North Face

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Sally Chin Monique Harper Marmeline Petion Eric Yaker

Advanced Financial Analysis Final Group Project The North Face, Inc. December 5, 1999

Table of Content
SECTION I
Industry Analysis
Overview Industry Trends Competitive Landscape

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3 4 5

SECTION II
Company Analysis
Background Strategy-SWOT Analysis Strategy-Porter’s Five Forces 6 6 7 9

SECTION III
Accounting Analysis
Cash Flow Analysis Quality of Earnings Earnings Manipulation 10 10 10 11

SECTION IV
Financial Analysis
Dupont Decomposition DCF Assumptions WACC Calculation DCF Results Multiples EBO Valuation Dupont Decomposition 12 12 12 13 13 13 14 14

SECTION V
Conclusion
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Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G

Accounting Analysis Beneish Model DCF Model DCF Sensitivity Multiple Valuation EBO Valuation EBO Sensitivity

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Industry Analysis
Overview The US apparel industry is large, mature, and highly fragmented and its sales are driven by economic conditions, demographic trends, and pricing. The average American spends about $800 a year on apparel. This translates into a market of about $215 billion for a population of close to 270 million. The market is divided into two tiers: national brands and other apparel. National brands are produced by about 20 sizable companies and currently account for some 30% of all US wholesale apparel sales. The second tier accounts for 70% of apparel and is comprised of small brand and private label products. As can be expected for a mature industry, growth for the sector is relatively small and companies within the industry have to constantly find ways to reduce costs, which explains the outsourcing of manufacturing to Asia and the Caribbean. As a result the industry has benefited from an increase in offshore manufacturing and favorable prices for raw materials, thereby reducing overall operating costs. The technical outdoor apparel segment is one segment of the highly fragmented apparel industry, which has managed to create a niche of its own. Professional climbers and outdoor enthusiasts are the primary consumers of this segment of the industry. In recent years however, these products have become increasingly popular among a broader group of consumers. This growth is due to an increase in outdoor recreational activities and adventure travel by the general population. There has also been a shift in consumer preferences, leading to a growing demand for highly functional products. The last and most important trend is the fact that there is now a growing acceptance of outdoor apparel as casual wear. Another positive for the industry as a whole is the fact that the U.S. economy as a whole has experienced modest inflation, low unemployment, and a booming stock market. The effects of these factors have trickled down to the apparel industry in the form of increased spending. On the negative side, the apparel industry is extremely competitive and highly fragmented. Due to the fact that the industry is characterized by simple technologies, low fixed assets per employee, and ease of expansion, barriers to entry are relatively insignificant. Though it is easy to enter the market, it is very hard to remain a viable competitor, as profit margins are very slim in such a competitive environment. Consumers also have considerable power over apparel and have expressed no loyalty to a particular brand. Such consumer behavior has increased costs for the

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companies operating in the industry, as they constantly have to spend money on advertising to build brand awareness. Industry Trends ! Increased Number of Teenagers/Aging Population The apparel industry will change with demographic trends. It is expected that over the next ten years, the number of both younger and older households will increase, while the number of middle households will contract. Companies are accustomed to servicing the middle group, and will now have to find new strategies to meet the new faces of...
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