American Eagle
Outfitters
Chris Glotzbach, Efe Faydali
and Tom Van Spankeren
12/4/2014
Agenda
1.Introduction
2.Macroeconomic Review
3.Relevant Stock Market Prospects
4.Company Review
5.Financial Analysis
6.Financial Projection
7.Application of Valuation Methodologies
8.Recommendation
Current Position
Dec 1999 – Buy 200 @ $44
Jan 2000 – Buy 200@ $27
Long 1,500 shares at $5.22
Mar 2000 – Buy 600 @ $15.63
Feb 2001 – 3:2 Split
Mar 2005– 2:1 Split
Apr 2005 – Sell 600 @ $26.284
Cost Basis: $7,830
Current Value: $21,540
Nov 2005 – Sell 700@ $23.33
Nov 2006 – Sell 400 @ $47.15
Dec 2006 – 3:2 Split
Nov 2007 – Sell 450 @ $22
Dec 2008 – Buy 1000 @ $9.07
Nov 2010 – Sell 500 @ $17.00
Apr 2011 – Sell 500 @ $16.04
Gain: $13,702.2 (174.82%)
Allocation in Portfolio
Sector: Services
Industry: Retail Apparel
2013 10-K Page 17
Macroeconomic Outlook
St. Louis Federal Reserve, St. Louis Federal Reserve
Teenage Apparel Industry
Here's How Teens Really Spend Money, What They Like, And Where They Shop
Teenage Apparel Industry
● Sales at retail stores increased 3.8% in 2013 versus 5.5% in 2012
o Projected at roughly 4% for all of 2014
● Comparable same store sales for teen retailer is down 5.3%
● H&M, Zara and Forever 21 gaining market share as teens prefer cheaper
generic clothing
● "The one commonality they all share is that the brand concepts are much
less relevant to the way kids shop and live today."-Craig Johnson,
president of Customer Growth Partners
Is less bad good enough for teen retailers?
Changing Teen Tastes Send Retailers Reeling
Company Overview
● Apparel Retailer targeting 15 to 25 year old men and
women
o Cornerstone is denim products
● Founded in 1977 and headquartered in Pittsburgh, PA
● 40,000 Employees
o 7,000 full time
2013 10k Page 3, 9
Fundamentals
● 2014 sales expected at -5.25%
● Efficiency:
o % change in inventory to sq. feet -11%, -16% and -8% (expected)
respectively in 2012, 2013 and 2014
o Sales/ selling sq. foot declined from $700.35 in 2013 to $635
(expected) in 2014
 Gross square footage has increased annually ~2%
● Gross margin declined from 40% in 2012 to 34.6% in 2013
o Due to weak traffic and deep-discount “box off” promotions
Wells Fargo Equity Research – Senior Analyst Paul Lejuez CFA
Brands
● American Eagle
o Denim is considered the cornerstone
o Branded shirts, shorts, hats and outdoor wear
o Growth rate: -8% 2nd quarter y-o-y growth
● aerie
o Intimate clothing A.K.A lingerie
o Faster growing segment
o Growth rate: 9% 2nd quarter y-o-y growth
● Sale of 77kids in 2012 after losing $35 million since its launch in 2008
o Store for younger teenagers and children
o Sold to Ezrani 2 Corporation for 65% of the cost of acquired inventory
2nd Quarter 2014 Results Presentation
Management
● Interim CEO Jay Schottenstein
o
o
Began in January of 2014
Was CEO from 1992-2002
● Still searching for a new permanent CEO after
Robert Hanson left
● Company performance→ Stock up 10x while
under CEO since 1994
American Eagle Investor Relations
Management Strategy For Growth
• Fortify the brands, processes and capabilities
• Grow in North America through under-penetrated U.S.
markets, factory stores, Mexico and e-commerce
• Transform the company into an omni-channel retailer with
both domestic and international presence
• Return value to the shareholders through profitable
growth
2013 10-K Page 4
S.W.O.T.
S: Brand Awareness, improvements
with inventory, omni-channel retail
experience, dividend yield, debt free
B/S
W: Target market is becoming less
brand dependent, no permanent
C.E.O., low gross margins, in mature
stage of market cycle
O: Store-to-Door program, ECommerce, un-penetrated domestic
market, Mexico and aerie
T: Weak economy, continuing
changes in consumer trends, intense
competition especially cheaper non“A’s”
Porters Five Forces
Power of Supplier → Low
Power of Buyers → High
Competition → Very High
Threat of Substitution → Medium
Threat of New Entry → Medium
Key Risks
●
●
●
●
Changes in consumer preferences and fashion trends
Decline in disposable income
Increase in input costs
Balancing the opening and closing of stores and the
management of existing stores
● Seasonality
● Inventory management
Revenue Origination
Percent of Revenue
Percent of Stores
8%
42%
11%
Men
Women
aerie
AE Stores
aerie
89%
50%
2013 10-K Page 51, Investor Relations
Technical Analysis
Yahoo! Finance
Financial Analysis-Ratios
Turnover Ratios
A/R Turnover
Day Sales Outstanding
Inventory Turnover
Inventory Days
Profitability Ratios
Revenue Growth Rate
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
2010
80.21
4.55
5.85
62.36
2010
40.14%
4.78%
7.48%
10.41%
2011
77.40
4.72
5.91
67.90
2011
5.93%
36.68%
4.86%
7.78%
10.71%
2012
75.04
4.86
5.96
58.19
2012
11.40%
40.00%
6.68%
13.22%
19.01%
2013
44.74
8.16
7.03
48.55
2013
-4.89%
33.70%
2.51%
4.90%
7.12%
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
2010
3.03
2.25
1.72
2011
3.18
2.27
1.77
2012
2.62
1.86
1.17
2013
2.22
1.52
1.01
Leverage Ratios
Debt/Assets
Interest Coverage
2010
28.13%
N/A
2011
27.37%
N/A
2012
30.46%
N/A
2013
31.16%
N/A
Greenblatt Ratios
EBIT/Tang Assets
EBIT/EV
2010
17.46%
11.08%
2011
14.72%
9.61%
2012
24.34%
14.04%
2013
9.10%
4.96%
Financial Analysis-R.O.E.
DuPont Ratios
Tax Burden
Interest Burden
Profit Margin
Asset Turnover
Leverage Ratio
ROE
2010
0.54
1.00
10.78%
1.57
1.39
10.41%
2011
0.60
1.00
8.82%
1.60
1.38
10.71%
2012
0.63
1.00
11.57%
1.98
1.44
19.01%
2013
0.58
1.00
4.30%
1.95
1.45
7.12%
Comparable Analysis
Abercrombie & Fitch
Aeropastle
Urban Outfitters
Express
The Gap
American Eagle
Abercrombie and Fitch
Aeropastle
Urban Outfitters
Express
The Gap
American Eagle
Multiples
Implied Price
Weighting
Components
Price
Weighting
40.0%
0.0%
20.0%
20.0%
20.0%
N/A
EV/EBITDA
4.64
-2.22
7.94
5.06
6.54
10.91
Enterprise Value
$1,950,000
$231,260
$3,950,000
$1,150,000
$17,140,000
$3,309,925
P/B
1.30
1.01
2.98
2.56
5.86
2.35
EV/EBITDA
5.76
$10.34
20%
$2.07
$12.55
Market Cap
$2,010,000
$250,000
$4,190,000
$1,200,000
$16,720,000
$2,708,431
P/Revenue
0.49
0.12
1.36
0.54
1.04
0.82
Trailing P/E
54.16
-1.05
18.46
15.33
14.13
60.57
P/B
2.80
$16.61
10%
$1.66
P/Revenue
0.78
$13.30
25%
$ 3.32
EBITDA
$420,350
($104,190)
$497,720
$227,480
$2,620,000
$303,377
EV/Revenue
0.47
0.11
1.28
0.52
1.06
1.00
EPS
$
$
$
$
$
$
Forward P/E
13.01
-1.72
16.11
13.40
13.11
15.94
Trailing P/E
31.25
$13.34
10%
$1.33
0.52
(3.01)
1.69
0.93
2.79
0.23
Sales/Ft Sq
417
445
691
338
365
662
EV/Revenue
0.76
$14.29
25%
$3.57
Shares
Outstanding
71370000
79090000
134270000
84170000
424000000
194431536
Net Income
$37,112
($238,061)
$226,916
$78,278
$1,182,960
$82,983
Inventory Turnover
2.6
6.2
4.7
5.3
3.5
7.0
Forward P/E
13.73
$5.86
10%
$0.59
Book Value
$1,546,154
$247,525
$1,406,040
$468,750
$2,853,242
$1,153,191
Revenue
$4,117,000
$2,091,000
$3,087,000
$2,219,000
$16,148,000
$3,305,802
Weighted Average Cost of Capital
Beta
Beta from Yahoo
1 Yr
3 Yr
5 Yr
Adjusted Beta
Return to Owner
1 Yr
3 Yr
5 Yr
Adjusted Return to Owner
1.11
0.99
1.08
0.98
1.06
-8.36%
5.84%
3.43%
0.31%
Graham Growth Rate
Trailing P/E
Implied Graham g%
Graham Growth Rate
2010 EPS
2011 EPS
2012 EPS
2013 EPS
Trailing Avg. P/E
Implied Graham g%
CAPM
Risk Free Rate
Market Premium
CAPM
59.79
25.65%
Capital Structure
Debt
Equity
Total Financing
$0.00
$2,792,036.86
$2,792,036.86
Discount Rate
Graham Implied g%
Graham Growth Rate Avg EPS
CAPM
Return to Owner
Adjusted Cost of Equity
25.65%
8.75%
9.39%
0.31%
8.35%
Tax Rate
After Tax - Cost of Debt
N/A
37.64%
N/A
0.70
0.78
1.19
0.43
25.99
8.75% Pre Tax - Cost of Debt
2.50% Cost of Equity
6.5% After Tax - Cost of Debt
9.39% WACC
Risk Premium
Discount Rate
8.35%
N/A
8.35%
3.00%
11.35%
0%
100%
100%
0%
20%
70%
10%
100%
100%
0%
Financial Projections
Retail Specific Ratios
Revenue/Selling Square Foot
Revenue/Store
Fiscal Year
2010
586
2,735
2011
620
2,919
2012
700
3,329
2013
635
3,101
2014
645
3006
2015
655
3050
2016
668
3110
2017
681
3172
2014
2015
2016
2017
2018
3,132,137
3,164,085
3,211,546
3,259,720
3,308,615
-5.25%
1.02%
1.50%
1.50%
1.50%
2,004,568
2,017,104
2,039,332
2,069,922
2,100,971
% of Sales
64.00%
63.75%
63.50%
63.50%
63.50%
Gross profit
1,127,569
1,146,981
1,172,214
1,189,798
1,207,645
36.00%
36.25%
36.50%
36.50%
36.50%
Total net revenue
% Growth
Cost of sales
% Margin
2018
695
3236
Discounted Cash Flow Analysis
DCF
Net Income (loss)
Lease Obligations
Depreciation and Amortization
Capital Expenditures
Change in NWC
FCF
PV FCF
Leases
Lease Obligations
PV of LO
Current Stock Price
Discount Rate
Terminal Rate
2014
$77,806
$273,827
$131,458
($230,000)
($161,551)
$414,642
$372,361.90
2015
$85,506
$261,828
$132,799
($175,000)
($166,516)
$471,649
$380,367.70
2016
$92,797
$233,810
$134,791
($140,000)
($160,305)
$481,702
$348,863.85
2017
$94,189
$206,934
$136,813
($160,000)
($154,680)
$432,616
$281,366.29
2018
$95,602
$177,229
$138,865
($150,000)
($157,001)
$418,696
$244,546.22
Terminal - 2019
2014
$273,827
$267,148
2015
$261,828
$249,212
2016
$233,810
$217,116
2017
$206,934
$187,472
2018
$177,229
$156,645
Terminal - 2019
$601,934
$519,046
$14.36
11.35%
1.25%
Enterprise Value
Shares Outstanding
Implied Share Price
$601,934
$4,247,919
$2,481,066
$2,863,503,366.53
194,431,536
$14.73
Target Price
DCF
2015
2016
2017
Net Income (loss)
$85,506
$92,797
$94,189
Lease Obligations
$261,828
$233,810
$206,934
Depreciation and Amortization $132,799
$134,791
$136,813
Capital Expenditures
($175,000) ($140,000) ($160,000)
Change in NWC
($166,516) ($160,305) ($154,680)
FCF
$471,649
$481,702
$432,616
1 Yr FCF PV
$423,556.36 $388,475.42 $313,313.89
Current Stock Price
Discount Rate
Terminal Rate
$14.36
11.35%
1.25%
2018
$95,602
$177,229
$138,865
($150,000)
($157,001)
$418,696
$272,313.10
Terminal - 2019
$601,934
$4,247,919
$3,364,711.66
2014 Enterprise Value $2,000,146,202.46
Shares Outstanding
194,431,536
Target Price
$
10.29
Conclusion
•
•
•
•
•
Weak topline growth
Earnings are driven by the cost management
Industry is at the mature stage
Intense competition
Uncertain management
Decision
• Sell 300 shares at market price
Questions?