Introduction:

Teuer Furniture is a privately owned premium furniture retail chain having showrooms in around 29

different states in the USA. Based on our analysis of Earnings, Cash flows and Profitability ratios like

ROA, we observe this company to be in a growth stage. Although the growth has been impacted

negatively during the financial crisis, Teuer seems to be back on growth path now. As the economy

and operating conditions appear to be stabilizing, some of the long term investors are looking to sell

their stake. In this case our main agenda is to determine the value of the firm using DCF and relative

valuation multiples.

Company strategy:

Teuer’s company strategy emphasizes on maintaining a high customer satisfaction with superior

quality of the furniture and exceptional service standards. Teuer mainly targets the high income

customer segment who buy the premium furniture. Unlike some of its competitors, Teuer doesn’t

maintain a large number of line of furniture models. But it ensures that its furniture showrooms have

large quantities of inventory having wide variety of sizes, styles and patterns. In addition, Teuer also

places high value on the sales associates they recruit. The track record of growth over the last

decade seems to imply the successful execution of this strategy by Teuer.

Business model:

The business model of Teuer looks very encouraging in terms of free cash flow generation. This is

mainly based on the high operating margin and low capital intensive nature of the business. As

Teuer’s customer segment is mainly higher income groups who are mainly focused on Teuer’s brand

and customer service, Teuer seems to be able to maintain premium pricing. This results in a high

operating margin for Teuer. We observe the business model of Teuer to be less capital intensive as

the company doesn’t undertake the manufacturing of the furniture. Teuer relies on a network of

domestic producers to get the furniture. In addition, all the showrooms of Teuer are leased rather than

owned. This would significantly reduce the need for capital to buy new showrooms. The balance

sheet of Teuer looks very strong with out any leverage, mainly driven by the robust cash flow
generating ability of Teuer.

Revenue model:

The revenue is generated by the sale of furniture across the stores. The revenue growth is mainly

driven by the sales generated by existing stores and new store openings. Typically it takes around 6

years for a store to attain its peak revenue. The revenue growth per each store will roughly stabilize

over the 6 years. The new store openings are mostly correlated with the prospects of the economy

(GDP growth). We observe most number of stores opening in the period before the financial crisis. As

the economy seems to recover now, Teuer may consider opening more new stores.

Forecasting methodology and assumptions:

Sales: Sales were forecasted at the company level by forecasting the sales growth rates of each

yearly cohort of showrooms by square foot and then taking these forecasts and multiplying them by

the furniture sales growth forecasts that were provided in Exhibit 2. This allowed us to growth the

aggregate company sales at a rate per square foot but by also taking into consideration the age of

each cohort of stores. We assume that its takes 6 years to reach the peak revenue for each store.

After 6 years, we assume the revenue growth to stabilize. The detailed estimates of sales forecasts

can be found in the table xxx in the appendix.

Assumptions related to the new store openings: We assume 2 new store openings per year over

next 3 years according to Teuer’s plans. We observe a positive correlation between the number of

new stores opening and previous year’s GDP growth. Based on this we assume new store openings

to be 2 in each of the years from FY16-18 in our base case scenario. The detailed summary of

assumptions related to new store openings in each scenario can be found in tables xxxx in appendix.

COGS, SG&A and Advertising costs: We estimated cost of goods sold, SG&A and advertising

costs as a percentage of sales. We used to historical trend to forecast the trend over initial 4 years for

each new store after opening. We assume the costs (COGS/SG&A/advertising) as a percentage of

sales to stabilize after 4 years. The detailed summary of our forecasts can be found in the tables

xxxxxx in the appendix.

Working capital assumptions: We observe the Accounts receivable, Inventory and Accounts

payable to be consistent over the past several years. We forecast Accounts receivable as a

percentage of sales of underlying operating year. Inventory and Accounts payable are forecasted

based on next year’s cost of goods sold. Accrued expenses are forecasted based on next year’s

SG&A and advertising costs. The detailed summary can be found in the tables xxx in the appendix.

Other assumptions: We assumed a straight line method of depreciation using an useful life of 5

years. The lease expense is assumed to increase by 2% y-o-y based on inflation and lease is

assumed to be renewed every 6 years. The lease rental is assumed to be increased by 7% after

renewal. Corporate expenses is assumed to be 5% of sales. The detailed summary related to this can

be found in the tables xxx in the appendix.

Free cash flow projections: We forecasted the free cash flow to the assets based on our forecasted

income statement and balance sheets. We determined the free cash flow to the assets by using the

formula (Net income-Capital expenditure+Depreciation-Net increase in working capital). The detailed

summary of projections can be found in the table xxx in the appendix.

Valuation using DCF: We used a discount rate of 12.1% and terminal growth rate of 3.5% to

determine the value of Teuer using DCF methodology. Based on the assumptions related to base

case scenario, we determine the value of the firm to be USDm253.975 equivalent to USD25.54 per

share.

Sensitivity analysis: We determined the sensitivity of our valuation with respect to the discounting

factor and long term growth rate. In our bull case scenario (using discount factor of 11.6% and

terminal growth rate of 4%), we determine the value to be USD28.42 per share. In our bear case

scenario (using a discount factor of 12.6% and terminal growth rate of 3%), we determine the value to

be USD23.25 per share. Detailed summary can be found in table xxx in the appendix.

Monte Carlo analysis: We determine the 90% confidence interval for the value to be USD24.997 to

USD26.213 per share using COE and terminal growth rate as parameters with 0.25% wide parameter

interval. Detailed table can be found in table xxx in the appendix.

Relative valuation multiples: We determined the valuation multiples for all the peers based on

sales, net income and cash flows at the end of 2012. The detailed table can be found in the table xxx

in the appendix.
Exhibiti
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