1. Maxwell Shoe Company Ben Bittrolff Mark Mitchell Andrea Ranalli Ryan Ricci Sonia Varkey Done By:

2. Maxwell Shoe Company Founded in 1949, Incorporated in 1976 Founded in 1949, Incorporated in 1976 Public in 1994 Public in 1994 The company produces casual and dress footwear for women. The company produces casual and dress footwear for women. The company also designed and developed private label footwear for selected retailers The company also designed and developed private label footwear for selected retailers All products are manufactured off-shore by independent factories at low cost. All products are manufactured off-shore by independent factories at low cost.

3. Product Lines Moderate, priced $25-$40 Upper Moderate $35-$50 Upscale$65-$80 Private Label Budget$12-$20

4. Channels Department Stores Department Stores Specialty Stores Specialty Stores Catalogue Retailers Catalogue Retailers Cable television shopping channels Cable television shopping channels 1997 JV with GE Capital to operate 130 retail Sam & Libby and Jones New York stores through SLJ Retail. Owned 49% 1997 JV with GE Capital to operate 130 retail Sam & Libby and Jones New York stores through SLJ Retail. Owned 49%

5. Company Strengths Established brand recognition Established brand recognition Strong manufacturing relationships Strong manufacturing relationships Low costs through high volume Low costs through high volume Good price points to customers Good price points to customers Good relationships through EDI Good relationships through EDI

6. Strategy for Growth Since 1987 focused on its branded footwear Since 1987 focused on its branded footwear Expect to enhance current brands, increase private label and acquire new brands Expect to enhance current brands, increase private label and acquire new brands

7. Analysis Rivalry Among Existing Firms (HIGH) Large number of firms Slow growth Productive capability High fixed costs Threat of New Entrants (MODERATE): Scale economies Access to distribution channels Common technology Bargaining Power of Suppliers (HIGH): Lots of alternative products Low switching costs, may compromise quality Many suppliers Large volumes Established relationships with suppliers Bargaining Power of Buyers (LOW): Low switching costs Many alternative products Cost and quality important Threat of Substitutes (HIGH): Similar price and performance Willingness & ease to switch

8. Monthly Stock Price History

9. Revenue Breakdown women 18-34 ~50% of revenue women 21-35 ~10% of revenue women over 30 ~25% of revenue Private Label n/a ~15% of revenue AppealRevenues

10. Class Participation Discuss Maxwell Shoe’s competitive advantage and whether it is sustainable in the retail industry

11. Competitive Advantage Cost Leadership Efficient production techniques Efficient production techniques Competitive product design Competitive product design Low cost Low cost

12. Accounting Analysis Do the financial statements accurately measure the economic activity of Maxwell Shoe? Do the financial statements accurately measure the economic activity of Maxwell Shoe? Answer: Yes Answer: Yes

13. Accounting Analysis CASH: Decreased in 1997 in order to fund rapid growth (inventory went from 12.2 MM in 1996 to 20.1 MM in 1997 with sales growing 28% in 1997) CASH: Decreased in 1997 in order to fund rapid growth (inventory went from 12.2 MM in 1996 to 20.1 MM in 1997 with sales growing 28% in 1997) SALES: Growth over past 3 years performed as well as sector (~16%) SALES: Growth over past 3 years performed as well as sector (~16%) NET INCOME: Growth outperformed sector (24% compared to 9%) due to Maxwell’s low-cost sourcing capabilities NET INCOME: Growth outperformed sector (24% compared to 9%) due to Maxwell’s low-cost sourcing capabilities Gross Margin was 23.4% (1996), 26.8% (1997) and 27.1% (1998) Gross Margin was 23.4% (1996), 26.8% (1997) and 27.1% (1998)

14. Accounting Analysis Company is debt-free Company is debt-free Financials in-line relative with retail industry and Maxwell’s strategy Financials in-line relative with retail industry and Maxwell’s strategy No accounting disclosures reported in financial statements No accounting disclosures reported in financial statements No apparent “Noise” No apparent “Noise”

15. Ratio Analysis Historical Expanded Dupont Ratios 199619971998 Year 5.75%6.83%8.08%Operating Margin 3.292.812.67Asset Turnover -23.80%-5.53%-22.95%Net Financial Leverage 14.42%17.98%16.63%Return on Equity (ROE) 18.93%21.39%21.58%Spread 18.93%19.17%21.58% Operating Return on Assets (ROA) N/A28.7%23.6%Sales Growth N/A51.7%47.3%Net Income Growth 23.4%26.8%27.1%Gross Profit Margin

16. Forecasting 1. Focus  Valuation of Maxwell Shoe 2. Determine Key Drivers 1. Strategy Analysis  Type and Nature of Drivers 2. Accounting Analysis  Can Financial Statement Items be used Reliably 3. Financial Analysis  Economic Behaviour of Drivers

17. Forecasting Key Drivers for Maxwell Shoe: 1. Sales Growth  Commonly used, major expenses and Cap. Exp. Track sales well 2. Profit Margin (NOPAT margin)  Track shifts in operational efficiency and competition

18. Forecasting Sales Growth Driven By: Sales Growth Driven By: Demand of Shoes/Industry Growth Demand of Shoes/Industry Growth Competitiveness of Industry Competitiveness of Industry NOPAT Margin Driven By: NOPAT Margin Driven By: Cost Structure (COGS) / Pricing Strategy Cost Structure (COGS) / Pricing Strategy Competitiveness of Industry Competitiveness of Industry

19. Forecasting Assumptions Sales growth based on Strategy, Accounting and Financial Analyses and recent performance (previous year) Sales growth based on Strategy, Accounting and Financial Analyses and recent performance (previous year) Maxwell’s Sales growth well above industry so should only forecast for 2-3 years (will eventually revert to industry mean) Maxwell’s Sales growth well above industry so should only forecast for 2-3 years (will eventually revert to industry mean) Similar for NOPAT margin growth Similar for NOPAT margin growth

20. Forecasting – Sensitivity Analysis 1. Pessimistic – Grow at GDP/Inflation levels (4%) 2. Most Likely – Grow at Industry Growth Level (17%) 3. Optimistic – Grow at Recent Pace (24%)

21. Sensitivity Analysis with the Class

25. Ratio Analysis of Forecasts 199920002001Expanded Dupont 17.00% Sales Growth 7.00% Operating Margin 2.85 Asset Turnover -20.00% Net Financial Leverage 38.71%30.18%22.89%NFL with 50 MM Debt 97.42%80.36%65.78%NFL with 100 MM Debt 16.95% ROE 27.18%25.47%24.11%ROE with 50 MM Debt 41.64%36.99%33.33%ROE with 100 MM Debt 14.95%14.92% Spread 18.69%18.33%18.22%Spread with 50 MM debt 22.27%21.21%20.36% Spread with 100 MM debt 19.95%19.94% Operating ROA 23.54%22.93%22.39%ROA with 50 MM Debt 27.21%26.06%25.07%ROA with 100 MM Debt

26. Subsequent Events 1999 (1 st 6 months): 1999 (1 st 6 months): Analyst Expectations: 61 cents Actual: 48 cents Disappointing performance was due to lower than expected sales, attributed to the ‘softness in the footwear market’. Disappointing performance was due to lower than expected sales, attributed to the ‘softness in the footwear market’. In July 1999, Maxwell sold the license for $25 million to the Jones Apparel Group. In July 1999, Maxwell sold the license for $25 million to the Jones Apparel Group. Maxwell was bought by Jones New York in 2004. Maxwell was bought by Jones New York in 2004.

27. The Perils of Forecasting