Coffee and Tea Apparel

ProHub Comment

This case tests quantitative reasoning through a hold-vs-sell M&A analysis, requiring candidates to project revenues under different scenarios, apply valuation multiples, and calculate payback periods. The case emphasizes identifying and adjusting for outliers in comparable transaction data—a critical skill in valuation work. The strong emphasis on framework development (market analysis, projected revenues, risks) combined with heavy quantitative work makes this a well-rounded M&A case.

Estimated Time 28 minutes
Difficulty Medium
Source Chicago Booth
25 / 100

Deloitte has been asked to help the client, Coffee, evaluate a hold or sell decision. Coffee is a large multinational women’s clothing retailer with worldwide revenues of over $3B in 2016. They sell sports, formal and casual apparel. The company as a whole has been performing strongly and has emerged out of the financial crisis with strong sales growth and many investment opportunities. Despite the company’s strong performance overall, its American operation has an underperforming brand that they have put up for review. The firm has also closed some of the brand’s associated stores.

The American operation has two major brands: a formal wear brand bearing the same name as the company, “Coffee,” and a casual wear brand named “Tea.” The brands are sold through the following channels: • Coffee branded retail stores: $200M in annual revenues • Tea branded retail stores: $20M in annual revenues • Coffee branded outlet stores: $150M in annual revenues • Wholesale sales to major retail chains (e.g., Macy’s): $600M in annual revenues

The Tea brand has historically been neglected because management has focused its resources on the core business – the Coffee brand. Nonetheless, the Tea brand has consistently put up a profit with minimal management attention and capital reinvestment. Essentially, Coffee wishes to understand whether they are better served by divesting the Tea brand and refocusing their attention on their core Coffee brand business or holding the Tea business and simply “milking the cash cow.”

Clarifying Information

  1. Sale of Tea brand will include only Tea’s branded product sales in Tea’s retail channel and Tea’s wholesale business
  2. Buyer will not have access to Coffee’s Outlet stores or Coffee branded retail stores for distribution
  3. Sales in the Wholesale channel are expected to remain unchanged in CY2017
  4. All store closings and openings occur at the start of the calendar year. Number of outlet stores remains constant
Mock Interview
Interviewer

Deloitte has been asked to help the client, Coffee, evaluate a hold or sell decision. Coffee is a large multinational women's clothing retailer with worldwide revenues of over $3B in 2016. They sell sports, formal and casual apparel. The company as a whole has been performing strongly and has emerged out of the financial crisis with strong sales growth and many investment opportunities. Despite the company's strong performance overall, its American operation has an underperforming brand that they have put up for review. The firm has also closed some of the brand's associated stores. The American operation has two major brands: a formal wear brand bearing the same name as the company, "Coffee," and a casual wear brand named "Tea." The brands are sold through the following channels: • Coffee branded retail stores: $200M in annual revenues • Tea branded retail stores: $20M in annual revenues • Coffee branded outlet stores: $150M in annual revenues • Wholesale sales to major retail chains (e.g., Macy's): $600M in annual revenues The Tea brand has historically been neglected because management has focused its resources on the core business – the Coffee brand. Nonetheless, the Tea brand has consistently put up a profit with minimal management attention and capital reinvestment. Essentially, Coffee wishes to understand whether they are better served by divesting the Tea brand and refocusing their attention on their core Coffee brand business or holding the Tea business and simply "milking the cash cow."

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
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Practice this case with AI Mock Interview

Coffee, a women’s apparel retailer, must decide whether to divest or hold its underperforming Tea brand. The case involves calculating 2017 revenue projections under hold and sell scenarios, applying appropriate valuation multiples to comparable transactions, and determining the payback period on the hold scenario. The analysis reveals that holding Tea creates greater shareholder value ($84M) than divesting ($46M), despite Tea’s declining store count and EBIT margins.

Key Insights:

  1. Revenue projection requires understanding of store closures and channel-specific dynamics—proportional store changes must be applied to retail channels only, not wholesale
  2. Valuation multiples should be adjusted for outliers and dated transactions; removing the 2012 pre-crisis deal (1.9x) yields a more reasonable 0.7x multiple versus the unadjusted 0.9x
  3. Payback analysis requires distinguishing between EBIT and true cash flow; candidates should factor in taxes (~40% rate) to derive net cash flow, extending payback from 4 to 7 years
  4. Beyond financial analysis, successful candidates should consider qualitative factors: channel fill capability, buyer synergies, brand loyalty impacts, and strategic fit with Coffee’s core positioning