The Analysts for Teuer

Part A

The analysts for Teuer used the historical financial statements to arrive at the projected growth of various financial parameters of the company. For each parameter, the growth rates were calculated based on the age of the individual stores.

For revenues, they examined historic sales growth on a cohort basis and adjusted for growth in the total furniture sales, expecting that this would decrease each year as the store became known in the community. For each year, the formula used was: ((Current year/ previous year) / (1 + Average historical Furniture sales growth for the cohort age)) – 1. This continues for 6 years, until it hits the terminal value of 0.3% (for the 7th year) from which it grows perpetually. For costs (including CGS, SGA, and Leases), they used the cohort approach to find the average cost growth as a proportion of revenues. Similarly, they projected cost growth for the first 3 years until it hits the terminal value for CGS (39.7%), SGA (13.6%), and advertising (7.2%). The terminal value was then used perpetually. Finally, the projected values for all other costs (Accounts receivable, Inventory and Accounts payable) were calculated as a single proportion of CGS. The growth of each category was projected forward using the single proportion for each category. Accrued expenses were at a constant level of 4.8% of the total inventory and accounts payable.

Examples from the 2018 Pro Forma statements can be seen below:

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Part B

The Sales, Net Income, and Cash Flow multiples for a peer group can differ significantly based on company size, geography, capital structure, vertical integration and horizontal scope of operations.

Capital structure can have a large impact on multiples utilizing sales. Those with increased leverage would have a higher ROA as they do not have the large asset of real estate on their balance sheet. Teuer does not invest in real-estate for the operations but instead leases their storefronts. A company with similar operations (and sales) that does invest in real estate (for example Furniture international Inc.) would likely report a much larger asset figure and therefore have a much lower ROA that Teuer (4% vs 25%).