Nike Wacc Case Study

Financial Management Agenda 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 2 Case Overview Nike, Inc. NorthPoint Group Investment Decision Current share price of USD 42. 09 ? Declining market share for the period 1997-2000 ? Strategy for revitalizing the company under consideration ? Plan to boost revenue and optimize costs ? Highly experienced management team ? Mutual fund management firm ? Emphasis on large-cap value stocks ? Has been outperforming the market for the past 18 months ? Kimi Ford – portfolio manager seeking to identify undervalued stocks, consistent with the fund’s investment strategy ? Stock valuation based on forecasting future cash flows over a ten year period ? Discounting the UFCFF using a predetermined WACC value ? Calculating the discount factor based on the CAPM approach ? Considering sensitivity analysis 3 Understanding the WACC ? The Weighted Average Cost of Capital is the interest rate (minimal return) at which investor-supplied capital (equity and interest bearing loans) has been provided. Therefore, it is the weighted average minimum expectation, which shareholders and creditors require for their respective investments made with the company under consideration. The WACC reflects both, the cost of equity and the cost of debt. Different sources of funds have different costs and therefore, depending on the capital structure of the organization, the weightings of debt and equity are calculated and assigned. ? The WACC is calculated using the following equation: WACC = [E/(D+E)] x Ke + [D/(D+E)] x Kd (1-t) ? The minimum required return on shareholders’ investment. ? CAPM method has been widely used in calculating the cost of equi ty. ? Ke = Rf + b. (Rm – Rf) ? Risk level and volatility are calculated based on historical data. Cost of Equity Cost of Debt ? The interest rate at which a company can acquire new debt. ? Any fixed rates on outstanding debt are not relevant, since the investors are concerned with what it will cost the company to generate cash from any future investments, which would occur at market rates rather than historical ones. ? After tax cost of debt = (1-t)Kd, since interest is tax deductible. 4 Critique of Joanna’s Calculations Calculating Ke Since Joanna’s FCF forecast reflects a ten year period, it could be argued that, for the sake of consistency, the yield of a risk free ten year security should be used instead. ? An arithmetic mean estimation of the risk premium is generally accepted as an appropriate approach by the investment community. * ? Since Nike is a multinational company, its revenue stream bears additional risk based on the specific allocations to various countries. This should reflect additi onal risk premium such as exchange rate risk, political risk etc. Such calculation goes beyond the scope of this case but it should not be ignored. Beta has been calculated as a historic average but the included value YTD 06/30/01 should be excluded not only since it is not consistent in terms of period length, but the apparels business is seasonal with great portion of the revenues coming during the months of Dec. and Nov. Historic betas prior to 1996 should not be excluded. Calculating Kd ? Cost of debt is not properly calculated since potential shareholders and creditors are not concerned with interest on outstanding debt, but rather the current market rate at which the company could borrow to finance its operations and potential expansion. The technique used by Joanna is useful only to get some rough insight on what Nike is paying on its existing debt. ? Joanna has undertaken an appropriate approach in calculating the after tax cost of debt, since debt is tax deductible. ? Joann a is right to consider debt denominated in foreign currency, however her approach is flawed since she is once again looking at outstanding debt, which arrangements that occurred some time in the past might significantly differ from the current market reality. ? Since existing Nike bonds are trading at discount, we already know that the market yield exceeds the coupon rate. 5 Strong arguments exist for using the geometric mean under certain circumstances. This point will be further elaborated Agenda 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regardin g an investment in Nike? Calculating Cost of Equity ? Rf = 5. 39% based on the current 10 year yield for the sake of consistency with the forecasted 10 year FCFF. ? Calculating risk premium based on arithmetic average vs geometric mean: ? Arithmetic average assumes no serial correlation and thus could be overstating the premium. ? Arithmetic average ignores estimation error and available data is limited. ? Arithmetic average works best for forecasting short term periods where long term periods seem to be better captured by the geometric mean. Cost of Equity Yield on 10-year Treasuries Risk premium – developed market (geo. Risk premium – developed market (arit. ) 5. 39% 5. 90% 7. 50% Average risk premium Risk premium – country specific Levered ? Unlevered Cost of Equity 6. 70% 0. 00% 0. 82 0. 77 10. 91% ? Both methods are acceptable and even though the arithmetic mean is widely accepted as the proper method, we are using an average of both since we are dealing wi th a long term period and the geometric mean could be potentially more representative. ? No additional country risk premium is assumed due to lack of data. ? Unlevered beta has been calculated in order to reflect only the amount of business risk. For any future beta projections it will be more appropriate to calculate relevered beta based on the targeted capital structure. Beta 1996 1997 1998 0. 98 0. 84 0. 84 1999 2000 Average 0. 63 0. 83 0. 82 7 Sources: Ibbotson Associates, Aswath Damodaran Calculating Cost of Debt ? To calculate the appropriate yield to maturity we need to take into account that the settlement date (05/07/2011) falls between coupon payments, meaning that the first period will be shorter than the remaining 40 (20 years of semiannual payments). ? We calculate a transaction price (dirty price) of USD 98. 9 using a YTM of approximately 7. 17%. After adjusting for the accrued interest we get the quoted price of USD 95. 60. ? We are not considering the effective YTM for the cost of debt since it is not clear whether the returns could be reinvested at the same rate due to the following reasons (list not exhaustive): ? The yield curve is usually not horizontal. ? The shape of the curve is dynamic and changes over time. ? Some premium should be considered on debt issued in foreign currency, but this goes beyond the scope of this assignment and no debt breakdown has been provided for that matter. Cost of Debt Coupon Years to maturity Periods within one year Total periods Face value of c-bond Market price of c-bond YTM* Effective YTM 6. 75% 20. 03 2 40. 05 100. 00 95. 60 7. 17% 7. 30% Yield to Maturity Days from last coupon date Days to next coupon date Days between coupon dates Transaction price Accrued interest adjustment Quoted price Yield to maturity 171 10 181 98. 79 3. 19 95. 60 7. 17% 8 * Calculations have been made based on a 360 day year Calculating WACC 10. 26% WACC †¢ Calculations of the weightings †¢ We use book value of debt since not Weightings Ke / Kd onsider the market value of equity based on the current price per share and the diluted shares outstanding. 89. 87%* 10. 13%** all interest bearing debt is in the form of bonds maturing on 07/15/21 with a current YTD of 7. 17%. However, since the company has low leverage and is not under financial distress, there should not be a significant difference between the current market and book value of the outst anding debt. Cost of Equity After Tax Cost of Debt 10. 91% †¢ Calculations are based on revised 4. 44% †¢ Before tax cost of debt has been assumptions previously described. †¢ Cost of equity is not to be adjusted reviously calculated at 7. 17%. †¢ After applying tax rate of 38% the for taxes. after tax cost of debt amounts to 4. 44%. 9 * Market capitalization as of 05/07/2001 is USD 11. 5 bn. ** Total interest bearing debt (current + non-current) as of 31/05/2001 is USD 11. 3 bn. Figures as of 05/07/2001 are not provided for a better estimate. Agenda 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 10 Other Methods for Calculating Cost of Equity ? Po = Do(1+g)/(r-g) ? Could be used for mature companies, which pay dividends on a constant basis, and it is reasonable to expect that they will also do so in the foreseeable future. ? The DDM model is overly sensitive over the value of assumed growth (g), however it is a very simple and straight forward method of calculating the fair value of a mature company. Since Nike is expected to undergo cost optimization over the next years, as well as shift in sales strategy, we should consider a high growth period of the expected dividends, after which constant growth could be assumed. ? For the purpose of this case, however, we are given than dividends increase by 5. 50% on an annual basis, even though Joanne predicts a CAGR of NOPAT for the period 2002-2011 equal to approximately 10. 4%. Dividend Discount Model Earnings Cap. Ratio ? Po = EPSo(1+g)(1-b)/(r-g), where b is the retention ratio. ? EPS is an accounting figure. The ratio depends on dividend policy. ? Useful and simple approach for mature firms with easily predictable future EPS and constant growth rate and retention ratio. ? For simplicity, we are assuming g = 5. 50%, just like in the DDM method. 11 DDM and Earnings Capitalization Ratio Calculations ? D1 has been calculated as of 30/06/2002, assuming 5. 5% increase in annual dividends paid in both 2001 and 2002. Do captures the period 30/06/2000-30/06/2001. ? Based on the DDM and Earnings Capitalization Ratio, we obtain a cost of equity of approximately 6. 7%-6. 8%. Both estimates seem unreasonably low. ? This is significantly lower than the calculated cost of equity using the CAPM model. Due to the flaws of both the DDM and Earnings Capitalization Ratio methods described above, we should hold the CAPM approach as most reliable in calculating the cost of equity. ? The calculation of the cost of equity using both the DDM and and Earnings Capitalization Ratio methods has been based on assumed constant growth in perpetuity, which will most likely not be the case, especially considering Nike’s new sales strategy and cost optimization over the next few years. Therefore, we are more likely going to observe a higher growth period followed by a stable growth period. Dividend Discount Model g Po 5. 50% 42. 09 Do D1 r 0. 48 0. 53 6. 77% Earnings Cap. Ratio g Po b (retention ratio) EPSo EPS1 r 5. 50% 42. 09 77. 75% 2. 16 2. 28 6. 70% 12 Agenda 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 13 Investment Decision Based on the calculated WACC value, using the CAPM approach, and the predicted UFCFF for the period 2002-2011, Nike’s stock appears undervalued Since the purpose of the assignment was to calculate the WACC value only, we have taken all predicted UFCFF levels as given, even though certain adjustments could be appropriate to better reflect the expected boost in sales resulting from the new sales strategy, and the expected cost optimizations. Based on the predicted NPV of UFCFF, we are given that the current price of USD 42. 09 suggests a 11. 17% discount rate. Since our calculations reveal that the actual discount rate ought to be 10. 26%, Nike’s share price is trading under its intrinsic value. Therefore, Kimi Ford should recommend a buy on the stock. 14

The Background of DAY

Background of DAY Background Our brand is a renowned international Danish-owned clothing company founded in 1997 by Keld Mikkelsen and Malene Birger, headquartered in Odense and at Kongens Nytorv in Copenhagen. Our profit in 2006 was up to 13 million and has been expanding in recent years. Moreover, we hold two fashion shows in Copenhagen fashion week every year. Products Our brand’s products can be classified into three main lines, which are male, female and home decor. Designet tilhorer hojeste kvalitet med etnisk inspireret broderi og udsmykning. The design of which belongs to the highest quality with a distinct Scandinavian style inspired by the true craftsmanship of Asian tailoring, the meeting of art and craft – embroidery, prints, patterns, edging and trimming. Our unique design includes modern, individual, bohemian and international styles with inspiration from the colonial period in the Far East, vintage flea market treasures and the glamour of the twenties and thirties. Retail format Our brand was originally a local retailer selling private labels but is now expanding into a global multichannel retailer. In less than 15 years of existence, our company has opened around 40 self-named boutiques. In total, 800 retailers in 25 different countries, such as Sweden , England and Germany, are currently selling our collections, out of which 60 can be found in France. Target market The target groups are women and men aged 25-40 with high income. Our new line 2nd DAY, on the other hand, is aimed at a slightly younger target market than the main range. The market segment is mainly Scandinavia, but is now expanding to other parts of Northern Europe. Konceptet bag tojet er, at tilbyde festtoj til hverdagen til den modebevidste kvinde og herre. The concept behind our clothes is to offer evening wear to everyday life for the fashion-conscious women and men. Background of Hong Kong The main focus of our brand is in the Northern Europe, but the fact is that it is also suitable for the Asian market. We think that DAY can do that, by choosing Hong Kong as a starting point. Hong Kong, as a metropolitan, contains elements which fit the attitude and concept of our brand. Hong Kong is a Special Administrative Region of the People’s Republic of China, located on the southern coast of China. This location provides a good connection for the linkage of international companies to China. Besides, Hong Kong is one of the most famous international financial centres of the world with stable economic situation and is a developed city where the citizens can enjoy good quality of lives. These characteristics effectively help our brand to build its image in Asia as a brand new market. Hong Kong was a colony of Britain, and now it becomes the SAR of China. Therefore, the concept of â€Å"East meets West† is rather familiar in Hong Kong. We can find both British architectures and Chinese markets in Wan Chai. We can also enjoy both steak and congee at Cha Chaan Tengs. This kind of fusion matches the concept of our brand, combining local with global, as we create our design by mixing Asian embroideries and Western contemporary cutting together, making pieces of daily couture. We believe that the fusion concept can arouse a pretty large market for Hong Kong people and they can adapt to our brand easily. The location of Hong Kong is also perfect for us to enter a larger market. Through Hong Kong, our products can be sold to China and other Asian cities. This is rather important as the interest of Danish fashion for Chinese companies is now rapidly growing. For instance, the Copenhagen Fashion Week this year attracted 50 Chinese buyers, media and producers like Vogue China, showing that a number of Chinese companies are giving a big recognition to Danish fashion. Now, there are approximately 30 Danish companies and 4000 retail stores operating in China, and the export level of the Danish fashion industry has increased its earnings by 11. 4%. Thus it is no doubt a suitable time for us to enter the Asian market for Danish fashion companie. However, the Chinese may not be able to digest this new style so fast. Hong Kong is a good indicator though. If this style is suitable for Hong Kong people, the products can be promoted to the Mainland more easily. After that, the promotion of our brand in China would be much more effective. More than that, Hong Kong is much more developed than the Mainland in terms of transportation. It would be easier to transport products to various places in Asia through Hong Kong. Apart from that, logistic costs can be minimized. The economic position of Hong Kong is another point which stands out. Hong Kong is a renowned financial and trading city, and the policies of Hong Kong suit these characteristics. Noticing the economic freedom, low tax rates, stabilized currency and complete law of Hong Kong, many companies are willing to have their business there. We could accomplish this as well. In addition, the economic situation fits our target. The annual GNP of Hong Kong is about US$45000, which tells us that Hong Kong citizens are generally rich, with a large purchasing power. Since our target market mainly focuses on high income customers, we believe that our brand can generate a large market in Hong Kong. Apart from that, our brand also matches the taste of Hong Kong citizens. As a metropolitan, the information flow of Hong Kong is rapid, and citizens can receive information directly. As a result, many citizens are familiar with fashion. They know how to mix and match and they notice good foreign brands. This attracts more and more fashion brands to enter Hong Kong. Recently, another Danish top brand Bruuns Bazaar has had their business in Hong Kong because of the market potential of Hong Kong. Currently, a number of citizens know what bohemian style is and they are interested in it. Having so few bohemian boutiques in Hong Kong, this would be a great opportunity for us to be the leader of this style in Hong Kong. Moreover, Hong Kong people generally like dressing casually, and that is why the simple cutting of H&M and Zara satisfies what they want. This can also be accomplished by us. The earth tone we are using is popular in Hong Kong, too. Therefore, we are sure that we can satisfy Hong Kong people’s specialized taste. The last point is related to our founder, Keld Mikkelsen. Before founding DAY, he had studied Asian tailoring and culture for over a decade in Hong Kong. He is familiar with the characteristics of Hong Kong. If our brand is open in Hong Kong, it would be not only meaningful but also useful to develop a large business with Mikkelsen’s knowledge. To develop our brand as a global business, a start in Asia is essential. There are significant cities in Asia like Singapore, Bangkok and Tokyo. However, from the perspectives of economy, physical location and social culture, Hong Kong is the best choice to promote our brand globally. Starting our business in Hong Kong would bring us to a new and more successful chapter of DAY. Mission statement, goals, objectives Mission statement To drive bohemian style into Asia and to be the leader of bohemian style in Asia by providing mass appeal but creative and unique merchandise offering superior value to customer. Through the inspirational key look and iconic design, we are committed to provide our customers with the ultimate creative design. Goals We aim at making Hong Kong citizens become interested in our unique design with bohemian style, bear in mind that DAY is a well known brand name in Hong Kong and make purchase in our shops. In addition, we will introduce our home collection into Hong Kong market within a few years. Objectives Our objective is a 40% increase in traffic in the first half month, following by a 90% increase in transactions from the first month of trading to the sixth. In the first year, we will open a flagship store. It is the first step for our brand to enter Hong Kong market and to make a great profit. Then we will open a branch store each year. With our existing non-transactional brand site already attracting 2000 visitors a day, we are tasked with increasing this number, as well as growing our 14,000 database. We have to ensure that most Hong Kong citizens aged 25-40 will recognize our brand in five years. Outside Hong Kong, we will have our self-named boutiques in ten other Asian cities within five years. SWOT analysis Strengths The first competitive advantage of our company is the experience of opening retail stores in foreign countries. We have got over 40 self-named boutiques all around Europe and 800 retailers in 25 different countries. We also have over 15 years experience of running our stores and maintaining our reputation in the market. Secondly, our unique style, bohemian style, is rarely found in Hong Kong and this is beneficial for us to enter the market. Even if the style is similar, our target customer may be different as we focus on high income customers. This would avoid direct competition with those brands having similar style as ours. For instance, in the recent spring / summer, the sub-brand of i. , b+ab, has opened a line of bohemian style clothing. However, it would not become a great competitor of our brand due to the difference in price range and customer group. b+ab targets at a younger customer group (20+) while our brand targets at a maturer customer group (30+). In addition to that, the casual style would be easier accepted by this group of customer. Furthermore, our popularity in foreign are a has built up a good image to Hong Kong. As the information flow of Hong Kong is rapid, some of the customers may already know our brand even we do not have any stores in Hong Kong. Apart from that, our high-end product strategy has kept the quality assurance of our brand and we hold two fashion shows in Copenhagen fashion week every year in order to increase our publicity. Lastly, the low inventory of each item has led to lower carrying cost and would not tide up the cash flow. The small quantity of each design has also created a sense of scarcity. We can let the customers differentiate themselves from the others with our design. Weaknesses One of the weaknesses of our brand is the location of our production factories. As they are far away from Hong Kong, the running cycle will be slowed down, which is a serious problem for a fast fashion company. Moreover, the far-away-distribution centre will cause longer lead time and high transportation cost. In addition, as the assortment of our business concentrates mainly on one specific type, Bohemian style, if Hong Kong customers do not have interest in this style, possibly there will be no market in Hong Kong. What is more, as our brand is mainly for high class customers, the customer range is narrow, and so opening chain stores in Hong Kong can be quite risky. Unlike those fast fashion brands with medium price range, it is far more difficult for high class customers to have impulse purchasing. As buying high-priced clothes is only a hedonic need, customers may have to think twice before buying the clothes, and their desire to buy the products may be lowered after considering the price and the use of the clothes. Opportunities The opportunities of our brand include the market potential in Hong Kong. Since Hong Kong customers tend to buy new clothes regularly, they are willing to accept and explode new things. Generally, they welcome new brands to enter Hong Kong market. In addition, bohemian style is quite a new style to Hong Kong. Compared with the sporty and normal casual style which has already existed in Hong Kong, it is rare to have such a retailer store selling bohemian style clothing only. The unique style may attract customers to make a visit or even make a purchase in our store. Moreover, we notice that Japanese has recently become interested in bohemian style, and quite a number of Hong Kong customers tend to follow Japanese fashion. Since Hong Kong customers today can get fashion information from different media like newspapers, television, radio, magazines, direct mail, Internet and so forth, with so many Japanese magazines reporting the latest wearing trend in their own country, which can be easily bought in Hong Kong, Hong Kong customers can access Japanese information and follow the trend easily. Threats Talking about the threats we may face, lacking experience would be one of them. As this is our first time to open a store in an Asian country, opening a flagship store in Hong Kong would be rather experimental. Operating a store in Hong Kong may not be the same as operating our own local store. The second threat is the difficulty in finding a location for the flagship store in Hong Kong, which is a crowded place and in which the rent of a store is high. As the main purpose of opening the first store in Hong Kong is to promote our brand to the public and let Hong Kong customers concern about our design, the location of the store ought to have heavy traffic of high class customers, for example, a fashion centre. However, the rent of a store in a fashion centre is always high due to the designated atmosphere and the erfect facilities. Besides, there are too many intertype competitions and so it can be difficult to enter and stay in the market. Although bohemian style is a new style to Hong Kong, there are many other fashion brands with different kinds of style with the same price range and customer group as ours. Economic recession of Hong Kong will be another threat. As the unemployment rate has been quite high, our target group may not accept the price. In 2008, Hong Kong's economy has fallen into recession for the first time in five years, and the territory's gross domestic product has contracted 0. % on a seasonally adjusted basis, after a 1. 4% fall between April and June. In 2009, according to official records, Hong Kong's economy has left a year-long recession, recording a growth of 3. 3% in the second quarter ended in June. The figures, which were seasonally adjusted, were higher than forecast by economists. As a result, the government has increased its growth predictions for 2009. Even though the economy of Hong Kong is improving, concern still exists as the purchasing power of Hong Kong customers has decreased. Retail market strategies Retail format Being a multichannel retailer, we allow customers to make their purchase at our self-named boutique, pop-up store or on the Internet. Later on, in order to let people concern more about our brand, we will also run collection shops in Hong Kong. Besides, we plan to create a Chinese version on our website so as to make Chinese customers’ purchase even more convenient, and the products would be sent to the customers’ homes directly or they can take the products personally from our store. Target market Our main target customers include high income Asian and European women and men who are fond of trendy and casual fashion and are aged 25 to 40. Their expense on clothing would be approximately $5,000 to $10,000 per month. Retail Mix Location For our first specialty store in Hong Kong, we would choose a fashion centre as our store location. Being a newly developed brand in Hong Kong, it is too risky for us to locate our first store in freestanding sites, central business district or main streets, where we are responsible for all the operation and promotion. It is also quite difficult to attract customers for their initial visit as our brand is not widely known by Hong Kong customers. Renting a store in a fashion centre, on the contrary, is much securer. Being controlled by the mall developer, common facilities like outdoor signage, parking area, parking lot light and security are provided in the shopping centre. Advertising and special events to attract consumers are also available, and operating costs can be shared with others. Apart from that, shopping centres can usually draw a large number of customers due to the wide range of product offerings, easy access, lower crime rate, and last but not least the clean and comfortable shopping environment. Our ideal fashion centres include Elements in Kowloon and Landmark in Central. Being composed mainly of upscale apparel shops, boutiques, and gift shops carrying selected fashions or unique merchandise of high quality and price, the two fashion centres successfully attract a wide range of high income and fashion-conscious local customers and tourists. Other upscale apparel shops located there may be our competitors, but we would consider them as complementary shops as we are selling completely different types of clothes. We have our own unique style. For the most significant advantage of these two malls, we would say it is the convenience brought by the public transport as both Elements and Landmark are located very close to the MTR station. In such a small city with such a dense population and so many buildings like Hong Kong, we understand that finding a store can be difficult and each foot of a store in a fashion centre can cost us a lot. Yet, we would keep paying attention to the arrangement and changes of our chosen fashion centres and properly transfer our cash flow and properties to ensure we are well-prepared for renting a store in Hong Kong. Merchandise assortment For our product categories, we aim at providing a deep assortment of simple and basic clothing. In each category, quite a number of styles would be provided in order to satisfy the customers, and there will not be big differences between the products sold in Hong Kong and our original merchandise assortment. In order to meet our customers’ needs, we will provide a wide size range of clothing from XS to XL. A wide variety of colour will be provided, too. On the other hand, only women’s and men’s wear would be sold first. As it is quite rare for Hong Kong people to buy furniture or something else in shops held by a fashion brand, we are afraid that it may be risky if we introduce our home collection at the same time we launch our first store in Hong Kong. As for the decoration of our store, items from our home collection will be used, and we will think about operating the line as well at a later stage if we notice that customers also show their interest in those items. Pricing The price range of our products is now high, and this can be also applied to Hong Kong because of the favourable economic condition of Hong Kong. The economic condition creates a lot of high income consumers to purchase goods of high prices. Therefore the adjustment of pricing will not be large. Besides, the low inventory adds value of the products. As each kind of our products is only available in a limited amount, higher price can even be achieved in Hong Kong. However, the pricing will be set lower in the first two months, about a 10% off sale, in order to attract more consumers, who always love to purchase cheaper goods. Notice that our products in Hong Kong are sold at a lower price than the initial one, they would be pleased to make a purchase and our company can gain positive images. Eventually, our company can earn long-run profits. Generally, big sales will not occur, and this can be explained by our physical location. For example, one of our chosen locations Elements has a lot of specialty stores selling luxurious and expensive products. If we offer large discounts, our products would  be  much cheaper than those of other boutiques and shops for high income consumers, and as a result we will not be favourable in this high price market competition. Another point is that when we have only one flagship store but without any outlet stores or discount stores, steady pricing, instead of offering big sales such as 70% off, which can be offered in Denmark, would be more appropriate. Yet, seasonal discount is still acceptable. We can offer about 25% off sales at the end of the seasons. On the other hand, we offer VIP systems. Inside our VIP room, there are two types of products. One is our normal products sold at a 20% discount. Another is the exclusive and limited products available only in our VIP room and sold at a price about 15% higher than our normal products, aiming at showing the special identity of the VIP members. What is more, a free home decor style reusable bag would be given to each of our VIP members as a gift after his or her purchase. Promotion In order to bring more traffic to our store, we would like promote ourselves in three aspects, which are advertising, sales promotion and public relations. 1) Advertising We would like to have institutional advertising to promote the reputation of our company by taking a series of promotion photos which can represent the style of our brand. The photos would express the relaxing and leisure feeling of bohemian lifestyle. As Hong Kong people are generally stressful and busy, photos with relaxing and comfortable feeling would be attractive and conspicuous. On the other hand, newspapers, magazines, Internet, transit advertising and outdoor advertising would be our ideal advertising media. We would like to have one to two full page advertisement on newspapers and magazines. We would choose the South China Morning Post to be the first newspaper we have our advertisement on since it is one of the most famous English newspapers in Hong Kong and their target readers are similar to our target customers. As for magazines, Hong Kong fashion magazines like Jessica and Cosmopolitan would be our choices as quite a lot of our target customers would like reading these kinds of magazines. Moreover, we would add a Chinese version to our online shop and our advertising page on Facebook in order to attract and provide convenience to the Asian market. This kind of advertisement would be less expensive but more effective than the others as we have already set up the basic program. Furthermore, transit and outdoor advertising are two effective forms of advertising to attract traffic as most people can read the advertisement when they pass by. Our advertisement would be set up on the wall of the fashion centre where our store locates, and bus-body advertisement would also be our choice as buses would run around the central business district and let people know about our brand. 2) Sales promotion In order to promote our brand, holding special events would be effective, too. For instance, we can have catwalk shows in our shop and exhibitions in different shopping malls. The exhibitions would show our new clothing of the coming season in the display area of the shopping malls, so as to provide opportunities for people to appreciate our products. Moreover, we would like to hold a seasonal discount before the coming of the next season. This can help clear the dead stock in the store effectively. Besides, we would like to set up a pop-up store for a month. The pop-up store would possibly look like a home and would be decorated in the style of our home collection, showing our comfortable and leisure bohemian style. This can let our customers view our products comfortably. One of the most suitable locations for setting up our pop-up store is Festival Walk in Kowloon Tong as the visitors of Festival Walk are quite similar to our target customers. It is also easy to access and has an ideal exhibition area in the middle of the mall. What is more, people who are attracted by our pop-up store can easily travel to our store as Festival Walk and one of our chosen locations Elements are quite nearby. Moreover, we would set up a VIP system. When customers shop for a certain amount of money, they can join our VIP. VIP members of our store can enter our VIP room and make their purchase freely and comfortably with a 10% discount. In addition to that, each of them can get a free home decor style reusable bag as a gift for packing his or her goods. This can please the customers with an exquisite packing and also help us promote our home collection line. Apart from that, letters would be sent to inform the customers of our latest news and products, and well-designed cards would also be sent on their birthdays and at some special festivals, aiming at maintaining the firm connection between our customers and our brand. ) Public relations As for the public relations, we would donate parts of our profits to Red Cross as our company has joined the Red Cross Club. This can help improve our image and more importantly support charitable foundations. For instance, we can donate 5% income of a set of product to Red Cross. We can also hold some events from which benefits would be donated to Red Cross. One exa mple is that when a customer donates his or her old pair of jeans, he or she can get a 15% off discount when he or she buys a new pair of jeans from our store, and the old jeans collected would be donate to Red Cross. Customer service In order to increase the brand loyalty of our currently existing customers and to encourage them to make their next visit, customer service is an integral part to operate our brand. As customers’ trust can be destroyed at once by a major service problem, we would like to avoid this by providing return policies, pre-order service, delivery service, and more importantly, strengthening our personal service. 1) Personal service We believe in the friendly face of retailing. Our highly professional, responsible and trustworthy staff would warmly greet our customers with courtesy. They are good at answering queries and solving problems, too. Besides, they are able to offer reassurance whenever it is needed, turn complainants into brand champions, and more importantly, actively offer assistance in selecting fashion merchandise. For example, they cross-sell related products, follow up abandoned carts, track order progress, keep a trained eye out for suspicious activities, and provide weekly activity reports. We perform promises to customers and the degree of trendy  apparels with different colors for mix and match. 2) Return policies We offer product exchange and return policies and money back guarantees. Refunds or gift cards would also be given to customers if they change their mind in respect of their purchase, as long as the items are returned within 2 days of purchase with the original receipt, original tags and original bags attached. Gift cards, sale items and samples are excluded from this policy. Customers may choose the refund by exchange to bonus point for next time purchase. 3) Pre-order Apart from return policies, pre-order service is also provided. Before making purchase, customers can take notice on our leaflet showing detailed information of each product. As they may not be able to find a suitable size of clothing for themselves, they can pre-order a specific size of clothing. Pre-order items will be arrived within two to three weeks, and customers are welcome to settle the payment within one day after placing an order. We will arrange the reservation for our customers as soon as possible, and inform customers by email before shipping and once the pre-order has been arrived at Hong Kong. 4) Delivery In order to encourage customers to buy and to provide them with convenience, free delivery service is offered on orders $5000 or over. The delivery will be made the next day after the customers settle the payment. Store design and display Similar to our local store in Denmark, simple and warm tone with yellow lighting would be the main layout of our flagship store in Hong Kong in order to provide customers with warm feeling. The display window would be plain in colour and our latest design would be shown there. In order to provide customers with home feeling, clothes racks instead of dummies would be used. For instance, a whole set of clothing can be displayed with a big whiteboard card as the background, and with the model’s face being drawn on the card. Inside our store, a VIP room exclusive for our VIP members would be built. We plan to set up the room on the second floor of the store and there would be luxurious and comfortable sofas for customer. Furniture from our home collection will possibly used to decorate the room, aiming at promoting our home collection products. Relaxing and slow background music will be used in our store. As for the wallpaper of our store, unobvious floral print will be chosen as it is widely used in home decoration. In short, we will follow the general style of Europe’s housing as our store layout. Roberto Cavalli – our existing competitor Type of products clothes, accessories, eyewear, shoes, jewels, perfumes, watches, underwear, bags Target Market high income group middle age -25-40 years old Style The main color is the series of earth tone color, blue, black and white. The exaggerate pattern are always used in their design. l  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Retailer distribution cha nnels Boutiques (2067-2069,IFC Mall, Central[+852 22347621]) online store Mission| To provide women with timelessly dramatic pieces that flatter the female form. | Types of products| Mainly clothes, accessories, eyewear, shoes, jewels, perfumes, watches, underwear and bags are sold. Style| The main color of the series is earth tone color, blue, black and white, and exaggerate patterns are always used in their design. | Retailer format| Both boutiques and online shops are available. | Target market| High income customers aged 25 to 40 are their main target group. | Pricing| Most products are sold at a high price and VIP is offered. VIP can enjoy special discounts, fashion shows and parties organized by Roberto Cavalli. | Store Display| The store display of Roberto Cavalli is clean, modern and simple. White is usually used in the store color, while the lighting is direct and white. With mannequins standing behind the window, the layout is no different from many boutiques. | Promotion| As a worldwide famous brand, Roberto Cavalli puts a large amount of effort on promotion. Each season, campaigns are shot and put in large billboards outside specialty centers. These campaigns are also posted on famous fashion magazines like Elle and Vogue. Besides, under publicity, Elle often reports news of Roberto Cavalli. The target customers of Roberto Cavalli are powerful women, therefore they often organize big shows and welcoming celebrities stand on red carpets, and generate promotion with publicity. What is more, Roberto Cavalli had a crossover with H;M to organize campaigns in 2007. | Customer Service| Generally, the service approach of Roberto Cavalli is expressive. The staff care about customers' choice of clothing. They also offer the best size of clothing for the customers. Besides, Roberto Cavalli provides customers with care service, allowing customers to ask questions about their shopping experience by e-mail. | Type of products clothes, accessories, eyewear, shoes, jewels, perfumes, watches, underwear, bags Target Market high income group middle age -25-40 years old Style The main color is the series of earth tone color, blue, black and white. The exaggerate pattern are always used in their design. l  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Retailer distribution channels Boutiques (2067-2069,IFC Mall, Central[+852 22347621]) online store (http://store. robertocavalli. com/navigation. asp? tskay Comparison with Roberto Cavalli The style between DAY and Roberto Cavalli is slightly different. However, as both are high-end fashion brands, some strategies are similar. For example, pricing, location and customer service strategies are relatively standard aiming at attracting the same kind of customers. Yet, our emphasis is mainly n merchandise assortment, promotion and store display to create sustainable differential advantages. In terms of the style of merchandise, DAY is presenting its specific style. As the wild, sexy style is quite common in the Hong Kong market, Roberto Cavalli can hardly provide a unique image for customers. On the contrary, the bohemian s tyle of DAY cannot be easily found in Hong Kong, especially the high-end bohemian fashion items. Therefore, it is quite hard to copy the style of DAY, and this can definitely attract a certain amount of customers. In addition, DAY’s products are more suitable for the Hong Kong citizens. Although Roberto Cavalli is also selling expensive clothing with earth tone colour, the style is more dramatic and exaggerated. The dramatic style had once been fashionable in Hong Kong in the 80s, but this trend is now fading. Hong Kong people are going back to basic, simple and relaxing clothing style. As DAY is doing the mixing of Western and Eastern styles, our products do not contrast a lot, but instead have a harmonic look. The style DAY runs is the style Hong Kong people currently want and it would last for a period of time. This creates an advantage in selling the appropriate products to the right market. As for the promotion strategy, Roberto Cavalli is very good at promoting its brand, but we have a different approach that can create a specific image of DAY. The campaigns of Roberto Cavalli are international, sexy and passionate. Yet, to develop in Asia countries, a mild advertising package would be more approachable to the customers. Considering the stressful lifestyle of Hong Kong people, the promotional photos of DAY Hong Kong express leisure bohemian lifestyle to comfort the customers. What is more, Day offers a Chinese version online shop, facilitating more Chinese consumers and Asian tourists to purchase our products. Although DAY’s target market is high income consumers, using the close and considerate promotion strategy can help us create a different image of our high-end products, and differentiate from other high-end brands like Roberto Cavalli. Talking about the store display, DAY can have a more appealing store display. Roberto Cavalli’s store display is just too simple, just like many other specialty stores. However, Day is presenting a home feeling store display. Using warm lighting and floral-printed wallpaper to comfort our customers, the environment we provide is more attractive than Roberto Cavalli does. In fact, DAY is not simply selling fashion merchandises, it is selling lifestyle. The store display and the promotion strategy are to create relaxing bohemian lifestyle to the customers. However, Roberto Cavalli is just presenting luxurious clothing and does not give a strong impact to the customers. As a matter of fact, all kinds of lifestyle are related to fashion as trend does affect lifestyle. To conclude, it is more appropriate to say that DAY is a high-end brand with our own personality, but not only a luxurious brand. Future prospects We can foresee that DAY can achieve a great success in Hong Kong. Noticing that Scandinavian fashion has been introduced to Hong Kong in recent years, and many Hong Kong citizens are quite fond of this kind of fashion, we believe that Hong Kong has a large market potential for DAY, and this potential can last for a long time. While H&M is currently the leader of Scandinavian fashion for the general public, we trust that DAY can be the leader for the high income group. In the future, we would have the following goals and objectives, in an attempt to further consolidate our business in Hong Kong. Our first goal is to introduce DAY’s lifestyle to Hong Kong citizens. Consumers purchase products only if the brand is highly recognized. To achieve this, the lifestyle of DAY should be introduced further. The simplistic lifestyle we present is what Hong Kong people are looking for. Being busy and stressful all the time, they do need a city escape. The campaigns we are currently doing can show what city escape is about. Therefore, promoting this point can advance the sales of DAY. Moreover, we would like to introduce our home collection to the customers within a few years so as to earn more profits and complete the image of DAY as a brand. To facilitate the development of our home collection, our store would mainly be plain in colour and decorated with products from our home collection. Home decor style gifts would also be given in order to provide customers with a comfortable and relaxing home feeling of DAY. Another goal is to enlarge our business by opening more shops. Our plan is to open a branch store in Hong Kong each year. Another objective of this goal is to develop our business into Asian countries. As globalization continues and imitation happens globally, we cannot focus on one location only. Being one of the fashion centres in Asia, we believe that Hong Kong can influence other Asian cities. From the starting point Hong Kong, the leader of DAY Asia, we will have our retail shops in ten other Asian cities within five years, to achieve DAY as a global brand. We hope that DAY can create bigger and bigger business. As a result, we propose that DAY should have its business Hong Kong. We hope the proposal can help continue the DAY story. Reference www. day. dk/ http://us. fashionmag. com/ http://www. tifdb. com/ www. wikepedia. org/ http://www. modeshanghai. net/ Fourthly, our high-end product strategy has kept the quality assurance of our brand. Fifthly, we have organized fashion shows regularly in order to increase our publicity. We hold two fashion shows in Copenhagen fashion week every year, spring/summer and fall winter. Sixthly, the low inventory of each item has led to lower carrying cost and would not tide up cash flow. The small quantity of each design has created a sense of scarcity. We can let the customers to differentiate themselves from the others with our design. Our aim is to carry out everyday contemporary glamor_____ Weakness One of the weaknesses of our brand is the location of our production factories. As it is far away from Hong Kong, the place we shot, it will slow down the running cycle, which is a serious problem of fast fashion industry. Moreover, the far-away-distribution centre will cause longer lead time. Secondly, as the assortment of our business has concentrated in one specific type(i. e Bohemian style), if Hong Kong customers do not have interest in this style, there will be no market in Hong Kong. Thirdly, as the brand is for high class customers, the customer range is narrow, so there will be risks on opening chain stores. Unlike the fast fashion brand which has medium price range, it is far more difficult for high-class customer to have impulse purchasing. As buying high priced clothes is only a hedonic need, customers will have to think twice before buying the clothes. The customer will be less desire to buy the product after considering the price and the need of the clothes. * Factories set in foreign countries * -> far away in Hong Kong, shipment and transportation cost is high * -> Slow down the running cycle (fast fashion) * ->Long lead time (distribution centre) assortment concentrate in one specific type * -> if Hong Kong customers do not accept/ favor on this style, there will be no market in Hong Kong. * As the brand is for high class customers, the customer range is narrow, so there will be risks on opening chain store. * Opportunities The opportunities of the brand included the market potential in Hong Kong, as Hong Kong customers tends to buy new clothes regularly, they are willing to acce pt and explode new things. They welcome new brand to enter Hong Kong market. Secondly, Bohemian style is a new style to Hong Kong. Compared with the sporty and normal casual style which have already existed in Hong Kong, there is rare to have such a retailer store selling Bohemian style clothing only. The unique style will interest the customers to make a visit or even a purchase in our store. Thirdly, as Japanese started the interest in Bohemian style recently, Hong Kong customers tends to follow the Japanese style. Nowadays Hong Kong customers can get the fashion information from different media like newspaper, television, radio, magazines, direct mail and Internet, etc. There are many Japanese magazine reporting the latest wearing trend in their own country, and these magazine can be easily bought in Hong Kong. In other words, Hong Kong can easily access the Japanese information and follow the trend. Threats Talking about the threats which would be faced, lacking experience will be one of them. This is our first time to open a store in Asian country so the flat ship store in Hong Kong would be rather experimental. The method and operation of a store may have slightly different compared with our own local store. The second threat is the difficulties in finding a location for the flat ship store in Hong Kong. Hong Kong is a crowded place and the rent of a store is high. As the main purpose of opening the first store in Hong Kong is to promote our brand to the public and let Hong Kong customers concern about our design, the location of the store ought to have a heavy traffic of high-class customers, for example, fashion centre. However, the rent of fashion centre is always high due to the designated atmosphere and the perfect facilities. Thirdly, there are too many intertype competitions so it is difficult to enter and stay in the market. Though Bohemian style is a new style to Hong Kong, there are still different style of the brand appear in Hong Kong, In short, there are many fashion brand with many kinds of style according to the same price range and customer group. Economic recession of Hong Kong will be another threat, as the unemployment rate is high, our target group may not accept the price. In 2008, Hong Kong's economy has fallen into recession for the first time in five years amid a global economic slowdown the third quarter, the territory's gross domestic product contracted 0. 5% on a seasonally adjusted basis, after a 1. 4% fall between April and June. The government's economist, Helen Chan, said domestic demand faltered significantly in October, while exports fell to the lowest level since 2002. What;s more, in 2009, according to official records, Hong Kong's economy has left a year-long recession, recording a growth of 3. 3% in the second quarter ended in June. The figures, which were seasonally adjusted, were higher than forecast by economists. As a result, the government has increased its growth predictions for 2009. Though there's improvement in the economy of Hong Kong, concern is still existed as the purchasing power of Hong Kong customers is decreased.

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