BENTLEY INVESTMENT GROUP

Consumers Preview Presentation

October 14, 2009

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
ECONOMIC
INDICATORS

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 Gross Domestic Product = C + I + G + NX
Looking at how large the “C” is in
GDP. GDP information can be found here:
http://www.bea.gov/national/index.htm#gdp

Consumer spending is a vital

component of any economy, in
the U.S. it currently represents
71% of GDP

GDP is a gauge of the health of a

country’s economy – GDP is
measured as a comparison to
the previous quarter

Bentley Investment Group | 2009-2010

 GDP
“Personal spending on cars, clothes, food and other items accounts for 71% of gross domestic product,
according to the latest Bureau of Economic Analysis data. That's slightly above the level one year ago
and well above the long-term average around 65%.” –USA Today (October 11, 2009)

Bentley Investment Group | 2009-2010

 Consumer Price Index (CPI)
CPI information can be found here:
–Rising or Falling? http://www.bls.gov/CPI/
–Which industries?
–Elasticity of the Goods?

The CPI is one of the most

important indicators in terms
of moving the markets and
setting monetary policy for
the Fed.

Bentley Investment Group | 2009-2010

 Retail Sales Report
Retail information can be found here:
–Overall Retail Sales http://www.census.gov/retail/
–Ex-Autos
–Industry Specific Sales

The ex-autos sales growth

exceeded economist estimates
of a 0.2 percent increase.

Excluding a 10.4 percent drop in

auto sales, retail sales actually
rose 0.5 percent in September

Bentley Investment Group | 2009-2010

Retail Sales Ex-Autos

Bentley Investment Group | 2009-2010

 Unemployment & Jobs Data
• 15.1 million Americans
Unemployment information can be found here:
currently out of work http://www.bls.gov/cps/

• Monthly Release and weekly

jobless claims:
– Most recent release,
10/2/09: 9.8%
– Highest rate since June of
1983
– Leads to consumer
uncertainty and resulting
“tight wallets”

Bentley Investment Group | 2009-2010

 Consumer Sentiment
• Univ. of Michigan Survey of Consumer
Confidence: Consumers surveyed on
current attitudes as well as economic
Consumer Sentiment information can be found here:
expectations. http://research.stlouisfed.org/fred2/series/UMCSENT

• Conference Board Consumer

Confidence:
– Respondents appraisal of current
business conditions
– Expectations of business
conditions 6 months hence
– Respondents expectations
regarding their total family
income
Bentley Investment Group | 2009-2010
University of Michigan Consumer
Confidence

Bentley Investment Group | 2009-2010

 Conference Board Consumer
Confidence Index

• Slight dip in the index as of the latest

September release, after an uptick in
August.

• “While not as pessimistic as earlier

this year, consumers remain quite
apprehensive about the short-term
outlook and their incomes. With the
holiday season quickly approaching,
this is not very encouraging news."

Bentley Investment Group | 2009-2010

 Consumer Credit
• Latest Federal Reserve credit release:
October 7th
– Credit outstanding fell for the 7th straight month
by $12 billion- larger fall than expectations.

– “Households are in paying down debt mode,

they’re not in the mode of taking on new debt.”

Bentley Investment Group | 2009-2010

Bentley Investment Group | 2009-2010
THE CONSUMER
SECTOR…
…DIVIDED

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 Discretionary and Staples

• Consumer Discretionary includes

automotive, housing, entertainment and retail - this sector
is highly cyclical and relies highly on consumer leisure
spending.

• Consumer Staples include food, beverages,

tobacco, prescription drugs and household products – this
sector is not as exposed to economic cycles and thus is
considered more immune to recessions.

Bentley Investment Group | 2009-2010

ENTERTAINMENT/ MEDIA
INDUSTRY OVERVIEW

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 Why Invest in this Industry?
• Undervalued due to low revenues from
advertising
• Directly correlated to consumer spending
• Pro-cyclical

Bentley Investment Group | 2009-2010

 Finding a Quality Company
• Well diversified within industry
– Opportunities for cross promotion
– Reduction of risk due to diversification
– Take advantage of economies of scale
• Greater purchasing power
• Quality Products
– Consumers will buy/watch what is appealing
– Copyrights to big-name characters

Bentley Investment Group | 2009-2010

 Key Industry Statistics
• GDP
• Consumer disposable income
• Consumer Confidence
• Is industry expanding
– Firms aren’t limited to growth by taking market
share from other companies
– International markets

Bentley Investment Group | 2009-2010

 Advertising Revenues
• Have declined in recent quarters
• Is expected to increase with economy
strengthening
– Automobile industry

Bentley Investment Group | 2009-2010

RESTAURANT INDUSTRY
OVERVIEW

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
Industry By Segment

Bentley Investment Group | 2009-2010

 Key Ratios And Statistics
• Real gross domestic product
• Disposable personal income of consumers
• Commodity prices
• Unemployment rate
• Interest rates

Bentley Investment Group | 2009-2010

 Upside

• Low barrier to entry/high return

• Franchising
• Commodity prices likely to ease
• Labor costs to move slowly

Bentley Investment Group | 2009-2010

 Downside
• Across industry gross margins decreasing
due to low sales figures
• Consumers expected to save more, spend
less
• Travel to be weak in 2009 despite cheaper
fuel.
• Intense competition and high fixed costs

Bentley Investment Group | 2009-2010

APPAREL
INDUSTRY OVERVIEW

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 Industry Basics
• Large, mature and highly fragmented
• Within national brands, 10 largest
companies account for 16% of wholesale
apparel sales
• Low barriers to entry: simple technologies,
ease of expansion, low fixed assets per emp.
• Major apparel companies: Nike, V.F. Corp,
Polo Ralph Lauren, Hanesbrands

Bentley Investment Group | 2009-2010

 State of the Industry
• Industry is heavily affected by state of the economy,
availability of credit and the consumer’s willingness to
buy:

• Credit crunch has damaged

apparel firms’ ability
to borrow: troubles at CIT

• Consumer woes: unemployment, credit constriction,

loss of wealth
Bentley Investment Group | 2009-2010
 A “New Normal” for Apparel?
• A long recovery for
consumers:
unemployment,
deleveraging, and renewed
focus on savings
• Less credit to fund
extravagant purchases
• Frivolity to frugality: a new
consumer mindset?
Bentley Investment Group | 2009-2010
Challenges for the Apparel Industry

• Restore pricing integrity

• Align supply and demand:
inventory adjustment and
cash generation
• Cope with the “new
normal:” providing value
for consumers and
embracing trends (green
initiatives, e.g.)

Bentley Investment Group | 2009-2010

Analyzing an Apparel Company
• Macro factors: rate of unemployment,
trends in discretionary income
• Sector-specific factors: rate of spending on
apparel vs. other discretionary items,
dominant fashion trends
• Assess individual companies based on
financial position, competitive stance, brand
recognition, target demographics, etc.

Bentley Investment Group | 2009-2010

CONSUMER NON-DURABLE
INDUSTRY OVERVIEW

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 Consumer Non-durables
• 2 Segments:
– Household products (soaps, detergents, cleaning
products)
– Personal products (shampoo, toothpaste, health and
beauty aides)

Bentley Investment Group | 2009-2010

 How Nondurables Operates
• New Products = key driver of company’s future sales
growth
– Look for companies integrating new products, and investing in new
R&D
• What drives demand?
– Price: products are necessities; a decrease in disposable income
puts downward pressure on product prices
– Demographics: more people = more bodies to bathe = more houses
to clean
– Household Income: Demand is directly linked to household income
trends – increase in income moves consumers up from bargain
products to premium ones
– Innovation: companies creating excitement about their products

Bentley Investment Group | 2009-2010

 Key Ratios
• Disposable Income: inflation
adjusted income less taxes
– April 2009 was at 2.8% down
from 4.7% growth in 2008
• Personal Consumption
Expenditure: compared with
disposable income
– April 2009, decline of 2.9%
compared to a decline of .06% in
2008
Bentley Investment Group | 2009-2010
• Consumer Price Index: tracks
retail price inflation (deflation)
for products sold to end-use
consumers
– April 2009, CPI projected to decline
1.7%
• Foreign Currency Exchange
Rates: US household and
personal care products
industries outsource growing
portions of their sales
 Analyzing the Industry
• Assess the Business
– Market leadership and brand strength, do people recognize their
products?
– Who are their competitors, how do they match up?
• Income Statement
– Sales, Gross Profit Margin, Operating Margin, Net Income, EPS
• Balance Sheet
– Debt Leverage
• Performance Ratios
– ROA, ROE
• Price-to-Earnings Ratio

Bentley Investment Group | 2009-2010

RETAIL
INDUSTRY OVERVIEW

Bentley Investment
Bentley Group
Investment Group | Fall 2009
| 2009-2010
 How to Value Retail: Macro
• GDP
• Consumer Confidence Index and Consumer
Sentiment
• Retail Sales, released monthly
– Chainstoreage.com has historical sales figures
• Unemployment
• Consumer Price Index (Inflation)

Bentley Investment Group | 2009-2010

 How to Value Retail: Industry
• Compare apples to apples; Abercrombie and
Fitch and Wal-Mart are both retailers but
they are not in the same business
– Compare sales revenue
– Relatively similar products
– Demographic targets

Bentley Investment Group | 2009-2010

 How to Value Retail: Key Metrics
• Same store sales
• Sales per square foot
• Inventory turnover
• Profit margins (again remember to compare
against similar companies)
• Compare room for growth; domestically or
internationally

Bentley Investment Group | 2009-2010

 Retail Going Forward
Week Ahead
– Retail sales released this morning
• Good sign if sales continue to decrease by less than
estimates (or if they are positive)
– CPI & Jobless Claims announced on Thursday
• Low inflation and less people filing for
unemployment insurance is good for consumers
– Consumer Sentiment released on Friday
• If people are more optimistic about the future they
will be more willing to spend

Bentley Investment Group | 2009-2010

 Questions?

Invest in Your Future

Bentley Investment Group | 2009-2010