Konstantinos Chatziioannou
Catherine Lien
Michelle Oboarekpe
Kuralay Seitalina
Yang Shen-Ho
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Business Overview
Business Strategy
Ratios/DuPont Analysis
Current Financial Position
Competitors
 Multiples Valuation
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Industry Breakdown
SWOT
Macroeconomic Analysis
Pro Forma Assumptions
DCF
Recommendation
 Portfolio Correlation
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Founded in 1977, “high-quality, on-trend
clothing, accessories and personal care
products at affordable prices”
 American Eagle®
 15-25 year old boys/girls
 Sweaters, graphic t-shirts, fleece, outerwear, and
accessories
 939 in US and Canada
 www.ae.com – ships to more than 75 countries
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Other Brands
 aerie® by American Eagle®
 Launched Fall 2006
 15-25 year old AE® girl
 Dormwear, intimates, personal care products
 137 standalone stores in US and Canada,
www.aerie.com
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Other Brands
 77kids ® by American Eagle®
 Kids ages 2-10 years
 Only available online : www.77kids.com
 MARTIN+OSA®
▪ Clothing and accessories
▪ 28-40 year old men and women
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MARTIN+OSA® closed as of 3/5/2010
 Board approved management’s
recommendation
 Not achieving performance levels to warrant
further investment
 Closes all 28 stores, terminate all online and
corporate operations for FY 2010
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Organic store growth
 Leasehold improvements
 Improving in-store experience
 AEO Direct
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International expansion
 Middle East franchising presence
ROE Breakdown
1.80
1.60
1.40
1.20
Assets Turnover
1.00
Interest Burden
Leverage Ratio
0.80
Tax Burden
Operating Profit Margin
0.60
0.40
0.20
0.00
2004
ROE
2005
2004
21.24%
2006
2005
21.81%
2007
2006
22.99%
2008
2007
23.83%
2009
2008
6.88%
2009
5.48%
Same stores sales growth
20.0%
15.0%
AEO
10.0%
5.0%
Peer Average
0.0%
2005
-5.0%
-10.0%
-15.0%
2006
2007
2008
2009
Sales per square foot (mm)
$700
$650
AEO
$600
$550
Peer Average
$500
$450
$400
2005
2006
2007
2008
2009
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Aeropostale, Inc. (NYSE: ARO)
 895 stores in 49 states and Puerto Rico; 44
stores in Canada
 Targeted demographic
▪ Primary: 14 to 17 year-old young women and men
▪ Graphic t-shirts, tops, bottoms, sweaters, jeans, and
outerwear, and accessories
▪ Secondary: Elementary school children between
7-12 year-old
▪ Casual clothing and accessories
 FY 2009 Total Revenue = $2.23B
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Abercrombie & Fitch Co. (NYSE: ANF)
 1,096 stores in North America, Europe, and Asia
 Abercrombie & Fitch, abercrombie kids,
Hollister
▪ Knit and woven tops, graphic t-shirts, fleece, bottoms,
outerwear, personal care products, and accessories
 Gilly Hicks
▪ Bras, underwear, sleepwear, and at-home products for
women
 In store, direct-to-consumer, and website retail
outlets
 FY 2009 Total Revenue = $2.928B
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The Gap, Inc. (NYSE: GPS)
 3,100 stores in the United States, UK, Canada,
France, Japan, and Ireland
 Gap, Old Navy, Banana Republic, Piperlime,
and Athleta
▪ Clothing, accessories, and personal care products
for men, women, children, and babies
 In store, catalogue, and website retail outlets
 FY 2009 Total Revenue = $14.197B
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Urban Outfitters (NasdaqGS: URBN)
 155 Urban Outfitters, 137 Anthropologie, 34
Free People stores, and 1 Terrain garden
center in the United States, Canada, and
Europe
 Urban Outfitters, Anthropologie, Free People,
and Terrain brands; apparel wholesale under
the Free People and Leifsdottir
 In store and website retail outlets
 FY 2009 Total Revenue = $1.9378B
Comparables Valuation
Key Ratios for Comparison
Ticker
Gross Profit
margin
Debt to
Equity
ROA
AEO
38.7%
14.1%
3.73%
ARO
38.0%
12.8%
7.29%
ANF
64.3%
23.4%
0.00%
GPS
40.3%
19.5%
5.81%
URBN
40.6%
5.2%
3.19%
“On June 16, 2009, A&F’s Board of Directors approved the closure of the
Company’s 29 RUEHL branded stores and related direct-to-consumer
operations.”
Multiples Valuation
Ticker
P/E
5y expected
PEG
TEV/Gross Profit
P/Sales
P/BV
AEO
ARO
ANF
GPS
URBN
minimum
maximum
23.43
13.04
532.12
15.05
29.70
1.51
0.70
0.96
1.27
1.13
3.91
3.713
2.780
3.313
8.771
1.327
1.250
1.448
1.118
3.383
2.514
6.416
2.321
3.245
5.056
13.04
532.12
0.70
1.27
2.78
8.77
1.12
3.38
2.32
6.42
minimum
maximum
weights
$ 10.56
$ 431.02
0%
$ 8.79
$ 15.94
25%
minimum
$
13.76
maximum
$
39.68
$
$
12.72
45.91
25%
$
$
15.99
48.40
25%
$ 17.52
$ 48.45
25%
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GICS: Apparel Retail (25504010)
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Concentrated
 50 largest companies generate 65% revenue
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Geographic Segmentation
Total Stores
OneSource
Ibisworld
REVENUE GROWTH RATE
Ibisworld
Predicted Revenue Growth
Ibisworld
Predicted Revenue Growth Rate
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Operates through multiple format
Broad product offerings across age
group
Strong customer relationship initiatives
to enhance brand loyalty
Strong brand equity
 Rated second coolest brand in a survey in
2007 by Teen Research unlimited
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Limited Investor Confidence
 Low multiple value
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Geographical Concentration
 80% from US
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Seasonality
International Merchandise
 Purchase significant portion on small
number Of sources
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Growth in online sales
Remodeling stores to enhanced
customer experiences
Business expansion through new stores,
or new brands
Middle East
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Changing in consumer preferences
Slow economy recovery
 According to a survey, majority of buyers
wouldn’t make a purchase if there was no
deal attached
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Intense competition reduce prices which
further reduce margins
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Personal Income
 Consumer Spending
 Personal Income
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Consumer Confidence
Credit Market
Bloomberg.com
Bloomberg.com
Bloomberg.com
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Interest rate risk
 Earnings can be affected due to exposure in
money market funds and auction rate
securities
 Debt, expiring in Apr 2010 and May 2010
bear floating interest rates at prime or LIBOR
▪ As of Jan 30, 2010: weighted average interest rate
of borrowing = 2.1%
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Foreign exchange rate risk
 Exposure through Canadian operations
▪ No hedging instruments
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Meets expectation well
 Number of new stores, remodeled stores
▪ Opened 8 AE stores, 21 aerie stores, 22 remodeled
▪ Expected 11 AE stores, 17 aerie, 25-35 remodeled
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Management seems pretty optimistic
about growth
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Sales growth
 2010-2012 = 3%-5%
 2013-2017 = 6%-7%
CapEx is $120M and lower but normalizes in 2014
Abnormally high cash level
Closure of M+O
Auction Rated Securities in 2010
Discount rate 12.72%
Intrinsic share value of $9-$11
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Current holding: 2,500 shares
Dec 1999-1,500 shares bought at $5.23
Dec 2008-1,000 shares bought at $9.07
Multiple Valuation $13-$39
DCF Valuation $9-$11
Current share price = $17.74
Sell Stop Order of
1,000 shares at $16