WEBVTT 1 00:00:01.090 --> 00:00:03.495 Hello and welcome to this Vidcast, which is devoted 2 00:00:03.495 --> 00:00:06.815 to the acquisition of Sketchers in a footwear business 3 00:00:06.915 --> 00:00:11.215 by a very well-known capital investment fund based in 4 00:00:11.275 --> 00:00:12.855 Brazil 3G capital. 5 00:00:14.655 --> 00:00:17.625 Earlier this month on the 5th of May, 2025, 6 00:00:18.195 --> 00:00:21.905 3G Capital announced that they are going to buy Sketchers 7 00:00:21.925 --> 00:00:23.785 for $9.4 billion. 8 00:00:24.535 --> 00:00:25.585 When you buy a company, 9 00:00:25.885 --> 00:00:28.825 it can be cash shares are a combination. 10 00:00:29.565 --> 00:00:30.705 Now if you are shareholder 11 00:00:30.705 --> 00:00:34.025 or Sketchers, it can be offered $63 in cash for each 12 00:00:34.025 --> 00:00:36.585 and every share, but you also have the alternatives 13 00:00:36.585 --> 00:00:40.385 to receive only $57 plus a share 14 00:00:40.685 --> 00:00:43.945 of the new company, which is going to be created ad hoc 15 00:00:44.245 --> 00:00:47.145 and which will hold the assets of Sketchers. 16 00:00:49.025 --> 00:00:52.035 When you make an offer to buy a company, generally speaking, 17 00:00:52.225 --> 00:00:54.435 everybody is going to compare the price which you are 18 00:00:54.635 --> 00:00:57.995 offering with the recent stock prices of the company. 19 00:00:58.655 --> 00:01:00.875 In the case of Sketchers, it's a little bit difficult, 20 00:01:00.895 --> 00:01:03.315 but let's take a midterm average. 21 00:01:04.215 --> 00:01:05.675 We look at the last five years. 22 00:01:05.705 --> 00:01:08.355 Five years ago the company is worth $30. 23 00:01:09.175 --> 00:01:11.635 We are at the end of Covid pandemic 24 00:01:12.055 --> 00:01:15.035 and then the stock price is going to go up to 50 plus 25 00:01:15.575 --> 00:01:16.595 and then go down 26 00:01:16.775 --> 00:01:20.635 to the initial $30 per share at the end of 2022. 27 00:01:21.185 --> 00:01:24.115 Then as a consequence of the huge growth which is going 28 00:01:24.115 --> 00:01:26.075 to be experienced by the company, 29 00:01:26.695 --> 00:01:28.795 the stock price will go skyrocketing 30 00:01:28.815 --> 00:01:33.355 to reach a high point at the beginning of 2025 of $75 plus. 31 00:01:34.655 --> 00:01:37.555 Now, because of tariffs announcements and 32 00:01:37.555 --> 00:01:40.795 because of the localization of the manufacturing footprint 33 00:01:40.795 --> 00:01:44.835 of Sketchers, very likely the stock price collapses 34 00:01:45.255 --> 00:01:49.955 and go down from 75 plus to less than $50. 35 00:01:50.415 --> 00:01:52.275 So if you compare with the low point, 36 00:01:52.405 --> 00:01:55.475 $63 represents plus 35%, 37 00:01:56.135 --> 00:01:58.275 but if you compare with the high point at the beginning 38 00:01:58.275 --> 00:02:02.915 of the year, it's minus 16% at the end of the day. 39 00:02:02.915 --> 00:02:05.075 If you look at 61 where it stands 40 00:02:05.095 --> 00:02:08.955 to the end 63 when the company is going to be actually paid 41 00:02:09.015 --> 00:02:13.035 by the new owner, 60 something is roughly the average 42 00:02:13.215 --> 00:02:16.115 of the last say 16, 18 months. 43 00:02:18.545 --> 00:02:21.595 When you try to analyze the purchase price as opposed 44 00:02:21.595 --> 00:02:24.155 to the last stock price, you can compare the company 45 00:02:24.225 --> 00:02:26.835 with itself, but you can also compare the company 46 00:02:27.185 --> 00:02:28.795 with the stock market index. 47 00:02:29.015 --> 00:02:31.675 The company is listed in a New York stock exchange, 48 00:02:32.175 --> 00:02:34.715 and let's compare the evolution of the market 49 00:02:35.055 --> 00:02:37.915 and the company over the last five years, 50 00:02:37.915 --> 00:02:42.555 whether you observe, I would say up to the end of 2022, 51 00:02:43.105 --> 00:02:45.995 it's basically parallel evolution except 52 00:02:46.015 --> 00:02:49.275 for a certain moment when Sketchers went a little bit higher 53 00:02:49.465 --> 00:02:53.475 than the market and then starting in 2023, 54 00:02:54.175 --> 00:02:56.115 the stock price of sketcher is going 55 00:02:56.115 --> 00:03:00.605 to outperform the market significantly outperform up 56 00:03:00.625 --> 00:03:02.645 to the moment tariffs are announced 57 00:03:02.785 --> 00:03:04.605 and then it goes back to the same level, 58 00:03:05.385 --> 00:03:07.085 but now it's a little bit up 59 00:03:07.105 --> 00:03:09.605 and if you compare the evolution of prices 60 00:03:09.945 --> 00:03:11.765 and indexes over the last five years, 61 00:03:12.265 --> 00:03:14.405 the New York Stock Exchange is up by 90% 62 00:03:14.905 --> 00:03:19.085 and Sketchers is up by 120%, so it's good performance 63 00:03:19.085 --> 00:03:21.205 because you have to add the dividends 64 00:03:21.205 --> 00:03:23.685 and the shares buyback generated by the company. 65 00:03:23.785 --> 00:03:28.435 In the meantime, the company is quite recent. 66 00:03:28.895 --> 00:03:31.915 It was created by Robert Greenberg in California, 67 00:03:32.555 --> 00:03:36.195 Manhattan Beach in 1992. 68 00:03:36.335 --> 00:03:38.915 The company's a little bit more than 30 years old 69 00:03:39.535 --> 00:03:40.595 now selling the company 70 00:03:40.815 --> 00:03:43.835 for nine point something billion dollars when the company 71 00:03:43.895 --> 00:03:45.595 was created 30 years ago. 72 00:03:45.775 --> 00:03:48.075 That's a quite good performance for the founders. 73 00:03:48.745 --> 00:03:52.235 Initially, the company was very much about shoes, footwear 74 00:03:52.775 --> 00:03:54.035 and a little bit utility 75 00:03:54.295 --> 00:03:56.795 and very much casual shoes, 76 00:03:57.565 --> 00:04:01.075 rapid development in the nineties about lifestyle, 77 00:04:01.655 --> 00:04:05.995 so casual, lifestyle, comfortable, affordable, 78 00:04:06.095 --> 00:04:09.195 and that's very strong pricing positioning for the company, 79 00:04:09.485 --> 00:04:10.715 especially again, 80 00:04:10.775 --> 00:04:14.875 the companies which are offering premium stuff, trendy, 81 00:04:15.105 --> 00:04:17.755 comfortable, and it's nice alternative 82 00:04:17.815 --> 00:04:20.915 to the big brands including Nike and others. 83 00:04:21.565 --> 00:04:23.915 There were plenty of commercial successes, 84 00:04:23.915 --> 00:04:26.235 including the very well-known delight. 85 00:04:28.885 --> 00:04:31.415 Some celebrities are going to represent the brand 86 00:04:31.415 --> 00:04:35.175 and bring their own style in the design, 87 00:04:35.395 --> 00:04:37.175 in the storytelling of the brand. 88 00:04:37.485 --> 00:04:40.895 Britney Spear, Christina Aguilera are going 89 00:04:40.895 --> 00:04:43.895 to give you an idea about this segment which is targeted 90 00:04:44.195 --> 00:04:45.215 by Sketchers. 91 00:04:46.915 --> 00:04:49.215 The company is growing and is quite successful, 92 00:04:49.715 --> 00:04:52.735 and then it's time to think about diversification, 93 00:04:52.825 --> 00:04:54.895 broadening the scope and so on so forth. 94 00:04:55.515 --> 00:04:58.135 You remember that the company is very much about lifestyle 95 00:04:58.355 --> 00:05:01.375 and casual starting in the two thousands, they try 96 00:05:01.375 --> 00:05:03.495 to get into the performance shows, 97 00:05:03.915 --> 00:05:05.815 so it's running, it's about fitness. 98 00:05:06.445 --> 00:05:09.375 It's a different market in which you have a little bit 99 00:05:09.515 --> 00:05:13.015 of high performer companies including Nike. 100 00:05:13.425 --> 00:05:15.055 We'll discuss that a little bit later on. 101 00:05:16.275 --> 00:05:18.975 Internationalization will start in 2010 102 00:05:19.155 --> 00:05:21.335 and it's going to very much accelerate 103 00:05:21.395 --> 00:05:22.615 the growth of the company. 104 00:05:23.245 --> 00:05:24.895 It's going to be very successful. 105 00:05:25.635 --> 00:05:28.775 Now, let's go back a few years before IPO. 106 00:05:28.935 --> 00:05:31.335 The company is listed on a New York stock exchange 107 00:05:31.635 --> 00:05:34.415 and it was listed in 1999. 108 00:05:34.695 --> 00:05:36.255 A perfect moment for the listing 109 00:05:36.485 --> 00:05:40.015 because at that time the market is extremely bullish 110 00:05:40.315 --> 00:05:42.815 and is buying anything at any price, 111 00:05:43.405 --> 00:05:47.415 then they will start growing, also expanding the brand 112 00:05:47.795 --> 00:05:51.575 for children, for clothing, accessories and so on so forth. 113 00:05:51.955 --> 00:05:54.855 But basically the core business is about footwear 114 00:05:54.965 --> 00:05:57.965 with a very precise branding and positioning. 115 00:05:59.585 --> 00:06:01.375 Where does a company stand today? 116 00:06:01.755 --> 00:06:05.015 Annual sales, annual revenue is about $9 billion. 117 00:06:05.435 --> 00:06:08.575 You remember that the companies acquired four $9.4 billion, 118 00:06:08.955 --> 00:06:10.815 so a little bit more than one year of sales. 119 00:06:11.475 --> 00:06:13.855 The company is selling 300 million units 120 00:06:14.295 --> 00:06:16.255 products over the planet. 121 00:06:17.145 --> 00:06:21.215 62% are international sales, so the development, 122 00:06:21.275 --> 00:06:24.135 the abroad development was absolutely successful. 123 00:06:24.765 --> 00:06:27.335 More than 5,000 stalls worldwide 124 00:06:28.075 --> 00:06:30.415 and the Sketchers brand is number three 125 00:06:30.555 --> 00:06:31.615 in the footwear business. 126 00:06:32.075 --> 00:06:34.935 We are going to discuss the competitors a little bit later. 127 00:06:35.625 --> 00:06:38.535 There is of course plenty of technology in the shoes, 128 00:06:39.095 --> 00:06:42.175 a little bit for performance and a lot for comfort, 129 00:06:43.155 --> 00:06:45.735 and that's very well illustrated by the 130 00:06:46.245 --> 00:06:50.095 very well known Sketchers, hand free sleeping shoes. 131 00:06:50.875 --> 00:06:52.135 You just get in 132 00:06:52.135 --> 00:06:55.295 and get out with your food in the shoe without the need 133 00:06:55.295 --> 00:06:59.255 of your hands, so that's extremely comfortable for the user. 134 00:06:59.685 --> 00:07:01.015 Perfect illustration. 135 00:07:03.185 --> 00:07:04.605 Now, the company has been growing 136 00:07:04.945 --> 00:07:09.285 and has been extremely successful growing its revenues the 137 00:07:09.285 --> 00:07:12.485 company has established in California in 92, 138 00:07:13.235 --> 00:07:16.325 they opened the first retail store in 94, 139 00:07:16.875 --> 00:07:19.925 initial public offering end of the nineties, 140 00:07:20.665 --> 00:07:22.325 and then the beginning of the 2000. 141 00:07:22.325 --> 00:07:24.925 The company is going to stabilize the revenue at the level 142 00:07:24.925 --> 00:07:29.245 of about 1 billion, 1 billion in 2005, 143 00:07:29.865 --> 00:07:32.445 but 2 billion in 2010 144 00:07:33.025 --> 00:07:35.205 and three in 2015, 145 00:07:35.745 --> 00:07:38.605 and then there will be a kind of acceleration in the growth 146 00:07:39.185 --> 00:07:42.045 2020, it's a bit down because of Covid, 147 00:07:42.705 --> 00:07:46.645 but 6 billion in 21, 9 billion in 24, 148 00:07:46.865 --> 00:07:51.565 and the company is announcing 10 billion for 26, so 149 00:07:51.565 --> 00:07:55.645 that's very successful in terms of growth, revenue growth, 150 00:07:58.095 --> 00:08:00.465 it's nice to grow, but what about the p and l? 151 00:08:00.695 --> 00:08:03.905 Because if you grow at the expense of your profitability, 152 00:08:04.135 --> 00:08:05.585 that might be an issue. 153 00:08:05.765 --> 00:08:08.785 You remember that performance is definitely 154 00:08:08.785 --> 00:08:10.105 what is creating value. 155 00:08:10.885 --> 00:08:13.585 So when the company is benchmarking 23 156 00:08:13.685 --> 00:08:17.785 and 24, the good news is again about sales from eight 157 00:08:18.005 --> 00:08:22.225 to 9 billion, but the gross margin sales minus cost 158 00:08:22.225 --> 00:08:23.385 of sales is going to be up 159 00:08:23.645 --> 00:08:27.465 by 1.2% from a little bit less than 52% 160 00:08:27.525 --> 00:08:29.345 to a little bit more than 53. 161 00:08:29.975 --> 00:08:32.905 When you are growing and when your volumes are growing, 162 00:08:33.365 --> 00:08:35.025 you may generate economies of scale, 163 00:08:35.075 --> 00:08:38.425 which is about productivity and cost of sales. 164 00:08:39.205 --> 00:08:42.025 Now, the operating margin is up by 0.3% 165 00:08:42.165 --> 00:08:45.985 and not by 1.2%, which was gross margin. 166 00:08:46.605 --> 00:08:47.905 For very simple reason, 167 00:08:48.125 --> 00:08:51.265 the company is investing in the development 168 00:08:51.365 --> 00:08:55.305 of the brand in innovation in digitalization, 169 00:08:55.905 --> 00:08:59.325 and then there are an increase in the overhead expenses, 170 00:08:59.465 --> 00:09:02.165 in the indirect expenses, but not 171 00:09:02.165 --> 00:09:04.165 because a company is spending more, but 172 00:09:04.165 --> 00:09:07.325 because a company is investing, which is quite important, 173 00:09:08.025 --> 00:09:11.125 the bottom line is up and the earnings per share is up. 174 00:09:11.555 --> 00:09:12.725 This is quite good news 175 00:09:12.725 --> 00:09:14.685 because when you are making some profits, 176 00:09:14.685 --> 00:09:15.885 you can reinvest the profit. 177 00:09:16.435 --> 00:09:18.125 This is about retain earnings thanks 178 00:09:18.125 --> 00:09:19.685 to which you can finance your growth, 179 00:09:19.945 --> 00:09:23.485 but you can also return to the shareholders through say, 180 00:09:23.765 --> 00:09:25.645 dividends and or buybacks, 181 00:09:27.465 --> 00:09:29.005 And then we go to the balance sheet. 182 00:09:29.625 --> 00:09:34.485 The balance sheet is extremely ous, I would say conservative 183 00:09:34.825 --> 00:09:37.605 and focusing on something fundamental as far 184 00:09:37.605 --> 00:09:40.765 as corporate finance is concerned, which is liquidity, 185 00:09:41.435 --> 00:09:44.325 there's a little bit of debt in the balance sheet 186 00:09:44.325 --> 00:09:47.125 and the debt to equity ratio represents about 10%, 187 00:09:47.665 --> 00:09:50.885 but in fact there's more cash than debt in the company 188 00:09:51.425 --> 00:09:52.885 and it's not net debt. 189 00:09:53.115 --> 00:09:54.165 It's net cash. 190 00:09:54.585 --> 00:09:58.805 The company holds something like $1.4 billion of cash 191 00:09:58.945 --> 00:10:00.445 and short term securities, 192 00:10:00.945 --> 00:10:04.205 so the company is extremely strong in terms of liquidity. 193 00:10:04.905 --> 00:10:07.765 As the company is generating positive free cash flow 194 00:10:07.785 --> 00:10:10.605 to $171 million in 24, 195 00:10:11.035 --> 00:10:13.245 then the companies ac accumulating cash 196 00:10:13.745 --> 00:10:16.205 and then can return the cash to the shareholders. 197 00:10:16.865 --> 00:10:18.565 The free cash flow is a cash flow 198 00:10:18.575 --> 00:10:22.285 after investment in capital expenditures, so ccs cash, 199 00:10:22.285 --> 00:10:25.845 which is left at the disposal of the shareholders to go 200 00:10:25.945 --> 00:10:27.165 for external growth 201 00:10:27.425 --> 00:10:30.125 or to return the cash back to their shareholders' pocket, 202 00:10:30.665 --> 00:10:33.605 and then it's $1 billion of shares, 203 00:10:33.605 --> 00:10:36.565 which were repurchased in 2024. 204 00:10:36.705 --> 00:10:38.645 It represents something like 10% 205 00:10:38.645 --> 00:10:40.085 of the market capitalization. 206 00:10:42.635 --> 00:10:44.175 So far, the picture is okay, 207 00:10:44.835 --> 00:10:47.655 the company is growing at a nice rate, 208 00:10:48.085 --> 00:10:50.535 it's accelerating its growth in the past year 209 00:10:50.535 --> 00:10:54.135 as a company is profitable, the return on sales is okay, 210 00:10:54.795 --> 00:10:56.815 and the balance sheet is quite strong, 211 00:10:57.235 --> 00:10:58.935 so these are only good news, 212 00:10:58.995 --> 00:11:00.895 but unfortunately between quotes, 213 00:11:00.965 --> 00:11:03.175 Sketchers has some competitors. 214 00:11:03.875 --> 00:11:06.255 You remember I said that they are number three, 215 00:11:06.675 --> 00:11:07.735 who is number one? 216 00:11:07.735 --> 00:11:09.295 Number one is Nike. 217 00:11:09.795 --> 00:11:11.415 Number two is Adidas, 218 00:11:11.555 --> 00:11:14.375 and number three, I would say X equal more or less. 219 00:11:14.855 --> 00:11:16.215 Puma and Sketchers. 220 00:11:17.085 --> 00:11:21.095 Nike is very much in a performance show lifestyle. 221 00:11:21.605 --> 00:11:25.175 Also the company's extremely strong worldwide 222 00:11:25.355 --> 00:11:26.935 and it's very much about premium, 223 00:11:27.715 --> 00:11:30.535 but performance sport athletes, this is 224 00:11:30.535 --> 00:11:34.935 what is definitely the core business of Nike, Adidas, 225 00:11:35.045 --> 00:11:36.935 it's a little bit like Nike, 226 00:11:37.475 --> 00:11:41.015 but it's very much concentrated in Europe when Nike is 227 00:11:41.015 --> 00:11:43.015 definitely a worldwide camping. 228 00:11:44.055 --> 00:11:45.775 Puma is a little bit about performance, 229 00:11:45.795 --> 00:11:49.295 but it's very much about luxury, I would say trendy 230 00:11:49.715 --> 00:11:53.765 and so, so fast growing like Sketchers, you remember 231 00:11:53.765 --> 00:11:56.725 that Skecher is very much about lifestyle, comfort 232 00:11:57.425 --> 00:12:01.045 and something very different from these premium brands, 233 00:12:01.375 --> 00:12:02.485 affordable prices, 234 00:12:03.105 --> 00:12:06.405 so you can buy your comfort at a reasonably low price. 235 00:12:08.655 --> 00:12:12.205 These four players I have described have differentiated 236 00:12:12.535 --> 00:12:15.125 strategies, positioning and marketing point of view. 237 00:12:15.895 --> 00:12:19.365 Let's have a look at the financial metrics In 2024, 238 00:12:20.255 --> 00:12:23.405 first Sketchers, 9 billion in revenues 239 00:12:23.945 --> 00:12:26.525 and a return capital employed, which is quite high. 240 00:12:26.525 --> 00:12:28.245 It's a combination of return on sales 241 00:12:28.465 --> 00:12:29.485 and assets to turnover. 242 00:12:29.515 --> 00:12:30.845 This is a DuPont formula. 243 00:12:31.585 --> 00:12:35.805 Return on sales is 10% multiplied by 2.5 assets turnover. 244 00:12:36.265 --> 00:12:40.645 The return capital employed is then 25%, so you remember 245 00:12:40.645 --> 00:12:44.565 that the company is quite big, the company is growing, the p 246 00:12:44.565 --> 00:12:47.405 and l is okay, the balance sheet is strong 247 00:12:47.505 --> 00:12:49.685 and the financial performance is high. 248 00:12:50.055 --> 00:12:51.605 It'll have an impact on the market 249 00:12:51.705 --> 00:12:53.885 to book on the relative value creation, 250 00:12:54.705 --> 00:12:59.525 the number one is definitely Nike, 50 plus billion dollars 251 00:12:59.625 --> 00:13:03.885 of revenues worldwide, a higher return on sales, 12 252 00:13:03.905 --> 00:13:08.445 as opposed to 10 a higher assets productivity, 4.4 253 00:13:08.545 --> 00:13:09.885 as opposed to 2.5, 254 00:13:10.545 --> 00:13:15.205 and then the return capital employed for the company is 54%, 255 00:13:15.375 --> 00:13:17.205 which is absolutely mind blowing. 256 00:13:17.755 --> 00:13:19.125 This is a very big company 257 00:13:19.545 --> 00:13:21.525 and an extremely high performance. 258 00:13:22.885 --> 00:13:25.845 Puma number three x, a equal with catchers 259 00:13:25.965 --> 00:13:27.645 with roughly the same revenues, 260 00:13:27.985 --> 00:13:31.405 but the return on sales is lower 7% as opposed to 10. 261 00:13:31.785 --> 00:13:35.285 The assets turnover is slightly higher, three as opposed 262 00:13:35.285 --> 00:13:38.285 to 2.5, and then the row says 21%. 263 00:13:38.715 --> 00:13:40.445 It's less performing than Sketchers 264 00:13:40.825 --> 00:13:43.205 and there will be a consequence on the market to book 265 00:13:43.865 --> 00:13:46.405 number two as Heida between Sketchers 266 00:13:46.585 --> 00:13:49.845 and Nike, 24 billion in terms of revenues, 267 00:13:50.045 --> 00:13:53.725 a lower return on sales, 5.7 as opposed to 10, 268 00:13:54.105 --> 00:13:58.645 but a significantly higher assets turnover 4.3 which matches 269 00:13:58.755 --> 00:14:02.205 with Nike as opposed to 2.5 for Sketchers. 270 00:14:02.905 --> 00:14:05.285 All in all, a lower return on sales, 271 00:14:05.565 --> 00:14:08.165 a higher asset turnover, it's roughly same rose 272 00:14:08.585 --> 00:14:09.685 as Sketchers. 273 00:14:09.935 --> 00:14:12.445 These are about the financial metrics, so you understand 274 00:14:12.445 --> 00:14:15.645 that these companies, all of them generate a R, 275 00:14:15.655 --> 00:14:17.485 which is more than the wac, definitely, 276 00:14:17.905 --> 00:14:21.245 and the leader among the best is Nike. 277 00:14:23.925 --> 00:14:26.145 Of course, this high Rose has an 278 00:14:26.145 --> 00:14:27.345 impact on the market to book. 279 00:14:27.525 --> 00:14:28.545 You remember that the market 280 00:14:28.545 --> 00:14:30.585 to book is a relative value creation, 281 00:14:30.715 --> 00:14:33.425 enterprise value divided by capital employed 282 00:14:34.025 --> 00:14:36.585 a no dimension figure, which we can correlate 283 00:14:36.585 --> 00:14:38.265 with a return on capital employed 284 00:14:38.645 --> 00:14:41.825 and with the economic profit, the rose is high 285 00:14:41.845 --> 00:14:43.225 for Sketchers, so the market 286 00:14:43.245 --> 00:14:45.465 to book is significantly higher than one. 287 00:14:45.895 --> 00:14:48.305 It's creating value for the shareholders. 288 00:14:48.405 --> 00:14:52.205 For the investors, the market to book is about three, 2.9, 289 00:14:52.865 --> 00:14:55.405 but what is also very interesting is to go back 290 00:14:55.405 --> 00:14:58.565 to the gearing, you remember the company is cash rich, 291 00:14:58.705 --> 00:15:01.085 so the gearing is minus 0.2. 292 00:15:01.825 --> 00:15:04.885 It means that if you have $1 of equity, in fact, 293 00:15:04.885 --> 00:15:09.285 you have 20 cents of cash and 80 cents of capital employed. 294 00:15:09.985 --> 00:15:12.285 So again, the company is creating value, 295 00:15:12.865 --> 00:15:15.445 the company is strong, the company is conservative, 296 00:15:15.625 --> 00:15:17.525 and the company is performing. 297 00:15:18.265 --> 00:15:22.405 The beta is about consumer good. Plus it's 1.1. 298 00:15:22.405 --> 00:15:27.325 It's a little bit more than one because it's uh, FMTG, 299 00:15:27.745 --> 00:15:30.485 but because also you have to pay for that 300 00:15:30.625 --> 00:15:33.565 and maybe even though it's affordable, it's a kind 301 00:15:33.565 --> 00:15:35.205 of a premium consumption. 302 00:15:36.465 --> 00:15:38.205 Adidas has the same beta. 303 00:15:38.715 --> 00:15:41.045 Nike has a beta, which is a little bit higher, 304 00:15:41.465 --> 00:15:43.645 and Puma beta, which is a little bit lower, 305 00:15:43.705 --> 00:15:47.645 but what all these companies have in common is their 306 00:15:47.645 --> 00:15:48.885 conservative balance sheet. 307 00:15:49.465 --> 00:15:52.365 The gearing for skecher is minus 0.2. 308 00:15:52.585 --> 00:15:57.125 The gearing for Nike is minus 0.2, which is exactly the same 309 00:15:57.465 --> 00:15:59.925 and for Adidas and Puma, cash 310 00:16:00.025 --> 00:16:02.525 and debt are matching zero gearing. 311 00:16:03.345 --> 00:16:04.685 You remember about the rose, 312 00:16:05.445 --> 00:16:08.485 Puma has a little bit lower roses than Sketchers, 313 00:16:08.825 --> 00:16:12.765 and the market to book is 1.5 as opposed to 2.9, 314 00:16:13.425 --> 00:16:17.645 but 1.5 is just half of 2.9 315 00:16:18.155 --> 00:16:21.285 when the rose is a little bit lower, so you understand that 316 00:16:22.085 --> 00:16:23.365 probably Sketchers in the mine 317 00:16:23.485 --> 00:16:25.805 of investors has a better reputation. 318 00:16:26.395 --> 00:16:29.045 What is really strange is not the fact that the market 319 00:16:29.105 --> 00:16:33.525 to book of Nike is 7.4, which is consistent 320 00:16:33.525 --> 00:16:34.725 with a very high rose. 321 00:16:35.195 --> 00:16:38.445 What is strange is that Hadida shares the same market 322 00:16:38.445 --> 00:16:41.925 to book with 7.5 when the return capital 323 00:16:42.445 --> 00:16:44.565 employee is just half of Nike, 324 00:16:45.305 --> 00:16:46.565 and definitely you understand 325 00:16:46.565 --> 00:16:50.125 that here you have a specific point on the graph. 326 00:16:52.195 --> 00:16:54.765 When you compare companies to understand their 327 00:16:55.405 --> 00:16:57.045 relative stock market credibility. 328 00:16:57.555 --> 00:17:01.045 It's interesting to position them on the graph in which the 329 00:17:01.165 --> 00:17:05.685 X axis is a rose and the Y axis is a market to book. 330 00:17:06.195 --> 00:17:08.765 When you look at how Puma, Sketchers 331 00:17:08.765 --> 00:17:12.165 and Nike are comparing, that's absolutely straightforward. 332 00:17:13.005 --> 00:17:16.725 Puma has a lower rate of return and a lower market to book. 333 00:17:16.955 --> 00:17:20.925 Nike has the highest rate of return on the highest market 334 00:17:20.945 --> 00:17:23.805 to book, and Skechers is somewhere in between. 335 00:17:24.575 --> 00:17:27.845 Again, what is very strange is that Adidas 336 00:17:28.105 --> 00:17:31.005 as roughly the same rose as Skechers, 337 00:17:31.405 --> 00:17:33.205 a little bit higher than Puma, 338 00:17:33.465 --> 00:17:36.965 but shares the same market to book as Nike. 339 00:17:37.385 --> 00:17:38.485 That's quite strange, 340 00:17:38.785 --> 00:17:39.845 but that does mean 341 00:17:39.875 --> 00:17:43.045 that the investors are quite optimistic in the future 342 00:17:43.075 --> 00:17:44.765 development of Adidas. 343 00:17:46.705 --> 00:17:48.085 To complete this vidcast 344 00:17:48.385 --> 00:17:51.765 and this description, I would like to make the valuation 345 00:17:51.765 --> 00:17:54.845 of Sketchers and try to compare its fundamental value 346 00:17:54.875 --> 00:17:57.565 with a price which is paid by 3G capital. 347 00:17:58.595 --> 00:18:00.125 When you want to evaluate a company, 348 00:18:00.265 --> 00:18:01.805 you calculate free cash flows, 349 00:18:01.805 --> 00:18:04.085 which you discount at the wac in the free cash flow. 350 00:18:04.225 --> 00:18:06.965 Say something very important, not only the bid up, 351 00:18:07.025 --> 00:18:10.845 but the capital expenditures and the day you want to grow. 352 00:18:10.945 --> 00:18:13.805 You have to grow your manufacturing footprint, you have 353 00:18:13.805 --> 00:18:17.165 to grow your capacity and invest in industrial operations. 354 00:18:17.355 --> 00:18:20.045 This is why the CapEx figure as a percentage 355 00:18:20.045 --> 00:18:23.645 to revenue at Sketchers is significantly high. 356 00:18:24.435 --> 00:18:25.645 It's more than four, 357 00:18:25.875 --> 00:18:28.685 less than 5% if you look at the last four years, 358 00:18:29.185 --> 00:18:32.885 but the company is proposing a guidance for 2025 359 00:18:32.985 --> 00:18:34.725 or 6.7%. 360 00:18:35.505 --> 00:18:38.285 Now it's no more 400 million which are 361 00:18:38.845 --> 00:18:40.045 invested in the business operation. 362 00:18:40.045 --> 00:18:42.885 It's 650 million in CapEx, 363 00:18:43.465 --> 00:18:46.325 and of course when I make the valuation, I'm going 364 00:18:46.325 --> 00:18:49.605 to take a CapEx figure, which is a little bit conservative, 365 00:18:49.665 --> 00:18:53.285 and I will make a sensitivity analysis not only on ebitda, 366 00:18:53.665 --> 00:18:56.565 not only on the growth, but also on the CapEx figure. 367 00:18:58.825 --> 00:19:00.165 Now let's move to the valuation. 368 00:19:00.945 --> 00:19:05.285 I'm going to start with the financial metrics of 2024 369 00:19:05.665 --> 00:19:08.405 to evaluate the company with its current performance. 370 00:19:08.905 --> 00:19:11.805 We already had a discussion on the capital expenditures. 371 00:19:12.485 --> 00:19:14.525 I will use the working capital requirement 372 00:19:14.585 --> 00:19:16.445 as it is a cash conversion cycle 373 00:19:17.025 --> 00:19:20.485 and the EPDA as it is the gross objectives are 374 00:19:20.925 --> 00:19:23.405 provided by the financial communication of the company, 375 00:19:23.495 --> 00:19:25.885 which is providing some guidance for the next years. 376 00:19:26.345 --> 00:19:27.925 As far as the method is concerned, 377 00:19:28.075 --> 00:19:31.605 it's about calculating a fundamental value, so you don't use 378 00:19:32.165 --> 00:19:34.925 multiples, you use the discounted free cash flow method, 379 00:19:35.305 --> 00:19:37.565 so you calculate the free cash flows, a bid 380 00:19:37.565 --> 00:19:41.045 after tax tax savings on the depreciation, plus 381 00:19:41.655 --> 00:19:44.445 minus evolution of the working capital requirement 382 00:19:44.745 --> 00:19:46.125 and capital expenditures. 383 00:19:46.675 --> 00:19:49.285 Then you calculate your free cash flows, you make them grow 384 00:19:49.285 --> 00:19:52.485 during a certain period of time at a high growth rate, 385 00:19:52.545 --> 00:19:54.765 and then you stabilize, you get the terminal value, 386 00:19:54.785 --> 00:19:55.805 you discount at the work, 387 00:19:55.805 --> 00:19:57.485 and then you get the enterprise value. 388 00:19:58.315 --> 00:20:01.205 Generally speaking, to calculate the value of equity, 389 00:20:01.345 --> 00:20:03.765 you calculate enterprise value minus debt, 390 00:20:04.225 --> 00:20:07.485 but as in this company, cash is exceeding debt. 391 00:20:07.825 --> 00:20:09.405 The value of equity is going 392 00:20:09.405 --> 00:20:12.765 to be enterprise value plus cash net of debt. 393 00:20:13.475 --> 00:20:16.085 Once you get the value of equity, you divide by the number 394 00:20:16.085 --> 00:20:17.605 of shares outstanding, 395 00:20:18.505 --> 00:20:22.045 and then starting from this initial fundamental tools 396 00:20:22.225 --> 00:20:24.685 and financial metrics, I'm going 397 00:20:24.685 --> 00:20:27.085 to make a sensitivity analysis to get a kind 398 00:20:27.085 --> 00:20:28.565 of a range for the valuation. 399 00:20:29.115 --> 00:20:34.085 According to my calculation, the range is between 63 and 86, 400 00:20:34.625 --> 00:20:38.965 and you remember that the transaction is proposed at $63 per 401 00:20:38.965 --> 00:20:42.685 share, so it seems to be a quite attractive investment 402 00:20:42.905 --> 00:20:44.085 for 3G capital. 403 00:20:44.175 --> 00:20:47.165 There is an upside potential, which is quite promising 404 00:20:47.350 --> 00:20:48.845 for the new owners of the campaign, 405 00:20:49.305 --> 00:20:50.925 but what is very interesting is 406 00:20:50.925 --> 00:20:52.605 to make a sensitivity analysis 407 00:20:53.185 --> 00:20:56.525 and if you change a B, DA as a percentage to revenue 408 00:20:56.705 --> 00:21:01.205 by just 1%, you change the value by $12. 409 00:21:02.035 --> 00:21:03.725 This is absolutely phenomenal 410 00:21:03.725 --> 00:21:06.165 because in the minds of the new investors, 411 00:21:06.345 --> 00:21:09.045 if you can boost the EBIT D, it's going 412 00:21:09.045 --> 00:21:12.085 to be a fantastic upside potential for the value. 413 00:21:14.555 --> 00:21:16.895 If you look at the picture of sketcher, so far 414 00:21:17.475 --> 00:21:20.335 all the lights are green, good p 415 00:21:20.335 --> 00:21:23.575 and l, strong balance sheet, nice performance growth 416 00:21:23.755 --> 00:21:24.935 and value creation. 417 00:21:24.995 --> 00:21:27.095 For the investors, that's great, 418 00:21:27.095 --> 00:21:29.055 but still there are a few challenges. 419 00:21:29.595 --> 00:21:32.295 The first one I already mentioned is a localization 420 00:21:32.295 --> 00:21:33.815 of the manufacturing footprint. 421 00:21:34.305 --> 00:21:38.415 40% of the product sold by the company are producing China, 422 00:21:38.765 --> 00:21:40.655 another 40% in Vietnam. 423 00:21:41.275 --> 00:21:44.415 So you understand that when everybody's discussing 424 00:21:44.515 --> 00:21:47.255 and asking questions about the evolution of tariffs, 425 00:21:47.725 --> 00:21:48.895 that might be an issue. 426 00:21:49.605 --> 00:21:51.975 This is probably the reason why the stock price 427 00:21:51.975 --> 00:21:54.495 of the company collapsed from 75 plus 428 00:21:54.835 --> 00:21:57.655 to less than 50 quite recently. 429 00:21:58.435 --> 00:22:01.495 Is it going to be an issue in the long term? We'll see. 430 00:22:01.925 --> 00:22:05.455 Certainly an issue in the long term will be the investor. 431 00:22:05.745 --> 00:22:08.135 3G Capital has a very specific 432 00:22:08.275 --> 00:22:11.055 and kind of brutal management culture. 433 00:22:11.525 --> 00:22:13.055 It's very much about cost cutting. 434 00:22:14.005 --> 00:22:17.015 Cost cutting is okay if it is about competitiveness, 435 00:22:17.075 --> 00:22:20.175 but if you cut costs, which are real investment, 436 00:22:20.525 --> 00:22:21.615 that might be an issue. 437 00:22:22.395 --> 00:22:24.455 The company is improving its gross margin, 438 00:22:24.635 --> 00:22:27.215 but he's investing in research, in innovation, 439 00:22:27.355 --> 00:22:30.695 in the digital transformation, in the branding, advertising, 440 00:22:30.695 --> 00:22:31.975 promotion, innovation. 441 00:22:32.755 --> 00:22:36.655 Now you have to keep on investing if you want to create 442 00:22:37.165 --> 00:22:39.495 sustainable, profitable growth. 443 00:22:40.635 --> 00:22:42.855 The last challenge is about competition. 444 00:22:43.375 --> 00:22:47.175 I described the existing competition with big players such 445 00:22:47.175 --> 00:22:49.855 as Adidas and of course Nike, 446 00:22:50.515 --> 00:22:53.935 but there are new Chinese brands which are also quite 447 00:22:54.195 --> 00:22:58.095 trendy, comfort, lifestyle, affordable, 448 00:22:58.595 --> 00:23:03.175 and then the company will have to definitely invest in order 449 00:23:03.275 --> 00:23:07.815 to be successful against these existing and new competitors. 450 00:23:10.185 --> 00:23:12.245 If I say that the management culture 451 00:23:12.265 --> 00:23:15.045 of 3G Capital might be an issue, it's 452 00:23:15.045 --> 00:23:18.205 because I qualified this company as a kind of muscular 453 00:23:18.845 --> 00:23:23.005 investor full of energy in order to reduce and cut costs. 454 00:23:23.745 --> 00:23:26.805 The company was created by three B Brazilian gentlemen 455 00:23:27.035 --> 00:23:29.885 including number one, George Paolo Lemon, 456 00:23:30.585 --> 00:23:31.965 who is very well known 457 00:23:32.105 --> 00:23:36.525 for management practices consisting in reducing costs, 458 00:23:37.075 --> 00:23:39.445 cost cutting, buy, fix and sell. 459 00:23:39.545 --> 00:23:41.245 You buy the company you integrate, 460 00:23:41.245 --> 00:23:43.125 you improve the processes, you cut costs, 461 00:23:43.145 --> 00:23:44.925 you cut everything, and then you sell. 462 00:23:45.275 --> 00:23:48.165 It's a kind of frugal vision of uh, investment 463 00:23:48.345 --> 00:23:51.845 and development, zero based budgeting each and every year. 464 00:23:51.845 --> 00:23:55.965 You have to justify each and every dollar of spending r 465 00:23:55.965 --> 00:23:57.205 and d marketing. 466 00:23:57.295 --> 00:23:59.485 These are not investment, these are cost, 467 00:23:59.485 --> 00:24:01.325 and you have to reduce this cost. 468 00:24:02.225 --> 00:24:05.045 Now, if you look at the track record of 3G Capital, 469 00:24:05.835 --> 00:24:07.085 it's quite differentiated. 470 00:24:07.265 --> 00:24:11.245 The first vidcast of the academy was devoted to Kraft Heinz, 471 00:24:11.735 --> 00:24:14.365 which acquired together with Berkshire Hadaway. 472 00:24:14.625 --> 00:24:17.725 It was massive value destruction. 473 00:24:17.865 --> 00:24:19.565 It was a dramatic story, 474 00:24:20.425 --> 00:24:24.845 and um, 3G Capital got out of Kraft Heinz, by the way, 475 00:24:25.025 --> 00:24:29.365 big losses AB in Bev and Hoi the Bush plus in Bev. 476 00:24:29.365 --> 00:24:30.445 At the beginning it was okay, 477 00:24:30.465 --> 00:24:33.245 but the acquisition of Sub Miller was not that successful. 478 00:24:33.785 --> 00:24:35.645 In the end is just okay. 479 00:24:36.345 --> 00:24:38.085 To be honest, Tim Horton's 480 00:24:38.085 --> 00:24:42.885 and now RBI today is really a successful operation 481 00:24:42.885 --> 00:24:45.725 with a fantastic multiple as an exit. 482 00:24:46.225 --> 00:24:49.965 So you understand that it's a kind of a mixed storytelling 483 00:24:50.395 --> 00:24:52.805 with very good, but very bad news. 484 00:24:54.735 --> 00:24:56.835 So what can we anticipate for the future 485 00:24:56.975 --> 00:25:00.315 of Sketchers in the portfolio of 3G Capital? 486 00:25:01.255 --> 00:25:02.835 Of course, they want to keep on growing. 487 00:25:03.185 --> 00:25:06.635 They have a portfolio of clients, of customers they want 488 00:25:06.635 --> 00:25:09.755 to serve their customers with technology, comfort, 489 00:25:09.905 --> 00:25:11.795 lifestyle, train, and so on and so forth. 490 00:25:12.095 --> 00:25:16.635 But the acquirer is very obsessed by margins. 491 00:25:17.455 --> 00:25:20.235 Now, if you want to grow, you have to invest. 492 00:25:20.375 --> 00:25:23.275 If you want to invest, you have to spend the money, 493 00:25:23.375 --> 00:25:25.515 and it's not only capital expenditures, 494 00:25:25.945 --> 00:25:27.515 it's about expenses in the p 495 00:25:27.515 --> 00:25:29.435 and l, which are not really costs, 496 00:25:29.615 --> 00:25:31.675 but they are investments for the future. 497 00:25:32.465 --> 00:25:36.395 Then the future is going to be probably a little bit made 498 00:25:36.395 --> 00:25:40.555 of tensions, tensions between the management, 499 00:25:40.775 --> 00:25:42.195 the current management. 500 00:25:42.195 --> 00:25:45.715 Sketchers is supposed to remain at the head of the company, 501 00:25:46.255 --> 00:25:48.715 but the relationship with the investors is going 502 00:25:48.715 --> 00:25:50.235 to be probably a little bit chaotic. 503 00:25:50.825 --> 00:25:54.555 They will have to make trade offs between margins today, 504 00:25:54.685 --> 00:25:57.355 investment today, growth tomorrow, 505 00:25:57.935 --> 00:26:01.075 and there will be plenty of paradoxes to manage 506 00:26:01.455 --> 00:26:03.715 for managers in business operations. 507 00:26:04.135 --> 00:26:06.075 So these managers are going 508 00:26:06.075 --> 00:26:09.115 to experience an extremely difficult life 509 00:26:09.615 --> 00:26:12.795 and they need a talent, which is resilience.