TEUER FURNITURE(A)

Discounted Cash Flow Valuation

 
FACULTY GUIDE:
Prof. (Dr.) KAMRAN QUDDUS 
INDIAN INSTITUTE OF MANAGEMENT, RANCHI

Submitted by: (Group No.-04)

Reg No.
NAME
(AIS ID)

X008-19 GAGANJEET SINGH GUJRAL

X010-19 JAY KISHAN SARAFF
X015-19 PRAVEEN KHATTRI
X021-19 SACHIN DEO KUMAR
X024-19 SYAM SREEDHAR
Index
 Case Introduction
 About Company’s Profile
 Challenge Ahead
 Methodology adopted (step by step)
 Firm’s Asset Valuation (By DCF Method)
 Summary
 Case Introduction
 The Case “TEUER FURNITURE(A):Discounted Cash Flow Valuation”
is written by Mr. Mitchell A. Petersen, Published by Northwestern
Kellogg School of Management, solely for Management/Finance class
room discussion purpose.

 It gives insights about how forecasts and the business valuation of a firm
are done in real life scenario.

 The case and its solution would be focussed on DCF method of

valuation.
 About Company’s Profile
 The Teuer Furniture was launched in 2003 by Kim Smithson and Scott
Casper to serve the demand for high-quality designer furniture for home
furnishing in USA.
 The firm opened its first showroom at the end of 2003 in Kansas City,
Missouri had grown to 29 showrooms within 12 years of its opening.
 Concentrated on second-tier cities
 Target market is high-end(upper-income) customers
 Showrooms were leased
 Majority of capital expenditure was on building interiors, hiring and
training sales associates
 Survived recession of 2008 and successfully growing
 The Teuer was growing by adopting a limited capital investment strategy
About Company’s Profile(Cont..)
 At the end of 2012, Teuer’s Inventory was about $33million, (48% of next
years estimated COGS)
 Inventory stock equal to about 6 month of its anticipated sales for the next
year.
 Strong believer of Organic Growth Strategy and opening of new
showrooms.
 Total sales in furniture industry grew at 5%/year from 2003 to 2006,
however Teuer had much higher than its industry record. Its sales grew from
$2 million in 2004 to $51 million by 2007.
 Given the industry’s performance, Teuer did surprisingly well during the
recession, however sales growth rate dropped and became quite
unpredictable; from 97% in 2007, 54% in 2008, 15% in 2009 to again 23%
in 2010.
 At the end of 2012, 187 nos. of shareholders associated with Teuer.
Challenge Ahead
(Valuation Challenge: Financial Forecasting)

 In 2012, after recession, Teuer was growing and on secure financial ground.
 A no. of Long-term investors asked to sell their shares.
 The firm had never repurchased shares from its investors.
 Key challenge was ‘limited capital in the firm’
 Teuer’s decision of whether to finance the investor buyout from cash
generated by the business could be obtained i.e. to Buy Back Shares
(Investment buyout) or Seeking new Equity Investors
 To begin the valuation process, Teuer’s CFOJennifer Jerabek and her
finance team were asked to assemble a set of forecasts upon which the
valuation and stock price would be based.
 Methodology Adopted
(Step by Step)

 Step-1: To forecast future Income starting with sales revenue.

 Two issue were observed in forecasting based on previous year’s data:
(a). The effect of showroom openings and maturation
(b). The effect of economy: the recession and subsequent (anemic)
recovery meant a simple projection of past showroom levels was not
meaningful.
 To overcome above tow issues, adjusted sales growth was calculated for each cohort
and year.
 Step-2: To forecast the initial sales of the three showrooms that had happened in
2012 and the six that were expected to open in the next three years.
 Step-3: To build the pro forma IS, BS and CF for Teuer
 Step-4: DCF valuation of the Teuer
 Forecasting Parameters:
(Abstract sheet from Calculations)

Exhibit 10: Forecasting Parameters

1 2 3 4 5 6 7
Sales growth 70.2% 33.5% 22.9% 9.7% 1.5% 0.3%
CGS (% sales) 70.9% 63.7% 56.2% 39.7% 39.7% 39.7% 39.7%

SGA (% sales, excluding dep & advertising) 19.3% 18.3% 17.3% 13.6% 13.6% 13.6% 13.6%
Advertising (% sales) 10.6% 8.9% 8.2% 7.2% 7.2% 7.2% 7.2%
Accounts Receivable (% sales) 32.4%
Inventory (% next year's CGS) 47.6%

Accounts Payable (% next year's CGS) 16.3%

Accrued expenses (next year's SGA adv) 4.8%

Depreciation (years) 5
Refresh cost 70.0%
Corporate tax rate 40.0%
Corporate expenses 5.0%
Discount rate 12.1%
Long-term growth rate 3.5%
Shares outstanding (K) 9,945

Asset Value 3,30,902

Share value 33.27
 Pro Forma IS Statement:
(Abstract sheet from Calculations)

Teuer Furniture Pro Forma Income Statement

2012 2013 2014 2015 2016 2017 2018 2019

Sales 1,48,218 1,65,024 1,81,929 1,99,600 2,17,540 2,31,499 2,42,308 2,51,122

CGS -61,955 -69,828 -76,969 -84,078 -90,505 -94,907 -97,645 -99,741

SGA (exc adv & dep) -21,253 -23,295 -25,689 -28,131 -30,415 -32,104 -33,266 -34,150

Advertising -10,744 -12,179 -13,399 -14,664 -15,904 -16,779 -17,442 -17,987

Depreciation -1,450 -1,084 -1,469 -2,143 -2,900 -2,853 -2,491 -2,095

Lease (stores) -9,320 -10,613 -11,575 -12,320 -13,092 -13,382 -13,678 -14,106

Corp Expense (inc lease/adv) -7,411 -8,251 -9,096 -9,980 -10,877 -11,575 -12,115 -12,556

Taxes -14,434 -15,909 -17,492 -19,314 -21,539 -23,960 -26,268 -28,195

Net income 21,651 23,864 26,239 28,970 32,308 35,940 39,403 42,292

Parameters:

Corporate tax rate 40%

Corporate expenses 5%
Summary:
Sales Growth 11.3% 10.2% 9.7% 9.0% 6.4% 4.7% 3.6%
 Teuer Furniture Pro Forma Balance Sheet
(Abstract sheet from Calculations)

Teuer Furniture Pro Forma Balance Sheet

2012 2013 2014 2015 2016 2017 2018
Assets
Accounts Receivable 48,200 53,529 59,012 64,745 70,564 75,092 78,598
Inventory 33,343 36,608 39,989 43,046 45,140 46,442 47,438
Total Current Assets 81,543 90,137 99,002 1,07,790 1,15,703 1,21,533 1,26,036
PPE 3,920 5,686 7,980 10,374 8,357 5,925 4,303
Total Assets 85,463 95,823 1,06,982 1,18,164 1,24,060 1,27,459 1,30,340

Liabilities and Equity

Accounts Payable 11,364 12,571 13,732 14,781 15,500 15,948 16,290
Accrued Expenses 1,682 1,876 2,054 2,223 2,346 2,434 2,503
Total Current Liabilities 13,046 14,447 15,786 17,005 17,847 18,382 18,792
Debt 0 0 0 0 0 0 0
Equity 72,417 81,376 91,196 1,01,159 1,06,213 1,09,077 1,11,547
Total Liabilities and Equity 85,463 95,823 1,06,982 1,18,164 1,24,060 1,27,459 1,30,340

Balance sheet check (A=L+E)

Current Asset-Current Liability 68,497 75,690 83,216 90,785 97,856 1,03,152 1,07,244
Increase in NWC 7,193 7,526 7,570 7,071 5,295 4,092
Teuer Furniture Pro Forma Cash Flow
(Abstract sheet from Calculations)

Teuer Furniture Pro Forma Cash Flow

Assets
2012 2013 2014 2015 2016 2017 2018
Sales 1,48,218 1,65,024 1,81,929 1,99,600 2,17,540 2,31,499 2,42,308
- Costs -1,12,132 -1,25,251 -1,38,198 -1,51,316 -1,63,693 -1,71,600 -1,76,637
- Taxes -14,434 -15,909 -17,492 -19,314 -21,539 -23,960 -26,268
Net income 21,651 23,864 26,239 28,970 32,308 35,940 39,403
- Capital expenditure -2,229 -2,850 -3,764 -4,537 -883 -421 -869
+ Depreciation 1,450 1,084 1,469 2,143 2,900 2,853 2,491
- Increase in NWC -8,365 -7,193 -7,526 -7,570 -7,071 -5,295 -4,092
Cash flow assets 12,508 14,905 16,418 19,007 27,254 33,076 36,933

Terminal value 24,821 26,385 25,927 26,775 34,249 37,078 36,933Cash flow discounted to yr 2018
PV 3,30,902 TV 4,44,480
Asset value 3,30,902 Sum of Terminal Value 6,56,648
Share value 33.27

Parameters:
Asset discount rate 12.1%
Long-term growth rate 3.5%

Shareholders (#) 187

Shares outstanding (K) 9,945

Growth Rates:
Sales 1,65,024 1,81,929 1,99,600 2,17,540 2,31,499 2,42,308
Net income 23,864 26,239 28,970 32,308 35,940 39,403
Cash flow from assets 14,905 16,418 19,007 27,254 33,076 36,933
Final Summary

Asset’s Present value- $3,30,902,000

Share value- $33.27

Subject to:
Asset Discount Rate- 12.1%
Long-term Growth Rate- 3.5%
Shareholders -187
Shareholders Outstanding -9945
Thanks