American Eagle Outfitters, Inc.
NYSE: AEO
11/2/2010
Ruonan Ding
Meiling Liu
Cardo Martinez
Rajani Meka
Prateek Sharma
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Industry Analysis
Competitors
Company Overview
SWOT
Management Discussion
Financial Performance Analysis
DuPont Analysis
DCF Model
Multiple Valuation
Recommendation
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Dec 1999 – BOT 200 @ $44
Jan 2000 – BOT 200@ $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 700@ $23.33
Nov 2006 – Sold 400 @ $39.19
Dec 2006 – Splits 3:2
Nov 2007 – Sold 450 @ $22
Dec 2008 – BOT 1000 @ $9.07
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RCMP Currently Holds 2500 shares of AEO with a weighted average price
of $6.766 and an unrealized gain of $22,142 (as of 1-Nov-2010)
Source: Yahoo! Finance
Market Value (Excl. Cash)
Cost Basis (Excl. Cash)
WFR
AEO
7%
18%
WAG
WFR
AEO
15%
33%
34%
BGC
6%
DO
MOS
4%
13%
JKHY
4%
MCD
WAG
MCD
14%
JKHY
BGC
9%
5%
DO
3%
13%
11%
MOS
11%
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American Eagle Outfitters is a clothing and
accessories retailer based in Philadelphia, PA.
It was founded in 1977 by Mark and Jerry
Silverman as a subsidiary of Retail Ventures,
Inc.
The Silverman’s sold their ownership interest
in 1991
The company started trading on the NASDAQ
in 1994 as AEOS
Targets teens and young adults
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Brands Include
◦ The American Eagle Outfitters –
targets 15-25 year old boys and girls.
934 stores in US and Canada
◦ aerie® by american eagle – offers
dorm-wear and intimates for girls –
144 standalone stores in US and
Canada
◦ 77kids by american eagle – targets
kids up to 14 yrs of age
◦ Online via www.ae.com and
www.aerie.com – ships to more than
76 countries
Source: http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-homeprofile
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Total revenues of Family Clothing Stores
Industry for 2009 was $2,862 billion.
Representing a CAGR of 5.1% from
2005-09
The breakdown of sales across the globe:
◦
◦
◦
◦
Asia Pacific
Europe
Americas
Rest of the world
46.2%
30.4%
22.8%
4.2%
Source: Industry Report titled "Apparel Retail Industry Profile: Global", Data Monitor- Reference Code-0199-2005
Persistent Link:
http://search.ebscohost.com.proxy2.library.uiuc.edu/login.aspx?direct=true&db=bth&AN=51689167&site=bsi-live
Key External Drivers for Demand:
◦
◦
◦
◦
Number of young adults
Consumer sentiment
Per capita disposable income
Competition from substitutes such as department
stores
Source: IBISWorld Industry Report 44814 Family Clothing Stores in the US September 2010
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The Family Clothing Stores industry is a
highly competitive one, facing threats from
within and from outside the industry.
Competitive Factors:
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
Having a clear market position
Ability to control stock on hand
Established brand names
Production of goods currently favored by the market
Attractive product presentation
Experienced workforce
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Industry Rival is High:
 Fickle demographic
 Fast fashion chains
 Depends on trends and seasonality
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Buyer Power is High:
 Demand is highly affected by consumers disposable
income level
 Fashion taste and product mix
 Sensitive to price change

Supplier Power is Moderate:
 Purchasing from international suppliers
 Suppliers compete on the price and quality basis
 Eliminate import quotas in 2005

Threats of Substitutes is High:
 Substitute good from not only the competitors
but also department stores

Buyers Bargaining Power is High:
 Low switching cost
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There is a general positive outlook for the
industry as consumer discretionary income
increases
Growth will be lead by the Asia Pacific region
(CAGR of 8.3%) whilst the European region
will only face a growth rate of 3.9%. Growth is
expected to be the slowest in the Americas
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Urban Outfitters (Ticker: URBN)
◦ Lifestyle Specialty Retail
 Urban Outfitters, Anthropologie, Free People and
Terrain Brands
 Retail stores and e-commerce
◦ Wholesale Business
 Free People and Leifsdottir brands
◦ Core operating location: US
◦ FY 2009 Revenue : $1.9378B
Source: Yahoo Finance, http://finance.yahoo.com/q?s=URBN
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Aeropostale, Inc (Ticker: ARO)
◦ Mall-based specialty retailer and online sales
through aeropostale.com
◦ Target group: Aeropostale for 14-17 years old
women and men; P.S for 7-12 years elementary
school children
◦ Presence only in North America
◦ FY 2009 Revenue: $2.23B
Source: Yahoo Finance, http://finance.yahoo.com/q?s=ARO
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Gap, Inc (Ticker: GPS)
◦ Specialty retailer
 Brands include Gap, Old Navy, Banana Republic,
Piperlime, and Athleta brand
◦ Franchise agreements with unaffiliated franchisees
 Gap and Banana Republic stores
◦ Presence in United States, Canada, the United
Kingdom, France, Ireland, and Japan.
◦ FY 2009 Revenue: $14.19B
Source: Yahoo Finance, http://finance.yahoo.com/q?s=GPS
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Abercrombie and Fitch, Inc (Ticker: ANF)
◦ Specialty retailer
 Stores and direct-to-consumer operations
 Brands include Abercrombie & Fitch, abercrombie kids,
Hollister and Gilly Hicks brands
◦ Presence in North America, Europe and Asia
 1,096 stores
◦ FY 2009 Revenue: $2.928B
Source: Yahoo Finance, http://finance.yahoo.com/q?s=ANF
Strengths:
 Strong brands
 Strong distribution channels
 Little-to-zero debt on Balance Sheet
Weakness:
 Needs to maintain hype to sustain “teen” loyalty.
Research shows that most teens are not loyal customers
 Currently in excess of 90% of its revenues are generated
in the USA (stores are now primarily in USA and
Canada)
Opportunities:
 Increased demand for women’s accessories
 Expansion into global markets (Asia) via franchising
agreements
Threats:
 Strong dependency on consumer spending.
Accessories especially dependent on “discretionary
spending”
 Merchandizes from limited suppliers
1200
1000
1098
1103
987
869
911
800
Total stores
$638
$521
600
$577
$519
$642
Net Sales per
average selling
sqft
400
200
Fy 2007
38%
55%
7%
0
Fy 2005 Fy 2006 Fy 2007 Fy 2008 FY 2009
Fy 2008
42%
50%
8%
Women's
Apparrel and
Accessories
20%
15%
10%
FY 2009
40%
51%
9%
aerie
16%
5%
0%
Men's
Apparrel and
Accessories
1%
Comparable Store
Sales
12%
-5%
0%
50%
100%
-4%
-10%
-10%
-15%
FY 2005FY 2006 FY 2007 FY 2008 FY 2009
Source: AEO 10-K, pg.17
http://www.sec.gov/Archives/edgar/dat
a/919012/000095012310028815/l3923
7e10vk.htm
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Increase in sales through e-commerce in ‘09
Depreciation increased by 11% in ‘09 compared to ’08 due to
greater PP&E driven by their capital expenditures
Complete closure of Martin +OSA
2010 Outlook
Expecting ‘10 to be more favorable than ’09
Focus on controlling expenses and keep it less than ’09
Low inventory levels
Source: 2009 Annual 10-K report
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Growth Strategy:
◦ Through new internal brands and franchising
◦ Open 40 new stores in US and Canada in ’10
◦ Franchising in Asia
◦ Franchising in the Middle-East
◦ Acquisitions
Capital Expenditures:
◦ Reduced to $127.4 million in ‘09 as opposed to $265.3 million in
’08
◦ Aiming at keeping CAPEX between $100-$120 million in ’10
Source: AEO 10K, FY 2010
• For the Fiscal year ’09, 60% of their sales attributed to women’s apparel and
accessories
• Aerie initiative started in ’06, exclusively for women’s apparel
• International Expansion: Franchising agreements in the Middle-East, China and HongKong
Source: Industry Report titled "Apparel Retail Industry Profile: Global", Data Monitor- Reference Code-0199-2005
Persistent Link:
http://search.ebscohost.com.proxy2.library.uiuc.edu/login.aspx?direct=true&db=bth&AN=51689167&site=bsi-live
YEAR
SALES ($MM)
2010
2009
2008
2007
2006
5 YEAR GROWTH RATE %
2,990.52
2,988.87
3,055.42
2,794.41
2,321.97
6.5
NET INCOME ($MM) EPS ($)
169.02
179.06
400.02
387.36
293.71
-12.9
0.82
0.87
1.85
1.74
1.29
-10.7
Source: AEO 10-K, FY 2010, ‘09, ‘08
Inventory and A/R management
FISCAL YEAR END
Receivables Turnover
Receivables Days Sales
Inventories Turnover
Inventories Days Sales
1/30/2010 1/31/2009 2/2/2008
36.57
29.55
95.78
9.85
12.18
3.76
9.16
10.13
10.67
39.3
35.52
33.75
Operational Asset Utilization
FISCAL YEAR END
Net Sales/Working Capital
Net Sales/Net Plant & Equipment
Net Sales/Current Assets
Net Sales/Total Assets
1/30/2010 1/31/2009 2/2/2008
3.94
5.71
4.74
4.19
4.04
4.88
2.56
3.23
2.99
1.4
1.52
1.64
Amount in $millions, except ratios
Source: Form 10-K, FY 2010, FY 2009
Metric
Value
Weight
Weighted Value
Cost of Equity
from CAPM
8.31%
60%
4.99%
Cost of Equity
from ROE
22.24%
10%
2.224%
Cost of Equity
from HPR (5year)
18.74%
30%
5.622%
Total
12.836%
RFR is the yield on 10-Year T-Bond
The company has no long-term debt outstanding and does not intend to change its
capital structure in the near future
All amount in $millions, except per share data and ratios
Company Name
Abercrombie and Fitch
Aeropostale, Inc
Urban Outfitters, Inc
Ticker Mkt Cap
ANF
3,760
ARO
2,240
URBN
5,000
P/E (ttm)
40.56
P/B (mrq) P/S (ttm) ROE (ttm)
2.08
1.21
6.62%
9.49
4.58
0.97
53.54%
19.72
3.77
2.39
20.99%
Gap, Inc
GPS
11,840
10.90
2.77
0.81
26.35%
American Eagles Outfitters, Inc
Minimum
Median
Mean
AEO
3.050
23.52
9.54
20.35
21.28
2.27
2.04
2.62
3.04
1.03
0.77
1.04
1.27
11.58%
40.87
4.38
2.44
Per Share Valuation (Median)
Per share Valuation (Mean)
17.91
18.73
21.15
24.52
15.91
19.48
Max
Min
max-min
35.97
8.40
27.57
35.36
16.47
18.89
37.32
11.78
25.54
Maximum
Normalized EPS
Revenues
Book Value Per Share
Shares Outstanding
$0.88
2990.5
$8.07
206.17m
Source: Yahoo! Finance
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DCF model values the stock in the range $16-18.
The multiples analysis values the stock between
$18-22.
At a market price of $15.62 (as of 11/1/2010), we
think the stock is fairly valued with limited upside
potential, pending any news event.
We recommend selling 500 shares (20% of
current holding) at a limit price of $17/share (Good
till 12/6/2010)
Pre-Recommendation
Post-Recommendation*
WFR
WFR
7%
7%
WAG
AEO
15%
34%
MOS
AEO
WAG
30%
16%
MOS
13%
14%
BGC
5%
BGC
5%
MCD
14%
JKHY
9%
DO
MCD
JKHY
15%
10%
DO
3%
3%
*Approximate representation of market value