American Eagle Outfitters,
Inc.
By,
Pratik Kamdar
Rajani Meka
Raj Dhawle Patil
Shih-Wei Huang
Presented April 5, 2011
RCMP Portfolio
• Currently, Portfolio holds 2000 shares
• 1500 shares are held, remaining from three different
purchases beginning in December 1999, at the split
adjusted price of $5.23 per share. Currently, the
position has an unrealized gain of 203% as on 3rd
April, 2011
• Multiple sales of these three original purchases
have been made since then, each producing sizable
capital gains
• 500 shares were bought at the price of $9.07 per
share on 3rd Dec. 2008. Currently, the position has
an unrealized gain of 75% as on 3rd April 2011
• At present, AEO represents 28% of our portfolio
holdings by Market Value
The Company
• An American clothing and accessories retailer
based in Pittsburg, PA
• Sells its merchandise through stand-alone stores
in malls and online through www.ae.com
• Key Facts:
• Founded in 1977
• Headquarters: Pittsburg, PA
• Currently operates 1086 stores in US & Canada; Avg.
store size-4700 selling sq.ft.
• CEO: James V. O'Donnell
• Employs around 39,900 people
• Stock trades on NYSE under symbol ‘AEO’
Recent News:
• On 9th March’ 2011, Company CEO James V.
O’Donnell expressed his intention to retire.
Search for New CEO is on
• Recent Speculation regarding Company being an
attractive LBO target; Reason: Company posted
negative comparable sales growth during quarter
fiscal 2010 but still cash rich
• On 31st July’ 2010, Completed Closure of its brand
‘M+0’; Reason: brand was not achieving
performance levels commensurate with
investments.
History
•
1977-Funded by Mark & Jerry Silverman as a subsidiary of Retail
Ventures, Inc., which operated ‘Silverman’s Menswear’
•
1989- Bothers sold other businesses & decided to focus only on
AEO
•
1991-Schottensteins, 50% owner in AEO bought out remaining
50% interest from Silverman family
•
•
2001-Opened AEO’s 1st Canadian Store
1994- Company went Public
•
2006-Company launched new brand ‘M+O’ for Adults and Aerie
for Women
•
2008-Launched new brand 77Kids for children
•
2010-Closed ‘M+O’; Opened first International Store in Dubai,
UAE
What it Does & How?
AEO Distribution
Centre
Garment
Manufactures
AEO Headquarters
AEO Designers
AEO
Stores
Business Segments
‘AE’
Apparels & Accessories for Men &
Women aged 15-25;
Total 929 stores across US & Canada
‘aerie’
‘AE Direct’
Sells All Merchandise
Online; Ships to 76
Countries worldwide
AEO,
Inc.
Apparel & Intimates
Collection for
college going Girls;
148 Stores across US
& Canada
‘77Kids’
Clothing & Accessories for Babies &
Kids aged 0-10 years ;
9 Stores across US & Canada
Management Outlook
• Company expects an improvement in sales on the
basis of solid product line up, continued cost cuts &
better managed Inventory
• Company Expects to Mitigate Rising Product Costs
with Targeted Reduction in Mark-downs, Selective
Price Increases & On-going Cost Savings
• Internal Development of New Brands
• Expansions Overseas though Franchise route while
keeping an eye on Acquisition Opportunities
Growth Strategy:
•
•
•
•
•
•
International Expansion: The company is entering into
Multiple Franchise Agreements to open Series of AE Stores
at International Locations:
Year
Party
Region
2009
Alshaya Trading Co.
Middle East, North Africa, Eastern Europe
2010
Dickson Concepts Ltd.
China, Macau (commences 2011)
2011
Sumikin Bussan Co. & Fox
Wizel Ltd.
Japan, Israel (commences 2012)
* No Capital/ Operational Involvement
Opening New Stores: Depending on Geography and
Demographics
Remodel Old Stores to Current Store Format to Offer Unique
Shopping Experience
Strengthen e-commerce Operation
Cut Costs & Manage Inventory
Key Performance Indicators
•
Comparable Store Sells: Provides measure of Sales
Growth for Stores open more than a Year
•
Net Sales Per Average Square Feet: Provides Measure of
Store Productivity and Operational Efficiency
•
Inventory Turnover: Measure how Productively Inventory
is Bought & Sold. Slow Moving Inventory affects
Profitability
•
Gross Profit: Provides Measure of whether or not
Company is optimizing the Price & Inventory Levels to
Achieve Optimal Sales Levels
•
Sufficient Cash Levels
Recent Financial Performance
Fiscal Year ended Jan 29th ’2011
•
Net Sales were up 1% over 2009 figures
•
Annual Comparable Store Sales were down 1% over comparable
figure in 2009
•
Net Income (from Cont. Operations) was 6% against 7% of Sales
in 2009owed to loss from selling Inv. Securities
•
Cash Decreased by $155.8 million to $740.6 million
•
Overall Results were affected by Loss Recognized from Closure
of “M+O” & Selling Investment Securities
•
Company Paid a Quarterly Dividend of $0.11 per share and
Special Dividend of $0.50 per share in Fiscal 2010
•
Repurchased 15.5 million shares in fiscal 2010.
•
New Store openings were Funded by Operating Cash Flows
Recent Stock Performance
Source: finance.yahoo.com
SWOT Analysis
Strengths:
Weaknesses:
• Affordability
• Fickle Customer Base/Low
• Solid Geographical Presence
Pricing Power
• No Financial Leverage, High • Excessive Dependence on
Operating Cash Flow
One Supplier
• Good Product Assortment
• Seasonality
• Slow Moving Inventory
Opportunities:
Risks:
• International Expansion
• Internal Development of
New Brands
• Economic Recovery
• Cotton Prices
• Inventory Risk due to
Misidentification of Trends
• Economic Condition and
Growth Discretionary
Spending
• Failure of New Brand
Offerings
MARKET OVERVIEW
MARKET VALUE:
The global apparel retail industry grew by 2.1% in 2009 to reach a value of
$1,078.2 billion.
MARKET VALUE FORECAST:
In 2014, the global apparel retail industry is forecast to have a value of
$1,222.7 billion, an increase of 13.4% since 2009.
MARKET SEGMENTATION:
Women's wear is the largest segment of the global apparel retail industry,
accounting for 51.3% of the Industry’s total value.
GEOGRAPHIC SEGMENTATION:
The Americas account for 35.7% of the global apparel retail industry value.
MARKET RIVALRY:
Despite the current global economic downturn, the apparel retail industry
continues to grow at a healthy rate and this, coupled with the absence of
switching costs for consumers and great product differentiation, means that
rivalry within the industry is no more than moderate.
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
Historic Growth
TABLE 1: Global Apparel Industry Value :$ billion
Year
$billion
2005
954.1
2006
1003.4
5.2
2007
1040.8
3.7
2008
1056.0
1.5
2009
1078.2
2.1
CAGR 2005-09
% Growth
3.1
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
Historic Growth
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
Key Revenue Driver
• Consumer Sentiment Index
– Higher the consumer confidence higher is the
spending on retail on clothing.
• Number of Youth
• Disposable Household Income
Segmentation by Age
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
Forecasted Growth
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
Forecasted Growth
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
MARKET SEGMENTATION
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
PORTERS FIVE FORCE MODEL
• Rivalry among competitors (High)
• Low entry barriers
• Extensive price competition
• Bargaining Power of Buyers (Moderate)
• Individual consumers
• High Product differentiation
• Price Sensitive
• Retailers cannot forward integrate
• Bargaining power of Suppliers(low)
• Liberization of trade.
• Industry is mostly labor intensive
• Low switching cost for retailers
PORTERS FIVE FORCE MODEL
• Threat of New Entrants ( Low to Moderate)
• Setting up single store does not require large capital
outlay.
• It might trigger a price war with players with multiple
stores and brands.
• Economies of scale
• Threat of New Substitutes(Low)
• Signifier of socio economic class
• Substitutes for apparel retail include buying directly
from manufacturers, which is facilitated by the growth
of online sales.
• Home-made and custom-made (couture) clothing are
also niche alternatives to retail of ready-made clothes
Sales Per Square Feet
American Eagle
Abercrombie and
Fitch
GAP
Aeropostale
2010
2011
2010
2011
2009
2010
2009
2010
$422
$420
$339
$390
$365
$383
572
624
Same Store Sales Growth
American Eagle
(%)
Abercrombie and
Fitch(%)
GAP
(%)
Aeropostale
(%)
2010
2011
2010
2011
2009
2010
2009
2010
-4
-1
-23
7
-3
1
8
10
Competitors
Abercrombie and Fitch, Inc (Ticker: ANF)
•
Presence in North America, Europe and Asia
•
FY 2010 Revenue : 3.47B
Aeropostale, Inc (Ticker: ARO)
•
Presence only in North America
•
FY 2010 Revenue: 2.40B
Urban Outfitters (Ticker: URBN)
•
Core operating location: US
•
FY 2010 Revenue: 2.27B
Gap, Ins (Ticker: GPS)
•
•
Presence in United States, Canada, the United Kingdom, France,
Ireland, and Japan.
FY 2010 Revenue: $14.66B
Stock Price Movements
2006 Jan 01 - 2011 Apr 01
Source: http://www.google.com/finance
Key Ratios of Retailers
Inventory and A/R Management
Receivables Turnover
1/31/2009
80.35
1/30/2010
77.17
1/29/2011
83.13
Industry
32.93
Receivables Days Sales
4.54
4.73
4.39
11.08
Inventories Turnover
6.03
5.69
5.72
4.46
Inventories Days Sales
60.58
64.19
63.76
81.84
Operational Asst Utilization
Net Sales/Working
Capital
Net Sales/Net
Plant&Equip
Net Sales/Current Assets
Net Sales/Total Assets
1/31/2009
1/30/2010
1/29/2011
5.63
3.88
3.77
3.98
4.12
4.61
3.19
2.52
2.53
1.50
1.38
1.58
Source: http://globalbb.onesource.com/homepage.aspx
Ratio Comparisons
with
Competitors
Inventory and A/R Management
ANF
ARO
URBN
GPS
AEO
Receivables Turnover
40.29
136.09
62.48
-
83.13
Receivables Days Sales
9.06
2.68
5.84
-
4.39
Inventories Turnover
3.61
10.46
6.43
5.67
5.72
Inventories Days Sales
101.16
34.89
56.72
64.41
63.76
Operational Asset Utilization
ANF
ARO
URBN
GPS
AEO
Net Sales/Working Capital
8.01
9.47
3.83
8.01
3.77
Net Sales/Net Plant&Equip
5.72
8.02
3.88
5.72
4.61
Net Sales/Current Assets
Net Sales/Total Assets
3.74
2.08
5.11
3.05
2.84
1.27
3.74
2.08
2.53
1.58
Source: http://globalbb.onesource.com/homepage.aspx
Other Ratio Comparisons
Other Ratio Comparables
Industry
13.42%
AEO
10.65%
12.00%
8.21%
6.13%
9.11%
30.64%
15.11%
16.35%
9.06%
14.81%
ROE
8.08% 53.36%
Payout Ratio
42.00%
N/A
PEG Ratio(5 yr expected) 1.08
0.84
20.16%
N/A
0.89
26.84%
21.00%
1.15
12.42%
101.71%
1.15
28.29%
19.60%
N/A
ANF
ARO
URBN
GPS
Operating Margin
8.15%
16.11%
18.21%
Net Margin
4.33%
9.64%
ROA
6.12%
14.49%
Source: http://globalbb.onesource.com/homepage.aspx
Float Number
ANF
ARO
URBN
GPS
AEO
Shares
Outstanding
87.25
87.46
164.41
606
194.69
Float
86.1
86.6
127.7
526.73
172.02
% Available for
98.68% 99.02% 77.67% 86.92% 88.36%
Trading
Source: http://finance.yahoo.com
DuPont Analysis with Competitors
Tax Burden*Interest Burden*Operating Profit Margin*Asset Turnover*Leverage = ROE
2008
2009
2010
2011
ANF
0.63*1.02*0.21*1.44*1.70=33.01%
0.60*1.02*0.14*1.22*1.64=17.79%
0.66*1.01*0.04*1.04*1.54=4.30%
0.66*0.99*0.07*1.18*1.59=8.08%
ARO
0.62*1.03*0.13*3.09*2.02=50.73%
0.60*1.00*0.13*2.87*2.38=54.09%
0.60*1.00*0.17*2.81*2.01=58.13%
0.60*1.00*0.16*3.05*1.81=53.35%
URBN
0.68*1.04*0.15*1.32*1.49=20.93%
0.64*1.03*0.16*1.38*1.39=20.91%
0.64*1.02*0.17*1.18*1.39=18.71%
0.65*1.01*0.18*1.27*1.32=20.16%
GPS
0.62*1.07*0.08*2.01*1.66=18.35%
0.61*1.02*0.11*1.92*1.75=22.33%
0.61*1.00*0.13*1.78*1.72=23.76%
0.61*1.01*0.13*2.08*1.58=26.84%
AEO
0.63*1.06*0.20*1.64*1.35=28.99%
0.61*1.05*0.12*1.50*1.43=16.70%
0.70*0.98*0.11*1.38*1.43=14.26%
0.62*0.93*0.11*1.58*1.28=12.42%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
ANF
ARO
URBN
GPS
AEO
2008
2009
2010
2011
Source: http://globalbb.onesource.com/homepage.aspx
Comparable Approach
Ticker
Market
Cap
($mm)
Price
American Eagles
Outfitters, Inc
AEO
3,080
15.84
0.7
Abercrombie and
Fitch
ANF
5,220
59.7
Aeropostale, Inc
ARO
2,120
Company Name
Urban Outfitters, Inc URBN
Gap, Inc
GPS
Diluted
Book Value
EPS
Per Share
($/Share)
Revenue Per
Share
EV
($mm)
EBITDA
($mm)
6.95
14.8
2410
462.81
1.67
21.67
39.39
2310
506.21
24.31
2.49
4.95
26.18
1,900
442.67
4,970
30.24
1.6
8.58
13.63
4820
514.01
13,650
22.71
1.88
6.73
23.06
1,168
253
Source: http://globalbb.onesource.com/homepage.aspx
Comparable Approach (Con.)
Company Name
Ticker
P/E
P/B
P/S
EV/EBITDA
American Eagles
Outfitters, Inc
AEO
22.63
2.28
1.07
5.21
Abercrombie and Fitch
ANF
35.75
2.75
1.52
4.56
Aeropostale, Inc
ARO
9.76
4.91
0.93
4.29
URBN
GPS
18.90
12.08
3.52
3.37
2.22
0.98
9.38
4.62
19.12
3.64
1.41
5.71
Urban Outfitters, Inc
Gap, Inc
Average Multiple
Triangulation
P/E
P/B
P/S
DCF Value
Price
13.4
25.31
20.95
15.49
Weight
0.20
0.05
0.05
0.70
Triangulated Value
Weighted price
2.68
1.27
1.05
10.84
$15.83
Ave P/E* EPS(AEO)
13.39
Ave P/B* BPS(AEO)
25.31
Ave P/S*RPS(AEO)
20.95
Source: http://globalbb.onesource.com/homepage.aspx
Discounted Cash Flow Results
1/29/2012
1/29/2013
1/29/2014
1/29/2015
1/29/2016
Net Income
210.51
229.45
245.51
257.79
265.52
D&A
148.93
162.33
173.70
182.38
187.85
Capex
(90.00)
(96.19)
(102.80)
(109.87)
(117.42)
(7.77)
(9.09)
(7.70)
(5.89)
(3.71)
261.67
286.51
308.71
324.41
332.24
Changes in NWC
Cash Flow
Terminal Value
Free Cash Flow
Enterprise Value
Net Debt Outstanding
3644.42
261.67
$3,098.00
0
Shares Outstanding
199.98
Share Price
$15.49
286.51
308.71
324.41
3976.66
Discount Rate
12.39%
Terminal Growth
Rate
3.00%
Sensitivity Analysis
Terminal Growth Rate
Discount Factor
15.49
11% 11.50%
12% 12.39%
12.5% 13.00%
13.5%
14.0%
2%
16.7
15.8
15.0
14.4
14.3
13.6
13.0
12.4
2.5%
17.4
16.4
15.6
14.9
14.8
14.0
13.4
12.8
3%
18.2
17.1
16.2
15.5
15.3
14.5
13.8
13.2
3.5%
19.1
17.9
16.9
16.1
15.9
15.1
14.3
13.6
4%
20.2
18.8
17.6
16.8
16.6
15.7
14.8
14.1
4.5%
21.4
19.8
18.5
17.6
17.4
16.3
15.4
14.6
DuPont Analysis
DuPont Analysis
2009
2010
2011
2012
2013
2014
Tax
Interest
Burdan Burden
0.61
0.93
0.7
0.98
0.62
0.93
0.62
1.00
0.62
1.00
0.62
1.00
Operating
Asset Levera
Profit Margin Turnover
ge
ROE
0.11
1.58
1.28 16.70%
0.11
1.38
1.43 14.26%
0.11
1.58
1.28 12.42%
0.11
1.55
1.43 14.88%
0.11
1.55
1.42 14.80%
0.11
1.53
1.41 14.41%
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Tax Burdan
Interest Burden
Operating Profit
Margin
Asset Turnover
Leverage
2009
2010
2011
2012
2013
2014
Source: http://globalbb.onesource.com/homepage.aspx
Recommendation
• DCF Valuation Range: $13.08- $19.45 with
Base case share price at $15.49
• Triangulated Value at : $15.83
• Current Market Price: $16.22
• Sell 500 shares @ current market price
Current Portfolio Allocation
6.33%
27.51%
17.70%
AEO
DO
JKHY
MCD
MOS
14.08%
10.03%
WAG
WFR
12.98%
11.37%
Unrealized Gains
210.42%
78.83%
Initial Position
500 shares @ $9.07
1500 shares @ $5.23
Recommendation
Sell 500 shares