EPS (EUR) 0.30 0.22 0.19 0.10-0.07 n.m. CASH FLOW Cash from operations 160.0 89.0 50.0 67.0-22.0-52.0 Cash from investing -42.0-32.0-36.0-48.0-40.0-20.0 Cash from financing -82.0-53.0-46.0-41.0 46.0 50.0 Net Change in Cash 39.0 6.7-29.0-21.0-17.0-22.1 BALANCE SHEET (SELECTED ITEMS) Cash and short term investments 112.0 118.0 85.0 57.0 47.0 49.0 Inventory 152.0 172.0 197.0 209.0 282.0 242.0 Inventory as a % of revenue 17.6% 20.2% 22.2% 25.9% 37.4% 36.2% Inventory as a % of assets 25.0% 27.6% 30.4% 32.3% 42.5% 34.8% Notes payable/short-term debt 0.0 0.0 7.8 7.3 67.0 99.0 Retained earnings 403.0 400.0 384.0 339.0 291.0 353.0 Profitability has fallen significantly since 2009 mainly because of both slumping sales and operating inefficiencies. This has caused Geox to lose cash quickly and dangerously since 2010, which is also reflected in Retained Earnings figures. Another troubling indicator is inventory as a percentage of assets, which grew from 25% in 2009 up to almost 43% in 2013. To tackle this dire position, Geox management has outlined a two-year business plan from 2014-2016 that intends to: Focus on the core business and product innovation; Reduce costs by simplifying the business and reducing complexity; Restructure monobrand store network based on profitability and performance criteria; Capitalize on growth opportunities in the countries of Northern and Eastern Europe, and Asia through commercial exposure; Improve gross profit. The plan has specific targets for each year in terms of stores, channels and performance that we benchmark below. 2013 2014 2016 MANAGEMENT ACTUAL MANAGEMENT FORECAST MANAGEMENT FORECAST Sales (EUR m) 755 754 805 821 1,000 1,015 EBITDA 3.0% 1.4% 5.0% 7.4% 11.0% 8.9% EBIT -2.0% -4.6% Break Even 2.4% 7.0% 4.6% 4
Looking at the performance of 2013 and the first three quarters of 2014, we see that management is on track to achieve its plan. This is also reflected in the overall DOS, Franchise and Wholesale dynamics outlined in its plan. Looking into the 2015 and 2016, we base our revenue forecasts on management s plan for channel dynamics, and use realistic assumptions for operating performance as shown in the valuation chapter. The most troubling aspect of the business is that, considering the hardships Geox went through and the current turnaround, it pays a hefty dividend (2009-2011 almost 100% of Net income, 2012-2013 paying a dividend despite a loss or low income) that drains cash. Moreover, it looks as if it is being financed through debt (EUR 61m loan in 2013, and EUR 70m in 2014), something that has not happened before. 5
VALUATION Absolute Valuation - DCF According to the forecasts (detailed in the Appendix), we yield a target price of EUR 3.12. This result is achieved by discounting cash flows at a WACC of 8.2%, which is mainly driven by the cost of equity given the low leverage of the sector (88% equity and 12% debt). In particular, we computed the cost of equity through the CAPM with the following inputs: 10y Italian government bond as risk free security with a return of 2.1%; Market Risk Premium of 7.85%; Beta of 0.55 in line with Geox peers; Small Cap Premium of 2.5%. Besides that, in order to measure inputs sensitivities, we performed a scenario analysis. Source: BSIC WACC Perpetual growth rate 1.0% 1.5% 2.0% 2.5% 3.0% 7.2% 3.27 3.60 3.88 4.21 4.62 7.7% 3.05 3.24 3.46 3.73 4.05 8.2% 2.78 2.94 3.12 3.33 3.58 8.7% 2.55 2.68 2.83 3.00 3.20 9.2% 2.34 2.45 2.58 2.72 2.88 Relative Valuation - Market Multiples Market multiples valuation shows a high degree of variability (standard deviation of 1.29), mainly because of the distressed situation of Geox, which is under restructuring. However, the 2014 EV/EBITDA multiple confirms our price estimation based on our DCF model. (As of 26/11/14) Market Cap (EUR m) P/E EV/Sales EV/EBITDA EV/EBIT 2014 2015 2014 2015 2014 2015 2014 2015 Puma 3,511 36.4x 26.2x 0.9x 0.8x 13.1x 10.8x 18.9x 14.5x Deckers 2,120 21.7x 20.2x 1.8x 11.9x 14.0x Skechers 1,215 22.3x 17.3x 1.3x 1.1x 11.2x 9.3x 14.1x 11.5x Crocs 1,408 29.0x 23.6x 0.8x 0.8x 9.0x 7.6x 17.5x 12.4x Bata 794 37.0x 3.3x 21.2x 26.1x AVERAGE 29.3x 21.8x 1.6x 1.1x 13.6x 9.9x 19.1x 13.1x Geox 1.45 1.75 4.88 3.94 3.12 2.84 1.38 1.62 Source: BSIC 6
APPENDIX - FORECASTED FINANCIALS Income Statement ( thousands) 2012 2013 2014e 2015e 2016e 2023e CAGR (2013 2016) CAGR (2017 2023) Net sales 807,615 754,191 821,868 908,400 1,015,482 1,417,865 11.2% 4.9% Gross Profit 388,093 351,490 392,026 437,844 491,995 688,365 12.0% 4.9% Margin % 48.1% 46.6% 47.7% 48.2% 48.4% 48.5% EBITDA 61,557 10,685 60,761 76,697 90,815 160,794 14.3% 6.8% Margin % 7.6% 1.4% 7.4% 8.4% 8.9% 11.3% EBIT (operating profit) 19,965 (34,633) 19,761 33,697 46,815 118,852 53.9% 12.8% Margin % 2.5% (4.6%) 2.4% 3.7% 4.6% 8.4% Profit before taxes 17,714 (38,479) 18,759 30,294 43,822 119,385 52.8% 13.9% Margin % 2.2% (5.1%) 2.3% 3.3% 4.3% 8.4% Net income 10,039 (29,749) 12,869 20,782 30,062 81,898 52.8% 13.9% Margin % 1.2% (3.9%) 1.6% 2.3% 3.0% 5.8% EPS 0.04 n.m. 0.05 0.08 0.12 0.32 7
Balance Sheet ( thousands) 2012 2013 2014e 2015e 2016e 2023e Accounts receivables 181,797 135,126 146,110 161,493 180,530 252,065 Inventories 209,249 281,907 275,925 274,988 296,705 408,445 Accounts payables (162,606) (169,098) (175,106) (186,702) (205,288) (283,341) Net working capital 228,440 247,935 246,929 249,779 271,947 377,168 NWC as % of Net Sales 28.3% 32.9% 30.0% 27.5% 26.8% Intangible assets and PP&E 135,917 129,314 133,314 132,314 130,314 124,546 Invested capital 364,357 377,249 380,243 382,093 402,261 501,714 Financial assets 3,717 2,630 3,326 3,677 4,110 5,739 Other assets 52,001 67,285 67,285 67,285 67,285 67,285 Other liabilities (73,608) (71,695) (71,695) (71,695) (71,695) (71,695) Total funds invested 346,466 375,469 379,159 381,360 401,961 503,043 Share capital, premium & other 25,921 25,921 25,921 25,921 25,921 25,921 Reserves 376,915 329,508 285,177 295,568 310,599 521,393 Minority interests 0 0 0 0 0 0 Total equity 402,836 355,429 311,098 321,489 336,520 547,314 Short term financial debt 7,336 66,969 65,548 65,325 70,484 97,029 Long term financial debt 161 62 20,112 20,112 20,112 20,112 Cash and equivalents (63,867) (46,991) (17,599) (25,567) (25,155) (161,411) Net financial position (56,370) 20,040 68,061 59,870 65,441 (44,271) Total funds invested 346,466 375,469 379,159 381,360 401,961 503,043 8
Statement of Cash Flows ( million) 2013 2014e 2015e 2016e 2023e EBIT (operating profit) (34,633) 19,761 33,697 46,815 118,852 - Operating taxes (estimated) 9,524 (5,434) (9,267) (12,874) (32,684) = NOPLAT (25,109) 14,327 24,430 33,941 86,168 + Depreciation and amortisation 45,318 41,000 43,000 44,000 41,942 = Gross cash flow 20,209 55,327 67,430 77,941 128,110 +/- Change in accounts receivables 46,671 (10,984) (15,383) (19,037) (4,942) +/- Change in inventories (72,658) 5,982 937 (21,717) (7,294) +/- Change in accounts payables 6,492 6,008 11,596 18,585 5,077 - Net capital expenditures (38,715) (45,000) (42,000) (42,000) (42,000) = Free cash flow operating (FCFO) (38,001) 11,333 22,580 13,773 78,950 +/- Change in other assets (liabilities) (17,198) 0 0 0 0 - Financial expenses (3,846) (1,002) (3,403) (2,994) 533 + Other financial items 0 0 0 0 0 +/- Change in financial assets 1,087 (696) (350) (433) (113) - Non operating taxes (794) (456) (246) (886) (4,802) +/- Financial debt raised / (repaid) 59,534 18,628 (223) 5,159 1,733 +/- Equity raised / (bought back) (2,106) (50,765) 0 0 0 - Dividends paid (15,552) (6,434) (10,391) (15,031) (40,949) - Minorities interests 0 0 0 0 0 = Change in cash (16,876) (29,392) 7,968 (412) 35,352 Cash & equivalents (BoP) 63,867 46,991 17,599 25,567 126,060 Change in cash (16,876) (29,392) 7,968 (412) 35,352 Cash & equivalents (EoP) 46,991 17,599 25,567 25,155 161,411 9
DISCLAIMER All the views expressed are opinions of Bocconi Students Investment Club members and can in no way be associated with Bocconi University. All the financial recommendations offered are for educational purposes only. Bocconi Students Investment Club declines any responsibility for eventual losses you may incur implementing all or part of the ideas contained in this website. The Bocconi Students Investment Club is not authorised to give investment advice. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by Bocconi Students Investment Club and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. Bocconi Students Investment Club does not receive compensation and has no business relationship with any mentioned company. Copyright Dec-14 BSIC Bocconi Students Investment Club 10