D15-46. Assessment of Comparables, Multiples, and Observed PB Refer to the information in D15-44 and D15-45.
Required

a. Comment on the reasonableness of using Ralph Lauren Corp. and The Gap Inc. as comparables in valuing Guess? Inc.

b. Assume that you are a staff analyst at a major analyst firm. Write a memorandum to your senior analyst identifying any issues you believe should be considered before using the value estimates from D15-44 and D15-45.

c. Analysts’ average 5-year earnings growth forecast for Guess? is 4.3%. Which of the firms in the table below do you believe would be best for valuing Guess? using comparable PE ratios? Explain.
Company Ticker Analysts’ 5-Year Earnings Forecasts Debt-to-
Equity ROE Forward PE PB Current Hanesbrands. . . . . . . . . . . . . . . . HBI 12.47% 1.37 31.22% 14.34 5.97 Foot Locker. . . . . . . . . . . . . . . . . FL 9.85% 0.06 17.33% 13.70 2.48 The Home Depot. . . . . . . . . . . . . HD 16.43% 1.18 35.55% 16.14 9.05 The Men’s Wearhouse . . . . . . . . MW 8.30% 0.09 10.22% 19.93 2.46 Apollo Global Management . . . . APO (15.34)% 2.01 39.28% 10.97 1.69 Cabela's. . . . . . . . . . . . . . . . . . . . CAB 17.80% 1.76 15.05% 15.47 2.87 Perry Ellis . . . . . . . . . . . . . . . . . . PERY 4.60% 0.51 2.61% 14.29 0.56 TJX Companies. . . . . . . . . . . . . . TJX 10.97% 0.30 54.14% 17.11 10.36 Quiksilver . . . . . . . . . . . . . . . . . . ZQK 15.00% 2.14 (48.37)% 26.48 3.51 Kohl's. . . . . . . . . . . . . . . . . . . . . . KSS 5.45% 0.81 14.79% 11.76 2.00 Abercrombie & Fitch . . . . . . . . . ANF 14.34% 0.11 3.08% 15.07 1.73 Dillard's . . . . . . . . . . . . . . . . . . . . DDS 16.40% 0.41 16.34% 10.24 2.03

d. The PB ratio for Guess? is 2.32, its trailing four-quarters ROE is 14.32%, its historical five-year average EPS growth is −9.82% (with an industry average of 16%), and analysts forecast a 14%
earnings growth rate for the industry over the next five years. Using this information, reverse engineer the expectations implied by Guess?’s PB ratio.
PB* (equals PB ratio observed ???? 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.32 Case 1: Solve for implied growth rate Assumed parameters ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%
Discount rate, r

e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11%
Implied parameter Growth rate, ( r e1 [PB* ???? r e]????????????ROE)/PB*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? %
Case 2: Solve for implied discount rate Assumed parameters ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%
Growth rate, g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5%
Implied parameter Discount rate, (ROE????1????[PB* ???? g])/(1 1????PB*). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Case 3: Solve for implied future ROE Assumed parameters Discount rate, r

e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11%
Growth rate, g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5%
Implied parameter ROE, (PB* ???? [ r e????????g]) 1????r

e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? %