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NDIC CONSUMER DIVISIONRecommendation: Buy Wrigley (WWY)
Lauren Wilcox- Associate Analysts:Renee Gipson & Steve Howenstein (GPS)Greg Stewart (WMT)Colleen Day & Carolyn White (JNJ)Frank Barra & Randy Yang (PEP)Patrick Schafer (WWY)
CONSUMER HOLDINGS
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SECTOR OVERVIEW
Gap Inc. (GPS)
GPS current trading price - November 4, 2004 - approx. 22.37
Gap Inc. Overview
Gap is an International specialty retailer selling casual apparel, personal care items, and other accessories for men, women, and children, celebrating its 35th anniversary in 2004.
Fiscal 2003 Revenue of $15.9 billion October 2004: Comparable store sales grew 3%, as net revenue for
the month increased 5%, compared to a year ago
Controls various affiliates that target different consumer interests with diverse marketing styles: The Gap, Gapkids, babyGap, Banana Republic, and Old Navy.
As of October 22, 2004, Operates 3,038 stores in the United States, the United Kingdom, Canada, France, and Japan.
Competitor Comparisons
Major Competitors:
American Eagle Outfitters
Abercrombie & Fitch
SWOT Analysis
Strengths Diversity under different
brands Appealing to all ages and
genders and providing products in all price ranges
Brand recognition and effective advertising…2004 “How Do You Wear It?” campaign and tour
New private label credit card awarding customers at Gap, Old Navy, and Banana Republic
Weaknesses
Heavily influenced by consumer spending and current economic state of the nation
Gap must be able to compete with its competitor in the market for teen apparel
SWOT Analysis
Opportunities Gap and Old Navy maternity and
Old Navy plus-size lines Appeal to Internet shoppers with
new credit card and special offers
Development of an entire new line for women over 35 years old
Former Oscar de La Renta VP of design and senior designer of J Crew will oversee product design
Ten stores in two markets will open in Fall 2005
Threats Gap continues transitions with
new management and designers American Eagle continues to
report increased sales Gap CEO, Paul Pressler, could
potentially return to Disney New set of competitors with the
new brand Stability of international
operations
Future Outlook Stock re-purchase program is up to $750 million
Continue “pop culture” marketing campaign with various entertainment stars
Focus on inventory management
Likely to be more management changes
Keep an eye on development and success of new line
PepsiCo, Inc (PEP)
PepsiCo, Inc Overview
PepsiCo, Inc. is a global snack and beverage company. The Company manufactures, markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.
It is organized in four divisions: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International and Quaker Foods North America.
Its North American divisions operate in the United States and Canada. Its international divisions operate in nearly 200 countries, with its largest operations in Mexico and the United Kingdom.
Competitor Comparison
SWOT Analysis
Strengths Strong brand name
(Number 2 in industry)
Strong international market
Rising earnings in 2004
Weaknesses People are
questioning its water purification process
Health craze may lower consumption of products
SWOT Analysis
Opportunity Changed name of Diet
Sierra Mist to Sierra Mist Free
Growing international market after Coca-Cola’s European anti-trust settlement
Threats Relationship with
Advertising Agency is in jeopardy
NHL Lockout means lack of exposure for Pepsi Center in Denver
Future Outlook
Growing international market should bring on greater sales
May need to focus on healthier products
Expecting increase earnings and growth in 2004 of 13-15%.
Johnson & Johnson (JNJ)
GRAPH
JNJ Overview
Johnson & Johnson is engaged in the manufacture and sale of products related to human health and well-being.
Over 200 operating companies worldwide.
The Company's business is divided into three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.
Consumer segment: baby and child care, skin care, oral and wound care and women's healthcare fields, as well as nutritional and over-the-counter pharmaceutical products.
Pharmaceutical segment: antifungal, anti-infective, cardiovascular, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, psychotropic and urology fields.
Medical Devices and Diagnostics segment: products used by or under the direction of physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics.
SWOT Analysis
STRENGTHS Surpass industry averages in
sales and income JNJ: 45,850.0 mil vs.
15,012.1 mil JNJ: 9,137.0 mil vs. 2,747.3
mil For the nine months revenues
rose 13% to $34.6 billion: Revenues reflect a strong
performance of RISPERDAL, LEVAQUIN, and TOPAMAX
36.30% one-year income growth
WEAKNESSES Patients taking JNJ’s arthritis
drug Remicade may have higher risk of lymphoma
Relative price strength decreasing
P/E to growth ratio suggests stock may be overvalued
SWOT Analysis
OPPORTUNITIES Most pharmaceutical stocks
rose as a Bush victory is seen as reducing the threat of government-imposed price cuts on drug companies & the threat of drug imports
FDA approved a JNJ company’s CHARITE artificial disc to treat severe low back pain
Viactiv introduced new Vitamin Chews in new flavors
THREATS PG has been very successful
(billion dollar sales) in China market
Negative financing cash flow
Wal-Mart, Inc. (WMT)
Wal-Mart Stores, Inc. Overview
Wal-Mart Stores, Inc. operates discount stores and Supercenters, as well as Sam's Clubs. The Company's Wal-Mart discount stores and Supercenters offer merchandise such as apparel, housewares, small appliances, electronics, and hardware.
The products are categorized into grocery, candy and tobacco; hardgoods; soft goods-domestics; pharmaceuticals; electronics; sporting goods and toys; health and beauty aids; stationery; one-hour photo; jewelry; apparel and shoes.
In the United States Wal-Mart operates 1478 discount stores, over 1,471 Supercenters, 538 SAM's CLUBs and 64 Neighborhood Markets. It also operates 1,400 units internationally.
The company operates in the United States, the United Kingdom, Argentina, Brazil, Canada, China, Germany, South Korea, Mexico and Puerto Rico.
Competitor Comparisons
SWOT Analysis
Strengths Gross margins stronger in 3rd Qtr.,
changed tax rate pushed earning to "high end" of per-share forecast range of 52 cents to 54 cents
Foods division producing steady profits, becoming even greater threat to supermarkets
Steady international expansion and sales abroadFor October, total sales increased 10.4 % For
the quarter, sales rose 11.4%
SWOT Analysis
Weaknesses Sales at stores open longer than a year rose only 2.8
percent lower end of an earlier forecast of 2 percent to 4 percent
Senior management dedicating too much time to legal and publicity issues, hurting WMT’s focus
Focusing on price points: quantity rather than quality Targeting low-end customers Losing high income shoppers
Disturbing trend in non-food/general merchandise Only exceeded 2% growth sales in one quarter since 3rd
Qtr. ’02
SWOT Analysis
Opportunities Food market is strong Higher consumer spending
post-election Worst is behind us attitude Stocked price target around
$64 Increased holiday sales Wal-Mart International:
continued growth Beginning to focus on quality
Threats Target:
Capturing high income customers
Focusing on quality with more high-end products
Gap between companies increasing
Employee health care issues Retail stocks risen without
WMT about 11% since August, while WMT has done nothing
Future Outlook
Analysts believe that WMT’s next move is up.
Company is beginning to focus on quality to better compete with Target.
Positive impact of increasing consumer spending.
Continuous improvements in stores.
PROPOSAL: BUY Wm. WRIGLEY Jr. Company (WWY)
World’s #1 maker of chewing gum. World famous brands marketed in over 180 countries.
Manufactures & markets chewing gum and other confectionary products.
Factories: 4 in U.S. and 11 abroad Subsidiary: Amurol Confections--maker of novelty
gums and candies, such as Bubble Tape, Everest, Squeeze Pop and Velamints.
2 Domestically wholly owned associated companies: L.A. Dreyfus Company (gum base) & Northwestern Flavors, LLC (processes flavorings and rectifies mint oil)--both manufacture products other than chewing gum.
Chairman & CEO Bill Wrigley Jr. represents 4th generation of company’s helm.
Products
Taste: Juicy Fruit Spearmint Doublemint Extra
Oral Care: Orbit White Orbit Freedent
Breath-Freshening: Winterfresh Big Red Eclipse Eclipse Flash
Wellness: Airwaves Alpine
Recent News/ Past Performance
CHICAGO, Oct. 26: WWY announced today double-digit volume, sales and earnings growth for the third quarter and the nine months ended September 30, 2004. Earnings per share of $0.56 for the quarter and $1.67 through nine months were up 12% from the year-ago periods on global sales growth of 17% for the quarter and 20% year to date.
Sales increases were driven by worldwide shipment growth of
13% in the quarter and 14% through nine months.
Volume gains reflect solid performance of WWY & impact of Joyco Acquisition.
More International Expansion- Oct 21, 2004: Close down plant made fresh breath film in AZ and move it to Poland because revenue from the breath film in Europe is increasing.
International- Joyco Acquisition
Last April 2004: WWY acquired confectionery businesses of the Joyco Group from Agrolimen, a privately held Spanish conglomerate. Key additions to the Wrigley Company's portfolio of brands
will include Boomer bubble gum, Pim Pom lollipops, and Solano candy.
Wrigley will also acquire major sales and production operations in China, India and Spain, smaller commercial operations in France, Italy and Poland, as well as Cafosa, Joyco's gum base business.
Recent Performance
Sales for the quarter in North America up 6%- driven by volume growth and positive mix.
U.S.- Orbit and Eclipse were key contributors to sales Wrigley’s EMEAI Region (particularly Europe) sales
were up 25% on strong volume growth. Asia: Sales up 23% Consolidated operating profits in quarter grew by 10%,
reflecting sales increases in all regions and positive impact of currency (somewhat offset by increased investment in brand support, selling infrastructure, IT, R & D as well as costs of Joyco acquisition.)
Recent News
Dividends Declaration: Oct 26: Wrigley Company declared a regular dividend of $0.235 on
each share of Common Stock three-month period beginning February 1, 2005.
Stock Repurchase: Aug 18, 2004: Board of Directors authorized future stock repurchases of up to $300 million.
This new repurchase program will follow the completion of the Share Repurchase Program authorized by the Board in January of this year, under which $60 million remains available for repurchase of company stock.
“The authorization underscores the continued confidence the Board of Directors has in the Company's financial strength and long term business prospects," said Bill Wrigley, Jr., Chairman of the Board, President and CEO.
KEY STATISTICS
Market Cap (b) 15.169
P/E Ratio 32.05
EPS 2.11
Earnings Growth 11.10%
ROE 26.28%
ROA 18.73%
Profit Margin 14.02%
Beta .123
Operating Margin 20.53%
Shares Out (mil) 224.76
52-week high 67.90
52-week low 54.44
% Held by Insiders 26.85%
Dividends .94
Price/Book 7.83%
Change Rel S&P 9.12%
OCF (mil) 744.60
Competitor Comparison
WWY TOPP Industry
(food processing)
Market Cap: 15.17B 415.07M 181.88M
Rev. Growth 11.80% 2.50% 6.50%
Revenue 3.37B 304.90M 315.64M
Gross Margin 57.39% 35.13% 26.44%
Operating Margins 20.53% 4.30% 5.78%
Net Income 473.13M 11.66M 7.14M
EPS 2.106 .281 .48
PE 32.05 36.55 18.92
SWOT Analysis
Strengths: With acquisition of Joyco, WWY
expands to new foreign markets and increases product mix.
Exceeded estimated EPS two consecutive quarters
Increasing product mix with research and innovation
For the nine months ended 9/30/04, revenues rose 20% to $2.69 billion. Net income rose 12% to $376 million. Revenues reflect higher Russia, China and U.S. shipments and improved product mix. Net income was partially offset by higher expenses for increased research.
Not much competition
Weaknesses:
New products? Aside from flavors may not be much technological improvements in the gum business.
SWOT Analysis
Opportunities: International Expansions
with Joyco acquisition (Global revenue up 17% in just one year.)
New brand developments
Threats: Competition from
companies with other big name products in addition to gum.
Ex: Hershey’s makes Bubble Yum & Cadbury Adams makes Bubblicious.
Only company solely manufactures gum products/ breath strips.
Future Outlook
Solid company with increasing revenue and net income
Growth potential internationally
Innovations- increased research spending; continue to update product mix
Analyst Recommendations: Analysts estimate growth of 10.8% over the next 5 years as compared to an industry growth of only 8.43%.
Questions?