American Eagle
Outfitters
Liu Yi
Xu Wenqiang (Wayne)
Nov 7, 2013
Agenda
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•
•
•
•
•
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Introduction & Holding Review
Macroeconomic Factors & Industry Overview
Company Overview
Management Outlook
Financial Analysis
Valuation
Conclusion & Recommendation
Introduction: Founded in 1977 and went public in 1994,
AEO is an apparel retailer targeting teenagers and
young adults
2007:
Traded on NYSE
2001:
Annual sales
surpass $ 1 bn;
Cross the border
to Canada
1999:
First flagship
store in San
Francisco
1977:
The first AE store
opens
Source: Company Website
2010:
Expands
internationally
2006:
Aerie, an
intimates brand
just for her,
launches
2000:
AE opens its 500th
store
1994:
AE goes public on
Nasdaq
Holding Review: We’ve been holding AEO for a long
time
•
Transaction history
–
–
–
–
–
–
–
–
–
–
–
–
–
•
•
Dec 1999 – Buy 200 @ $44
Jan 2000 – Buy 200@ $27
Mar 2000 – Buy 600 @ $15.63
Feb 2001 – 3:2 Split
Mar 2005 – 2:1 Split
Apr 2005 – Sell 600 @ $26.284
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
Current Price: $ 14.65
Current Position: Long 1500 shares of AEO with a weighted average price of
$5.2252
Source: Yahoo Finance
Macroeconomic Factors: Disposable personal income,
retail sales, and etc. are key drivers to apparel retail
industry
United States Disposable Personal Income
YOY %, 2003 – 2012
8
7
6
5
4
3
2
1
0
-1
2003
2004
2005
2006
2007
2008
2009
Disposable Personal Income Growth: %
Source: US Bureau of Economic Analysis
2010
2011
2012
Macroeconomic Factors: Disposable personal income,
retail sales, and etc. are key drivers to apparel retail
industry (cont’)
United States Retail Sales
YOY %, 2003 – 2013
Source: US Census Bureau, www.tradingeconomics.com
Industry Overview: US apparel retail industry is growing
at 4.7%, with women’s wear as the largest segment
United States apparel retail industry value
$ billion, 2008 – 2017
450
400
350
300
250
200
150
100
50
0
United States apparel retail industry category
segmentation
% share, by value, 2012
6%
5%
4%
16.6%
3%
Women's Wear
2%
51.7%
1%
0%
Industry Value: $ Billion
Growth: %
CAGR (2012 - 2017): 4.7%
Source: Market Line Apparel Retail in the United States, Feb 2013, P8 - P11
31.8%
Men's Wear
Children's Wear
Industry Overview: Fairly fragmented market, moderate
growth and independent consumers result in a
moderate level of competition in the industry
Apparel Retail Industry Five Forces Analysis
Rivalry Competition
•Strong (4.3)1
The US apparel retail market is fairly fragmented
All kinds of players are in this market, such as branded
retailers, department stores, hypermarkets, discount stores and
etc.
Fast pace of change in fashion and low level of product
differentiation add to competition
Buyers’ Bargaining Power
•Medium (3)
All buyers are large amount of individual consumers
Low switching cost among brands
Retailers can differentiate themselves through styles, price
ranges
Retailers need to offer what buyers want
Suppliers’ Bargaining Power
•Weak (2.7)
Suppliers are clothing manufacturers and wholesalers, who
usually are small to medium sized businesses
Branded retailers usually source from Asia
Substitutes
•Medium (3)
Though there is no substitute to apparel, there are some to
retail. One option is buying online
Major retailers are all building their online stores
There are growing number of online fashion stores
Home made and custom made clothing are niche alternatives
Threat of New Entrants
•Strong (4)
Barriers to entry are not high
There is little regulation in this industry
Low switching costs and low level of product differentiation
make it easier for new entrants to compete with existing players
Footnote: 1. Number in the brackets is the overall rating for this factor, larger number means stronger power
Source: Market Line Apparel Retail in the United States, Feb 2013, P12 – P17
Company Overview: AEO operates 2 major brands,
while it also has a fast growing online business
• AEO Brand
– Targets 15 to 25-year old men and women
– Denim is the cornerstone of the brand’s assortment
– Gaining market share through differentiated fashion in key categories
is a primary focus
– 921 stores by first half 2013
• aerie by AEO
– Collection of intimates and personal care product for AEO girl
– 135 stores by first half 2013
• AEO Direct (Online business)
– An extension of the lifestyle conveyed in the stores
– Currently ship to 81 countries
– Comparable sales increased 25% in 2012
Source: 2012 10-K, P3
Company Overview: AEO’s business model focuses on
the two ends of the value chain
Business Model of AEO
Manufacture
Sell
• Through 1044 stores
and online channel, as
of end of 2012
– 950 stores in US
– 94 stores in
Canada
• Co-branded credit
card (AEO Visa Card)
and private label
credit card (AEO Credit
Card)
• During fiscal year 2012,
purchase all of the
merchandise from nonNorth-American
suppliers
• Rely on a small number
of foreign sources for a
significant portion of
purchase
Ship & Distribute
•
•
•
•
•
Merchandise shipped directly from vendors and routed through 3rd party trans loaders
US distribution centers in Pennsylvania and Kansas
Canada distribution centers in Ontario
Jan 2013 newly opened 3rd party distribution center in Mexico City to support Mexican stores and e-commerce
Certain products shipped directly to stores
Source: 2012 10-K, P5 – P7
Company Overview: With number of stores at a ceiling,
comparable sales growth is the key for future growth
Total Comparable Sales1 Growth
Revenue
3600
15%
3400
10%
3200
15%
5%
3000
2800
0%
10%
2600
-5%
5%
2007
2008
2009
2010
Total Revenue: $ million
2011
2012
0%
Growth Rate
2006
Number of stores
500
2008
2009
2010
2011
2012
-5%
1500
1000
2007
-10%
3
39
116
137
148
158
151
135
903
929
954
938
929
911
893
921
0
AE
Total Comparable Sales Increase
Merchandise improvement, service improvement, store
remodeling and etc. are the drivers to increase comparable
sales.
aerie
Footnote: 1. Comparable sales provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period.
Source: 2012 10-K, P17, 2011 10-K, P17, 2010 10-K, P16
Management Outlook: The story in 2013 is not that
promising
Management Outlook
• Store opening plan 2013
– Approximately 50 AEO stores,
primarily in North America,
Mexico and China
• Remodel and refurbish plan
2013
– Remodel and refurbish
approximately 45 to 55
existing AEO stores and close
approximately 20 to 30 AEO
stores and 15 to 20 aerie
stores
Source: 2012 10-K, P4, Second Quarter 2013 Financial Results, P5, P10
Results
• 19 net openings for the
whole company, as of Aug 3,
2013
– 10 in US, 1 in Canada
– 3 in China, 3 in HK, 2 in
Mexico
• Total comparable sales
declined 6% as of Aug 3,
2013
– AE declined 7%, aeire
increased 1%, AEO Direct
increased 17%
SWOT Analysis
Strengths
• Strong brand with no debt
• aerie gains a niche in underserved teen
intimate apparel market
• Strong in a few categories, such as
denim
Opportunities
• International expansion
–
American Eagle Outfitters and aerie
merchandise is available at 49 international
franchise store locations in 13 countries, by
end of 2012
• Online sales
–
AEO Direct comparable sales increased 25%
in 2012, increased 17% in the first half of
2013
Source: 2012 10-K, P23, 2013 Second Quarter 10-Q, P5
Weaknesses
• Target customer base is small and has
limited consumption capability
• Relatively small scale
Threats
• Potential raw material inflation and
increase in labor cost
• Weak back-to-school and holiday sales
this year
Financial Analysis – Ratios
Profitability
Net Margin %
Asset Turnover (Average)
Return on Assets %
Financial Leverage (Average)
Return on Equity %
Return on Invested Capital %
Liquidity/Financial Health
Current Ratio
Quick Ratio
Financial Leverage
Efficiency
Days Sales Outstanding
Days Inventory
Payables Period
Cash Conversion Cycle
Receivables Turnover
Inventory Turnover
Fixed Assets Turnover
Asset Turnover
Source: Morning Star
2009-01
5.99
1.56
9.35
1.39
13.03
12.62
2009-01
2.3
1.31
1.39
2009-01
4.48
58.47
31.17
31.78
81.45
6.24
4.38
1.56
2010-01
5.65
1.46
8.24
1.35
11.32
10.93
2010-01
2.85
1.79
1.35
2010-01
4.65
61.88
30.93
35.6
78.47
5.9
4.12
1.46
2011-01
4.74
1.48
7
1.39
9.6
9.5
2011-01
3.03
1.99
1.39
2011-01
4.4
63.76
33.14
35.01
83.05
5.72
4.38
1.48
2012-01
4.8
1.65
7.92
1.38
10.96
10.96
2012-01
3.18
1.94
1.38
2012-01
4.45
61.06
31.58
33.93
82.04
5.98
5.16
1.65
2013-01 TTM
6.68
6.43
1.88
1.93
12.52
12.41
1.44
1.48
17.6
18.36
17.6
18.36
2013-01 Latest Qtr
2.62
2.31
1.54
0.97
1.44
1.48
2013-01 TTM
3.4
4.89
62.21
80.67
31.56
51.11
34.05
34.45
107.23
74.71
5.87
4.52
6.37
5.78
1.88
1.93
Financial Analysis – Dupont
DuPont Analysis
250.00%
200.00%
Tax burden
Interest Burden
150.00%
100.00%
Operating Margin
Asset Turnover
Leverage ratio
50.00%
ROE
0.00%
2009-01 2010-01 2011-01 2012-01 2013-01 TTM
Tax burden
59%
72%
44%
66%
57%
64%
Interest Burden
1
1
1
1
1
1
Operating Margin
10.11
7.97
10.69
7.31
11.35
10.01
Asset Turnover
1.56
1.46
1.48
1.65
1.88
1.93
Leverage ratio
1.39
1.35
1.39
1.38
1.44
1.48
ROE
13.03
11.32
9.6
10.96
17.6
18.36
Source: 2012 10-K
Dividend Signaling
For the Quarters Ended
February 2,2013
October 27,2012
July 28,2012
April 28,2012
January 28,2012
October 29,2011
JuLy 30,2011
April 30,2011
Market Price
High
Low
$21.45
$18.49
$23.80
$19.89
$20.92
$17.89
$18.43
$13.58
$15.72
$12.89
$13.60
$10.17
$15.71
$12.49
$16.18
$14.46
Cash Dividends Per
Common Share
$
0.22
$
1.61
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
$
0.11
• During Fiscal year 2012, and Fiscal 2011. American Eagle paid quarterly dividends as
shown in the table above. Included in the above table for the quarter ended October
27, 2012 AEO paid a special cash dividend of $1.50 per common share.
• During Fiscal year 2013, American Eagle paid quarter dividends 0.125 each on June
27, 2013 and September 30, 2013.
Source: 2012 10-K
Recent Stock Performance
20 & 200 Day Moving Average Stock Chart
•
•
After March, 2013 American Eagle’s stock price has consistently been below the
200 day moving average
While the trend of the 200 day moving average is going downward, there is a
slightly increase trend for 20 day moving average
Source: Yahoo Finance
Valuation – WACC Calculation
WACC Calculation
Component
Weight
Explaination
Realized return
12.18%
0.35
5 years realized return
CAPM
9.40%
0.65
Formula
Company Beta
0.96
5 years regression
Risk free Rate
2.70%
U.S. 10 years treasury
Market Risk Premium
7%
Assumption
Cost of Equity
10.37%
Formula
Cost of Debt
N/A
No debt
WACC
10.37%
Premium 0%
• We believe there is not that much volatility in this industry; therefore we add
0% premium into the WACC
• No debt
Source: 2012 10-K
Valuation – Discounted Cash Flow
Cumulative Present Value of FCF
$1,354.6
Enterprise Value
Terminal Value
2022 FCF
$256.2
3.00%
Growth Rate
Terminal Value
$2,790.7
Less: Total Debt
-
Less: Preferred Securities
-
Plus: Cash And Equivalents
-
$3,578.7
Discount Factor
0.40
Present Value of Terminal Value
Implied Equity Value
$2,790.7
$1,436.1
% of Enterprise Value
51.5%
Enterprise Value
$2,790.7
Number of Shares Outstanding
192.70
Implied Share Price
$14.48
Sensitive Analysis
Discount Factor
Growth Rate
$14.48
8.87%
9.37%
9.87%
10.37%
10.87%
11.37%
11.87%
2.00%
16.01
16.77
17.65
18.69
19.95
15.06
15.68
16.41
17.26
18.26
14.24
14.76
15.37
16.06
16.88
13.53
13.97
14.48
15.06
15.73
12.91
13.29
13.72
14.21
14.77
12.37
12.70
13.07
13.48
13.95
11.89
12.18
12.50
12.85
13.25
2.50%
3.00%
3.50%
4.00%
Source: 2012 10-K
Valuation – Comparable Analysis
Company Name
Ticker
P/E
P/B
2.34
P/S
0.83
EV/EBITDA
4.94
American Eagles Outfitters, Inc
AEO
13.17
Abercrombie and Fitch
ANF
10.95
1.50
0.59
4.34
Aeropostale, Inc
ARO
-29.61
1.77
0.28
7.22
Urban Outfitters, Inc
URBN
21.51
3.76
1.91
9.58
GPS
14.01
5.14
1.11
6.07
Mean
4.22
3.04
0.97
6.80
Median
12.48
2.76
0.85
6.64
High
21.51
5.14
1.91
9.58
Low
-29.61
1.50
0.28
4.34
Weight
Weighted
price
Gap, Inc
Multiple
Price
P/E
P/B
4.68
19.00
0.25
1.17
0.25
4.75
P/S
17.17
0.25
4.29
EV/EBITDA
17.94
0.25
4.48
14.70
Value
Source: 2012 10-K
Comparable Stock Chart
AEO Comparables
Abercrombie & Fitch Co. (NYSE:ANF)
Aéropostale, Inc. (NYSE:ARO)
Urban Outfitters Inc. (NasdaqGS:URBN)
Gap, Inc. (NYSE:GPS)
•
•
American Eagle’s recent stock performance has been underperformed to S&P
500 and underperformed most of its competitors.
Retailers catering to the teen set are navigating a rough back-to-school season.
Source: Yahoo Finance
Decision Drivers
• Strengths
– Strong brand with no debt
– Above average capability of inventory control
• Concerns
– Nov 15, 2013 quarterly results could miss expectation
– International expansion risk
– Quickly changing fashion trends of teens
Recommendation
• Valuation
– Current Price $14.65 per share
– Analyzed Price $14.48 based on Discounted Cash Flow
– $14.70 based on Comparable Analysis
• Recommendation
– Hold
Q&A
Thank you ,any questions?