1. Discount-Variety Stores Industry Module 3- Market Multiple Valuation Kate Johnson

2. “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

3. Product Types Two brands: 1)High quality national brands from leading manufacturers 2)Comparable quality private brand selections 10,000 SKUS/store 10$ or less

4. 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

5. Steps to Using Multiples Step 1: Select relevant summary measures Step 2: Identify comparable companies to use in determining the market multiple Step 3: Compute the market multiple (ratio) from the comparable companies Step 4: Compute the DG’s value using its performance measure and the market multiple Step 5: Performance measure is: - enterprise performance measure  subtract value owed to debt holders and divide by shares outstanding to get equity value per share -equity measure  divide Focusing on enterprise values so that capital structure isn’t carefully considered

6. Step 1 Select the summary performance measures to use as the basis for valuation EPAT NEA EPAT from Sales Sales Per Square Foot Why this selection? One B/S multiple two I/S multiples, one industry specific multiple (sales per square foot most often used in retail industry)

7. Step 2: Identify Comparable Companies Note: Costco is removed for sensitivity analysis Identify comparable companies to use in determining the market multiple

8. 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 Select the comparable companies to use in determining the market multiple

9. Notes Market multiple valuation is a method not a model Different industries should use different measures Presumes target company not fairly valued No correct answer to “how we produce the multiple”

10. Step 3: Computing Multiples Compute the market multiple from the comparable companies’ market values and performance measures

11. Estimating value: EPAT Multiple

12. Estimating value: NEA Multiple

13. Estimating value: EPAT from Sales Multiple Profit Multiple

14. Sales per Square Foot Multiple Focuses on sales not total revenue

15. Buy, Sell or Hold?

16. Buy, Sell, or Hold? Valuation using EPAT multiple: Sell, Sell Valuation using NEA multiple: Sell, Sell Valuation using EPAT from sales: Sell, Sell Valuation using sales per square foot: Buy, Hold Dilemma : One suggests Dollar General is undervalued Sensitivity analysis suggests Dollar General is overvalued

17. Issues Different year ends for each company Sales per square foot doesn’t take into account online sales Sales per square foot calculations are based on total square foot of all stores and total sales- info may be skewed? Dollar General the outcast in many respects (especially size) (although is extremely competitive regarding gross margin)

18. Can we exclude Walmart? Walmart is considered a leading competitor to DG!

19. Yet, Walmart has almost double the amount of sales per square foot!

20. Excluding Walmart Removing Walmart suggests perhaps we should sell the stock, not buy! Decision: Exclude, overall we should sell the stock as it is overvalued. Average of estimates decreases when Walmart is removed!

21. Evaluating Results Subjective measure that requires one to make assumptions and judgment No right judgment makes it difficult No one measure is the right one to use Market multiples popular due to simplicity Place to start, “first-pass, parsimonious indicator of value”