Teuer furniture

©2014 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Mitchell A. Petersen with the research assistance of Varun Bhatnagar, Beverly Clingan, Tiffany Li, Kara Moore, and Tanisha Patni. Teuer Furniture is a fictional company whose profile was created based on data from real industry leaders. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise— without the permission of Kellogg Case Publishing.

MITCHELL A. PETERSEN KEL788

Teuer Furniture (B): Multiples Valuation

Teuer Furniture had regained its financial footing by the end of 2012. A number of long-term investors, including several of Teuer’s original non-management investors, now want to sell their shares. Jennifer Jerabek, the chief financial officer of Teuer, and her team put together an extensive valuation of the company based on a discounted cash flow (DCF) analysis. One criticism of the DCF valuation is that the resulting stock value depends upon the assumptions of the model. There are often dozens or hundreds of assumptions that go into a sophisticated DCF valuation model. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high and others considered the value too low. Jerabek was instructed to produce a valuation that did not depend upon assumptions about future growth, profitability, and capital investment needs or the discretion of the finance team. She was asked to value Teuer using a multiples approach.

Multiples Approach to Valuation

Multiples valuation is relatively straightforward as compared to a sophisticated DCF analysis. To value a firm or division using a multiples approach, one needs only two inputs: a set of comparable firms and a set of valuation metrics. For each comparable firm and valuation metric, the team calculates the ratio of the comparable firm’s market value to the valuation metric.1 Unlike DCF, for which Jerabek’s team was required to make a large number of assumptions, a multiples approach requires the team to make only one assumption—that the valuation ratio for the comparable firm(s) (which can be observed) is the same as the valuation ratio for Teuer Furniture (which cannot be observed).

A large number of possible valuation metrics can be derived from the income statement, balance sheet, and cash flow statement of a company. Valuation metrics can also be taken from

1 The numerator of the ratio (the value of the firm) is sometimes measured as the equity value and sometimes as the enterprise or asset value. The enterprise or asset value is the value of debt plus equity.

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This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

TEUER FURNITURE (B) KEL788

2 KELLOGG SCHOOL OF MANAGEMENT

non-financial sources.2 Even if the team focused only on profits, it could use net income, pre-tax profits, earnings before interest and taxes (EBIT), earnings before interest, taxes, amortization, and depreciation (EBITDA), or gross profit (revenue minus costs of goods sold). To limit the scope of the analysis, Jerabek decided to start with three valuation metrics: sales revenue, net income, and cash flow from assets (CFA).

Comparable Firm Selection

The next challenge Jerabek faced was finding a set of comparable firms. To help with the selection and data collection, she turned to one of her contacts at a boutique investment bank, Primus River Capital. Its mergers and acquisitions group provided a list of publicly traded firms whose primary industry classification was home furnishings or home furnishings retail.3 A number of firms classified as home furnishings were excluded because their product mix was very different from Teuer’s.4 This resulted in a list of nine firms. The income statements and balance sheets of the nine firms are contained in Exhibit 1, along with additional financial market data. The available data for Teuer Furniture is presented in the same format in Exhibit 2.

Although the nine firms provided by Teuer’s banker all have a presence in the home furnishings industry, they differ across a number of potentially important dimensions. A description of each firm’s business is contained in Exhibit 3. Some of the firms manufacture furniture, while others do not. Some have international operations—either sales or manufacturing—while others do not. Some of the firms have product lines that are more limited than Teuer’s, while others have product lines that are much broader.

Valuation of Teuer Furniture

With the data in hand, Jerabek needed to select from the nine candidates a set of firms that are comparable to Teuer Furniture, as well as select a valuation ratio. But on what dimensions should she compare the firms?

2 Within some industries, specific non-financial metrics are used. In the natural extraction industry, for example, proven or probable reserves are used as a valuation metric. In the social media industry, the number of visits to a webpage or the number of downloads of an app can be used. In the cable or newspaper industries, the number of subscribers can be used as a valuation metric. 3 Companies in the home furnishings retail industry sell household furniture, kitchenware, bathware, linens, and other consumer products for the home. These products are typically sold through specialty store chains, outlet stores, catalogs, and e-commerce websites. Companies that sell floor coverings (carpets and rugs) and window treatments (curtains and draperies) through retail channels are also included in this industry. 4 Some of the excluded firms include Bed Bath & Beyond (bed linens, basic housewares, and consumables), Flooring America (carpet, ceramic tile, hardwood, and vinyl floor coverings), Kirklands (framed art, wall décor, lamps, and decorative accessories), and Mattress Firm Holdings Corp. (mattresses and related products). Rent-A-Center Inc. was also excluded, as its business model and target consumer is distinct from Teuer’s (leasing household durable goods on a rent-to-own basis).

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This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

KEL788 TEUER FURNITURE (B)

KELLOGG SCHOOL OF MANAGEMENT 3

Exhibit 1: Comparable Firms’ Financials

PANEL A: BASSETT FURNITURE INDUSTRIES INC. (BSET)

INCOME STATEMENT 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Revenue 269.7 253.2 235.3 232.7

Cost of goods sold 128.4 125.6 122.6 129.9 Selling, general, and administrative 134.8 122.0 110.8 103.8 Depreciation 0.0 0.0 0.0 0.0 R&D 0.0 0.0 0.0 0.0 Other expenses (income) -5.2 -54.8 4.9 21.6 Interest expenses (net) -0.2 0.6 -0.8 2.0

Income before taxes 12.0 59.7 -2.2 -24.5 Taxes -14.7 4.4 -0.2 -1.8 Net income 26.7 55.3 -2.0 -22.7

Adjusted income (all equity firm) Earnings before interest and taxes 11.7 60.3 -3.0 -22.5 Adjusted taxes (all equity firm) -14.4 4.4 -0.3 -1.7

Net income (all equity firm) 26.1 55.9 -2.7 -20.9 BALANCE SHEET 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Assets

Cash and equivalents 45.6 69.6 11.1 23.2 Accounts receivable 15.8 14.8 31.6 34.6 Inventory 57.9 45.1 41.8 33.4 Other current assets 13.3 10.7 7.0 13.3

Total current assets 132.5 140.2 91.5 104.5 Property, plant, and equipment 56.6 49.9 46.3 50.6 Goodwill and other intangibles 0.0 0.0 15.1 14.9 Other long-term assets 38.0 33.0 44.5 46.1

Total long-term assets 94.7 83.0 105.8 111.7 Total assets 227.2 223.2 197.3 216.2

Liabilities Accounts payable 22.4 18.8 24.9 14.7 Accrued expenses 17.4 17.7 17.4 17.2 Notes payable 0.0 0.0 0.0 0.0 Current maturities of long-term debt 0.0 0.0 9.5 4.4 Other current liabilities 12.8 15.3 10.1 7.0

Total current liabilities 52.6 51.8 61.8 43.3 Long-term debt and capital leases 3.1 3.7 4.3 32.0 Other liabilities 14.3 15.3 24.9 30.7 Common equity 157.3 152.4 106.3 110.3

Total liabilities and shareholder’s equity 227.2 223.2 197.3 216.2 FINANCIAL DATA Cash flow from assets -2.2 Stock price 14.2 Common shares outstanding 10.9 Market value of equity 154.7 Enterprise value 112.2 Asset price/Cash flow assets NMF Asset price/Adjusted net income 4.3x Asset price/Sales 0.4x Equity price/Net income 5.8x

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This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

TEUER FURNITURE (B) KEL788

4 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 1 (continued)

PANEL B: ETHAN ALLEN INTERIORS INC. (ETH)

INCOME STATEMENT 6/30/2012 6/30/2011 6/30/2010 6/30/2009 Revenue 729.4 679.0 590.1 674.3

Cost of goods sold 339.1 329.5 309.8 326.9 Selling, general, and administrative 322.0 296.7 262.6 394.5 Depreciation 18.6 20.8 29.4 25.6 R&D 0.0 0.0 0.0 0.0 Other expenses (income) 0.0 0.0 0.0 0.0 Interest expenses (net) 8.5 5.6 7.1 8.4

Income before taxes 41.2 26.4 -18.8 -81.2 Taxes -8.5 -2.9 25.5 -28.5 Net income 49.7 29.3 -44.3 -52.7

Adjusted income (all equity firm) Earnings before interest and taxes 49.7 31.9 -11.7 -72.8 Adjusted taxes (all equity firm) -10.2 -3.5 15.9 -25.5

Net income (all equity firm) 59.9 35.4 -27.7 -47.2 BALANCE SHEET 6/30/2012 6/30/2011 6/30/2010 6/30/2009 Assets

Cash and equivalents 88.7 91.4 84.9 53.0 Accounts receivable 14.9 15.0 17.1 13.1 Inventory 155.7 141.7 134.0 156.5 Other current assets 23.4 20.4 23.6 29.2

Total current assets 282.8 268.5 259.7 251.7 Property, plant, and equipment 295.7 294.9 305.7 333.6 Goodwill and other intangibles 45.1 45.1 45.1 45.1 Other long-term assets 21.2 19.8 21.2 16.1

Total long-term assets 362.0 359.8 372.1 394.8 Total assets 644.8 628.3 631.8 646.5

Liabilities Accounts payable 27.3 27.0 24.0 22.2 Accrued expenses 58.0 65.0 65.3 58.5 Notes payable 0.0 0.0 0.0 0.0 Current maturities of long-term debt 0.3 0.0 3.9 0.0 Other current liabilities 65.5 62.6 52.6 31.7

Total current liabilities 151.1 154.6 145.7 112.5 Long-term debt and capital leases 154.3 165.0 199.4 203.1 Other liabilities 17.8 27.0 28.2 25.0 Common equity 321.7 281.7 258.5 305.9

Total liabilities and shareholder’s equity 644.8 628.3 631.7 646.5 FINANCIAL DATA Cash flow from assets 27.7 Stock price 19.9 Common shares outstanding 28.8 Market value of equity 573.1 Enterprise value 638.9 Asset price/Cash flow assets 23.0x Asset price/Adjusted net income 10.7x Asset price/Sales 0.9x Equity price/Net income 11.5x

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This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

KEL788 TEUER FURNITURE (B)

KELLOGG SCHOOL OF MANAGEMENT 5

Exhibit 1 (continued)

PANEL C: FURNITURE BRANDS INTERNATIONAL INC. (FBN)

INCOME STATEMENT 12/29/2012 12/31/2011 12/31/2010 12/31/2009 Revenue 1,072.3 1,107.7 1,159.9 1,224.4

Cost of goods sold 827.3 837.1 879.2 986.2 Selling, general, and administrative 252.8 270.9 285.2 322.8 Depreciation 18.9 21.9 23.9 20.7 R&D 0.0 0.0 0.0 0.0 Other expenses (income) 16.6 20.8 16.5 65.8 Interest expenses (net) 5.7 3.6 3.2 5.3

Income before taxes -49.0 -46.6 -47.9 -176.5 Taxes -1.8 -2.8 -8.9 -67.8 Net income -47.3 -43.8 -39.0 -108.7

Adjusted income (all equity firm) Earnings before interest and taxes -43.4 -43.0 -44.8 -171.1 Adjusted taxes (all equity firm) -1.6 -2.6 -8.3 -65.7

Net income (all equity firm) -41.8 -40.4 -36.4 -105.4 BALANCE SHEET 12/29/2012 12/31/2011 12/31/2010 12/31/2009 Assets

Cash and equivalents 11.9 25.4 52.0 83.9 Accounts receivable 125.7 108.0 114.5 184.5 Inventory 244.3 228.2 249.7 226.1 Other current assets 11.3 9.5 11.2 9.3

Total current assets 393.2 371.0 427.4 503.7 Property, plant, and equipment 103.4 115.8 124.9 134.4 Goodwill and other intangibles 76.1 77.5 86.5 87.6 Other long-term assets 45.7 50.2 37.6 32.4

Total long-term assets 225.2 243.5 249.0 254.4 Total assets 618.4 614.5 676.4 758.1

Liabilities Accounts payable 113.6 85.6 79.9 83.8 Accrued expenses 58.7 53.6 61.2 75.9 Notes payable 0.0 0.0 0.0 0.0 Current maturities of long-term debt 0.0 0.0 0.0 17.0 Other current liabilities 0.0 0.0 0.0 0.0

Total current liabilities 172.3 139.2 141.1 176.8 Long-term debt and capital leases 105.0 77.0 77.0 78.0 Other liabilities 286.3 266.1 198.8 240.6 Common equity 54.8 132.3 259.6 262.8

Total liabilities and shareholder’s equity 618.4 614.5 676.4 758.1 FINANCIAL DATA Cash flow from assets -5.8 Stock price 7.4 Common shares outstanding 8.0 Market value of equity 59.7 Enterprise value 152.8 Asset price/Cash flow assets NMF Asset price/Adjusted net income NMF Asset price/Sales 0.1x Equity price/Net income NMF

For the exclusive use of J. Claudio, 2019.

This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

TEUER FURNITURE (B) KEL788

6 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 1 (continued)

PANEL D: HAVERTY FURNITURE COMPANIES INC. (HVT)

INCOME STATEMENT 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Revenue 670.4 621.4 620.3 588.3

Cost of goods sold 318.0 300.2 301.6 282.8 Selling, general, and administrative 309.6 297.8 295.4 292.2 Depreciation 19.4 18.2 16.9 19.3 R&D 0.0 0.0 0.0 0.0 Other expenses (income) -0.8 -0.2 -3.0 -1.4 Interest expenses (net) 0.6 0.7 0.8 0.8

Income before taxes 23.5 4.6 8.7 -5.4 Taxes 8.6 -10.9 0.2 -1.2 Net income 14.9 15.5 8.4 -4.2

Adjusted income (all equity firm) Earnings before interest and taxes 24.1 5.3 9.5 -4.6 Adjusted taxes (all equity firm) 8.8 -12.6 0.3 -1.0

Net income (all equity firm) 15.3 17.9 9.2 -3.6 BALANCE SHEET 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Assets

Cash and equivalents 53.6 49.6 58.1 44.5 Accounts receivable 9.7 11.5 13.8 15.3 Inventory 96.9 93.7 91.9 93.3 Other current assets 19.7 22.9 13.2 15.2

Total current assets 179.9 177.7 176.9 168.3 Property, plant, and equipment 193.1 179.3 175.5 176.4 Goodwill and other intangibles 0.0 0.0 0.0 0.0 Other long-term assets 29.1 28.1 17.7 16.2

Total long-term assets 222.2 207.4 193.2 192.6 Total assets 402.1 385.1 370.2 360.9

Liabilities Accounts payable 28.2 21.2 18.1 19.1 Accrued expenses 11.8 11.0 31.4 30.2 Notes payable 0.0 0.0 0.0 0.0 Current maturities of long-term debt 0.9 0.8 0.5 0.4 Other current liabilities 49.0 39.4 20.6 21.8

Total current liabilities 89.9 72.4 70.6 71.4 Long-term debt and capital leases 18.5 12.3 8.6 6.8 Other liabilities 34.3 37.8 37.9 38.1 Common equity 259.4 262.7 253.2 244.6

Total liabilities and shareholder’s equity 402.1 385.1 370.2 360.9 FINANCIAL DATA Cash flow from assets 16.2 Stock price 16.3 Common shares outstanding 22.3 Market value of equity 362.9 Enterprise value 328.7 Asset price/Cash flow assets 20.3x Asset price/Adjusted net income 21.5x Asset price/Sales 0.5x Equity price/Net income 24.3x

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This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

KEL788 TEUER FURNITURE (B)

KELLOGG SCHOOL OF MANAGEMENT 7

Exhibit 1 (continued)

PANEL E: LA-Z-BOY INCORPORATED (LZB)

INCOME STATEMENT 4/28/2012 4/30/2011 4/24/2010 4/25/2009 Revenue 1,231.7 1,187.1 1,179.2 1,226.7

Cost of goods sold 851.8 832.8 804.5 887.9 Selling, general, and administrative 306.7 299.7 307.5 408.7 Depreciation 23.5 24.3 25.2 24.1 R&D 0.0 0.0 0.0 0.0 Other expenses (income) -18.6 2.1 -5.8 -2.6 Interest expenses (net) 1.4 2.3 3.0 5.6

Income before taxes 66.9 26.0 44.7 -97.0 Taxes -22.0 8.6 12.7 24.3 Net income 88.9 17.4 32.1 -121.3

Adjusted income (all equity firm) Earnings before interest and taxes 68.2 28.3 47.7 -91.4 Adjusted taxes (all equity firm) -22.5 9.4 13.5 22.9

Net income (all equity firm) 90.7 18.9 34.2 -114.4 BALANCE SHEET 4/28/2012 4/30/2011 4/24/2010 4/25/2009 Assets

Cash and equivalents 152.4 115.3 108.4 36.1 Accounts receivable 167.2 161.3 165.0 147.9 Inventory 143.8 138.4 132.5 140.2 Other current assets 36.6 17.2 21.2 23.7

Total current assets 500.0 432.2 427.1 347.8 Property, plant, and equipment 114.4 120.6 138.9 150.2 Goodwill and other intangibles 3.0 3.1 3.1 3.1 Other long-term assets 68.3 37.5 38.8 51.4

Total long-term assets 185.7 161.2 180.7 204.8 Total assets 685.7 593.5 607.8 552.5

Liabilities Accounts payable 56.6 49.5 54.7 41.6 Accrued expenses 44.9 37.4 51.7 75.7 Notes payable 0.0 0.0 0.0 0.0 Current maturities of long-term debt 1.8 5.1 1.1 8.7 Other current liabilities 46.4 40.0 39.8 0.0

Total current liabilities 149.8 132.1 147.3 126.0 Long-term debt and capital leases 7.9 29.9 46.9 52.1 Other liabilities 86.1 70.1 73.7 68.6 Common equity 441.9 361.3 339.8 305.7

Total liabilities and shareholder’s equity 685.7 593.4 607.8 552.5 FINANCIAL DATA Cash flow from assets 72.5 Stock price 15.3 Common shares outstanding 52.2 Market value of equity 801.4 Enterprise value 658.8 Asset price/Cash flow assets 9.1x Asset price/Adjusted net income 7.3x Asset price/Sales 0.5x Equity price/Net income 9.0x

For the exclusive use of J. Claudio, 2019.

This document is authorized for use only by Jose Claudio in FIN 370 - Financial Statement Analysis - Spring 2019 taught by JACK TRIFTS, Bryant University from Jan 2019 to May 2019.

TEUER FURNITURE (B) KEL788

8 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 1 (continued)

PANEL F : RESTORATION HARDWARE HOLDINGS INC. (RH)

INCOME STATEMENT 2/2/2013 1/28/2012 1/29/2011 1/30/2010 Revenue 1,193.0 958.1 772.8 625.7

Cost of goods sold 756.6 601.7 499.0 423.1 Selling, general, and administrative 390.4 327.9 274.8 238.9 Depreciation 0.0 0.0 0.0 0.0 R&D 0.0 0.0 0.0 0.0 Other expenses (income) 115.1 1.6 2.1 -10.5 Interest expenses (net) 5.8 5.1 3.2 3.2

Income before taxes -74.8 21.7 -6.4 -29.0 Taxes -62.0 1.1 0.7 -0.4 Net income -12.8 20.6 -7.1 -28.6