CASE: Crocs, Inc. 1. Which comparable company is a useful peer for valuation purposes as of the case date? Will it continue to be a good match into the future? Lululemon is a useful peer for valuation purposes as of the case date. There are three main factors to determine a useful peer. First one is comparable growth. Fiscal year 2006 sales growth of Crocs had been %227 and growth of over %130 was likely for fiscal year 2007. On the other side, compound annual growth rate of sales of Lululemon is over %100 (Exhibit 4). Second main factor is risk. Since that Crocs and Lululemon are new highgrowth brands, they have comparable risks. Last one is profit margin. Crocs has high margins on its products as a result of economies of scale. Lululemon has also high margins. (COGS to sales 48.3%) Moreover, both companies use wide range of distribution channels.
However, Lululemon will not be a good match in the future. If Crocs become a long-term company with a recognized brand then Nike or Timberland will be a good match than Lululemon. 2. Use the multiples approach to estimate the value of Crocs. Multiple for Comparable Firms Price / Earnings EV / Sales EV / EBITDA Lululemon 129.78 15.20 66.67 Nike Timberland Deckers Columbia AVERAGE 30.90 4.54 20.21 13.16 1.42 8.77 42.95 4.80 23.91
19.97 20.94 1.90 0.95
PARAMETER OF TARGET FIRM Price / Earnings EV / Sales EV / EBITDA Average Value per Share 167.60 830.10 257.90
ESTIMATED VALUE OF TARGET FIRM 7,198.69 3,987.23 6,167.12
# SHARES 85 85 85
VALUE PER SHARE 84.69 46.91 72.55 68.05
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3. Use the discounted cash flow approach to estimate the value of Crocs. PERIOD YEAR EBIT after tax (EBIAT) + Depreciation =Cash Flow from Operations (CFFO) +/- Change in Net Working Capital +/- Capital Expenditures =Free Cash Flow (FCF) +Terminal Value (TV) =Sum of FCF + TV Present Value - Market Value of Debt = Valuation of Equity / Number of Shares Value of Equity per Share 1 2008 227.91 21.37 249.28 2 2009 329.27 30.87 360.14 3 2010 407.12 41.83 448.95 4 2011 468.03 50.51 518.53 5 Steady 549.64 549.64 (40.41) (20.20) 489.04 10,451.19 10,940.23
(72.48) (118.48) (146.11) (115.72) (55.27) 121.53 121.53 7,154.31 (91.20) 7,063.11 85.00 83.10 (63.35) 178.31 178.31 (73.06) 229.78 229.78 (57.86) 344.95 344.95
4. Decide and defend what you think is a reasonable range of value estimates, and then make your best case for the “true” value using your estimate of future growth rates. Under the discounted cash flow approach we are using several assumptions to calculate future cash flows. Also calculating terminal value is another big assumption. In this we assume the growth rate to be fixed for several years. Also calculating terminal value is an approximation. Regarding these some unrealistic assumptions I argue that discounted cash flow approach with terminal value calculation is not so much reasonable. On the other side, under the multiples approach, market efficiency is a crucial factor. The more the market is efficient; the best value is estimated by this multiples approach. Because in this approach we are assuming that market if efficient so the market prices. Another issue is that it is not easy to determine comparable companies. These companies should be comparable in every possible dimension; especially in risk and growth. Page | 2
In this regards, I argue that the multiples approach will give a reasonable range of estimates. So, according to multiples approach; average value per share is $68.05. This value is less than the discounted cash flow approach which is $83.10. I estimate future growth rates as following: Assumptions 2009 2010 39.0% 28.0%
So, under these growth rate assumptions I calculate value of equity per share ($65.06) as following.
PERIOD YEAR EBIT after tax (EBIAT) + Depreciation =Cash Flow from Operations (CFFO) +/- Change in Net Working Capital +/-...
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