1. What is going on at American Greetings?
   1. Discuss the competitiveness of the industry.
   2. Discuss the factors that drive the fundamental value of American Greetings.
2. The shares of American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If yes, why? If not, why not? Whether you think it is appropriate or not what alternative multiple of EBITDA do you think could be used and why? What is the implied share price that corresponds to that multiple?

3. Please model cash flows for American Greetings for fiscal years 2012 through 2015. Using a marginal tax rate of 40% and a market risk premium of 5%. What is your estimate of the appropriate discount rate for the free cash flow forecast? Based on a discounted cash flow model, what is your best estimate of the implied enterprise value of American Greetings and the corresponding share price? Discuss your results and the implications for the decision facing American Greetings.

4. What are the key drivers of value in your model and why? Do you recommend repurchasing shares? Provide specific reasons to support your recommendation.

age 1 CASE 45 American Greetings This year American Greetings is demonstrating to naysayers that the greeting card space is not dead. The company has accelerated top-line (growth] through a combination of organic growth and acquisitions, and year-to-date revenues are trending well ahead of our forecast. However, the growth has come at a cost that is also far greater than we had anticipated ... In Q3 marketing, spending increased by a surprising $10 million ... The company also accelerated investment spending in the digital space to support the growth of recently launched cardstore.com. In addition, (American Greetings] has incurred... incremental expenses this year to roll out new doors in the dollar-store channel. Jeff Stein, Managing Director, Northcoast Research It was New Year's Day 2012, and the weather was unseasonably warm in Cleveland, Ohio, headquarters for American Greetings Corporation (AG). But while temperatures were up, the same could not be said of AG's share price, which had been cut in half over the previous several months to a year-end closing price of $12.51 (Exhibit 45.1). EXHIBIT 45.1 | American Greetings Share Price (monthly close) $30 $25 $20 $15 $10 $5 $0 TT ses & May-10 Jun-10 Jul-10 Nov 10- Dec-10- Jan-11 - Feb-11- Mar 11- April EFE US Aug.11 ny Data source: Yahoo! Finance. At times of low equity valuation, AG management historically had turned to share buybacks. With current valuation levels, management was considering going into the market with a $75 million repurchase program. The repurchase was to be funded from AG's operating profit and cash reserves. The decision hinged on how the future of the enterprise was expected to play out. If the share price reasonably reflected bleak prospects for AG, management should preserve cash for future needs. If, on the other hand, AG stock was simply temporarily out of favor, the buyback plan presented a prudent defensive strategy. American Greetings With $1.7 billion in revenue, AG was the second-largest greeting card publisher in the United States. To meet the changing times, AG sold greeting cards as both paper products through traditional retail channels and electronic products through a number of company websites. In addition to gift cards, AG marketed gift wrap, candles, party Feb 2009 ) 2010 (Feb 2011) (Feb ) 2011E Feb 2012) 1,593 1,677 743 526 258 0 6 157 28 129 47 82 Total American Greetings Figures Total Revenue Material Liber, and Other Production Costs Seling. Distribution and Marketing Expenses Administrative and General Expenses Goodwill and Other Intangible Asset Impairments Other Operating Expenses Operating Income Net Interest and Other Nonoperating Expenses Income Before Income Tax Expense Income Tax Expense Net Income Earnings Per Share Basic Dividends per Share By Business Unit Operating Sogmont Not Sales North American Social Expression Products International Social Expression Products Real Operations AG Interactive Operating Segment Eornings North American Social Expression Products International Social Expression Products Retal Operations AG Interactive 2.18 0.56 goods, candles, and other giflware. To strengthen its business, the company owned and maintained the Page 572 following major brands: American Grectings, Carlton Cards, Gibson, Recycled Paper Grectings, Papyrus, and Design Ware. AG owned the rights to a variety of popular characters, including Strawberry Shortcake, the Care Bears, Holly Hobbie, the Get Along Gang, and the Nickelodeon characters. The company was able to generate additional revenue by licensing the rights to these characters. Overall, management positioned AG as a lcader in social cxpression products that assisted "consumers in enhancing their relationships to create happiness, laughter, and love."l The company had a long affiliation with the founding Sapirstein family. Shortly after immigrating to the United States in 1905, Jacob Sapirstein, a Polish entrepreneur, launched a business distributing German manufactured postcards in Cleveland with the help of his young family. Eventually the business leadership was passed on to Jacob's oldest son, Irving Stone, then to Irving's son-in-law, Morry Weiss. In 2003, Morry's sons, Zev and Jeffrey Weiss, were appointed as CEO and president, respectively. Morry Weiss continued to serve as chairman Despite the strong family affiliation, AG was widely held in the public equity markets, with more than 11,000 sharcholders, including large positions by such institutional investors as the British investment fund MAM Investments (10.6% of AG shares) and U.S. funds Dimensional Fund Advisors (10.5%), BlackRock (7.9%), and LSV Asset Management (6.7%). Dividend payments to investors had been on an upward trend in recent years, rising from 12 cents per share in 2004 to 56 cents in 2010. . Exhibits 45.2 and 45.3 provide AG's detailed financial statements. Since AG's fiscal year ended in February, the figures for 2011, for example, included results through February 2012, so remained estimates for the remaining two months. 2.22 0.60 7861698 99 * * * * * 078509288 | 93 48 4+8= *** 1.191 262 1.215 344 1,095 271 179 83 78 68 218 20 148 20 70 (78) (19) 1162) 14 Total Revenue by Product Category Everyday Greeting Cards 704 Seasonal Greeting Cards 357 Gift Packaging 240 Other Revenue 44 All Other Products 345 Det snurces: Company account management and Chester estimates. Fiscal year ends February of subsequent year 753 377 223 32 207 823 408 239 32 176 EXHIBIT 45.2 American Greetings Income Statement, December 2011! (in millions of dollars) EXHIBIT 45.3 American Greetings Balance Sheet! (in nillions of dollars) 2009 2010 2011E Feb 2010) Feb 2011) Feb 2012) Cash and Cash Equivalents 138 216 Trade Accounts Receivable 136 120 Inventories 164 180 Prepaid Expenses 148 128 Othor Current Assets 94 72 Total Current Assets 679 716 Not Property. Plant, and Equipment and Other Assots 850 832 Total Assets 1,529 1.547 Dobt Duo within Ono Yom 1 0 Accounts Payable 95 87 Other Current Liabilities 272 245 Curront Lisbilities 369 332 Long-Term Debt 329 233 Other Libilities 196 219 Sharcholders' Equity 636 763 Total Liabilities and Shareholders' Equity 1,529 1.547 1.536 Dute sources: Company accounts: management and case syitor estimates. IF real your and February of absent year, . * * * * * expanded to Greeting Cards Two players, Hallmark and AG, dominated the US. greetings card industry. Hallmark, privately held by the Hall family, was the larger of the two, with total worldwide revenue at S4 billion. From its headquarters in Kansas City, Missouri, Hallmark had aggressively expanded its business internationally with operations in more than 100 countries. Hallmurk maintained licensing agreements with independent Hallmark Gold Crown retail stores that marketed Hallmark products and owned ancillary businesses such as Crayola (the crayon maker) and the Hallmark Channel cable network. Other card companies, such as Avanti Press, Blyth, CSS Industries, and Deluxe had found successful niches in the $6 billion U.S. greeting card market. Mintel, the industry analyst firm, maintained that the overall greeting card market had contracted by 9% since 2005 and that the contraction would continue (Exhibit 45.4), Mintel's best-case scenario called for a 4% market decline over the next four years; its worst-case called for a 16% decline. The market contraction was thought to samostan be driven by the substitution for greeting cards of other forms of social expression products, due to the case of such alternative forms as smart phones, electronic social networking, and digital imaging, the last of which affected the traditional Christmas card mrket in particular. The rapid expansion of social media networks such as Facebook provided even stronger challenges to electronic cards, An industry survey found that the Page 573 social media substitution was particularly acute in a younger demographic (Exhibit 45.5). Analysts expected the trend to continue as the case of digital communication substituted for traditional forms of social expression EXIBIT 45.4 | Total U.S. Greeting Cards Sales (Actual and Forecast) ) cards electronically. Card manufacturers maintained websites that allowed consumers to purchase paper greeting cards on the Internet via computer or smart phone and have the physical cards delivered directly to the recipient. Kiosks had been placed in retail stores that allowed customers to create custom cards. Distribution hed ed to build a substantive presence in the cxpanding dollar-store retail channel, where greeting cards were reported to be a top-selling item. Despite the trends, large numbers of people continued to buy greeting cards. In a recent survey, 52% of US. respondents had purchased a greeting card in the past three months. This figure was down from 59% who had responded affirmatively in 2006.2 Valuation With an end-of-year close of $12.51 per share, AG's PE ratio was at 6 times, its enterprise value to EBITDA ratio at 3.5 times, and its market-to-book ratio was below 1. All these valuation ratios were at the bottom of AG's group of comparable companies. Exhibit 45.6 contains financial details and business descriptions for the AG-comparable group. AG's management believed its valuation suggested an opportunity, but low levels also demonstrated substantial concem by the capital market regarding the prospects of the company. For example, equity analysts at Standard and Poor's maintained a hold recommendation on the stock, claiming t following We see [AG's 2012] sules increasing 2.5% to $1.73 billion. ... We see demand benefitting from increased promotional speading in a more stable cconomic cuvironment as the company pursues growth within the discount distribution channel... acquisitions ... [and] international saks... We expect margins to narrow ... reflecting a shift in customer mix toward the discount channel, increasing marketing costs to pur demand, distribution expansion costs, and expenses related to plans to move AG's headquarters buikling While we believe channel migration will result in a permanent negative margin shift, we do not helieve transition costs related to expanded distribution cfforts will be a factor in the long term. ! EXHIBIT 15.6 Carparable Fires, End of 2011 (in illions of dollars except share price) Sales at current prices In millions of dollars annual change 2005 6.537 2006 6,420 -18 2007 6,285 -2.1 2000 -03 2009 6,109 -19 2010 5,935 -3.5 2011 fost 5838 -16 2012 s 5711 -22 2013) 5.596 -2.0 2011 5,078 -2.1 2015 5.359 -22 DHL ure: Vintul, bens e II. S. Canx Ruraw, Fourmie Conxu. ALI EXHIBIT 45.5 Feelings about Cards: Usage Chenge abong 2, 00 Respocidents, October 2010 By Ape Category 18-24 25-34 35 40 45 50 55-64 65+ In the last year, I want me card tamil sadn. 22% 17% 26% 20 2246 21% 24% In the last year, I har ut four-cach - thone to calcand greetings over social networking sites such as Facebook 20%26% 27% 218 1916 15% 13% Dotore: Vintel The industry had responded to the substantive technological shift with important market innovations. Both Hallmark and AG had created an extensive collection of electronic cards that made it easy for customers to send Enterprise Valo 2011 EXTITBIT 45.7 American Greetings Operating Performance 2005 2006 2007 2008 2009 2010 Revenue Growth 0 -7% - 1% -5% -3 Operating Margin 8 25 GS 96 9% 714 569 592 194 1,901 NA 1,800 1,712 1,145 EBITDA Revenue EBITDA Multiple 1,550 204 3.5 984 48 11.7 1,050 122 5.5 453 30 6.5 1,420 359 5.3 4,100 NA NA 1,000 156 12.2 1,350 240 7.1 1,950 189 6.0 896 25 Shares Total Total Price Outstanding Cash Debt American Gewings 12.51 38.3 35 235 Blyth 5680 82 182 101 Consolidated Graphics 48.28 102 7 197 CSS Industries 19.92 97 10 0 Do 22.76 50.5 31 742 Hallmark NA NA NA NA Lancaster Culory 60.34 27.3 162 0 Meredith 3265 44A 26 250 Scholastic 29.97 31.1 114 215 Rond ROA ROE Bets Rating American Greetings 7 7% 11% 163 18+ Blyth OR 1.60 B Console Graphies 5% 10% 1.45 FA CSS Industries 1.35 Deluxe 136 56 95% 185 B Hallmark NA NA Lancaster Colony 10% 195 0.42 Meredith 7% 15 1.75 BB Scholastic 6% 8% 104 FR Dostures Ystad France, Stand & Poor's Mergent EBITDA miles defined as reprise Value divided by EBITDA The raigs for Con Graphics and Mardiharated by come wil 46 2011 2005 2006 2007 2008 2009 2050 Revenue growth -- Oporting margin Vote: Final and buy a subsequent Data source: Co pay financial state ents. A bullish view held that AG would be able to maintain operating margins at 9% and achieve long-term ongoing revenue growth of 3%. A bearish view held that AG's prospective revenue growth would be near zero into the future and that margins would continue to erode to a long-term rate of 5%. The expectation was that recent investments and ongoing electronic product substitution would generate some future working capital efficiency for AG, but there was little evidence that fixed asset turnover would improve. Exhibit 45.8 details the specific assumptions for the two scenarios. Bly Global marketer of candios, gourmet food, weight management products, holiday , cards, photo albums and houseware products Consolidated Graphics Provides commercial printing services in North America, including brochures, the holder communications, trading cards, calendars, catalogs, and greeting cards CSS Industries Design, produces, and all social expression products in North America, including greeting cards, it wapping, Valentine cards, Halloween costumes, and stationery Dulu Provide printed products to financial institutions and small businesses worldwide including forms, checks, orwelopes, and grooting cards Lancaster Colony Manufactures and markets specially foods, glassware, and candies in the United States Meredith Licenses brands and publishes magazines in Better Homes and Gardens Ladies Home Jumal Family Fun in the United States Scho Publishes and distributes children's books and other media in the United States Des courte: A vriter Art Orly Seidman, a Value Line analyst, held a more optimistic view, cxpecting steady margins and steady long- term growth: The company has been improving the product pipeline Management should continue to follow consumer and socictal trends to better brand its offcrings. It has shifted its focus from its core segment to pursue noncard merchandise. Product innovation, stronger retail partnerships, and sell-diversified portfolio cught to Page 574 drive customer interest in its goods. Technological enhancements will likely remain key to its long-term approach. Over the past few quarters, (AG) rolled out several complementary interactive products (ie, mobile apps) and should continue to bakter is digital position.1 It was clear that there was substantial disagreement regarding the future growth trajectory and operating margins for the company. Over the past several years, revenue growth had been near to below zero. In 2011, however, revenue growth was anticipated to be more than 7% (Exhibit 45.7). Similarly, operating margins, which had been abnormally low two to five years previously, had improved to 9% recently. The marginal tax rate for AG income was 39%. EXHIBIT 15.8 Financial Forecast Assumptions Actual Forecast 2011 2012 2013 2014 2015 Bullsh Scenario Revenue Growth 5.34 1.05 1.5% 2.08 255 Operating Margin 9.49 9.0% 9.0% 9.0% 9.0% Net Working Capital Turnover 5.02 6.00 6.50 7.00 7.50 Fred Asset Tumover 1.95 1.95 1.95 1.95 1.95 Bearish Scenario Rovenue Growth 6.36 5 0.06 0.0% 0.0% 005 Operating Margin 9.4% 7.06. 6.OK 5.04 Not Working Capital Turnover 5.00 6.00 6.50 700 Fred As Tumor 1.05 1.95 1.05 1.95 1.95 Note: The ratics are defined in the following sunner: Rovanie Growth in the snus percentage chain is total revenue, barsting Verein is operating in divided he total creanu, Net Working Casital Turvaver ir tual revenas civised by Let working capital where set working capital is current assets less current lobelistes, Fixed Asset Turnover is total revende duvided by net FPEE Another cssets. Dels murse: Can writer metinlux. DELN : Management understood that returns and growth were challenging to achieve in early 2012. Yields on U.S. Treasury bills and bonds were at historic lows of 0.1% and 2.8%, respectively (Exhibit 45.9). In such an cnvironment, investors would richly reward retums of even small magnitudes. EXTITBIT 45.9 Capital Market Data Yield 30-Day Treasury Bill 0.1% 10-Year Treasury Bond 2.8% 10-Year Corporate Bonds of Industrial Companies AAA 2.8% AA 2.9% A+ 3.2% A 3.3% A- 3.5% BBB+ 3.8% BBB 4.1% BBB- 4.6% BB+ 5.8% BB 6.5% BB- 6.5% B+ 6.8% B 8.4% B- 9.0% Historical Market Risk Premium Equity Market Index Less Government Debt 5.5% 5-Year Forecast U.S. Real GDP Annual Growth Rate 3.3% U.S. GDP Annual Deflator Rate 1.8% Consumer Price Index Annual Rate 2.2% Data sources: Bloomberg, Value Line Investment Survey, and case writer estimates. age 1 CASE 45 American Greetings This year American Greetings is demonstrating to naysayers that the greeting card space is not dead. The company has accelerated top-line (growth] through a combination of organic growth and acquisitions, and year-to-date revenues are trending well ahead of our forecast. However, the growth has come at a cost that is also far greater than we had anticipated ... In Q3 marketing, spending increased by a surprising $10 million ... The company also accelerated investment spending in the digital space to support the growth of recently launched cardstore.com. In addition, (American Greetings] has incurred... incremental expenses this year to roll out new doors in the dollar-store channel. Jeff Stein, Managing Director, Northcoast Research It was New Year's Day 2012, and the weather was unseasonably warm in Cleveland, Ohio, headquarters for American Greetings Corporation (AG). But while temperatures were up, the same could not be said of AG's share price, which had been cut in half over the previous several months to a year-end closing price of $12.51 (Exhibit 45.1). EXHIBIT 45.1 | American Greetings Share Price (monthly close) $30 $25 $20 $15 $10 $5 $0 TT ses & May-10 Jun-10 Jul-10 Nov 10- Dec-10- Jan-11 - Feb-11- Mar 11- April EFE US Aug.11 ny Data source: Yahoo! Finance. At times of low equity valuation, AG management historically had turned to share buybacks. With current valuation levels, management was considering going into the market with a $75 million repurchase program. The repurchase was to be funded from AG's operating profit and cash reserves. The decision hinged on how the future of the enterprise was expected to play out. If the share price reasonably reflected bleak prospects for AG, management should preserve cash for future needs. If, on the other hand, AG stock was simply temporarily out of favor, the buyback plan presented a prudent defensive strategy. American Greetings With $1.7 billion in revenue, AG was the second-largest greeting card publisher in the United States. To meet the changing times, AG sold greeting cards as both paper products through traditional retail channels and electronic products through a number of company websites. In addition to gift cards, AG marketed gift wrap, candles, party Feb 2009 ) 2010 (Feb 2011) (Feb ) 2011E Feb 2012) 1,593 1,677 743 526 258 0 6 157 28 129 47 82 Total American Greetings Figures Total Revenue Material Liber, and Other Production Costs Seling. Distribution and Marketing Expenses Administrative and General Expenses Goodwill and Other Intangible Asset Impairments Other Operating Expenses Operating Income Net Interest and Other Nonoperating Expenses Income Before Income Tax Expense Income Tax Expense Net Income Earnings Per Share Basic Dividends per Share By Business Unit Operating Sogmont Not Sales North American Social Expression Products International Social Expression Products Real Operations AG Interactive Operating Segment Eornings North American Social Expression Products International Social Expression Products Retal Operations AG Interactive 2.18 0.56 goods, candles, and other giflware. To strengthen its business, the company owned and maintained the Page 572 following major brands: American Grectings, Carlton Cards, Gibson, Recycled Paper Grectings, Papyrus, and Design Ware. AG owned the rights to a variety of popular characters, including Strawberry Shortcake, the Care Bears, Holly Hobbie, the Get Along Gang, and the Nickelodeon characters. The company was able to generate additional revenue by licensing the rights to these characters. Overall, management positioned AG as a lcader in social cxpression products that assisted "consumers in enhancing their relationships to create happiness, laughter, and love."l The company had a long affiliation with the founding Sapirstein family. Shortly after immigrating to the United States in 1905, Jacob Sapirstein, a Polish entrepreneur, launched a business distributing German manufactured postcards in Cleveland with the help of his young family. Eventually the business leadership was passed on to Jacob's oldest son, Irving Stone, then to Irving's son-in-law, Morry Weiss. In 2003, Morry's sons, Zev and Jeffrey Weiss, were appointed as CEO and president, respectively. Morry Weiss continued to serve as chairman Despite the strong family affiliation, AG was widely held in the public equity markets, with more than 11,000 sharcholders, including large positions by such institutional investors as the British investment fund MAM Investments (10.6% of AG shares) and U.S. funds Dimensional Fund Advisors (10.5%), BlackRock (7.9%), and LSV Asset Management (6.7%). Dividend payments to investors had been on an upward trend in recent years, rising from 12 cents per share in 2004 to 56 cents in 2010. . Exhibits 45.2 and 45.3 provide AG's detailed financial statements. Since AG's fiscal year ended in February, the figures for 2011, for example, included results through February 2012, so remained estimates for the remaining two months. 2.22 0.60 7861698 99 * * * * * 078509288 | 93 48 4+8= *** 1.191 262 1.215 344 1,095 271 179 83 78 68 218 20 148 20 70 (78) (19) 1162) 14 Total Revenue by Product Category Everyday Greeting Cards 704 Seasonal Greeting Cards 357 Gift Packaging 240 Other Revenue 44 All Other Products 345 Det snurces: Company account management and Chester estimates. Fiscal year ends February of subsequent year 753 377 223 32 207 823 408 239 32 176 EXHIBIT 45.2 American Greetings Income Statement, December 2011! (in millions of dollars) EXHIBIT 45.3 American Greetings Balance Sheet! (in nillions of dollars) 2009 2010 2011E Feb 2010) Feb 2011) Feb 2012) Cash and Cash Equivalents 138 216 Trade Accounts Receivable 136 120 Inventories 164 180 Prepaid Expenses 148 128 Othor Current Assets 94 72 Total Current Assets 679 716 Not Property. Plant, and Equipment and Other Assots 850 832 Total Assets 1,529 1.547 Dobt Duo within Ono Yom 1 0 Accounts Payable 95 87 Other Current Liabilities 272 245 Curront Lisbilities 369 332 Long-Term Debt 329 233 Other Libilities 196 219 Sharcholders' Equity 636 763 Total Liabilities and Shareholders' Equity 1,529 1.547 1.536 Dute sources: Company accounts: management and case syitor estimates. IF real your and February of absent year, . * * * * * expanded to Greeting Cards Two players, Hallmark and AG, dominated the US. greetings card industry. Hallmark, privately held by the Hall family, was the larger of the two, with total worldwide revenue at S4 billion. From its headquarters in Kansas City, Missouri, Hallmark had aggressively expanded its business internationally with operations in more than 100 countries. Hallmurk maintained licensing agreements with independent Hallmark Gold Crown retail stores that marketed Hallmark products and owned ancillary businesses such as Crayola (the crayon maker) and the Hallmark Channel cable network. Other card companies, such as Avanti Press, Blyth, CSS Industries, and Deluxe had found successful niches in the $6 billion U.S. greeting card market. Mintel, the industry analyst firm, maintained that the overall greeting card market had contracted by 9% since 2005 and that the contraction would continue (Exhibit 45.4), Mintel's best-case scenario called for a 4% market decline over the next four years; its worst-case called for a 16% decline. The market contraction was thought to samostan be driven by the substitution for greeting cards of other forms of social expression products, due to the case of such alternative forms as smart phones, electronic social networking, and digital imaging, the last of which affected the traditional Christmas card mrket in particular. The rapid expansion of social media networks such as Facebook provided even stronger challenges to electronic cards, An industry survey found that the Page 573 social media substitution was particularly acute in a younger demographic (Exhibit 45.5). Analysts expected the trend to continue as the case of digital communication substituted for traditional forms of social expression EXIBIT 45.4 | Total U.S. Greeting Cards Sales (Actual and Forecast) ) cards electronically. Card manufacturers maintained websites that allowed consumers to purchase paper greeting cards on the Internet via computer or smart phone and have the physical cards delivered directly to the recipient. Kiosks had been placed in retail stores that allowed customers to create custom cards. Distribution hed ed to build a substantive presence in the cxpanding dollar-store retail channel, where greeting cards were reported to be a top-selling item. Despite the trends, large numbers of people continued to buy greeting cards. In a recent survey, 52% of US. respondents had purchased a greeting card in the past three months. This figure was down from 59% who had responded affirmatively in 2006.2 Valuation With an end-of-year close of $12.51 per share, AG's PE ratio was at 6 times, its enterprise value to EBITDA ratio at 3.5 times, and its market-to-book ratio was below 1. All these valuation ratios were at the bottom of AG's group of comparable companies. Exhibit 45.6 contains financial details and business descriptions for the AG-comparable group. AG's management believed its valuation suggested an opportunity, but low levels also demonstrated substantial concem by the capital market regarding the prospects of the company. For example, equity analysts at Standard and Poor's maintained a hold recommendation on the stock, claiming t following We see [AG's 2012] sules increasing 2.5% to $1.73 billion. ... We see demand benefitting from increased promotional speading in a more stable cconomic cuvironment as the company pursues growth within the discount distribution channel... acquisitions ... [and] international saks... We expect margins to narrow ... reflecting a shift in customer mix toward the discount channel, increasing marketing costs to pur demand, distribution expansion costs, and expenses related to plans to move AG's headquarters buikling While we believe channel migration will result in a permanent negative margin shift, we do not helieve transition costs related to expanded distribution cfforts will be a factor in the long term. ! EXHIBIT 15.6 Carparable Fires, End of 2011 (in illions of dollars except share price) Sales at current prices In millions of dollars annual change 2005 6.537 2006 6,420 -18 2007 6,285 -2.1 2000 -03 2009 6,109 -19 2010 5,935 -3.5 2011 fost 5838 -16 2012 s 5711 -22 2013) 5.596 -2.0 2011 5,078 -2.1 2015 5.359 -22 DHL ure: Vintul, bens e II. S. Canx Ruraw, Fourmie Conxu. ALI EXHIBIT 45.5 Feelings about Cards: Usage Chenge abong 2, 00 Respocidents, October 2010 By Ape Category 18-24 25-34 35 40 45 50 55-64 65+ In the last year, I want me card tamil sadn. 22% 17% 26% 20 2246 21% 24% In the last year, I har ut four-cach - thone to calcand greetings over social networking sites such as Facebook 20%26% 27% 218 1916 15% 13% Dotore: Vintel The industry had responded to the substantive technological shift with important market innovations. Both Hallmark and AG had created an extensive collection of electronic cards that made it easy for customers to send Enterprise Valo 2011 EXTITBIT 45.7 American Greetings Operating Performance 2005 2006 2007 2008 2009 2010 Revenue Growth 0 -7% - 1% -5% -3 Operating Margin 8 25 GS 96 9% 714 569 592 194 1,901 NA 1,800 1,712 1,145 EBITDA Revenue EBITDA Multiple 1,550 204 3.5 984 48 11.7 1,050 122 5.5 453 30 6.5 1,420 359 5.3 4,100 NA NA 1,000 156 12.2 1,350 240 7.1 1,950 189 6.0 896 25 Shares Total Total Price Outstanding Cash Debt American Gewings 12.51 38.3 35 235 Blyth 5680 82 182 101 Consolidated Graphics 48.28 102 7 197 CSS Industries 19.92 97 10 0 Do 22.76 50.5 31 742 Hallmark NA NA NA NA Lancaster Culory 60.34 27.3 162 0 Meredith 3265 44A 26 250 Scholastic 29.97 31.1 114 215 Rond ROA ROE Bets Rating American Greetings 7 7% 11% 163 18+ Blyth OR 1.60 B Console Graphies 5% 10% 1.45 FA CSS Industries 1.35 Deluxe 136 56 95% 185 B Hallmark NA NA Lancaster Colony 10% 195 0.42 Meredith 7% 15 1.75 BB Scholastic 6% 8% 104 FR Dostures Ystad France, Stand & Poor's Mergent EBITDA miles defined as reprise Value divided by EBITDA The raigs for Con Graphics and Mardiharated by come wil 46 2011 2005 2006 2007 2008 2009 2050 Revenue growth -- Oporting margin Vote: Final and buy a subsequent Data source: Co pay financial state ents. A bullish view held that AG would be able to maintain operating margins at 9% and achieve long-term ongoing revenue growth of 3%. A bearish view held that AG's prospective revenue growth would be near zero into the future and that margins would continue to erode to a long-term rate of 5%. The expectation was that recent investments and ongoing electronic product substitution would generate some future working capital efficiency for AG, but there was little evidence that fixed asset turnover would improve. Exhibit 45.8 details the specific assumptions for the two scenarios. Bly Global marketer of candios, gourmet food, weight management products, holiday , cards, photo albums and houseware products Consolidated Graphics Provides commercial printing services in North America, including brochures, the holder communications, trading cards, calendars, catalogs, and greeting cards CSS Industries Design, produces, and all social expression products in North America, including greeting cards, it wapping, Valentine cards, Halloween costumes, and stationery Dulu Provide printed products to financial institutions and small businesses worldwide including forms, checks, orwelopes, and grooting cards Lancaster Colony Manufactures and markets specially foods, glassware, and candies in the United States Meredith Licenses brands and publishes magazines in Better Homes and Gardens Ladies Home Jumal Family Fun in the United States Scho Publishes and distributes children's books and other media in the United States Des courte: A vriter Art Orly Seidman, a Value Line analyst, held a more optimistic view, cxpecting steady margins and steady long- term growth: The company has been improving the product pipeline Management should continue to follow consumer and socictal trends to better brand its offcrings. It has shifted its focus from its core segment to pursue noncard merchandise. Product innovation, stronger retail partnerships, and sell-diversified portfolio cught to Page 574 drive customer interest in its goods. Technological enhancements will likely remain key to its long-term approach. Over the past few quarters, (AG) rolled out several complementary interactive products (ie, mobile apps) and should continue to bakter is digital position.1 It was clear that there was substantial disagreement regarding the future growth trajectory and operating margins for the company. Over the past several years, revenue growth had been near to below zero. In 2011, however, revenue growth was anticipated to be more than 7% (Exhibit 45.7). Similarly, operating margins, which had been abnormally low two to five years previously, had improved to 9% recently. The marginal tax rate for AG income was 39%. EXHIBIT 15.8 Financial Forecast Assumptions Actual Forecast 2011 2012 2013 2014 2015 Bullsh Scenario Revenue Growth 5.34 1.05 1.5% 2.08 255 Operating Margin 9.49 9.0% 9.0% 9.0% 9.0% Net Working Capital Turnover 5.02 6.00 6.50 7.00 7.50 Fred Asset Tumover 1.95 1.95 1.95 1.95 1.95 Bearish Scenario Rovenue Growth 6.36 5 0.06 0.0% 0.0% 005 Operating Margin 9.4% 7.06. 6.OK 5.04 Not Working Capital Turnover 5.00 6.00 6.50 700 Fred As Tumor 1.05 1.95 1.05 1.95 1.95 Note: The ratics are defined in the following sunner: Rovanie Growth in the snus percentage chain is total revenue, barsting Verein is operating in divided he total creanu, Net Working Casital Turvaver ir tual revenas civised by Let working capital where set working capital is current assets less current lobelistes, Fixed Asset Turnover is total revende duvided by net FPEE Another cssets. Dels murse: Can writer metinlux. DELN : Management understood that returns and growth were challenging to achieve in early 2012. Yields on U.S. Treasury bills and bonds were at historic lows of 0.1% and 2.8%, respectively (Exhibit 45.9). In such an cnvironment, investors would richly reward retums of even small magnitudes. EXTITBIT 45.9 Capital Market Data Yield 30-Day Treasury Bill 0.1% 10-Year Treasury Bond 2.8% 10-Year Corporate Bonds of Industrial Companies AAA 2.8% AA 2.9% A+ 3.2% A 3.3% A- 3.5% BBB+ 3.8% BBB 4.1% BBB- 4.6% BB+ 5.8% BB 6.5% BB- 6.5% B+ 6.8% B 8.4% B- 9.0% Historical Market Risk Premium Equity Market Index Less Government Debt 5.5% 5-Year Forecast U.S. Real GDP Annual Growth Rate 3.3% U.S. GDP Annual Deflator Rate 1.8% Consumer Price Index Annual Rate 2.2% Data sources: Bloomberg, Value Line Investment Survey, and case writer estimates