American Eagle outfitters

1
American Eagle outfitters

• Presented by Linden Lu
• Yanlei Xu
• Gleb Zarkh
• Mohamed Ibrahim
• 11-14-2007

2
Presentation Outline

• Company overview
• Industry and competitors
• RCMP position and historical transactions
• Macro economic view
• Firm risks and growth model
• Valuation
• Assumptions
• DCF
• Multiple valuation
• Recommendation

3
Company Overview

• American Eagle Outfitters is one of leading
  apparel retailers in US
• Design, market, and sell own brand of laidback
• Casual clothing including Jeans, Graphic Ts,
  accessories, footwear, outwear, basics
• targeting age 15-25
• Sell to US (1977), Canada (2001) and 41 foreign
  countries
• Venues Primarily Mall-based, limited stand-alone
  and internet sales
• In 2006 introduced 2 new brands
• MartinOSA as a separate brand targeting age
  25-40
• Aerie as a sub brand selling
  intimates for women
• As of Aug 07 it operated 928 stores
• 919 AE stores in US and Canada (including 5
  Aerie)
• 9 MartinOSA

4
Company Overview Cont.

• Revenue sources
• Traditional AE stores
• New store opening (MatinOSA, Aerie)
• E-commerce (mainly to overseas customers)
• Merchandise Mix (2006)
• Mens apparel (35)
• Womens apparel, accessories, intimates (60)
• Footwear for men and women (5)
• Slightly shifts to womens apparel from mens
  apparel
• Economy and Consumer inspired growth

5
Retail Apparel Industry

• Including retail stores and e-commerce is highly
  competitive quality, fashion, service, selection
  and price
• Porters Five Force
• Entry of New Competitors moderate
• Threat of substitutes high
• Bargaining power of buyers moderate
• Bargaining power of suppliers low
• Rivalry among existing competitors high

6
Competition

• 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 old, high price
• Aeropostale younger teens, low-mid price
• GAP 20-30, mid-high price
• American Eagle 20 year old, mid price

7
Transaction History

• 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

• 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

8
RCMP position

• Currently own 1,950 shares of AEO, trading at 22
  as of Nov 12th, 2007 for an unrealized gain of
  32,710 or 321.04.

• AEO represents 11.2 of the portfolio

9
Correlation matrix
AEE AEO CPRT CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFS
AEE 1
AEO -0.03 1.00
CPRT 0.38 0.20 1.00
FR 0.30 -0.03 0.28 1.00 1.00
JKHY 0.22 0.38 0.40 0.12 0.12 1.00
KMB 0.36 0.10 0.48 0.08 0.08 0.31 1.00
MVSN 0.16 0.41 0.32 0.21 0.21 0.55 0.03 1.00
SRCL -0.13 0.11 -0.02 -0.06 -0.06 0.08 -0.01 -0.12 1.00
SRZ 0.11 0.21 0.41 0.18 0.18 0.38 0.00 0.46 0.04 1.00
WAG 0.06 0.13 0.08 -0.15 -0.15 -0.02 0.24 -0.05 0.09 -0.17 1.00
DFS 0.31 0.28 0.10 -0.02 -0.02 0.40 -0.18 0.80 -0.55 -0.61 -0.11 1.00
10
Macro Economic outlook
2007

•  Weakest level since October 2005 (After
  Hurricane Katrina)
• 3 consecutive declines sum to -15 from July's 6
  year high.
• Housing recession, the financial (sub prime)
  mess and higher oil prices are all contributing. 
  

11
Slowdown in 2008
Price of Oil
Price of Corn
ARMs Reset in 2008
12
Business risk

• Consumers preferences
• The ability to satisfy customers demand and
  changing preferences is a primary source of
  business risk.
• Changes in fashion trends could lead to lower
  sales, excess inventories and higher markdowns,
  which could negatively affect AEO.

13
Business risk

• 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.
• The recent credit crunch , higher oil prices
  would affect the consumer spending, thus affect
  over all sales for 2007

14
Growth model

• AEO growth model depends on
• Growth from new store openings
• Comparable sales growth
• E-commerce
• For the new store openings
• AEO is looking for opportunities of growth in its
  2 new brands specially the Aerie Brand
• They believe that there is strong growth
  potential in the intimates market .

New stores 2006 2007E 2008E 2009E 2010E 2011E
Traditional AE stores 41 28 20 15 12 10
MartinOsa 5 10 10 12 14 16
Aerie 3 20 30 30 25 22
Total 49 58 60 57 51 48
15
Growth model

• Based on our view of the economy we expect a slow
  down in growth of sales by AEO specially in 2008.
• Refer to excel sheet for further explanation of
  the growth model

16
DCF valuation

• WACC Calculations
• Beta 1.21
• Equity 100
• WACC 12.47

17
Key assumptions
DCF valuation

• Revenue Growth Rate
• 2007 2008 2009 2010 2011
• 15.91 11.46 13.96 13.16 12.63
• Capital Expenditures
• 2007 2008 2009 2010 2011
• 250 120 120 125 130
• Depreciation/Amortization
• 2007 2008 2009 2010 2011
• 98.8 116.0 126.8 138.1 149.8

18
DCF valuation
Key assumptions

• Cost Of Goods Sold
• 2007 2008 2009 2010 2011
• 54.5 55 55 55 55
• SGA
• 2007 2008 2009 2010 2011
• 23.89 23.89 23.89 23.89 23.89
• Terminal Growth Rate 4

19
DCF Valuation

• DCF yields stock price 19.74
• Sensitivity Analysis

20
Multiple Valuation
Company P/E Price/Sales Price/Book Price to FCF
American Eagle 11.9 1.56 3.4 38.22
Aeropostale 15.4 1.23 5.36 18.27
GAP 20.47 0.97 2.95 33.27
Abercrombie 15.59 1.82 4.35 37.79
Industry 16.17 1.15 4.91 36.02
Multiple Used 15 1.4 4 36
IMPLIED PRICE 23- 25
21
Recommendation

• Sell 450 shares at Market price
• Market price is 22 as of 12th Nov 07
• Why sell ?
• DCF shows slightly overvalued although it was
  based on optimistic assumptions
• Relatively low beta
• Growth from new store openings and e commerce.
• Why not all the position?
• Multiple valuation shows undervalued
• The stocks return converge towards the industry
  mean return
• Diversification benefits

22
Recommendation
23
Recommendation
24
Sources

• Briefing.com
• http//www.conference-board.org/economics/Consumer
  Confidence.cfm
• http//www.bubbleinfo.com/statistics-2007/