American Eagle
Outfitters (AEO)
Presented December 2, 2008
Brian Bird
Matt Byford
Brandon Lee
Christina Lu
Overview
Company Overview
 Industry Overview
 Macroeconomy
 Financials
 Valuation
 RCMP Portfolio
 Recommendation

Company Overview

American Eagle Outfitters a leading apparel retailer in the US

Design, market, and sell own brand
• Casual clothing including Jeans, Graphic T’s, accessories, footwear,
outwear, basics




Targets ages 15-25
Sell to US (1977), Canada (2001) and 41 foreign countries
Venues: Primarily mall-based, limited stand-alone and internet sales
2006: introduced 2 new brands
• Martin+OSA as a separate brand targeting age 25-40
• Aerie
as a sub brand selling intimates for women

2008: www.77kids.com
• Targets 2-10 year olds

As of Feb 2008 it operated 987 stores



929 AE stores in US and Canada
39 Aerie stand-alone stores
19 Martin+OSA
Growth Strategy

Fiscal 2008 goals:
Open 80 stand alone aerie stores
 Open 40 new AE stores
 Open 15 Martin + OSA stores
 Remodel 40-50 existing AE stores


10% expected square footage growth
Industry Overview
Competition: individual and chain specialty
stores, as well as the casual apparel and
footwear departments of department stores
and discount retailers
 Key Competitors:

Abercrombie & Fitch: 20 year olds, high price
 Aeropostale: younger teens, low-mid price
 GAP: 20-30, mid-high price
 American Eagle: 20 year old, mid price

Retail Risks

Consumer preferences


Changes in fashion trends could lead to lower
sales, excess inventories and higher
markdowns
Seasonality

The fourth and third quarters have historically
provided 60% net sales & 65% of net income
Due to the year-end holiday season and
back-to-school selling season.
Industry Overview
Macro Trends

Tight credit markets

AEO: $300 million tied up in auction rate
securities
Retail sector struggling
 Consumer confidence extremely low
 Opportunity to benefit from cheaper lease
agreements in this economic downturn

Macro Trends
SWOT Analysis
Strengths
Weakness
•Brand
Identity/Leading Brand
•Strong balance sheet
•
Opportunities
Threats
Growth in stores
• 77Kids
• Martin + Osa
•
•
Cyclical business model
• Affected by weak economy
• Poor consumer confidence
Continuance in poor consumer
confidence
• Introduction of more competitors
• Becoming out of favor
Porter 5 Forces
•
The threat of substitute products
•
•
The threat of the entry of new competitors
•
•
There are competitive rivalries among stores and the possibility for new
companies to add too the rivalries, but because of AEO’s strong brand name
the probability of new, competitive rivalries is low.
The bargaining power of customers
•
•
The barriers of entry are not high. However, AEO has a strong which makes its
threat to new competitors lower.
The intensity of competitive rivalry
•
•
There are several substitutes for American Eagle clothing. However, the
propensity for buyers to substitute are not as high.
Customers have high bargaining power because there are several substitutes
to the products that American Eagle provides.
The bargaining power of suppliers
• AEO deals mainly with the textile commodities therefore suppliers it
is hard for the supplier to have bargaining power over AEO.
Marketable Securities

Three Types:
Debt held to maturity
 Trading Securities

• Assumed to be held for a short term profit
• Typically, only financial institutions hold
trading securities

Available-for-sale securities
• An intermediate class of securities tied to
a specific cash need
• Ex. AEO purchased available-for-sale
securities to finance its repurchase program
Auction Rate Securities

A debt security that is sold through a Dutch auction. The
auction rate security (ARS) is sold at an interest rate that
will clear the market at the lowest yield possible. This
ensures that all bidders on an ARS receive the same
yield on the debt issue.(source: investopedia.com)

In early 2008, the ARS market had grown to over $200
billion, roughly half of it being owned by corporate
investors.

In February 2008, the auction market failed and most
ARS have been frozen since then.
AEO Auction Rate Securities Exposure

As of August 2, 2008, AEO had $689.0 million
in cash and cash equivalents, short-term
investments, and long-term investments.


$332.6 million net investments in auction rate
securities
In the first half of the year, the company
experienced failed auctions for 49 ARS issues.

During the same time period, the company sold 33
ARS issues at par plus accrued interest at $84.9
million.
Cash Flow Statement:
Investing Activities

2005: Net purchases of $311 million in
available for sale securities

2006: Net purchases of $437 million in
available for sale securities

2007: Net sales of $354 million in
available for sale securities
Balance Sheet
Cash Flow Statement
Ratios and Margins
2003
2004
2005
2006
2007
Average
36.46%
46.66%
46.50%
47.97%
46.58%
44.83%
% Operating margin
6.88%
19.28%
19.97%
21.00%
19.60%
17.34%
% Net profit margin
3.95%
11.34%
12.74%
13.86%
13.09%
11.00%
%ROE - 5 yr avg
9.32%
22.14%
25.45%
27.33%
29.84%
22.82%
% ROA - 5 yr avg
6.94%
16.49%
18.32%
19.47%
21.42%
16.53%
% Gross margin 5 yr avg
50.00
40.00
30.00
20.00
10.00
0.00
Gross Margin
Net profit Margin
ROE
ROA
2003 2004 2005 2006 2007
Current ratio
2.78
3.27
2.99
2.60
2.71
2.87
Dupont Analysis
ROE
ROA
Equity Multiplier
2005
0.25451
0.18318
1.38942
2006
0.27330
2007
0.29842
0.21418
1.39331
ROA
Profit Margin
Asset Turnover
2005
0.18318
0.1274
1.44
2006
0.19470
2007
0.21418
=
=
0.19470
0.1386
0.1309
x
x
1.40370
1.40
1.64
Multiple Analysis
Competitors
Market Capital
Trailing P/E
Forward P/E
Price/Sales
M/B
ANF
1.55B
3.39
6.61
0.51
1.12
GPS
8.20B
8.83
8.49
0.57
2.07
LTD
3.05B
5.26
6.17
0.35
1.48
Trailing P/E
Forward P/E
Price/Sales
M/B
High
9.44
11.49
6.94
10.73
Low
14.30
13.75
8.30
14.27
Average
9.44
10.00
5.10
7.72
Multiple Analysis

AEO
Earning per share
1.62
Sales per share
15
Book value per share
6.89
diluted shares (Mn)
220,280
American Eagle Equity Value Using Multiples
P/E(trailing)
P/E(leading)
P/S
M/B
Using Average
9.44
11.49
6.94
10.73
Using High
14.30
13.75
8.30
14.27
Using Low
9.44
10.00
5.10
7.72
Football Chart
Implied price
$11.00~13.00
Football Chart
M/B
P/S
P/E(leading)
P/E(trailing)
0
2
4
6
8
10
12
14
16
Valuation: Earnings
Period
EPS Estimate
EPS Actual
Q1 2007
$0.35
$0.35
Q2 2007
$0.36
$0.37
Q3 2007
$0.45
$0.45
Q4 2007
$0.66
$0.66
Q1 2008
$0.19
$0.21
Q2 2008
$0.28
$0.29
Q3 2008
$0.30
$0.30
Q4 2008
$0.47
Feb. 2009
DCF: WACC
•Beta taken from Yahoo! Finance
•Share price of $8.59 as of mid-day Tuesday, December 2, 2008.
•Total debt includes $75 million in demand borrowings
DCF:
Assumptions:
•-10% growth in sales.
• Squeeze margins by increasing cost of sales to 55%.
DCF:
DCF Price: $12.14
+/- 10%: $10.93 - $13.36
Sensitivity Analysis:
RCMP Portfolio: Current
RCMP Portfolio: with Recommendation
Correlation
Transaction History

December 10, 1999
•

BOT 200 shares at
$27.00
May 3, 2000
•

•
January 10, 2000
•

BOT 200 shares at
$44.00
•
BOT 600 shares at
$15.63
•
•
•
February 23, 2001
•
3-2 split
•
March 8th, 2005
• 2-1 split
April 25th, 2005
• SLD 600 shares at $26.28
November 16th, 2005
• SLD 700 shares at $23.33
November 7th 2006
• SLD 400 shares at $39.19
December 28th, 2006
• 3-2 Split
November 2007
• SLD 450 shares at $22
Current Position
Currently own 1500 shares at $8.59 (Midday Dec. 2, 2008)
 Unrealized gain of $5,000 (64%)

Recommendation

BUY 1000 Shares of AEO at Market
Price

Cost of purchase: $8,590, bringing the total position to
$21,475.





The average cost per share: $6.57 (previously $5.23)
The DCF values the company at a range between $10.93
and $13.36.
The company is currently trading at about $8.60 (20% to
35% discount to the model).
Currently represents about 4.75% of the portfolio. The
addition would make AEO 7.60% of the portfolio.
Recommend average costing into the position as
consumer confidence remains weak.