netrashetty
Netra Shetty
Cache, Inc. (CACH) is a specialty retailer, which operates stores selling women's apparel and accessories under the names Cache and Cache Luxe. Each of these store concepts carries its own distinctive brand merchandise, which includes sportswear, dresses, and accessories (jewelry, belts, and handbags meant to complement the sportswear and dress categories). Cache targets women between the ages 25 and 45. Cache Luxe is the company's newest store concept that was rolled out to replace the Lillie Store concept. Cache Luxe stores will offer a larger selection of casual and evening apparel and accessories at higher price points. Meanwhile, the company recently decided to close its Lillie Rubin stores by the end of the third quarter. The company ended 2007 with 296 total stores, primarily situated in central locations in high traffic and upscale malls throughout the US. Cache also sells merchandise online through its website: www.cache.com.
The investment thesis for buying shares of Cache is the strength of the company's core Cache store concept, its direct sourcing efforts, and its healthy balance sheet.
Cache believes it can expand its total store count to 350 Cache stores, up from about 300 stores today. Part of the plan has been to increase its total square footage in the mid-single digits. Along with ramping up its store count, Cache has also been progressively refurbishing existing stores to enhance the customer-shopping experience. In addition, the company is not growing just for the sake of growth its strategy is to improve its profit margins with solid sales growth. Specifically, Cache's long-term growth strategy includes significantly increasing its operating profit margin to 15%, up from 7.5% in 2005, 6.3% (excluding Lillie Rubin exit costs) in 2006, and around 3.4% in 2007. To facilitate its profit margin expansion, the company's strategy has been to reduce the number of stock keeping units (SKUs) in its stores and the number of vendors from which it buys. Cache also has established a merchandising process that provides it with shorter product lead times. The shorter lead time enables the company to alter its merchandise mix to take advantage of popular offerings and reduce or eliminate unpopular items. The combination of a smaller number of product offerings on its shelves, fewer vendors, and shorter lead times enables the company to better manage its inventory. This should help minimize working capital requirements and boost profit margins. With that in mind, the company announced the acquisition of its largest supplier and believes it can have 40% of its merchandise directly-sourced by year-end 2007. This should help boost profit margins in 2008 and beyond. By seeking to grow its business profitably, Cache should be able to smartly manage its long-term store expansion, which should lead to several years of strong sales and earnings growth. In addition, the closing of its poorly performing Lillie Rubin stores should help boost profit margins. For the last two years, Lillie Rubin has been a consistent drag on the company's sales growth and profit margins. Additionally, the company maintains a pristine balance sheet with just $4.6 million in long-term debt with a debt-to-equity ratio of 4.2%. Cache's balance sheet and solid cash flows provide the company with the financial flexibility to internally finance its long-term growth plans, weather the current spending slowdown, or buyback shares. Note: the company recently announced a 3 million share buyback.
Lastly, the stock is down about 60% in the last twelve months, due to difficult environment for retailers and the company's soft results. But, we expect the company's performance to improve in the quarters ahead. We view this level as an attractive entry point for purchasing the shares.
Cabot Corporation is the world's largest seller of carbon black, an ultra fine particle used primarily in the production of tire rubber, by revenue. The company also generates revenues by selling aerogel, a low density insulation material, and other nano-sized particles such as fumed metal oxides, which are nano-sized particles used in the production of adhesives, sealants, coatings, greases, inks and toners.[1]
Rising oil prices are a major issue for Cabot. The company's top-line revenue growth is primarily driven by expansion of its business in China and other emerging markets.
Business Overview
Business & Financial Metrics[2]
In 2009, CBT incurred a net loss of $77 million on revenues of $2.24 billion. This represents a turnaround from 2008, when the company generated a net income of $164 million on $3.19 billion in revenues.
Business Segments[3]
Cabot Corporation is divided into segments by both operating region and business segment. The company operates in 18 countries and five regions: North America, South America, Europe, Asia Pacific, and China. In addition, Cabot has five primary business segments:
Contents
1 Business Overview
1.1 Business & Financial Metrics[2]
1.2 Business Segments[3]
2 Key Trends and Forces
2.1 An increase in the price of oil will increase Cabot's cost of sales and simultaneously decrease the demand for carbon black
2.2 Increases in the price of oil will decrease demand for cars and car tires[7]
2.3 CBT looks to China for future growth
3 Competition and Market Share
3.1 Competitors
4 References
Rubber Blacks (59% of revenue) - Carbon black is a fine, black powder. Cabot’s carbon black is sold for use in tires, building materials, toners, inkjet cartridges, and other various products. The primary product in this segment is rubber black, which is used primarily in tires. Carbon black is Cabot’s primary source of revenue.
Performance (29% of revenue) - This segment produces both specialty grades of carbon black and fumed metal oxides like fumed silica and fumed alumina.
Supermetals (6% of revenue) - Cabot’s supermetals business segment primarily produces tantalum, a metal used for making capacitors, semi-conductors, and jet engine blades.
Specialty Fluids (3% of revenue) - The main product in the specialty fluids segment is cesium formate, which is a fluid used in the drilling of oil wells.
New Business (3% of revenue) - This segment includes operations by the company's Inkjet Colorants, Aerogel, and Micropowders businesses.
Cabot’s business strategy is to use the cash earned by their older and core product lines (carbon black, fumed metal oxides, and supermetals products) to develop their newer products (specialty fluids, aerogel, and inkjet colorants).[4]
[3]
Key Trends and Forces
An increase in the price of oil will increase Cabot's cost of sales and simultaneously decrease the demand for carbon black
Cabot’s factories require oil to produce many of their carbon black products. In addition, the US Department of Energy expects the global demand for oil and petroleum to increase by 1.2 million barrels per day in countries like China, India, and the Middle East.[5] According to the Department of Energy, the global production of crude oil is also expected to decrease in non-OPEC countries, while the production of crude oil in OPEC countries is uncertain.[6] Both of these factors significantly affect the price of oil. If the price of oil rises there will be less demand in the automotive industry and therefore less demand for carbon black to be used in the production of car tires. Cabot’s production costs will also rise with a rise in the price of oil, which will negatively affect Cabot’s net income.
Increases in the price of oil will decrease demand for cars and car tires[7]
Rising oil prices dramatically increase the cost of owning a car, which discourages many potential buyers from buying new cars and existing car owners from driving as much as normal. Naturally, this has decreased the demand for car tires. Further increases in the price of oil will encourage current car drivers to decrease their driving and discourage potential car buyers from buying new cars. Both of these effects will reduce the demand for car tires and subsequently reduce the demand for Cabot's rubber black.
CBT looks to China for future growth
In March, 2008 Cabot announced the shutdown of one of its rubber black plants in West Virginia because there was not enough demand for rubber black in the US. In response to falling demand in the US, Cabot will expand its carbon black operations in China. The company expects most of its growth over the next several years to come from its Chinese expansion. As a result, Chinese demand for carbon black, will play a much more important role in the company's near term growth.
Competition and Market Share
Competitors
Cabot competes for market share in each of its five business segments and in each of its operating regions. Cabot’s main competitors in the carbon black industry are:
Degussa - Degussa was acquired by Evonik Industries in 2007 and is Cabot's main competitor in the carbon black industry. Through its subsidiary, Degussa Engineered Carbons, Degussa has carbon black operations in the United States. Evonik Industries plans to increase the efficiency of its Specialty Technology business segment through its acquisition of Degussa.[8]
Columbian Chemicals - After being acquired by a private equity firm in March, 2006, Columbian Chemicals is now a part of DC Chemicals. Columbian Chemicals operates 13 plants in 10 countries, and is expanding its plant operations in South America and Europe. Columbian Chemicals also plans to expand its plant operations in China.[9]
Birla - Birla is Cabot's primary competitor in Asia. Birla owns four carbon black companies including Thai Carbon Black, which plans to expand its plant operations in China in 2008.[10] Thai Carbon Black will be competing directly against Cabot for market share of the carbon black industry in China.
Sid Richardson - Sid Richardson only operates out of North America and has carbon black plants in three states.[11] The company is Cabot's smallest main competitor.
In its other industries, Cabot competes against hundreds of various local and global producers.[12]
The investment thesis for buying shares of Cache is the strength of the company's core Cache store concept, its direct sourcing efforts, and its healthy balance sheet.
Cache believes it can expand its total store count to 350 Cache stores, up from about 300 stores today. Part of the plan has been to increase its total square footage in the mid-single digits. Along with ramping up its store count, Cache has also been progressively refurbishing existing stores to enhance the customer-shopping experience. In addition, the company is not growing just for the sake of growth its strategy is to improve its profit margins with solid sales growth. Specifically, Cache's long-term growth strategy includes significantly increasing its operating profit margin to 15%, up from 7.5% in 2005, 6.3% (excluding Lillie Rubin exit costs) in 2006, and around 3.4% in 2007. To facilitate its profit margin expansion, the company's strategy has been to reduce the number of stock keeping units (SKUs) in its stores and the number of vendors from which it buys. Cache also has established a merchandising process that provides it with shorter product lead times. The shorter lead time enables the company to alter its merchandise mix to take advantage of popular offerings and reduce or eliminate unpopular items. The combination of a smaller number of product offerings on its shelves, fewer vendors, and shorter lead times enables the company to better manage its inventory. This should help minimize working capital requirements and boost profit margins. With that in mind, the company announced the acquisition of its largest supplier and believes it can have 40% of its merchandise directly-sourced by year-end 2007. This should help boost profit margins in 2008 and beyond. By seeking to grow its business profitably, Cache should be able to smartly manage its long-term store expansion, which should lead to several years of strong sales and earnings growth. In addition, the closing of its poorly performing Lillie Rubin stores should help boost profit margins. For the last two years, Lillie Rubin has been a consistent drag on the company's sales growth and profit margins. Additionally, the company maintains a pristine balance sheet with just $4.6 million in long-term debt with a debt-to-equity ratio of 4.2%. Cache's balance sheet and solid cash flows provide the company with the financial flexibility to internally finance its long-term growth plans, weather the current spending slowdown, or buyback shares. Note: the company recently announced a 3 million share buyback.
Lastly, the stock is down about 60% in the last twelve months, due to difficult environment for retailers and the company's soft results. But, we expect the company's performance to improve in the quarters ahead. We view this level as an attractive entry point for purchasing the shares.
Cabot Corporation is the world's largest seller of carbon black, an ultra fine particle used primarily in the production of tire rubber, by revenue. The company also generates revenues by selling aerogel, a low density insulation material, and other nano-sized particles such as fumed metal oxides, which are nano-sized particles used in the production of adhesives, sealants, coatings, greases, inks and toners.[1]
Rising oil prices are a major issue for Cabot. The company's top-line revenue growth is primarily driven by expansion of its business in China and other emerging markets.
Business Overview
Business & Financial Metrics[2]
In 2009, CBT incurred a net loss of $77 million on revenues of $2.24 billion. This represents a turnaround from 2008, when the company generated a net income of $164 million on $3.19 billion in revenues.
Business Segments[3]
Cabot Corporation is divided into segments by both operating region and business segment. The company operates in 18 countries and five regions: North America, South America, Europe, Asia Pacific, and China. In addition, Cabot has five primary business segments:
Contents
1 Business Overview
1.1 Business & Financial Metrics[2]
1.2 Business Segments[3]
2 Key Trends and Forces
2.1 An increase in the price of oil will increase Cabot's cost of sales and simultaneously decrease the demand for carbon black
2.2 Increases in the price of oil will decrease demand for cars and car tires[7]
2.3 CBT looks to China for future growth
3 Competition and Market Share
3.1 Competitors
4 References
Rubber Blacks (59% of revenue) - Carbon black is a fine, black powder. Cabot’s carbon black is sold for use in tires, building materials, toners, inkjet cartridges, and other various products. The primary product in this segment is rubber black, which is used primarily in tires. Carbon black is Cabot’s primary source of revenue.
Performance (29% of revenue) - This segment produces both specialty grades of carbon black and fumed metal oxides like fumed silica and fumed alumina.
Supermetals (6% of revenue) - Cabot’s supermetals business segment primarily produces tantalum, a metal used for making capacitors, semi-conductors, and jet engine blades.
Specialty Fluids (3% of revenue) - The main product in the specialty fluids segment is cesium formate, which is a fluid used in the drilling of oil wells.
New Business (3% of revenue) - This segment includes operations by the company's Inkjet Colorants, Aerogel, and Micropowders businesses.
Cabot’s business strategy is to use the cash earned by their older and core product lines (carbon black, fumed metal oxides, and supermetals products) to develop their newer products (specialty fluids, aerogel, and inkjet colorants).[4]
[3]
Key Trends and Forces
An increase in the price of oil will increase Cabot's cost of sales and simultaneously decrease the demand for carbon black
Cabot’s factories require oil to produce many of their carbon black products. In addition, the US Department of Energy expects the global demand for oil and petroleum to increase by 1.2 million barrels per day in countries like China, India, and the Middle East.[5] According to the Department of Energy, the global production of crude oil is also expected to decrease in non-OPEC countries, while the production of crude oil in OPEC countries is uncertain.[6] Both of these factors significantly affect the price of oil. If the price of oil rises there will be less demand in the automotive industry and therefore less demand for carbon black to be used in the production of car tires. Cabot’s production costs will also rise with a rise in the price of oil, which will negatively affect Cabot’s net income.
Increases in the price of oil will decrease demand for cars and car tires[7]
Rising oil prices dramatically increase the cost of owning a car, which discourages many potential buyers from buying new cars and existing car owners from driving as much as normal. Naturally, this has decreased the demand for car tires. Further increases in the price of oil will encourage current car drivers to decrease their driving and discourage potential car buyers from buying new cars. Both of these effects will reduce the demand for car tires and subsequently reduce the demand for Cabot's rubber black.
CBT looks to China for future growth
In March, 2008 Cabot announced the shutdown of one of its rubber black plants in West Virginia because there was not enough demand for rubber black in the US. In response to falling demand in the US, Cabot will expand its carbon black operations in China. The company expects most of its growth over the next several years to come from its Chinese expansion. As a result, Chinese demand for carbon black, will play a much more important role in the company's near term growth.
Competition and Market Share
Competitors
Cabot competes for market share in each of its five business segments and in each of its operating regions. Cabot’s main competitors in the carbon black industry are:
Degussa - Degussa was acquired by Evonik Industries in 2007 and is Cabot's main competitor in the carbon black industry. Through its subsidiary, Degussa Engineered Carbons, Degussa has carbon black operations in the United States. Evonik Industries plans to increase the efficiency of its Specialty Technology business segment through its acquisition of Degussa.[8]
Columbian Chemicals - After being acquired by a private equity firm in March, 2006, Columbian Chemicals is now a part of DC Chemicals. Columbian Chemicals operates 13 plants in 10 countries, and is expanding its plant operations in South America and Europe. Columbian Chemicals also plans to expand its plant operations in China.[9]
Birla - Birla is Cabot's primary competitor in Asia. Birla owns four carbon black companies including Thai Carbon Black, which plans to expand its plant operations in China in 2008.[10] Thai Carbon Black will be competing directly against Cabot for market share of the carbon black industry in China.
Sid Richardson - Sid Richardson only operates out of North America and has carbon black plants in three states.[11] The company is Cabot's smallest main competitor.
In its other industries, Cabot competes against hundreds of various local and global producers.[12]
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