Discount-Variety Stores IndustryModule 3- Market Multiple Valuation
Kate Johnson
“Save Time. Save Money.”
• Largest discount retailer in the US by number of stores
• Goodlettsville, Tennessee• 11,000 stores• 40 States• Southern, Southwestern,
Midwestern, Eastern US• Merchandise is typically $10
or less• Founded in 1939• Stock publicly traded in 2009
Product Types
• Two brands: 1)High quality national brands from leading manufacturers 2)Comparable quality private brand selections10,000 SKUS/store10$ or less
How are they profitable?• Convenient Locations• Time Saving Shopping Experience• Everyday Low Prices on Quality Merchandise• Key items in a broad range of general merchandise categories • Most basic shopping needs are met in one trip
Steps to Using MultiplesStep 1: Select relevant summary measures
Step 2: Identify comparable companies to use in determining the market multiple
Step 3: Compute the market multiple (ratio) from the comparable companies• Step 4: Compute the DG’s value using its performance measure and the
market multiple• Step 5: Performance measure is:
- enterprise performance measure subtract value owed to debt holders and divide by shares outstanding to get equity value per share
-equity measure divide• Focusing on enterprise values so that capital structure isn’t carefully
considered
Step 1 Select the summary performance measures to use as the basis for valuation
• EPAT• NEA• EPAT from Sales• Sales Per Square Foot• Why this selection?• One B/S multiple two I/S multiples, one
industry specific multiple (sales per square foot most often used in retail industry)
Step 2: Identify Comparable Companies
Note: Costco is removed for sensitivity analysis
Identify comparable companies to use in determining the market multiple
But DG is a Dollar Store?• Dollar General is more suited to be compared with Walmart, Target, and
Costco, as not everything is $1 (DLTR) and they have produce (unlike FDO)• Characteristics such as industry and size are often chosen for comparable
Select the comparable companies to use in determining the market multiple
Notes
• Market multiple valuation is a method not a model
• Different industries should use different measures
• Presumes target company not fairly valued• No correct answer to “how we produce the
multiple”
Step 3: Computing MultiplesCompute the market multiple from the comparable companies’ market values and performance measures
Estimating value: EPAT Multiple
Estimating value: NEA Multiple
Estimating value: EPAT from Sales Multiple
Profit Multiple
Sales per Square Foot Multiple
Focuses on sales not total revenue
Buy, Sell or Hold?
Buy, Sell, or Hold?
Valuation using EPAT multiple: Sell, SellValuation using NEA multiple: Sell, Sell
Valuation using EPAT from sales: Sell, SellValuation using sales per square foot: Buy, Hold
Dilemma: One suggests Dollar General is undervaluedSensitivity analysis suggests Dollar General is overvalued
Issues
• Different year ends for each company
• Sales per square foot doesn’t take into account online sales
• Sales per square foot calculations are based on total square foot of all stores and total sales- info may be skewed?
• Dollar General the outcast in many respects (especially size) (although is extremely competitive regarding gross margin)
Can we exclude Walmart?
Walmart is considered a leading competitor to DG!
Yet, Walmart has almost double the amount of sales per square foot!
Excluding Walmart
Removing Walmart suggests perhaps we should sell the stock, not buy!Decision: Exclude, overall we should sell the stock as it is overvalued.
Average of estimates decreases when Walmart is removed!
Evaluating Results
• Subjective measure that requires one to make assumptions and judgment
• No right judgment makes it difficult• No one measure is the right one to use• Market multiples popular due to simplicity • Place to start, “first-pass, parsimonious
indicator of value”