Transcript American Eagle Outfitters, Inc. AEOS

American Eagle
Outfitters, Inc.
AEOS
By, Matthew McDonnell1
Presented 11-15-2005
Outline
• Today, I will be discussing American Eagle Outfitters, Inc.
(AEOS), which is currently a major part of our client’s
portfolio.
• In addition to evaluating the firm itself, I will briefly
compare American Eagle Outfitters to some of its major
competitors.
• Third, I will discuss several stock valuation methods, as
well as other issues facing the firm.
• Finally, I will give a recommendation regarding what
should be done, if anything, regarding our holdings in
American Eagle Outfitters.
2
Macroeconomic Review
• Currently middle of earnings seasons
• Energy prices, although falling, still at relatively
high levels
• Rising interest rates affecting markets
• Energy-driven inflation, questionable consumer
confidence
• Many retailers reported slow start to 05 holiday
season, sales now growing stronger
3
American Eagle Outfitters- Vision
• “We will be a highly profitable,
international, multi-channel retail
organization”
• “We will grow through a portfolio of our
own distinct and segmented casual
lifestyle apparel brands”
4
Source: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available at http://library.corporateir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf
American Eagle Outfitters- Industry
Classifications
Sector: Consumer Discretionary
Industry Group: Retailing
Industry: Specialty Retail
Sub-industry: Apparel Retail
Industry: Multiline Retail
Sub-Industries: Internet Retail,
Catalog Retail
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Adapted from: Standard and Poor’s GICS Map, effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')
American Eagle Outfitters- GICS
Sector Description
Consumer Discretionary Sector:
“The GICS Consumer Discretionary Sector
encompasses those industries that tend to be
the most sensitive to economic cycles. Its
manufacturing segment includes automotive,
household durable goods, textiles & apparel and
leisure equipment. The services segment
includes hotels, restaurants, and other leisure
facilities, media production and services, and
consumer retailing and services.”1
6
1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at:
javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')
American Eagle Outfitters’ Business
• American Eagle is a “leading lifestyle retailer that
markets and sells [its] own brand of relaxed,
casual clothing.”
• Target audience: 15-25 year-olds
• Operates 846 stores in the US & Canada
• Located primarily in malls, with emphasis on “A”
center stores in especially high-traffic areas
• Purchases merchandise from suppliers who
either make it themselves or buy from
producers.
7
Source: Corporate Profile- About AE, American Eagle Homepage, accessed Nov. 07,
2005, available at: http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-homeprofile
American Eagle Outfitters- Products
Sold
2004 Sales Breakdown
Men's apparel &
accessories
5%
34%
Women's apparel
& accessories
61%
Footwear- men's
and women's
2003-2004 Change in Sales Composition
2002-2003 Change in Sales Composition
10%
4%
5%
5%
2%
2%
0%
0%
0%
0%
-5%
Men's apparel &
accessories
-10%
-8%
Women's
apparel &
accessories
Footwear- men's
-2%
and women's
-4%
Men's apparel &
accessories
Women's apparel &
accessories
Footw ear- men's and
w omen's
-3%
8
Source: American Eagle 2004 Annual Report
American Eagle Outfitters- Locations By State
9
Source Data: American Eagle Homepage
Map from Yahoo! Travel
American Eagle Outfitters- International
Sales Base
International Sales Base- 2004
Foreign
7%
Change In International Sales Base
2002-2003
Foreign
U.S.
93%
Change In International Sales Base
2003-2004
18.28%
20.00%
15.00%
Foreign
3.12%
10.00%
5.00%
0.00%
-10.00%
U.S
1
-1.09%
2
-5.00%
U.S
1
-0.22%
2
Source: American Eagle 2004 Annual Report
10
American Eagle Outfitters- Brand
Positioning
11
Source: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available at http://library.corporateir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf
American Eagle Outfitters- 2004
Accomplishments
• 31% increase in sales (21% comparable
store sales)
• 171% increase in operating income
• Nearly doubled market share in specialty
denim
» 2nd most purchased brand by target market
• Increased US store base by 5%
» 40% of new stores on the West coast
12
Source: American Eagle 2004 Annual Report
American Eagle Outfitters- 1st Half
2005 Performance
• Significant gains in teen brand popularity
– Seen as “3rd coolest brand for teens”
– Second most often shopped specialty brand for denim
• Comparable store sales up 20% over 1st half
2004
• 80% growth in EPS
• Slow start to holiday season, downgraded Q3
earnings, later upgraded to original projections
of $0.45-$0.46 per share
Sources: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available at http://library.corporateir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf
American Eagle Outfitters, Form 8-K filed Sept. 20, 2005
13
American Eagle Outfitters- Looking Forward
Plans for 2005 and Beyond
• Expansion
– New “flagship stores in NYC, Seattle”
– Expansion into Alaska, Hawaii, Canada, Puerto
Rico
– Still focused on Western, Southwestern US
• Evidenced by purchase of new distribution facility in
Ottawa, K.S.
• New operating system used to streamline
distribution
14
Source: American Eagle Outfitters 2004 Annual Report
American Eagle Outfitters- Looking Forward
(cont.)
One of American Eagle’s most significant plans for the
future is the recent unveiling of its new brand, Martin
and Osa
• Unveiled 10/20/2005, Scheduled to debut in malls in Fall,
2006
– Will operate as its own business segment separate of American
Eagle brand.
• Targeted to men, women age 25-40
– This is outside AE’s traditional 18-25 market
– Possibly explains move to Southwest US
• Will include “classic sportswear”
– Described by "a union of everything that is right about classics,
denim, and active sportswear”
– Using former Abercrombie & Fitch designers to head project
15
Source: American Eagle Outfitters Announces Name of New Concept: MARTIN + OSA,
American Eagle Homepage, accessed Nov. 1, 2005, available at: www. http://phx.corporateir.net/phoenix.zhtml?c=81256&p=irol-newsArticle&ID=770357&highlight=
American Eagle Outfitters- Financial
Analysis
Items of note include:
1. Increasing Liquidity
-- ↑Current Assets, ↓Non-current Assets
–
2.
Possible Implications: planned expansion,
anticipation of bad season.
Decreasing COGS as % Net Income
– Implication: Irregularities with respect to
inventory management/sales
– Stainable decline? Not likely.
16
American Eagle Outfitters- Stock
Performance vs. S&P 500 (5yrs)
17
American Eagle Outfitters- Stock
Performance vs. Competitors (5yrs)
18
American Eagle Outfitters’ Competitors
•
•
•
•
•
The Limited
The Gap
Abercrombie & Fitch
Aeropostale
Pacific Sunwear
19
American Eagle Outfitters- Comparable
Performance
ANF
Forward P/E
Profit Margin
Operating Margin
ROE
ROA
12.69
10.40%
18.24%
27.42%
17.14%
GPS
PSUN
AEOS
Industry
12.07
12.97
10.69*
9.18
7.43%
6.29%
11.34%
12.83%
12.25%
9.84%
19.33%
20.91%
22.46%
18.01%
29.79%
29.79%
12.93%
9.18%
22.96%
22.96%
20
Competitor Data: Yahoo! Finance, accessed Oct. 27, 2005, available at
http://www.finance.yahoo.com
American Eagle Outfitters- An RCMP
Holding
• Bought on 3 occasions: 12/1999, 03/2000,
05/2000
• Sold 25% of holdings in 04/2005
• As of Nov. 7, 2005, AEOS constituted 9% of the
portfolio’ book value and 20% of the portfolio’s
market value.
• Since its initial purchase, the stock price has
climbed 329%
• Realized gain= $11.054.60
• Unrealized gain= $41,620.00
21
American Eagle Outfitters- Porter’s 5
Forces
Existing loyalty to existing brands:
Incentives for using a particular buyer:
Barriers to entry:
Low
Moderate
Low
Threat of New
Entrants
High
Buyer concentration:
Brand identity:
Consumer switching costs:
Product's importance to buyer:
Consumers are price sensitive:
Low
High Bargaining Power
of Buyers
Low
Low
Low
Moderate
Degree of Rivalry
High
Exit barriers:
Low
Industry concentration:
Moderate
Maturity of industry: High
Brand identity/loyalty: Low
Product differences: Low
Bargaining
Power of
Suppliers
Low
Supplier concentration:
Importance of volume to supplier:
Supplier switching costs:
Supplier profitability:
Moderate
Low
Low
Low
Threat of
Substitutes
High
Consumer switching costs:
Buyer willingness to substitute:
Low
High
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American Eagle Outfitters- SWOT
Analysis
Strengths
Weaknesses
•
•
•
•
•
•
Inconsistent growth in historical income
•
Overvalued compared to intrinsic value,
P/E pricing methods
High liquidity= questionable use
of financial resources
•
•
Significant increase in comps
More efficient distribution
Strong EPS growth
Increasing margins
Trading at discount to its competitors,
industry
New, proven design team
Seen as a “cool” brand by teens
•
•
Questionable compensation of retail
associates
Opportunities
Threats
•
•
•
•
New clothing line, Martin and Osa debuting
fall 2006
--Also reaches out to new demographic
Continued expansion into new geographic
areas including SW USA, HI, Canada,
Puerto Rico
Slowly increasing online, international sales
•
•
•
Unpredictable industry, subject to fashion
trends
Higher materials prices as the result of US
de-facto reimposition of Multifiber Agreement
in summer 2005
GAP pursuing similar strategy as Martin and
Osa, possibly increased competition
Dependency on holiday sales, consumer
confidence. Both are in question for 2005.
23
American Eagle Outfitters- Impact of
Tariffs On Inputs
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American Eagle Outfitters- Portfolio
Diversification
RCMP
DJIA
Telecommunication
Services
4%
Health Care
9%
Health Care
8%
Industrials
25%
Consumer
Discretionary
13%
Consumer
Discretionary
28%
Materials
5%
Information
Technology
12%
Energy
4%
Consumer
Staples
21%
Consumer Staples
13%
Information
Technology
6%
Financials
37%
Financials
15%
Source: Adapted from Dow Jones Indexes, Component Weightings, accessed Nov. 5, 2005, available at
http://www.djindexes.com/mdsidx/index.cfm?event=showComponentWeights&rptsymbol=DJI&sitemapid=20
25
Standard and Poor’s GICS Map, effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')
American Eagle Outfitters- Portfolio
Diversification (cont.)
Q) Why is RCMP’s concentration in American
Eagle Outfitters a cause for concern?
A) Remember the GISC definition of the
Consumer Discretionary Sector:
The GICS Consumer Discretionary Sector
encompasses those industries that tend to
be the most sensitive to economic cycles.1
1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at:
javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')
26
American Eagle OutfittersQuestionable Employee Management
• Four American Eagle Outfitters employees
Pennsylvania, Illinois, and New Jersey have alleged their
former employers “violated certain federal and state
minimum wage and related laws.”1
• “American Eagle Outfitters, denying the allegations
made by the employees has entered into a Settle
Agreement for an unspecified amount.”2
• Although it is unlikely the settlement will have any
significant impact on earnings or stock price in the near
future, it raises questions regarding pervasive
improprieties within the company.
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1. Notice to Eligible Employees, Court of Common Pleas, Allegheny County, Penn., p.1, Received Nov. 9, 2005.
2. Id. at 1.
American Eagle Outfitters- Relative
Stock Valuation
ANF
Firm P/E
Industry P/E
Firm P/E as % Industry P/E
Implied Firm Growth
Implied Industry Growth
Implied Firm Growth as % Implied
Industry Growth
Overvalued/Undervalued/
On Target
GPS
PSUN
LTD
AEOS
21.97
13.72
19.25
15.07
14.44
17.33
17.33
17.33
17.33
17.33
127%
79%
111%
87%
83%
6.79%
7.00%
6.96%
7.00%
97%
99%
Premium
7.00%
5.08%
7.00%
7.21%
7.00%
0%
73%
103%
Discount Premium
Premium Discount
28
Data from: Yahoo! Finance, accessed Nov. 5, 2005, available at
www.finance.yahoo.com
American Eagle Outfitters- EPS Implied
Stock Price
Next year's (expectected) divident payout ratio over
(req. rate of return minus
expected growth rate of dividends)
= P/E Ratio
11.04%
8.00%
7.21%
13.98
Stock Price
EPS times
P/E Ratio (Allow for contraction from calculated above)
=EPS Implied Stock Price
2.03
12.00
24.41
26.85
(+ or - 10%)
21.97
29
American Eagle Outfitters- Intrinsic
Value
Assume a “reasonable” average growth rate in net
income, say 8%
Holding costs proportional, this generates an
intrinsic value of $21.52. This is below the
market price of $25.32
Holding other factors constant, net income would
have to grow at a rate of appox. 50% annually!
30
American Eagle Outfitters- Review
Macroeconomic Issues
• Relatively high energy prices
• Questionable consumer confidence
Microeconomic Issues
•
•
•
•
•
•
Firm plan anticipates launch of its new label in fall 2006
Huge growth in FY 2004
Questionable management relating to employee compensation
Priced at discount to the market
Overvalued according to EPS method
Overpriced according to Intrinsic Valuation method
– Very sensitive to changes in CAPEX spending, an area that may change dramatically
with continued expansion, launch of new label
Other Issues
• Portfolio diversification
– With American Eagle constituting 20% of the RCMP market portfolio, we are
susceptible to significant idiosyncratic risk
– This sector is, by definition, very susceptible to cyclical nature of the economy
31
American Eagle OutfittersRecommendation
Based on the factors just listed, I feel we
should sell 29% of our holdings, or 700
shares of American Eagle Outfitters at the
market.
American Eagle is a solid firm relative to the
industry in which it operates and I believe it
provides good exposure to a market that
indeed still has potential for growth. Our
remaining 1,700 shares should provide us
with this exposure
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The End
Questions?
33