This document summarizes a business valuation report for a women's clothing store. Financial statements and industry data were analyzed using the comparative company and discounted cash flow approaches. Comparable publicly traded companies were identified and adjustments were made to standardize their financials. Ratio analysis found the client's liquidity and profitability were lower than competitors. Market values for comparable companies were determined relative to total invested capital. Weighted averages and median multiples were calculated and used to value the client, resulting in a preliminary fair market value on a controlling, illiquid basis of $4,049,458,221.

1. Business Valuation
Samantha Hoffer

2. Introduction
Given the client’s balance sheet and income statements for the most recent five
years of operation, a valuation of this closely held company was performed. The
purpose of this business valuation is to compute the value of the client’s firm as an on-
going entity, utilizing both the comparative company and the discounted cash flow
approaches. The client’s firm was categorized within the women’s clothing stores
industry, one that was greatly affected by the recent recession.
Necessary adjustments were made to the financial statements of the
comparative companies in relation to the client’s in order to level the ground between
them. Multiple forms of analysis were also conducted to ultimately determine the
preliminary value of the client’s firm. This business valuation report is meant to
compare publicly competing firms to the client’s firm. Once the value was calculated,
the women’s clothing stores industry was analyzed, and various conclusions drawn.

3. Comparative Company Approach
• Ann Incorporated
• Chico’s FAS Incorporated
• Limited Brands Incorporated
• Lulu Lemon Athletica Incorporated
• Body Central Corporation
An advanced search was performed with the Mergent Online database in
accordance with the client’s criteria. Comparatives must possess the following
attributes: Women’s Clothing Stores SIC 5621, positive net income, and domestically
traded on a public U.S. market for at least five years. The current stock price of
acceptable comparatives should be above five U.S. dollars (Mergent).
This advanced search aims to locate U.S. companies classified under SIC 5621
with a net income greater than zero. These specifications yield the following 13 results:
• Aeropostale Inc.
• ANN INC.
• AnnTaylor Inc.
• Ascena Retail Group Inc.
• Body Central Corp.
• Cato Corp.
• Chico’s FAS Inc.
• Destination Maternity Corp.
• Express, Inc.
• Francesca’s Holdings Corp.
• Limited Brands, Inc.
• Lulu Lemon Athletica Inc.
• New York & Company Inc.

4. Upon further investigation, it was discovered that not all of these companies fit
proper comparative criteria. For example, “AnnTaylor Inc.” is not a publicly traded
company. Ann Inc., which is already a result, is the publicly traded entity for AnnTaylor
Inc. This fails to follow the comparative company requirements, and therefore
eliminates AnnTaylor from the list (Mergent).
Francesca’s Holdings and Express both do not have five years of financial
information, because they have only been traded publicly for four years. Cato
Corporation is a fairly small company and most of its stores are located only in the
southeast of the U.S. New York & Company has experienced significant net losses in
four of the past five years; this makes it a bad comparative to utilize for this valuation
(Mergent).
The remaining companies, that also did not become comparatives, target
specific, niche markets. Aeropostale, for example, focuses on a 14-17 year old
demographic and Destination Maternity targets pregnant women in the same respect.
This detail eliminates the remainder of the results. The five comparatives ultimately
chosen for this valuation follow trends similar to those within the client’s most recent
annual financial statements (2008-2013) (Mergent).
The first company, Ann Inc., is a holding company for its fully owned subsidiaries;
retail outlets that sell women’s apparel, shoes and other items. This company’s 1000+
outlets are mainly comprised of Ann Taylor, LOFT, and Ann Taylor Factory stores
(Mergent).
Chico’s FAS Inc. is a retailer of clothing, intimates, accessories, and other items
that are privately branded. These brands consist of: Chico’s, White House Black

5. Market, Soma Intimates, and Boston Proper. This company utilizes store outlets,
catalogs, as well as the Internet to sell its products (Mergent).
Limited Brands Inc. is a women’s intimate apparel retailer that also sells beauty
and personal care products. This company operates under the Victoria’s Secret and
Bath & Body Works brands. Methods of sale include retail stores, websites and
catalogues.
Lulu Lemon Athletica, Inc. is a retailer and designer of athletic apparel for both
male and female athletes, along with female youth sizes. This company sells its
apparel under both the lululemon athletica and ivivva athletica brand names. In addition
to apparel, the company sells fitness-related accessories (Mergent).
Body Central Corp. is a holding company that owns subsidiary companies selling
apparel and accessories at various store locations. Body Central and Body Shop stores
are the primary retail outlets for this company, with over 280 stores nationwide. Most of
this company’s merchandise is sold under its Body Central and Lipstick brands
(Mergent).

6. BIS Compilation and Adjustments
The attached BIS forms include a condensed balance sheet and the computations
of net worth, net income, and cash flow. The five-year financial statements and annual
reports of the comparative companies were researched extensively. The client provided
six years of company financial statements. Public financial data reports were accessed
through the Mergent database, while annual reports could be found on the respective
company website. The relevant figures were consolidated and recorded on the BIS
form that aims to mirror the client’s financial classifications. A few adjustments were
deemed necessary to ensure standardization between the six BIS forms; these
modifications will be detailed below.
Balance Sheet Adjustments
Many of the common adjustments to balance sheet are for intangibles, goodwill,
patents, trademarks and other similar items. The investigated companies report some
of these items on their balance sheets, but this adjustment would drastically reduce
overall net worth. Since that is the case with this particular valuation, no balance sheet
adjustments were on any of the BIS forms.
Inventory Valuation Adjustments
Another item on the BIS form that usually requires adjustment is inventory.
Different companies use different methods to calculate the value of its inventory. It is
customary to convert all BIS inventories to the same method. This information was
compiled from each comparative’s most recent annual report, accessed via webpage.
The method of inventory valuation can always be found in the notes that accompany the
company’s financial statements.

7. The “Women’s Clothing Stores” industry offers a rare set of companies that utilize
the same inventory valuation method. This can be attributed to the seasonality of
clothing, especially women’s clothing. If an item does not sell within the time period
desired by the company, the piece will be marked down periodically until sold. The
company’s inventories are valued at the lower of average cost or market at the
individual level, on a weighted-average cost basis.
Similarly to the balance sheet adjustments, the inventory valuation adjustments
are not needed because the six companies employ the same accounting practice
regarding inventories.
Income Statement Adjustments
Standardization is key to implementing useful and meaningful BIS forms. This last
piece is vital to the accuracy of company cash flow. When adjusting the income
statement, items that are not part of ordinary business must be removed. Doing this
results in subsequent adjustments regarding tax liabilities. The six companies in this
valuation specifically required adjustments for: minority interest, restructuring charges,
impairment charges, and the profit or loss from the sale of business units. All
adjustments were added back into the reported net income for that year, and the taxes
applicable to those adjustments were taken out. The result of these adjustments is
called the adjusted net income. Depreciation and amortization are added to this
adjusted figure to produce the final result in the form of Cash Flow.
The BIS forms additionally contain a section for Total Invested Capital (TIC) to be
computed. Short term and long term debt are combined to compile the total debt. Cash
is then subtracted from the total debt, and stockholders’ equity is added last. This

8. calculation results in TIC, which is a figure used to identify how much has been invested
in the firm through both debt and equity.
The section following, entitled “Additional Information,” includes net working
capital (NWC). This number can be found by subtracting current liabilities from current
assets.

9. Ratio Analysis
The client’s preliminary value as of 10/11/13 has been calculated, along with its
comparatives, using the BIS forms as a method of standardization. Moving forward, the
best way to evaluate the client’s balance sheet is by applying ratio analysis. This
process involves ten ratios, calculated for all six companies across a five-year time
span. The nature of the Women’s Clothing Stores industry is primarily manufacturing,
and the following ratios were chosen based on that aspect:
• Current Ratio
• Sales/Receivables
• Days in Inventory
• Sales/Fixed Assets
• Sales/Total Assets
• EBIT/Interest Expense
• Total Debt/Equity
• Net Income/Sales
• Net Income/Average Assets
• Net Income/Average Equity
Once the ratios were calculated, two spreadsheets were created to organize the
results. The first consists of five years of each company’s ratios, grouped by ratio. Also
included in this table are the five-year medians of each company’s individual ratios. The
final element of this sheet is the median of the comparatives’ medians, which is used to
compare directly with the client. The second spreadsheet compares all ten medians of
comparatives to the client’s median. The difference is calculated between the two and
the result appears in that column. This number is then used to assign a premium or a
discount to the client’s company in order to reflect its balance sheet and income
statement strength relative to comparatives.

10. Current Ratio
The current ratio is a measure of liquidity of the firm. It gauges the ability of a firm to
meet its short-term obligations. The client has a median of 8.39 – which is much higher
than the comparatives’ median of 1.66. This shows that the client holds strength above
the competition in terms of covering short-term liabilities.
Sales/Receivables
Also known as the Receivables Turnover ratio, this measures the speed that accounts
receivable are collected. This explains how quickly, from the time of purchase, a
customer takes to actually pay the company back. The client holds a much lower value
than the comparatives, indicating that this process is hindered within the client’s
business.
Days in Inventory
This ratio is computed as 365/(Sales/Inventory) and is a measure of inventory
accumulation. A high number means a lot of inventory is held, or a slow down in sales
or both! The lower the number, the better – this demonstrates an efficient supply chain
and an accurate forecasting of sales. The client is almost 60 days over the
comparatives’ average, leaving a negative effect on the company as a result.
Sales/Fixed Assets
The purpose of this ratio is to evaluate the usage of a company’s fixed assets. This
may also point out if a firm has too many or not enough fixed assets. The client is
slightly under the competitors, with a difference of 1.13 – this is a slight weakness. It
seems that this is close enough to the comparatives that it is no cause for major
concern.

11. Sales/Total Assets
Similar to the previous ratio, this measures how efficiently a company uses all of its
assets combined. This includes fixed assets and current assets. An even smaller
difference here, the client falls just .4 short of the comparative average. It is better to
have a number higher than the industry average, but that is not the case with the client.
EBIT/Interest Expense
This ratio measures the ability of a firm to meet its interest payments on outstanding
debt. The higher the number, the easier it is for the company to pay off accumulating
interest liabilities. The client struggled in this sector, with 0.524 a big problem if they
lose sales or something else goes wrong. The comparatives held a strong 14.87,
leaving a difference of 14.346 between the two.
Total Debt/Equity
This measure of financial leverage helps to determine how much of a business is
funded by debts and how much is funded via equity. If this ratio is a high number, it
usually indicates high risk regarding the firm’s ability to meet its interest payments.
Some comparative companies did not show long-term debt as a separate item on their
balance sheet; therefore other liabilities have been added to long-term debt (if any) to
calculate the total debt in this ratio.
Net Income/Sales
This ratio is the percent return on sales, after interest and taxes. The higher this ratio is,
the better. The comparatives, again, outperformed the client in this area by a small
margin. This shows the client’s company is not earning much of a return on its sales.

12. Net Income/Average Assets
Adding the year in question’s assets with the previous year’s assets, then dividing by
two calculates the average assets. This ratio is a measure of return on total assets.
The higher this figure, the stronger the company’s balance sheet. The client has around
a 4% return, while the comparatives have averaged to almost 13%. The balance sheet
of the client is weaker than those of the comparatives.
Net Income/Average Equity
Average equity is calculated by adding the year in question’s equity with the previous
year’s equity, then dividing by two. This ratio measures the percent return per dollar
invested in the business by its stockholders. The higher this number, the easier it will
be for a company to attain additional investment. The comparatives did extremely well
in regards to this ratio, holding 22.5%. This indicates strength of the comparatives and
their balance sheets, giving reason to attract more investments! On the other hand, the
client’s percentage is low at 5.8%, which is not terrible on a standalone basis, but the
company could possibly lose investment opportunities to its competition.

13. Market Appraisal
The next step in the valuation process is the completion of the market appraisal
worksheet or MAW. The purpose of this stage is to establish how the market values of
each comparative firm relate to the value of the firm’s total invested capital. To
complete this worksheet, first, all five comparative companies are listed by ticker
symbol. The 12/31/12 market price and the number of shares outstanding are stated,
and then multiplied together to determine the Total Market Value. These figures were
found on Google Finance as well as through 10K forms. In order to find the Total
Invested Capital, long- and short-term debts are added and cash is subtracted from the
Total Market Value. This Adjusted Market Value of TIC is then directly compared to the
Total Invested Capital figure calculated on the BIS forms. The resulting figure is the
Market Value of TIC to as a percent of TIC. This is found by dividing Total Adjusted
Market Value of TIC by TIC, usually expressed as a percent and usually more than
100%. The client’s comparatives follow this – ranging from 163% to 2626%!
Comparison of Market Values, Net Worth, Average Earnings & Average Cash Flow
Now that the market values of the comparative companies in regards to their TIC
have been established, a comparison must now be completed. The next table
constructed is used to indicate how the comparatives are valued in relation to their
EBITDA, EBIT, earnings and cash flow. All five-year averages are calculated using the
weighted average technique. This is done because most of the comparatives have
been growing rapidly over the past five years as a result of the U.S. economic recession
in 2007-2008. This technique gives a greater weight to the more recent years, and a
lesser weight to later years.

14. After the five-year EBITDA average is found, it is then divided into the Adjusted
Market Value of TIC from the MAW. The result of this division is the EBITDA multiple.
This process is repeated for EBIT, Net Income, and Cash Flow, respectively. The row
below the comparative company data contains the median multiples. These are used
so that extreme outliers will not have an undue impact on this valuation.
The Client row on the Multiple Table records the client company’s TIC, EBITDA,
EBIT, average earnings and average cash flow. Since not all multiples are equally
accurate in determining the value of the client company, the standard deviation and
coefficient of variation are computed. This is done to figure out which multiples are
better suited for the purpose of this valuation.
Value of the Client using the Guideline Company Approach
The Valuation Table is based primarily drawn from the Multiples Table. To
determine the preliminary value of the client, the median multiples of the comparatives
are multiplied by the client firm’s TIC, average adjusted EBITDA, average adjusted
EBIT, average adjusted net income, and average cash flow. After all of these figured
are computed, the preliminary value is determined by taking a weighted average of
these values. The weight assigned to each value is based upon its corresponding
coefficient of variation. The multiple with the lowest coefficient of variation is weighted
by a factor of 30% and the highest coefficient of variation will receive a weight of 10%
and so on. All of these weighted totals are then added together to create the Value of
operating equity on a freely traded minority basis; in the client’s case this figure is
$4,498,954,912. A premium for control of 15% is added to this number to determine the
Fair Market Value on a controlling interest basis. A 10% discount is subtracted for a

15. lack of marketability and this calculation results in the Fair Market Value on a controlling
interest and illiquid basis. The final step in determining the preliminary value of the
client’s firm is to apply the 20% discount because of a weak balance sheet. This
percentage discount was based on the ratio analysis performed earlier in this valuation.
Once the discount is subtracted from the Fair Market Value on a controlling interest,
illiquid basis, the Preliminary Value of the client company is established at
$3,725,134,667.

16. Discounted Cash Flow Analysis
When using the discounted cash flow technique, the cost of capital must first be
calculated. The cost of capital is a weighted average of the after tax cost of debt plus
the cost of equity. This cost of debt (Kd) is computed with the following equation:
Kd = r (1 - T)
Where r is the interest rate of the client, and T is the client’s tax bracket. To estimate
the client’s interest rate, the interest expense was divided by total debt, this results in an
8.1% interest rate. The tax bracket was determined by diving the client’s provision for
income taxes by income before taxes. This figure came to about 29%. The cost of debt
for the client is .0573.
Next, the Capital Asset Pricing Model was used to determine the cost of equity
(Ke). This model reads:
Ke = Rf + [(Km – Rf) Beta}
Where Rf is the risk free rate of return, in this case the Treasury note rate (^FVX) from
12/31/12 (.73%) was used. Km represents the return on the market. In this valuation,
Ibbotson’s Small company stock compound annual return (9.9%) was used. Since the
client did not provide a Beta figure for the firm, all five comparative company betas were
located on Google Finance and then averaged. This resulted in a Beta for the client of
1.716. Once all of these variables were compiled, the Capital Asset Pricing Model gave
a cost of equity around 16%.

17. After these two calculations are completed, the appropriate weights must then be
applied to them. The weight of debt (Wd) and the weight of equity (We) are calculated
in a similar fashion. Formulas for these weights are as follows:
Wd = Sum of LT & ST Debt/Sum of LT & ST Debt + Total Equity
We = Total Equity/Sum of LT & ST Debt + Total Equity
From the client’s BIS form, these figures are easily located. The sum of debts is
$16,536,564 and the total equity is $71,370,798. This results in the weight of debt at
.1881 and the weight of equity at .8119. This shows a much larger proportion of equity
than debt in the client’s firm.
Now that all the variables have been determined, the weighted average cost of
capital (WACC) can be calculated. Using the previously mentioned variables, the
formula reads:
WACC = Wd(Kd) + We(Ke)
Using this equation, the weighted average cost of capital for the client comes to 14%.
This percentage is an adequate reflection of the client’s expected rate of return.

18. Calculating Future Cash Flows
Since the client did not supply any projected cash flows, this must be done in
order to properly value the firm. Firstly, net sales are projected for the next five years,
from 2013 to 2017. Using the RATE excel formula, the sales growth rate is calculated
based on 2008 and 2012’s sales figures. In this case, the client’s sales growth rate
came to 6.59%. This growth rate is then applied to 2012’s net sales figure to determine
the projected 2013 sales. The process is repeated each year using the same growth
rate.
To determine the projected amount of operating expenses, another rate is
calculated. By taking operating expenses in 2012 as a percent of net sales from the
same year, the operating expense percentage is found. In this case, this percentage is
19.37%. In the same fashion as net sales, this rate is used to project the operating
expense for the following five years.
Depreciation is projected based on the growth from the past five years on the
client’s BIS form. The same procedure from the previous two projection calculations is
used to find the depreciation growth rate. In this case, the client’s growth rate is -4.69%
which shows a decrease in the amount of depreciation costs over the past five years.
Depreciation is then projected for the next five years using this growth rate.
For purposes of this valuation, there is an assumption that an increase in capital
expenditures equal to 20% of 2012’s net fixed assets will occur in 2014. Depreciation of
this new investment utilizes a three-year depreciable life following the Modified
Accelerated Cost Recovery System (MACRS). The capital expenditure totals
$4,035,897 with a depreciation expense of $1,343,954, $1,795,974, $597,313, and

19. $298,656, chronologically. Income before taxes is then calculated for each year by
subtracting operating expense and total depreciation from net sales.
The Net Operating Profit Before Taxes (NOPAT) is computed next by multiplying
the income before taxes by (1-T), where T is the 29% tax bracket of the client. In order
to get to free cash flow from NOPAT, capital expenditures are removed and
depreciation expenses are added back in.
The net working capital (NWC) growth rate is calculated using the same RATE
formula in Excel from 2008 to 2012. Net working capital is then forecasted for the future
five years by applying this determined growth rate of 2.59%. The change in net working
capital is found as a simple subtraction of the projected year’s NWC minus the previous
year’s forecasted NWC.
Free cash flows (FCF) are the result of subtracting capital expenditures and the
change in NWC from NOPAT. Depreciation is also added back to NOPAT to get the
free cash flow for each year. Once all of the free cash flows have been projected, these
figures must be discounted to the present in order to have an accurate value.
Depending on the number of years (n) in the future the FCF originates, it must be
discounted by the weighted average cost of capital as follows:
PV = FCF (1/(1+WACC^n))
Once the present values of free cash flows have been calculated for all projected
years, these numbers are then added together to find the total discounted free cash flow
for the client. This computation results in a present value of cash flows from the years
projected (2013-2017) to be $273,751,699.

20. Residual Value
Before discounting the future cash flows back to the present, the client’s residual
value must be found. The formula for doing so reads:
Residual Value = 2018 cash flow / (WACC – g)
Here, g represents the projected long-term growth rate of future cash flows.
Since the client’s growth rate is 2.2% and WACC is 14% - the residual value totals
$306,158,586.

21. Industry Review
Large corporations dominate the Women’s Clothing Stores Industry in the United
States. These firms usually have multiple outlets on the retail level – adding to their
brand awareness and overall profitability. In 2013, the annual revenue of this industry is
upwards of $11 billion. Considering the cyclical nature of this specific consumer good,
the 2007-2008 recession hit this industry very hard. Over the past five years, this
industry has been slow to return to its pre-recession profits, given the decrease in
disposable income among consumers.
The holiday season is clearly the height of women’s clothing retail sales, and the
recent upswing of Black Friday, Cyber Monday, and other similar promotional trends
have been positively affecting this industry. E-commerce is booming in this sector as
well, with the technological advances made via the Internet, and this is another factor
aiding these firms to increase sales. This also enables more international commerce to
be conducted.
Overall, this industry has its ups and downs, but has generally stayed on the rise
following the recession. The biggest threat facing these specialty retailers is their
competition from major department stores (Macy’s, Sears, Nordstrom). Although not
specializing in women’s clothing specifically, these corporations monopolize a large
portion of the market share.

22. Conclusion
This business valuation utilized two different approaches for determining the
value of the client’s firm. Given the billions of dollars that are annually generated by the
women’s clothing stores industry, the value determined is an appropriate reflection of
the client’s company. With a slow but steady growth, women’s clothing retailers are
once again operating profitably following the recession in 2007/2008.
Utilizing the comparative company approach of valuation, it was clear that the
client closely resembled its competitors within the same industry. Almost all of these
companies now implement some sort of e-commerce to increase its retail sales. The
Internet and technology in general have worked in favor of this particular industry, along
with numerous others, to reach more consumers domestically and internationally. This
is done without making large expenditures on retail store space, labor, and
transportation.
The discounted cash flow approach gave a detailed account of the cash flows
expected into future years. These projected numbers show that the value of the client’s
company should increase steadily over the next six years. The growth rates determined
were all positive, giving way for the client to expand in the future. In total, this valuation
of a closely held company accurately reflects the fair market value of the client’s firm at
$466,457,472.