LOGO
American Eagle
 Presented April 5, 2006 by Kevin Cowell and
Narayan Subramanian
 American Eagle Outfitters is a leading retailer that
designs, markets and sells its own brand of
laidback, current clothing for 15 to 25 year-olds,
providing high-quality merchandise at affordable
prices. AE's original collection includes standards
like jeans and graphic T's as well as essentials
like accessories, outerwear, footwear, basics and
swimwear.
 798 stores in US and Puerto Rico
 71 stores in Canada
Our AEOS Position
 Our Original Position:
 12/10/1999 – Bought 200 Shares @ $44
 3/10/2000 – Bought 200 Shares @ $27
 5/3/2000 – Bought 600 Shares @ $15 5/8
 Stock Splits
 2/23/2001 – 3:2
 3/28/2005 – 2:1
 Shares Sold:
 4/25/2005 – Sold 200 @ $26.28 and 400 @ $26.284
 11/16/2005 – Sold 700 @ 23.33
 Average Position:
 Adjusting for Splits and Buying at Different Prices our Position is
equivalent to buying 1700 Shares @ $7.84 on Dec. 10, 1999
Our Position (cont.)
 Sold 1300 shares out of 3000 in the past
year
 Diversification of risk
 Stock Price = $29.86 a/o March 31, 2006
 Current Value of AEOS position is $50,762
out of 294,749 for the Portfolio
 ~17% of current portfolio
 280.97% Gain
Macroeconomic Trends
 Increased Energy Costs Causing Inflation
 Consumer Confidence down from 106.8 to
101.7
 Consumers worried about job prospects and shortterm health of economy
 Increasing Interest Rates
 Could Affect Spring Retail Sales Accordingly
Retail Industry Outlook
Predicted 4.7% growth in retail sales
for 2006
 Down from 6.1% from 2005
Clothing retailers expected to see
solid sales growth
 4.0 – 5.0% range
* According to National Retail Federation’s 2006 Retail Sales Forecast
Demographic Changes
25-39 age group expected to grow
11% to 67 million people between
2005-2025
15-19 only expected to grow by 6%
New Opportunity for Retailers
Store Openings/Closings
2005 [CapEx = $83 m]
 36 Opened
 11 Closed
 43 Remodeled
2006 (est.) [CapEx = $175]
 Open 50
 Remodel 50
 7% increase in sq. footage
Martin + Osa
 New stores owned by AE to target the 25-39 year old
population
 4 Definite locations for Fall 2006 with 2 more stores
pending
 Tysons Corner Center (McLean, VA), Fashion Island (Newport Beach,
CA), NorthPark Center (Dallas, TX) and San Francisco Center
 Not test stores
 Plan on opening 10-17 more stores in 2007
 6,500 to 7,500 square feet/store
 Possible $1B opportunity per year (about 50% of current
Rev)
 Long-term goal
Product Life Cycle
AE
M+O
Martin + Osa - Challenges
 Very challenging demographic:
• Different Tastes
• Different Incomes
• Already proven difficult for Abercrombie and GAP
 Increasing Competition
•
•
•
•
•
•
Abercrombie- Ruehl
GAP- Forth and Towne
Polo- Rugby
Aeropostale- Jimmy’Z
J Crew
Banana Republic
Ruehl by ANF
Failing entry into the 25-35 y.o. niche
market
 Already adjusting their strategy
 Possibly falling into Gap’s blunders
• Same products, different price tag
Can AE avoid this pitfall?
Aerie by American Eagle
 Focuses on bras, panties, and casual dormwear for
girls and young women.
 “Take girls from the dorm room to the coffee shop.”
 Will incorporate the Aerie brand in existing stores
through renovations to create a “store within a
store.”
 Also plan on constructing side-by-side and freestanding stores with about 900-1000 sq. feet per
store
 Short-term goal
More Expansion
Many online sales going to Japan
AE is considering forming a
partnership with an established
Japanese retailer
 80-100 Stores
 AE International
530,000 sq foot increase in Kansas
distribution center (est. $55M)
AE Stock Prospects
Company
A&F
Stock Price
EPS
P/E
Forward P/E
Mkt. Cap
Beta
57.5
3.66
15.71
11.34
5.40 B
1.44
Aeropostale
28.95
1.37
21.09
15.65
1.57 B
1.62
AE
29.86
1.89
15.77
12.98
4.46 B
1.92
GAP (GPS)
17.69
1.23
14.34
12.46
15.38 B
1.82
PACSUN (PSUN)
22.07
1.67
13.24
10.87
1.64 B
1.14
Cyclical Nature of Industry
Q4 Conference Call
 Overall Sales Increased 13.4% in 2005 from
2004
 Same-Store Sales up 8%
 Margins Down
 Gross Margin Down 2.97%
 Op. Margin Down 2.68%
 Net Margin Down .9%
 Margins Decreased Due to Markdowns and
Increased Warehousing Costs
Valuation
 See Spreadsheet
 Intrinsic Value using Discounted Cash
Flow Analysis = $24.49 +- 10%
 Implied Stock Price Using EPS*P/E =
$27.82 +- 10%
Sensitivity Analysis
COGS as a % of Sales
y/y growth
rate of
sales
52.00%
52.50%
53.00%
53.50%
54.00%
54.50%
55.00%
7%
$22.98
$22.36
$21.73
$21.10
$20.47
$19.85
$19.22
8%
$24.09
$23.43
$22.78
$22.13
$21.47
$20.82
$20.17
9%
$25.23
$24.55
$23.87
$23.19
$22.51
$21.83
$21.15
10%
$26.40
$25.70
$24.99
$24.28
$23.57
$22.87
$22.16
11%
$27.62
$26.88
$26.15
$25.41
$24.68
$23.94
$23.20
12%
$28.88
$28.11
$27.34
$26.58
$25.81
$25.05
$24.28
13%
$30.17
$29.38
$28.58
$27.78
$26.99
$26.19
$25.40
14%
$31.51
$30.68
$29.86
$29.03
$28.20
$27.37
$26.54
15%
$32.89
$32.03
$31.17
$30.31
$29.45
$28.59
$27.73
Summary
 Martin + Osa Uncertainty
 Does Market Exist?
 Other Ventures:
 Aerie Intimate Brand
 AE International
 COGS Sensitivity
 Forecasting Trends and Inventory
 Can CAPEX Increases Drive More Sales?
Recommendation
 Final Recommendation: HOLD all 1700
shares
 Too early to determine the impact of Martin + Osa,
Aerie, and AE International on sales
 Projects have the potential to become huge growth
opportunities and profit drivers in the future
 Share price was slightly overvalued using DCF Model
and fairly priced using EPS Approach but both
techniques did not account for potential sales growth
due expansion activities but did take into account
increased capital expenditures