Tien Yun Chao
Qiang (Cindy) Fu
Shichao (Roman) Fan
Kyle Castner
Presented April 14, 2015
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Introduction
Macroeconomic Review
Industry Overview
Business Overview
Recent Financial Performance
Financial Analysis
Financial Valuation
Recommendation
1
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Current Position: 1500 shares with a weighted average price of $5.22
(16.47% of current equity portfolio)
Price(4/13/2015): $17.90
Return: 242.57%
P/E:43.34
Beta: 1.07
Industry: Retail Apparel
Leading apparel and accessories retailer founded in 1977
Operates more than 1,000 retail stores in the U.S. and internationally
Market Capitalization: 3,442.1(mm)
Total Revenue(1/31/2015): 3,282.9(mm)
Source: Yahoo! Finance and RCMP portfolio history
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
2
With employment gains in
recent months, coupled with
anticipated increases in
domestic wages, per capita
disposable income is expected
to increase a strong 3.1% in
2015.
Disposable income level is
expected to steadily strengthen
at an annualized rate of 2.4%
over the five years to 2020.
Source: US. Bureau of Economic Analysis Forecast: IBISWorld
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
3
Estimated value in 2015: 94.2 Index
value.
Forecasted value for 2020: 106.4
Index value.
2015-2020 Compound Growth: 2.5%.
Recovery will take place slowly
Estimated value in 2015: 66.5 US
cents per pound.
Forecasted value for 2020: 64.5 US
cents per pound.
2015-2020 Compound Growth: 0.6%.
Less volatile, relatively low price
Intro
Macro
Industry
Business
Financial
Analysis
Source: Historical- Conference Board Forecast- IBISWorld
Financial
Projection
Valuation
Recomm
endation
4
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Apparel market growth is decelerating
U.S. apparel market at close to $250 billion.
Market grew by 5.2% in 2012, 3.4% in 2013 and just 2.5% in 2014.
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Competition is getting intense
Customers have tended to switch to Fast-fashion retailers, such as Zara,
H&M, Forever 21.
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Internet penetration, on-line purchases increase
U.S. buyers changed their shopping behavior. More purchases online and
fewer visiting stores.
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: Forbes
Valuation
Recomm
endation
5
•
Competitive rivalry within the industry (High)
 Threat from fast-fashion chain is high
 Depends on fashion trend and seasonality
 Intense price competition
•
Bargaining Power of Buyers (High)
 Highly correlated to personal disposal income
 Customer’s taste and price sensitivity
•
Bargaining Power of Suppliers (Low)
 International suppliers from low labor cost countries
 Intense competition among suppliers
•
Threat of New Entrants (Moderate)
 Established brands with substantial resources
 Exclusive distribution agreements
•
Threat of Substitutes (Moderate)
 Many clothing choices
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
6
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American Eagle Outfitters, Inc.: retailer of clothing, accessories, and personal
care products in the United States and internationally, targeting at 15 to 25
year old men and women
Aerie: intimate and personal care products targeting at 15 to 21 year old girl
% of Total Revenue
Men's
apparel and
8%
accessories
39%
Women's
apparel and
53%
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
accessories
aerie
Source: AEO 2014 10-K
Valuation
Recomm
endation
7
Real Estate
 All of stores are leased, with initial terms of 10 years
International Operations (12% of AEO Total revenue)
 Canada — 101 stores; International — 35 stores
 Agreements with multiple third party operators to expand brands
internationally
Purchasing
 Design merchandise and source its manufacture from third-party
factories.
 Purchased substantial merchandise from non-North American suppliers
Merchandise Inventory, Replenishment and Distribution
 Shipped directly from vendors and routed through third-party transloaders
 Distribution centers in Pennsylvania, Kansas, and Ontario
 Opened a third-party distribution center in the Netherlands to support
European international store and e-commerce growth in 2014
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: AEO 2014 10-K
Valuation
Recomm
endation
8
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Jay Schottenstein- Chairman and Interim CEO
◦ Also serves as the chairman for Value City Furniture
◦ Diverse retail experience
Roger Markfield- Vice Chairman and Chief Design/Creative Officer
◦ Served as president from 1995-2006
◦ Formerly worked for R.H. Macy Co., The Gap and DSW Inc.
Jennifer M. Foyle- Global Brand President of Aerie
◦ New to the company, has significantly aided in the growth of Aerie
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: AEO 2014 10-K
Valuation
Recomm
endation
9
Management Tenure
AEO
ANF
URBN
EXPR
BKE
Intro
7.80
2.74
15.45
7.03
7.65
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: Bloomberg
Valuation
Recomm
endation
10
Strengths
•
•
•
•
Weaknesses
Strong brand name
Aerie brand growth
No debt capital structure
Management holdings
• Target customer base is small and
has limited consumption capability
• Potential closure of 70 stores
• No permanent C.E.O
Opportunities
•
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International expansion
• Possibility that rising prices of raw
 Engage in future franchise/license materials, labor
agreements
• Additional store impairment
 Expands Global Presence with New charges related to underperforming
License Agreements in
stores
Chile(2015Q3) and Peru(2016)
• Fluctuations in foreign currency
AEO Direct
exchange rates
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Intro
Threats
online business, ships to 81
countries worldwide
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
11
Turnover Ratio
Liquidity
70.00
3.50
60.00
3.00
50.00
2.50
40.00
2.00
30.00
1.50
20.00
1.00
10.00
0.50
0.00
0.00
2011
2012
Current Ratio
Intro
Macro
2013
Quick Ratio
Industry
2011
2014
Business
2012
2013
2014
Cash Conversion Cycle
Days Supply of Inventory
Days Payable Outstanding
Days Sales Outstanding
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
12
Dupont
Greenblatt
250.00%
60.00%
200.00%
50.00%
150.00%
40.00%
100.00%
30.00%
50.00%
0.00%
2011
2012
2013
2014
20.00%
ROE
10.00%
Tax Burden
Interest Burder
0.00%
Operating Profit Margin
2011
Asset Turnover
Macro
Industry
2013
Ratio #1 (EBIT/Tangible Assets)
Leverage Ratio
Intro
2012
Business
Financial
Analysis
Financial
Projection
Valuation
2014
Ratio #2 (EBIT/EV)
Recomm
endation
13
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March 4 Fourth Quarter 2014 Results
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EPS of $0.36 beat estimates by $0.02
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Revenue of $1.07B beat estimates by $10.0M
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Shares up 20.84% since the news
Source: Wall Street Journal
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
14
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: Stock Charts
Valuation
Recomm
endation
15
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Source: Yahoo Finance
Valuation
Recomm
endation
16
Income Statement
(In thousands, except per share amounts)
Total net revenue
% Growth
Cost of Good Sold
Gross profit
Selling, general and administrative expenses
Restructuring charges
Loss on impairment of assets
Depreciation and amortization expense
Operating income
Other income, net
Realized loss on sale of investments
Income before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Intro
Macro
2012A
2013A
2014A
3,475,802
11.40%
2,085,480
1,390,322
834,601
3,305,802
-4.89%
2,191,803
1,113,999
796,505
34,869
126,246
394,606
7,432
402,038
137,940
264,098
(31,990)
232,108
44,465
131,974
141,055
1,022
142,077
59,094
82,983
82,983
3,282,867
-0.69%
2,128,193
1,154,674
806,498
17,752
33,468
141,191
155,765
3,737
159,502
70,715
88,787
(8,465)
80,322
Industry
Business
2015E
3,414,182
4.00%
2,146,203
1,267,979
802,333
2016E
3,542,213
3.75%
2,226,685
1,315,528
832,420
2017E
3,666,191
3.50%
2,304,619
1,361,572
861,555
2018E
3,785,342
3.25%
2,379,519
1,405,823
889,555
2019E
3,898,902
3.00%
2,450,905
1,447,997
916,242
34,251
144,004
287,391
4,255.40
291,646.58
116,658.63
174,988
174,988
35,535
149,404
298,168
4414.974752
302,583.32
121,033.33
181,550
181,550
36,779
154,634
308,604
4569.498869
313,173.74
125,269.50
187,904
187,904
37,974
159,659
318,634
4718.007582
323,351.89
129,340.75
194,011
194,011
39,114
164,449
328,193
4859.547809
333,052.44
133,220.98
199,831
199,831
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
17
WACC
Beta
Risk-Free Rate
Risk Premium
Cost of Equity
Debt
Equity
Cost of Capital
Premium
Discount Rate
DCF
EBIT
-Taxes
+Depreciation
-Changes in Net Working Capital
-CapEx
Free Cash Flow
Present Value
Enterprise Value
-Outstanding Debt
-Preferred Stock
-Non-controling Interest
Implied Equity Value
Number of Shares Outstanding
Implied Stock Price
Intro
Macro
Industry
3,373.90
1.07
2%
6.00%
8.42%
0%
100%
8.42%
1.50%
9.92%
2015
2016
2017
2018
2019
Terminal Value
291,646.58
302,583.32
313,173.74
323,351.89
333,052.44
(116,658.63) (121,033.33) (125,269.50) (129,340.75) (133,220.98)
144,004.22
149,404.38
154,633.54
159,659.13
164,448.90
(4,807.60)
(6,019.78)
(5,829.16)
(5,602.24)
(5,339.36)
(153,638.18) (159,399.61) (164,978.59) (170,340.40) (175,450.61)
2.00%
160,546.40
165,534.98
171,730.03
177,727.62
183,490.39
2,362,296.64
146,053.76
136,997.98
129,295.32
121,731.70
114,333.71
1,471,957.89
2,120,370.36
-
$
Business
Financial
Analysis
Financial
Projection
Valuation
195,022
10.87
Recomm
endation
18
Comparable Companies
Company Name
Urban Outfitters
Abercrombie
Express
The Buckle
American Eagle
TEV/Total Revenues TEV/EBIT P/E P/TangBV
1.70
15.10 26.10
4.30
0.40
7.30 30.60
1.10
0.60
9.20 20.90
4.00
1.90
8.50 14.50
6.60
0.90
14.20 38.70
3.20
Weights
Urban Outfitters
Abercrombie
Express
The Buckle
Intro
Macro
Industry
Business
30.00%
40.00%
10.00%
20.00%
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
19
Weighted Average Multiples
TEV/Total Revenues
TEV/EBIT
P/E
P/TangBV
1.11
10.07
25.06
3.45
Valuation
TEV/Total Revenues
TEV/EBIT
P/E
P/TangBV
Price Per Share
Intro
Macro
Industry
$
$
$
$
$
Business
18.74
11.05
11.44
19.15
13.84
Financial
Analysis
25.00%
50.00%
15.00%
10.00%
Financial
Projection
Valuation
Recomm
endation
20
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DCF:$10.87
Comps: $13.84
Price: $17.90
SELL AEO
500 shares @MKT
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
21