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Valuation of Discount Variety Stores Using the Residual Enterprise Income Model

This presentation by Kate Johnson explores the valuation of discount variety stores, specifically focusing on a major retailer in the U.S. with over 11,000 locations. It evaluates the company using the Residual Enterprise Income Valuation Model, providing a comparison with assumptions and forecasts from prior analyses. Key aspects include estimating discounted value, addressing uncertainties, and identifying how the store achieves profitability through convenient locations and low pricing. The analysis reveals the significance of accounting methods in estimating enterprise value.

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Valuation of Discount Variety Stores Using the Residual Enterprise Income Model

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Presentation Transcript

  1. Discount-Variety Stores Industry Module 7:Valuation Using the Residual Enterprise Income Valuation Model Kate Johnson

  2. Agenda for Presentation • Company Information and Comparable • Assumptions and forecasts from Module 5 • Estimate of DG Value using the Residual Enterprise Income Valuation Model • Comparison of values from: Residual Income Enterprise Model (7) Cost of Capital and Valuation (6) Forecasts of Cash Flows (5) • Uncertainties and Problems

  3. “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

  4. Product Types • Two brands: 1)High quality nationalbrands from leading manufacturers 2)Comparable quality privatebrand selections 10,000 SKUS/store 10$ or less

  5. 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

  6. Discount-Variety Stores **Costco is least comparable

  7. 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

  8. Store Growth • 2010-2011 Growth: 6.02% • 2011-2012 Growth: 5.72% DG is a February 2 year end

  9. Valuation Using the Residual Income Enterprise Model • Allows us to move away from cash-flow based valuation and introduce a method by which value may be estimated using anticipated accounting numbers • Accountant’s choice of method of depreciation does not affect the valuation of the project • (Should!) produce enterprise value equal to that calculated in cost of capital and valuation (M6) and CF (M5)

  10. Assumptions and Forecasts Parsimonious Forecasts from M4, with 2018 and 2019 added

  11. Note on WACC (M6)

  12. Residual Enterprise Income Model

  13. Re-Estimating the Value of Firm From Module 7:

  14. Stock Price BUY!

  15. Uncertainties • Many assumptions: WACC may be too low • Current enterprise value produces a value slightly higher ($15) than the current stock price • 2013 data not yet available due to fiscal year end of February 2, so 2013 values were calculated based on estimates • Already adds uncertainty regarding the accuracy of forecasts

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