American Eagle Outfitters, Inc. NYSE: AEO 10/11/2011

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AMERICAN EAGLE OUTFITTERS, INC.
NYSE: AEO
10/11/2011
Aaron Czerkies
Amrin Razwin
Chris Tsoukalas
Ya Zuo
AGENDA
Investment history
 Company overview
 Industry analysis
 Competitors
 DuPont analysis
 Ratio analysis
 DCF model
 Multiple Valuation
 Recommendation

2
INVESTMENT HISTORY
•Current Price: $12.05
•Currently holds 1500 shares of AEO with a weighted
average price of $5.23 and an unrealized gain of $10,237
As of 7-Oct-2011
Source: Yahoo! Finance
3
•Transaction history
Dec 1999 – BOT 200 @ $44
Jan 2000 – BOT [email protected] $27
Mar 2000 – BOT 600 @ $15.63
Feb 2001 – 3:2 Split
Mar 2005– 2:1 Split
Apr 2005 – Sold 600 @ $26.284
Nov 2005 – Sold [email protected] $23.33
Nov 2006 – Sold 400 @ $47.15
Dec 2006 – 3:2 Split
Nov 2007 – Sold 450 @ $22
Dec 2008 – BOT 1000 @ $9.07
Nov 2010 – Sold 500 @ $17.00
Apr 2011 – Sold 500 @ $16.04
PORTFOLIO ALLOCATION
Cost of position %
(excl. cash)
Market price of
position % (excl. cash)
4
WFR
3%
WFR
11%
ABT
14%
ABT
11%
WAG
17%
AEO
10%
WAG
17%
AEO
19%
MOS
11%
DO
14%
MOS
15%
JKHY
5%
MCD
14%
DO
9%
MCD
18%
JKHY
12%
As of 7-Oct-2011
COMPANY OVERVIEW
American Eagle Outfitters is a retailer of casual
apparel, lingerie, accessories, and footwear
targeted at teens and young adults.
 The retailer maintains control over its proprietary
brand by designing and sourcing all of its own
merchandise.
 The company operates 931 American Eagle, 151
aerie, and 21 77kids stores in the United States
and Canada.
 American Eagle also ships to 76 countries
worldwide through its retail website.

5
Source: 10K 2011 report
BRANDS

American Eagle

Targets 15 to 25-year old men and women
6

aerie
New brand launched in 2006 fall
 Intimates and personal care product for girls


77kids


Introduced in Oct 2008
On trend, high quality clothing and accessories for
kids and babies
Source: 10K 2011 report
STORE GROWTH
Total AE Brand stores
Growth of AE Brand stores%
Total aerie stores
Growth of aerie stores%
Total 77kids stores
Growth of 77kids stores%
Total M+O stores
Total Retail Sq. Ft. (Gross)
Total Retail Sq. Ft. (Net)
Retail Revenues (in millions
of USD)
Sales/Sq. Ft., All (Gross)
Sales/Sq. Ft., All (Net)
2/3/2007
869
50
39%
8
-38%
911
5%
903
2/2/2008 1/31/2009 1/30/2010 1/29/2011 7/30/2011
911
987
1,098
1,103
80
122
29
37
60%
53%
-76%
28%
4
11
24
51
-50%
175%
118%
113%
987
1,098
1,103
1,089
1103
8%
11%
0%
-1%
1.3%
7
Stores at Beginning
Stores Opened
Growth of stores opened %
Stores Closed
Growth of stores closed %
Total Stores
Growth of stores %
1/31/2004 1/29/2005 1/28/2006
753
805
846
59
50
36
-25%
-15%
-28%
7
9
13
75%
29%
44%
805
846
869
7%
5%
3%
929
2.88%
39
1200.00%
954
2.69%
116
197.44%
938
-1.68%
137
18.10%
929
-0.96%
148
8.03%
9
5
19
28
28
0
3
4,239,497
3,466,368
1,435.4
4,540,095
3,709,012
1,889.6
4,772,487
3,896,441
2,322.0
5,173,065
4,220,929
2,794.4
5,709,932
4,595,649
3,055.4
6,139,663
4,920,285
2,948.7
6,215,355
4,981,595
2,940.3
6,339,469
5,067,489
2,967.6
$338.59
$414.1
$416.21
$509.47
$486.53
$595.92
$540.18
$662.04
$535.11
$664.85
$480.27
$599.29
$473.07
$590.23
$468.11
$585.61
931
0.21%
151
2.03%
21
133.33%
Source: 10K 2011 report
KEY RISK FACTORS
Changing consumer preferences and fashion
trends
 Economic pressures
 Raw material, labor, and energy prices increase
 New store openings and existing store remodels
 Internal development of new brands
 International merchandise sourcing strategy
 Seasonality
 International expansion through franchising

8
Source: 10K 2011 report
SWOT ANALYSIS

Strength
Strong brand
 Ample free cash flow

Weakness
Low customer switching cost
 930 AE branded stores has saturated the domestic market


Opportunities
aerie and 77kids brands
 International markets


Threats
Intense rivalry
 Fast fashion trend
 Increase of labor and material cost
 Economic recession

9

MACRO-ECONOMY AND CONSUMER
TRENDS

GDP
GDP percent change based on current dollars
2007
2008
2009
2010
4.9
1.9
-2.5
4.2
US Bureau of Economic Analysis

Consumption expenditure
 Slowly increasing for clothing and footwear
10
Year
GLOBAL APPAREL INDUSTRY


[1]
Growth %
448.5
464.2
480.5
498.2
517.7
536.8
3.0
3.5
3.5
3.7
3.9
3.7
IBISWorld forecasts that industry revenue will grow by 3.7%
over the five years through 2016.
Growth expected to be dependent on population growth,
disposable income and the sourcing of products from lowwage countries. [1]
http://clients.ibisworld.com/globalindustry/summary.aspx?indid=470
11
2011
2012
2013
2014
2015
2016
Revenue USD Billion
PORTER’S FIVE FORCES MODEL
•
•
•
•
Bargaining Power of Buyers (Moderate)
•
Consumers have high level of choice
•
High product differentiation
Bargaining Power of Suppliers (Low)
•
Globalization has liberalized trade.
•
Low switching cost for retailers
Threat of New Entrants (Low)
•
Clothing companies have high existing brand loyalty built up over
time
Threat of New Substitutes (Low)
•
Brand image and loyalty important for consumers
12
•
Competitive rivalry within the industry (High)
•
Competitive market with extensive price competition
COMPETITORS

GAP


Own Old Navy
Abercrombie & Fitch

Own Hollister
Pacific Sunwear
 Urban Outfitters

13
DUPONT ANALYSIS

AEO falls in the middle of its peers in the Dupont
analysis
DUPONT METHOD
Company
Abercrombie & Fitch Co.
Gap Inc.
Pacific Sunwear of California Inc.
Urban Outfitters Inc.
American Eagle Outfitters, Inc.
2009
ROE
Tax
Burden
Interest
Burden
Profit
Asset Leverage
Margin Turnover Ratio
4%
23%
(23%)
17%
50%
60%
130%
66%
99%
100%
100%
98%
5%
13%
(5%)
17%
104%
178%
215%
118%
154%
163%
156%
126%
11%
54%
100%
11%
138%
135%
2010
ROE
Tax
Burden
Interest
Burden
Profit
Asset Leverage
Margin Turnover Ratio
8%
30%
(45%)
19%
53%
61%
122%
67%
101%
100%
100%
99%
8%
13%
(9%)
18%
118%
208%
232%
127%
156%
173%
187%
127%
10%
44%
100%
11%
158%
139%
14
MANAGEMENT OVERVIEW








The selection of approximately 60 to 65 American Eagle stores in the United
States and Canada for remodeling during Fiscal 2011;
The planned closure of 15 to 25 American Eagle stores in the United States
and Canada during Fiscal 2011;
The planned opening of 18 new franchised American Eagle stores during
Fiscal 2011;
The expected payment of a dividend in future periods;
The possibility to engage in future franchise agreements, growth through
acquisitions and/or internally developing additional new brands;
The possibility that our credit facilities may not be available for future
borrowings;
The possibility that rising prices of raw materials, labor, energy and other
inputs to our manufacturing process, if unmitigated, will have a significant
impact to our profitability; and
The possibility that we may be required to take additional store impairment
charges related to underperforming stores.
15

The planned opening of 11 new American Eagle stores, 12 new 77kids stores
and 10 new aerie stores in the United States and Canada during Fiscal 2011;
PERFORMANCE
3,500.00
3,055.42
3,000.00
2,940.27
2,967.56
2,321.96
2,500.00
1,889.65
2,000.00
1,371.90
1,500.00
1,382.92
16
Millions in dollars
2,948.68
2,794.41
1,435.44
1,000.00
500.00
105.50
88.11
59.62
213.34
294.15
387.36
400.02
179.06
169.02
140.65
0.0
2002
2003
2004
2005
2006
Revenue
2007
2008
2009
2010
2011
Net Income
60.00%
15%
50.00%
12%
10%
40.00%
5%
30.00%
1%
0%
20.00%
-5%
10.00%
-10%
0.00%
2000
2002
2004
Operating Magrin %
2006
2008
2010
2012
Gross Profit Margin %
-15%
2007
2008
2009
2010
2011
-1%
-4%
-10%
Comparable store sales
Source: 10K 2011 report
RATIO ANALYSIS
Period Ended
Profitability
Return on Assets %
Return on Equity %
Margin Analysis
Gross Margin %
SG&A Margin %
EBIT Margin %
Net Income Margin %
Asset Turnover
Total Asset Turnover
Fixed Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Short Term Liquidity
Current Ratio
Quick Ratio
Long Term Solvency
Total Liability/Equity
LT Debt/Equity
Total Liabilities/Total Assets
1/28/2006
2/3/2007 2/2/2008 1/31/2009 1/30/2010 1/29/2011 1/30/2012 1/30/2013 1/30/2014 1/30/2015 1/30/2016
18.32%
25.46%
19.57%
27.33%
21.42%
29.84%
9.12%
12.71%
7.91%
10.71%
7.48%
10.41%
4.43%
6.35%
11.72%
15.56%
12.18%
16.42%
12.39%
16.69%
12.17%
16.24%
46.42%
23.19%
20.01%
12.67%
47.97%
23.82%
21.22%
13.86%
46.58%
23.39%
19.84%
13.09%
40.60%
23.43%
13.15%
6.07%
39.91%
24.67%
10.63%
5.75%
39.46%
24.03%
10.78%
4.74%
36.00%
26.00%
5.00%
2.83%
40.00%
24.70%
12.30%
7.37%
40.00%
24.70%
12.30%
7.57%
40.00%
24.70%
12.30%
7.58%
40.00%
24.70%
12.30%
7.58%
1.45
4.39
79.67
11.02
1.41
3.54
107.29
10.60
1.64
3.61
95.72
10.67
1.50
2.84
71.10
10.00
1.38
3.03
84.62
9.01
1.58
4.21
80.81
9.85
1.56
3.70
76.19
8.33
1.59
3.82
87.44
9.09
1.61
3.68
89.61
10.00
1.63
3.68
88.00
10.00
1.61
3.57
90.98
10.00
3.06
2.22
2.56
1.81
2.71
1.73
2.30
1.31
2.85
1.79
3.03
1.99
2.80
1.64
2.78
1.70
2.65
1.64
2.58
1.57
2.60
1.59
37.93%
0.00%
28.03%
38.95%
0.00%
28.40%
39.67%
0.00%
28.23%
39.33%
0.00%
28.25%
39.36%
0.00%
26.17%
35.45%
0.00%
28.13%
39.15%
0.00%
30.20%
43.30%
0.00%
24.52%
32.55%
0.00%
25.70%
34.64%
0.00%
25.58%
34.45%
0.00%
24.82%
17
DCF MODEL
Period Ended
Net Income
D&A
Capex
Changes in NWC
Cash Flow
Terminal Value
Free Cash Flow
1/30/2012 1/30/2013 1/30/2014 1/30/2015 1/30/2016
$85.78 $232.14 $273.01 $309.63 $335.08
151.36
94.49
108.13
122.54
132.55
-95
-98.85
-113.11
-128.18
-138.66
17.72
107.37
88.49
54.74
60.29
$159.87 $335.17 $356.53 $358.73 $389.27
3244.87
$159.87 $335.17 $356.53 $358.73 $3,634.14
Terminal Growth Rate
Discount Rate
2.00%
14.24%
$2,714.58
Net Debt Outstanding
0
Shares Outstanding
196.74
Enterprise Value
Share Price
$13.80
18
PUBLIC COMPARABLES ANALYSIS


Abercrombie & Fitch is trading at much higher premium relative to the
other firms
Gap is trading lower than its peers


Most likely because it’s a more mature company with less growth opportunities
Pacific Sunwear has been struggling, and with the weak economy, is
expected to be in a worse financial situation than its peers
VALUATION COMPS
Enterprise Value /
Company
Abercrombie & Fitch Co.
Gap Inc.
Pacific Sunwear of California Inc.
Urban Outfitters Inc.
Stock Price
10/10/11
% Off 52 Week
High
Low
$67.98
17.94
1.21
23.66
(13.1%)
(24.4%)
(82.3%)
(39.7%)
63.6%
19.0%
9.0%
10.2%
Market
Value
$6,034
9,382
81
3,652
Enterprise
Value
$5,758
8,924
121
3,425
Mean
Median
American Eagle Outfitters, Inc.
$12.31
(29.5%)
23.1%
$2,422
$2,126
P/E
2011E 2012E
Revenue
2011E 2012E
EBITDA
2011E 2012E
Price /
Book
21.2x
12.3
NM
16.6
14.5x
10.5
NM
13.2
1.4x
0.6
0.1
1.4
1.1x
0.6
0.1
1.2
8.2x
4.6
NM
7.4
6.3x
4.4
NM
6.2
3.2x
3.0
0.5
2.8
16.7x
16.6
12.8x
13.2
0.9x
1.0
0.8x
0.9
6.7x
7.4
5.6x
6.2
2.4x
2.9
0.7x
0.7x
5.3x
4.7x
14.3x
12.5x
1.8x
19
Source: Capital IQ, Company Filings, I/B/E/S
PUBLIC COMPARABLES ANALYSIS

AEO has a relative value ranging from $14.36 to
$16.48 a share

Based on fully dilutive shares
RELATIVE VALUE
P/E
16.7x 2011 P/E * 0.86 EPS
P/B
2.4x P/B * $1,367 BVE
Implied Share Price
EV/Revenue
3,243.07
16.48
0.9x EV / Revenue * $3,027.7
2,629.81
Implied Market Value
2,925.25
Implied Share Price
EV/EBITDA
$14.36
14.87
6.7x EV / EBITDA * $404.6
2,720.69
Implied Market Value
3,016.13
Implied Share Price
Source: Capital IQ, Company Filings, I/B/E/S
15.33
20
LIQUIDITY ANALYSIS


AEO has fairly strong cash position but takes on no debt, including
a revolver which drastically reduces it’s liquidity
Days cash is the number of days between when a firm disburses
cash to when it collects cash
LIQUIDITY COMPS
Company
Abercrombie & Fitch Co.
Gap Inc.
Pacific Sunwear of California Inc.
Urban Outfitters Inc.
2011E
Revenue
2011E Cash
COGS and
SG&A (a)
$4,205
14,726
881
2,514
$3,502
12,792
928
2,049
Cash (b)
$540
2,104
13
226
Revolver
Availability
$350
500
150
80
Total
Liquidity
Cash /
Revenue
$890
2,604
163
306
13%
14%
2%
9%
Mean
Median
American Eagle Outfitters, Inc.
$3,027
$2,622
$389
$0
$389
Days
Cash (c)
Liquidity /
Revenue
Days (d)
Liquidity
56
60
5
40
21%
18%
19%
12%
93
74
64
55
8%
11%
32
48
14%
18%
57
69
13%
54
13%
54
21
Source: Capital IQ, Company Filings, I/B/E/S
STOCK PRICE ANALYSIS


The stock market as a whole, including these firms, have
taken quite a dive over the last three months due to a weak
economy and rising commodity costs
AEO has outperformed its competitors over the last month
STOCK PRICE ANALYSIS
Company
Abercrombie & Fitch Co.
Gap Inc.
Pacific Sunwear of California Inc.
Urban Outfitters Inc.
Stock
Price
10/10/11
$67.98
17.94
1.21
23.66
1 Week
10/3/11
2 Week
9/26/11
1 Month
9/9/11
3 Months
7/10/11
13.96%
12.62%
9.01%
8.04%
3.69%
4.24%
(15.97%)
(2.23%)
7.92%
12.13%
(13.57%)
(3.66%)
(6.97%)
(5.48%)
(56.16%)
(26.13%)
Mean
10.91%
(2.57%)
0.70%
(23.68%)
Median
10.81%
0.73%
2.13%
(16.55%)
15.05%
(11.31%)
American Eagle Outfitters, Inc.
Source: Capital IQ, Company Filings, I/B/E/S
$12.31
8.75%
2.24%
22
RECOMMENDATION
The DCF ranged from $12.21 to $15.64
 Public Comparables ranged from $14.36 to $16.48


Less emphasis on the $16.48 because based on the P/B
High market volatility and increasing costs make
it a skeptical environment to buy
 HOLD

23
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