A examination and valuation of Lush Ltd.
Lush is about passion and innovation: passionate about the nature, environment and growth; and innovative for its handmade, unpacked and fresh cosmetics, seductive perfumes, and natural products.
Born from the ashes of Cosmetics to Go, Lush is now headquartered in Poole, Dorset in the UK. The company was initially registered with the Companies House by the name of Cosmetic House Limited in 1994 but was later renamed to Lush in the year 1995. It now operates over 600 stores in 43 countries worldwide. The fuel for this growth has been the result of adopting fresh natural ingredients, ideas and fun. The company’s’ ideology is the most important part of everything that it signifies. Lush produces and sells a range of handmade products, like face masks, soaps, bath bombs, bubble bars, hand and body lotions, hair treatments, etc. Lush uses natural resources like fruits, vegetables, essential oils, and synthetic ingredients without any animal fat in all its products. It is also against animal testing and performs tests solely with volunteers instead. This philosophy of its leaders attracts like-minded people, staff and clients, and communicates the brand essence with a clear vision and direction.
The original incarnation of what is now Lush began in the 1970s when Mark Constantine, an herbal trichologist, and Elizabeth Weir, incorporated a company named Constantine & Weir. They began with developing recipes for bath and beauty products and toted them round to potential buyers. Their verdict was: “Too earnest, very authentic, not at all commercial.” Constantine & Weir was one of the associate and suppliers to The Body Shop (acquired by L’Oreal in 2006), a UK -based company founded in 1976 by http://en.wikipedia.org/wiki/Anita_RoddickAnita Roddick.
As The Body Shop grew, Anita made a bid the rights to many of the products produced by Constantine & Weir for The Body Shop. It was good to be associated with the fastest growing cosmetic company in the world which was using products and ideas by C&W. This association was hampered after The Body Shop floated in 1984, when the partnership became uncomfortably formal. The Body Shop eventually bought the intellectual property rights to the business of Constantine & Weir for ?9m in 1991. C&W managed to dodge the buyout by starting a new company named ‘Cosmetics to Go’ in 1988. This company was primarily a mail-order business which failed ignominiously in 1994.
However, CTG managed to obtain new finance from Peter Blacker, of British Ensign Estates and his finance director Andrew Gerrie, who now form an integral part of the board of Lush. In 1994, CTG was renamed to Lush as result of a contest wherein they requested their existing customers to suggest a new name.
Peter Blacker and Andrew Gerrie were the first to help Constantine when CTG was already in agony and later were responsible in establishing Lush. Gerrie, an opulent entrepreneur had tremendous experience in cash and finance, was a great support to Constantine after having lost his confidence following the CTG debacle. Gerrie had a catalysing effect on the growth of Lush’s fortunes and is leading the expansion of the company. Constantine’s expertise in producing cosmetics is well complemented by Andrew’s ability of managing finances. Constantine and Andrew are the recognised leaders of the company. Besides being experts in their respective fields, they are socially intelligent, organisationally efficient and have a strong sense of imagination. The leadership team of Lush includes Elizabeth Bennett, Helen Ambrosen, Karl Joseph Bygrave and Margaret Joan who are also the shareholders.
Lush is a leading global brand with over 600 stores and subsidiaries in 43 countries worldwide and production laboratories in Europe, Canada, Australia, South America, Singapore and Japan. Their aim is to offer “the freshest products in the history of cosmetics.” All the stores in UK are fully owned by the company and the stores overseas are subsidiaries with local managers. The Lush store partnership model ensures management coherence and commitment with the company. Personal ownership adds motivation while willingness to invest in Lush means that the Lush concept is endorsed. At the same time Lush remains directly involved and able to steer the branch. Lush does not supply any other retailer so everything they produce is only sold in Lush shops or on-line from Lush websites.
Lush produces many different types of cosmetic products, from hair, face, body, and foot care, all the way to bath and shower care. Lush creates solid products to reduce packaging waste and the need for preservatives. Solid products are sold wrapped in paper or in small bags. Lush encourages customers and staff to purchase products using their own shopping bags to be more eco-friendly and even motivate customers to let their products go “naked” (without any packaging whatsoever). Some examples of Lush’s solid products include bubble bath bars, shampoo bars, hair conditioner bars, solid shower gel, and massage bars. Lush also carries bath bombs, also called bath ballistics, which are solid balls made of sodium bicarbonate and citric acid that fizz as they dissolve in the bath, releasing essential oils that scent the bath and soften the skin, and in some cases glitter, confetti, flower petals or seaweed. They hand-make the products in a factory in small batches based on orders from individual stores in order to keep their products fresh. In order to stay in touch with their fresh standard, Lush does not sell any product in their store that’s older than 4 months and most products have a total shelf life of approximately 14 months.
Lush lists their product ingredients in English as well as Japanese, French and many other languages, and uses fruit, vegetables, other plant products, and safe synthetics. Many products are labeled with a use-by date and who made the product.
All Lush products are vegetarian, and less than 30% contain animal products such as beeswax, honey, free range, unfertilized eggs and lanolin. Lush uses minimal packaging (over 70% of their products contain no packaging at all); the packaging that they do use is 100% recyclable and are made from used plastics and cardboard.
Products which contain no animal ingredients at all are marked as vegan in Lush catalogues, on store displays, and on the container itself. Lush uses methyl- and propyl- parabens, which have been used in food preservation and are both made of plant materials. Only the liquid products contain parabens; solid products have no preservative content as it is water that can breed bacteria in products. 70% of Lush products are preservative-free.
Ethos and campaigning
Lush does not buy from companies that carry out, fund, or commission any animal testing. Lush itself tests its products on human volunteers before they are sold.
In keeping with its stated ethos, Lush has also begun to phase out its use of sodium palm kernelate. Sodium palm kernelate is derived from trees in the natural habitat of orguntans. Greenwash, a pine scented soap, is the first soap to be made using palm-free soap noodles, but as of 2008 all Lush soaps are made with palm-free soap base.
Their aim is to have “100% of [their] packaging easily recyclable, compostable or biodegradable”. Lush is a supporter of controversial direct action, animal rights operations including the Sea Shepherds, a group that works to protect whales, seals, and other aquatic animals. In 2007 Lush started openly supporting campaigning groups by sending a dozen cheques for ?1000 each, including road protests groups such as Road Block and NoM1Widening, Hacan Clear Skies (anti-aviation group), and Dump the Dump (which is fighting against an incinerator) They introduced the “Charity Pot” body lotion, each pot promotes a different small charity on the lid, and the full purchase price (except for VAT) goes to charity. They have also introduced a range of “Go Green” products that they say are inspired by Rebecca Lush (no relation), a roads campaigner who set up Road Block in the early 1990s and who pied Jeremy Clarkson for his glorification of the car.
Benefits of Listing on Stock Exchange
Listing on a stock exchange can add value to a business of any size. Moreover, stock exchange listing cast a wider net into the capitalization pool i.e. the potential sources of equity funding, when a company is planning for expansion and leveraging. A listing will also to attach importance to Employee Share Ownership Scheme of Lush.
By obtaining a listing on a stock exchange, Lush will gain market exposure to a broader membership of the financial community including market makers, traders, retail investors and various financial institutions. This will eventually benefit Lush it’s a growing business and worth investing. Thus, listing will potentially increase capital investments of Lush, as opposed to private negotiations and networking, providing a better exposure to a larger financial market and wider range of investors.Being listed on an exchange implies that Lush meet the requirements and standards set by the exchange. This will add credibility to its business and therefore enhance its brand equity by improve customer’s perception of value in the company and its products. Moreover, listing will enhance financial information and investor public relations through the information/disclosures made available as required by listed companies.
Listing will facilitate Lush to ascertain its Enterprise Value and share price.
A need for capital investment is one of the main factors for Lush to lists on a stock exchange. Lush is a product based company and requires capital for producing inventories. Given the fact that they use on natural ingredients, their products are slightly expensive since they have to import or cultivate their ingredients regularly.
Stock market listing will provide wider and more accessible forms of investment for both investors and businesses. This will largely support a free market for buyers and sellers to meet, access and trade capital for ownership and vice versa. It could also be used as one of several sources of capital leveraging.
Lush finances its production through debt. Their debt gearing is a striking 40.63% which is very high for a product manufacturing company. Also their interest cover of 13.84% is also high. Listing on the exchange will provide a low cost of capital financing. It will also provide increased capitalization through wider market exposure and reduce the reliance on alternative sources of funding such as venture capital firms. This lower reliance for alternative sources of financing will improve negotiating leverage of the company when obtaining financing from venture capital firms whether it be through less liability protection as determined by the stock ownership terms or lower cost of capital. In other words, if the market exposure gained through listing is positive, the effects on financing can also be positive.
To summarize, listing a business on a stock exchange may be a good idea for a business seeking improved market awareness, greater potential for capital investment, enhancements to brand equity and negotiating influence etc. Listing on an exchange should probably be in line with or in accordance with business strategy, otherwise the listing may be premature or unnecessary.
Free Cash Flow Valuation
The discounted-cash-flow approach attempts to determine the value of the company (or “enterprise value”) by computing the present value of cash flows over the life of the company. Since a corporation is assumed to have infinite life, the analysis here is broken into a forecast period and a terminal value. Ideally, the forecast period should equate with the interval over which the firm enjoys opportunities for relatively high growth. The value of the company derived from free cash flows occurring after the forecast period is captured by a terminal value. To estimate the terminal value, cash flows are projected under a steady state assumption that the firm enjoys no opportunities for abnormal growth. Once a schedule of free cash flows is developed for the enterprise, the Weighted Average Cost of Capital (WACC) is used to discount them to determine the present value. The sum of the present values of the forecast period and the terminal value cash flows provides an estimate of company or enterprise value.
Free cash flow equals the sum of NOPAT (net operating profits after taxes.), plus depreciation and noncash charges, less capital investment and less investment in working capital. NOPAT is used to capture the earnings after taxes that are available to all providers of capital (i.e., NOPAT has no deductions for financing costs). Moreover, since the tax deductibility of interest payments is accounted for in the WACC, such financing tax effects are also excluded from the free cash flow, which can be expressed as:
FCF=NOPAT + Depreciation – CAPEX – ?NWC
NOPAT is equal to Operating Income x (1-Tc) where Tc is the marginal tax rate (30% equal to the UK corporate tax rate).
All items were taken from financial statements of Lush. The growth figures of sales for the year 2010 has been taken to be 30% which is the average sales growth form the year 2005-2009. After obtaining listing the company is supposed to have enough funds for operation and will not require any debt financing. Hence, the growth rate is likely to growth at an average 5% for the 1st five years from its listing. This phenomenon was also observed in the case of body shop where its growth shot up rapidly (22.54% in 1984 to an avg growth rate of 37.19% in 1989)over the 1st five years from its listing on the stock exchange.
The risk free rate is taken to be 4% as an average risk free rate of debt. Also the risk premium has been assumed to be 4%. The cost of debt assumed is 11.5% because Lush does a lot of short term borrowing and rates are high and generally fluctuate. Also their gearing has been really high and implies that they pay a very high rate of interest. The stock beta has been obtained from The Body Shop (now L’Oreal). The Body Shop has been used as a comparable company since its origination, method of operations and business is very similar to Lush. Some of the items have been expressed as a percentage of Sales to help us in our forecasts (% of Sales approach). The given growth rates of L’Oreal have been used to compute Sales for 2010-SS.2
COGS and SG&A can be approximated on the basis of their past relationship with Sales. We have assumed that this relationship will be the same in the future.
We have assumed that fixed assets will continue to grow at a rate of 40.75% which represents the average growth in fixed assets between 2005-2009. In reality, it is unlikely that Lush assets will be growing at such high rate forever. The historical depreciation/Fixed Assets ratio (average) is 23.4%. Given that there is no great variation in this historical ratio one can safely assume that the relationship between the two will be maintained in the future. We can then calculate an estimate for fixed assets and as a result depreciation itself as a function of fixed assets.
We assume that the valuation exercise is performed at the end of 2009, i.e. that the first FCF (end 2009) arrives 1 year from the time of the valuation.
Terminal Value is then calculated as follows:
Terminal Value = FCFSteady State ? (WACC ? gss)4
This is the value of all cash flows after 2014 as of the end of 2014 that then needs to be converted to value today (i.e. end of 2009). So it needs to be discounted 5 periods back.
PV Terminal Value = Terminal Value / (1+WACC)
Then the PV of the FCFs from 2010 to 2014 is:
PVFCF2010-2014 = FCF2010/(1+WACC)+ FCF2011/(1+WACC)^2 + FCF2012/(1+WACC)^3 + FCF2013/(1+WACC)^4+ FCF2014/(1+WACC)^5
The Enterprise Value is then given by PV Terminal Value + PVFCF2010-2014
This is the value of the firm to all providers of capital. To get the equity value one needs to subtract the value of total debt (ST Debt + LT Debt)
The terminal value growth rate used in the valuation is 15%, which equals the long-term risk-free rate; i.e., the long-term Treasury yield. Cosmetics companies are non-cyclical companies and have very little impact of inflation on their growth. Also Lush is one of its kind, and is therefore expected to growth at 15%. Looking at the its previous growth figures (18.94% CAGR for the past 15 years), 15% is a justified steady state growth rate.
The resulting Enterprise Value is 81.02mil and the value of Equity 47.59mil. The corresponding per share figure is 2.13 pence which can then be compared to future actual share prices.
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http://www. cftech.com/BrainBank/FINANCE/U SStockExchs.html
1. “Soap Stars”, The Business FT Weekend Magazine, 08.06.02
3. From a Lush shopping bag and website (www.lush.co.uk)
4. Lush mission statement
5. Marketing: Lush Gets a Makeover”, Rotterdam School of Management, Erasmus
Graduate School of Business, available on-line at
6. Reported by Sarah McCartney, Editor of Lush Times
9 Mary Linehan, Lush Press Office
10. “Living the Lush life” by Marge C. Enriquez, Lifestyle, 10.12.01