American Eagle Outfitters (AEO) Presented December 2, 2008

1
American Eagle Outfitters (AEO)Presented
December 2, 2008

• Brian Bird
• Matt Byford
• Brandon Lee
• Christina Lu

2
Overview

• Company Overview
• Industry Overview
• Macroeconomy
• Financials
• Valuation
• RCMP Portfolio
• Recommendation

3
Company Overview

• American Eagle Outfitters a leading apparel
  retailer in the US
• Design, market, and sell own brand
• Casual clothing including Jeans, Graphic Ts,
  accessories, footwear, outwear, basics
• Targets ages 15-25
• Sell to US (1977), Canada (2001) and 41 foreign
  countries
• Venues Primarily mall-based, limited stand-alone
  and internet sales
• 2006 introduced 2 new brands
• MartinOSA as a separate brand targeting age
  25-40
• Aerie as a sub brand selling
  intimates for women
• 2008 www.77kids.com
• Targets 2-10 year olds
• As of Feb 2008 it operated 987 stores
• 929 AE stores in US and Canada
• 39 Aerie stand-alone stores
• 19 MartinOSA

4
Growth Strategy

• Fiscal 2008 goals
• Open 80 stand alone aerie stores
• Open 40 new AE stores
• Open 15 Martin OSA stores
• Remodel 40-50 existing AE stores
• 10 expected square footage growth

5
Industry Overview

• Competition individual and chain specialty
  stores, as well as the casual apparel and
  footwear departments of department stores and
  discount retailers
• Key Competitors
• Abercrombie Fitch 20 year olds, high price
• Aeropostale younger teens, low-mid price
• GAP 20-30, mid-high price
• American Eagle 20 year old, mid price

6
Retail Risks

• Consumer preferences
• Changes in fashion trends could lead to lower
  sales, excess inventories and higher markdowns
• Seasonality
• The fourth and third quarters have historically
  provided 60 net sales 65 of net income Due
  to the year-end holiday season and back-to-school
  selling season.

7
Industry Overview
8
Macro Trends

• Tight credit markets
• AEO 300 million tied up in auction rate
  securities
• Retail sector struggling
• Consumer confidence extremely low
• Opportunity to benefit from cheaper lease
  agreements in this economic downturn

9
Macro Trends
10
SWOT Analysis
Strengths Brand Identity/Leading Brand Strong balance sheet
Weakness Cyclical business model Affected by weak economy Poor consumer confidence
Opportunities Growth in stores 77Kids Martin Osa
Threats Continuance in poor consumer confidence Introduction of more competitors Becoming out of favor
11
Porter 5 Forces

• The threat of substitute products
• There are several substitutes for American Eagle
  clothing. However, the propensity for buyers to
  substitute are not as high.
• The threat of the entry of new competitors
• The barriers of entry are not high. However, AEO
  has a strong which makes its threat to new
  competitors lower.
• The intensity of competitive rivalry
• There are competitive rivalries among stores and
  the possibility for new companies to add too the
  rivalries, but because of AEOs strong brand name
  the probability of new, competitive rivalries is
  low.
• The bargaining power of customers
• Customers have high bargaining power because
  there are several substitutes to the products
  that American Eagle provides.
• The bargaining power of suppliers
• AEO deals mainly with the textile commodities
  therefore suppliers it is hard for the supplier
  to have bargaining power over AEO.

12
Marketable Securities

• Three Types
• Debt held to maturity
• Trading Securities
• Assumed to be held for a short term profit
• Typically, only financial institutions hold
  trading securities
• Available-for-sale securities
• An intermediate class of securities tied to a
  specific cash need
• Ex. AEO purchased available-for-sale securities
  to finance its repurchase program

13
Auction Rate Securities

• A debt security that is sold through a Dutch
  auction. The auction rate security (ARS) is sold
  at an interest rate that will clear the market at
  the lowest yield possible. This ensures that all
  bidders on an ARS receive the same yield on the
  debt issue.(source investopedia.com)
• In early 2008, the ARS market had grown to over
  200 billion, roughly half of it being owned by
  corporate investors.
• In February 2008, the auction market failed and
  most ARS have been frozen since then.

14
AEO Auction Rate Securities Exposure

• As of August 2, 2008, AEO had 689.0 million in
  cash and cash equivalents, short-term
  investments, and long-term investments.
• 332.6 million net investments in auction rate
  securities
• In the first half of the year, the company
  experienced failed auctions for 49 ARS issues.
• During the same time period, the company sold 33
  ARS issues at par plus accrued interest at 84.9
  million.

15
Cash Flow StatementInvesting Activities

• 2005 Net purchases of 311 million in available
  for sale securities
• 2006 Net purchases of 437 million in available
  for sale securities
• 2007 Net sales of 354 million in available for
  sale securities

16
Balance Sheet
17
Cash Flow Statement
18
Ratios and Margins
2003 2004 2005 2006 2007 Average
Gross margin 5 yr avg 36.46 46.66 46.50 47.97 46.58 44.83
Operating margin 6.88 19.28 19.97 21.00 19.60 17.34
Net profit margin 3.95 11.34 12.74 13.86 13.09 11.00
ROE - 5 yr avg 9.32 22.14 25.45 27.33 29.84 22.82
ROA - 5 yr avg 6.94 16.49 18.32 19.47 21.42 16.53
Current ratio 2.78 3.27 2.99 2.60 2.71 2.87
19
Dupont Analysis
ROE ROA Equity Multiplier
2005 0.25451 0.18318 1.38942
2006 0.27330 0.19470 x 1.40370
2007 0.29842 0.21418 1.39331
ROA Profit Margin Asset Turnover
2005 0.18318 0.1274 1.44
2006 0.19470 0.1386 x 1.40
2007 0.21418 0.1309 1.64
20
Multiple Analysis
Competitors Market Capital Trailing P/E Forward P/E Price/Sales M/B
ANF 1.55B 3.39 6.61 0.51 1.12
GPS 8.20B 8.83 8.49 0.57 2.07
LTD 3.05B 5.26 6.17 0.35 1.48
Trailing P/E Forward P/E Price/Sales M/B
High 9.44 11.49 6.94 10.73
Low 14.30 13.75 8.30 14.27
Average 9.44 10.00 5.10 7.72
21
Multiple Analysis

• AEO

Earning per share 1.62
Sales per share 15
Book value per share 6.89
diluted shares (Mn) 220,280
American Eagle Equity Value Using Multiples American Eagle Equity Value Using Multiples American Eagle Equity Value Using Multiples American Eagle Equity Value Using Multiples American Eagle Equity Value Using Multiples
  P/E(trailing) P/E(leading) P/S M/B
Using Average 9.44 11.49 6.94 10.73
Using High 14.30 13.75 8.30 14.27
Using Low 9.44 10.00 5.10 7.72
22
Football Chart
Implied price 11.0013.00
23
Valuation Earnings
Period EPS Estimate EPS Actual
Q1 2007 0.35 0.35
Q2 2007 0.36 0.37
Q3 2007 0.45 0.45
Q4 2007 0.66 0.66
Q1 2008 0.19 0.21
Q2 2008 0.28 0.29
Q3 2008 0.30 0.30
Q4 2008 0.47 Feb. 2009
24
DCF WACC

• Beta taken from Yahoo! Finance
• Share price of 8.59 as of mid-day Tuesday,
  December 2, 2008.
• Total debt includes 75 million in demand
  borrowings

25
DCF

• Assumptions
• -10 growth in sales.
• Squeeze margins by increasing cost of sales to
  55.

26
DCF
DCF Price 12.14 /- 10 10.93 - 13.36
27
Sensitivity Analysis
28
RCMP Portfolio Current
29
RCMP Portfolio with Recommendation
30
Correlation
31
Transaction History

• December 10, 1999
• BOT 200 shares at 44.00
• January 10, 2000
• BOT 200 shares at 27.00
• May 3, 2000
• BOT 600 shares at 15.63
• February 23, 2001
• 3-2 split

• March 8th, 2005
• 2-1 split
• April 25th, 2005
• SLD 600 shares at 26.28
• November 16th, 2005
• SLD 700 shares at 23.33
• November 7th 2006
• SLD 400 shares at 39.19
• December 28th, 2006
• 3-2 Split
• November 2007
• SLD 450 shares at 22

32
Current Position

• Currently own 1500 shares at 8.59 (Mid-day Dec.
  2, 2008)
• Unrealized gain of 5,000 (64)

33
Recommendation

• BUY 1000 Shares of AEO at Market Price
• Cost of purchase 8,590, bringing the total
  position to 21,475.
• The average cost per share 6.57 (previously
  5.23)
• The DCF values the company at a range between
  10.93 and 13.36.
• The company is currently trading at about 8.60
  (20 to 35 discount to the model).
• Currently represents about 4.75 of the
  portfolio. The addition would make AEO 7.60 of
  the portfolio.
• Recommend average costing into the position as
  consumer confidence remains weak.