1. Maxwell Shoe Company, Inc. John Spiteri & Raj Joshi May 19, 2006

2. THE ULTIMATE GOAL Our goal today…. Present some of the underlying aspects of… Developing a… …….FORECAST MODEL….

3. Maxwell Shoe Company, Inc. Public Company Incorporated:1949 Employees: 149 Sales 1998: $165.92 Million US Stock Price 1998: $10.94 Stock Exchange: NASDAQ Ticker Symbol: MAXS

4. Company History The Maxwell Shoe Company designs and makes women’s footwear. The company produces casual and dress footwear for women under the following brand names: Mootises Tootsies, Sam & Libby, Jones New York The company also designed and developed private label footwear for selected retailers All products are manufactured off-shore

5. Product Lines Mootsies&Tootsies: Moderate, priced in the $25-$40 range Sam&Libby: Upper Moderate, priced in the $35-$50 range Jones New York: Upscale, priced in the $65-$80 range Private Label:Budget, priced in the $12-$20 range

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

7. Factors for Success Strong brand recognition Solid manufacturing relationships Low costs through high volume Good price points to customers Good relationships through EDI

8. Salient Data Category1995199619971998 Revenues101,870104,300134,200165,900 Sales growth-2.39%28.67%23.62% Net Income5,8346,0009,10013,300 Gross Margin23.5%23.4%26.8%27.1% Cash & Equiv6,68510,4003,10018,700 A/R17,83416,90028,60035,700 Inventory12,39412,20020,10022,900 CPTD100 LTD605500300200

9. 3 Steps to Forecasting 1. Accounting Analysis 2. Strategy Analysis 3. Financial Analysis

10. 1. Accounting Analysis Read financial notes in detail Ensure accounting policies correspond to industry practices i.e. look at revenue recognition policies across competitors to ensure consistency Look for inconsistencies i.e. how do they treat JV revenue Look for ‘noise’

11. 2. Strategy Analysis Porter’s Five-Forces Model Competition Among Existing Firms Threat of Potential Entrants Bargaining Power of Customers Threat of Substitute Products Threat of Substitute Products Bargaining Power of Suppliers Figure 5.3

12. Class Exercise 5 minute class exercise Each group will be assigned one of the five forces and asked to determine the elements that need to taken into account when developing Maxwell Shoe’s forecast model

13. Competitive Rivalry Fairly high competitive rivalry in this industry Large number of firms High fixed & storage costs Low levels of product differentiation No real sustainable competitive advantage

14. Threat of New Entrants Ease of entry into the industry Common technology Access to many distribution channels Low exit costs No real asset specificity

15. Supplier Power Moderate to Low Many suppliers in the industry Less concentration of power Purchasing commodity products Low switching costs however quality may suffer Long standing relationships may have significant impact on pricing concessions

16. Buyer Power Low Manufacturers sell directly to wholesale/retail markets which threatens forward integration No concentrated power by any one buyer Many suppliers Low switching costs

17. Substitutes Products High level of substitute products Similar in nature 50% of sales come from the 18-34 age group which has low loyalty, move with trends – could be influenced by a substitute product quite easily Difficult to raise prices

18. 3. Financial Analysis US in the year 1999 DOT COMS are still very ‘hot’ Estimated GDP Growth rate of 5% Inflation rate of 4% Unemployment rate of 4% General economic attitude: Still positive Industry is growing at an average rate of 17% over last 5 years

19. Maxwell’s Key Ratios $000’s 1995199619971998 Revenues101,870104,300134,200165,900 Sales growth-2.39%28.67%23.62% Net Income5,8346,0009,10013,300 Gross Margin23.5%23.4%26.8%27.1% EPS0.760.721.061.44 Cash & Equiv6,68510,4003,10018,700 A/R17,83416,90028,60035,700 Inventory12,39412,20020,10022,900 CPTD100 LTD605500300200

20. Maxwell Growth Plan Build on competitive advantage by: Enhance current brands Increase Private Label brands Acquire New Brands Diversification of brands is designed to appeal to a different market segment of the footwear industry.

21. Revenue Breakdown Mootsies & Tootsies Line: 50% of sales appeal to women aged 18-34 Sam & Libby Line: 10% of sales, appeal to women aged 21-35 Jones New York: 25% of sales, appeal to women > 30 Private Label: account for 15% of sales

22. FORECASTS INCOME STATEMENT What are key drivers of each of these items: Revenue Cost of Sales Selling Expenses These items all have a direct impact to EARNINGS

23. FORECASTS BALANCE SHEET What are the key drivers: Levels of Inventory Collection period Payables Debt servicing

24. FORECASTS CASH FLOW Income statement assumptions drive revenue however historical balance sheet performance will drive the cash flow

25. Sensitivity Analysis 3 typical scenarios: Optimistic – grow at historical approx.26% Probable – grow at Industry approx. 17% Pessimistic – grow at GDP or Inflation approx. 4-5%

26. Financial Modelling 10 minute class exercise Please open up Maxwell Shoe Company spreadsheet that was sent by Bill Assignment – look at the 3 scenarios Optimistic, Probable and Pessimistic Try to determine the growth for each scenarios and view the effects on the financial statements

27. What actually happened Reported 48 cents per share for the first six months of fiscal 1999, below analysts expectations of 61 cents per share. 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.

28. Financial Results post 1999 Category19992000200120022003 Revenues150.3158.2182.2204.4225.0 Sales growth-9.4%5.2%15.2%12.2%10.1% Net Income18.99.912.113.214.9 Gross Margin24.3%26.0%28.9%27.4%27.6% EPS1.991.04.84.89.98 Cash & Equiv28.948.158.370.597.1 A/R29.834.237.440.742.4 Inventory11.31218.3 14.2 CPTD1000000 LTD00000

29. Maxwell Shoe Company In 2004, Jones Apparel Group acquired all the outstanding stock of Maxwell Shoe Company for $23.25 per share in cash for a total value of $369 million.