Transcript American Eagle - UIUC College of Business

Brandon McArthur
Shivam Khanna
Bobby Schuster
Ganapati Raman
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Company Overview
Industry Overview
Growth Strategy
SWOT
Auction Rate Securities
Financial Projections
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Engage in the design, marketing, and sale of clothing in
the United States and Canada
Product Line: Jeans, Graphic Ts, accessories, outerwear,
footwear, basics, and swimwear
Target Market: Males and Females Ages 15-25
Operate in Both U.S since 1977 and Canada since 2001
Aerie
 New Intimates line opened in 2006, available at most AE stores as well
as online
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MARTIN + OSA
 Line opened in 2006 targeting 28-40 year old women and men
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77 Kids
 New Children’s apparel Brand launched online in 2008 and available in
stores in 2010
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Net Sales are down 2.2% in the last year.
Comparable Store Sales (stores opened in the
last 53 weeks) are down 10%.
Net Profit Margins are down about 7%
 13% (2007) to 6% (2008)
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AEO sold $393.6M of Auction Rate Securities
in 2008.
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100,000 stores in clothing retail
 Not including shoe and jewelry stores
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Highly concentrated
 50 largest companies account for 65% of sales
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Competition
 Large retailers, wholesalers, and internet retailers
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Demand driven by personal income and fashion
trends
Labor intensive
 Average annual sales per worker: 130,000
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Highest unemployment has consumers
slashing discretionary spending on clothing
Top Competitors
 Abercrombie & Fitch
▪ UBS AG analyst expects ANF to close Ruehl concept by
EOY (not announced by ANF)
 The Gap
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AEO concept, Martin + Osa, sales up 30% in
2008 probably due to promotions
 AEO expected to forecasts opening 28 new
American Eagle and aerie concepts, no Martin +
Osa
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AEO suing Citi for auction rate securities
 Claims to have been “lured” in to buying $258
million while the market for these securities was
falling
$100 invested starting in 2004
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Fiscal 2008 goals:
 Open 80 stand alone aerie stores
 Open 40 new AE stores
 Open 15 Martin + OSA stores
Fiscal 2008 Actual:
 Opened 77 stand alone aerie stores
 Opened 34 new AE stoes
 Opened 9 Martin + OSA sores
As of January 31, 2009:
 954 American Eagle Outfitters stores in the United States and Canada
 116 aerie stand-alone stores
 28 MARTIN + OSA stores.
• 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 Brand
Recognition 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 AEO’s 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, although
generally at higher prices.
• The bargaining power of suppliers
• AEO deals mainly with mainly with one supplier, but does not
have any exclusive contracts and has access to other suppliers
Strengths
•Brand
Identity/Leading Brand
•Better positioned Pricing Strategy in
weak economies to comparables
Opportunities
Growth in stores
• 77Kids
• Martin + OSA
•Aerie
•Flagship Store In Times Square
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Weaknesses
•Cyclical
business model
(Seasonality)
• Affected by weak economy
• Poor consumer confidence
Threats
•Continuance
in poor consumer
confidence
•Significant Write-Downs from ARS
• Introduction of more competitors
• Becoming out of favor -“Fashion is
Fad”
•Customs Regulation
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Auction rate securities are long-term debt instruments with
interest rates reset through periodic short-term auctions.
Holders of ARS can either sell into the auctions; bid based on a
desired interest rate or hold and accept the reset rate.
If there are insufficient buyers, then the auction fails and holders
are unable to liquidate their investment through the auction.
The result of a failed auction is that the ARS continues to pay
interest in accordance with its terms; however, liquidity for holders
is limited until there is a successful auction or until such time as
another market for ARS develops.
ARS are generally callable at any time by the issuer. Auctions
continue to be held as scheduled until the ARS matures or until it is
called.
Recorded a net temporary impairment of $35.3 million
($21.8 million, net of tax).
• Level 1 — Quoted prices in active markets for identical assets or liabilities. Quoted current market prices are readily
available.
• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities
• Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no
market activity and that are significant to the fair value of the assets or liabilities.
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Have borrowing agreements with two separate
financial institutions under which we may borrow an
aggregate of $350.0 million.
 $150.0 million can be used for demand letter of
credit facilities and $100.0 million can be used for
demand line borrowings.
 As of January 31, 2009, we had outstanding demand
letters of credit of $57.3 million and demand line
borrowings of $75.0 million.
 The demand line facilities comprising the
$100.0 million borrowing capacity expire on April 22,
2009.
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 Currently working with our lenders to renew these
facilities or to obtain committed credit lines of a
comparable amount.
Income Statement
(In USD Thousands)
2003
1,519,968
2004
1,881,241
23.8%
Actual
2005
2006
2,309,371 2,794,409
22.8%
21.0%
2007
3,055,419
9.3%
2008
2,988,866
-2.2%
2009
2,839,423
-5.0%
2010
2,782,634
-2.0%
Estimates
2011
2,921,766
5.0%
2012
3,272,378
12.0%
2013
3,763,235
15.0%
Cost of sales
% of total sales
Gross profit
% margin
965,716
63.5%
554,252
36.5%
1,003,433
53.3%
877,808
46.7%
1,235,620
53.5%
1,073,751
46.5%
1,453,980
52.0%
1,340,429
48.0%
1,632,281
53.4%
1,423,138
46.6%
1,814,765
55.2%
1,174,101
39.3%
1,566,413
55.2%
1,273,010
44.8%
1,535,085
55.2%
1,247,549
44.8%
1,611,839
55.2%
1,309,927
44.8%
1,805,260
55.2%
1,467,118
44.8%
2,076,049
55.2%
1,687,186
44.8%
SGA
% of total sales
379,289
25.0%
446,829
23.8%
538,091
23.3%
665,606
23.8%
715,180
23.4%
740,742
24.8%
681,534
24.0%
667,904
24.0%
701,299
24.0%
785,455
24.0%
903,273
24.0%
Depr / Amort
% of PPE
56,281
12.1%
68,273
11.0%
74,578
11.2%
88,033
10.3%
109,203
10.0%
131,219
10.1%
154,626
10.8%
165,412
10.8%
179,973
10.8%
197,230
10.8%
217,723
10.8%
Goodwill impairment loss
14,118
0
0
0
0
0
0
0
0
0
0
Operating income (loss)
104,564
362,706
461,082
586,790
598,755
302,140
436,849
414,233
428,655
484,433
566,190
2,021
1.9%
4,129
1.1%
15,885
3.4%
42,277
7.2%
37,626
6.3%
17,790
17,478
16,574
17,151
19,382
22,653
22,889
2,289
2,289
2,289
2,289
2,289
452,038
428,518
443,517
501,527
586,555
Net sales
% growth
Other income, net
% operating income
Non-temporary impairment
EBT
106,585
366,835
476,967
629,067
636,381
297,041
0
Income taxes
% of EBT
46,585
43.7%
142,603
38.9%
183,256
38.4%
241,708
38.4%
236,362
37.1%
117,980
39.7%
178,017
39.4%
168,754
39.4%
174,661
39.4%
197,506
39.4%
230,990
39.4%
Income from cont ops
60,000
224,232
293,711
387,359
400,019
179,061
274,022
259,764
268,856
304,021
355,564
Net income
60,000
213,343
294,153
387,359
400,019
179,061
274,022
259,764
268,856
304,021
355,564
Cash Flow Statement
(In USD Thousands)
2004
Operating activities:
Net income
Actual
2005
2006
2007
2008
2009
Estimates
2010
2011
2012
2013
213,343
294,153
387,359
400,019
179,061
274,022
259,764
268,856
304,021
355,564
Adjustments to reconcile net income:
Depreciation and amortization
Other adjustments to net income
68,273
38,278
74,578
61,212
88,033
15,552
109,203
28,440
133,141
73,654
154,626
49,048
165,412
48,067
179,973
50,470
197,230
56,527
217,723
65,006
Changes in assets and liabilities:
Decrease / (increase) in accts rec
Decrease / (increase) in inv
Decrease / (increase) in other
Increase / (decrease) in op liab
(3,612)
(17,405)
(29,205)
127,478
(2,714)
(72,748)
(15,659)
119,924
3,101
(52,905)
7,817
120,075
(5,875)
(22,841)
(1,038)
(42,956)
(9,551)
(8,443)
(22,647)
(47,571)
6,573
46,314
18,160
13,358
698
4,972
3,277
(9,860)
(1,710)
(12,182)
(3,502)
24,157
(4,309)
(30,699)
(10,973)
60,876
(6,033)
(42,978)
(15,767)
85,226
Total adjustments
183,807
164,593
365,641
64,933
118,583
288,079
212,567
237,206
268,652
303,176
Total cash flows from operations
397,150
458,746
753,000
464,952
297,644
562,101
472,331
506,062
572,673
658,741
Investing activities:
Capital expenditures
Investment activities
(97,288)
(178,392)
(81,545)
(311,519)
(225,939)
(425,182)
(250,407)
353,068
(265,335)
343,724
(135,000)
(100,000)
(135,000)
(160,000)
(190,000)
Total cash flows from investments
(275,680)
(393,064)
(651,121)
102,661
78,389
(135,000)
(100,000)
(135,000)
(160,000)
(190,000)
Financing activities:
Payments on note payable
Proceeds from note payable
Repurchase of common stock
Repurchase common stock-employees
Cash dividends paid
(2,655)
0
0
0
-8,709
(745)
0
(161,008)
(10,487)
-42,070
(3,020)
2,025
(146,485)
(7,635)
-61,455
(1,912)
0
(438,291)
(12,310)
-80,612
(2,177)
75,000
(3,432)
0
(82,394)
(15,000)
0
0
0
(86,448)
(15,000)
0
0
0
(86,448)
(15,000)
0
0
0
(86,448)
(15,000)
0
0
0
(86,448)
(15,000)
0
0
0
(86,448)
Total cash flows from financing
29,262
-166,112
-168,695
-513,786
(8,511)
(101,448)
(101,448)
(101,448)
(101,448)
(101,448)
Net increase (decrease) in cash
150,732
-100,430
-66,816
53,827
367,522
325,653
270,883
269,614
311,225
367,293
Balance Sheet
(In USD Thousands)
2006
2007
2008
2009
2010
Estimates
2011
2012
2013
130,529
8.1%
5.7%
59,737
3.0%
2.1%
116,061
6.2%
3.8%
473,342
24.1%
15.8%
636,819
31.0%
811,141
35.2%
977,709
37.6%
1,101,115
37.2%
1,308,928
38.5%
314,546
24.3%
620,989
38.7%
767,376
38.6%
503,878
27.0%
10,511
0.5%
10,175
1.0%
11,845
1.0%
13,703
1.0%
80,317
5.0%
94,664
5.0%
120,586
12.5%
137,991
13.8%
210,739
17.1%
263,644
18.1%
286,485
17.6%
294,928
16.3%
248,614
15.9%
243,642
15.9%
255,824
15.9%
286,523
15.9%
329,501
15.9%
22,820
1.5%
26,432
1.4%
29,146
1.3%
26,045
0.9%
31,920
1.0%
41,471
1.2%
34,898
1.2%
34,200
1.2%
35,910
1.2%
40,219
1.2%
46,252
1.2%
525,623
827,640
1,080,672
1,198,254
1,020,834
925,389
1,017,482
1,184,528
1,370,348
1,606,348
1,893,287
278,689
32.2%
18.3%
353,213
27.3%
18.8%
345,518
21.5%
15.0%
481,645
24.2%
17.2%
625,568
33.5%
20.5%
740,240
37.7%
24.8%
810,951
39.5%
28.6%
867,517
37.6%
31.2%
943,882
36.3%
32.3%
1,034,388
34.9%
31.6%
1,141,864
33.5%
30.3%
24,357
2.8%
84,416
6.5%
145,774
9.1%
251,644
12.7%
165,810
8.9%
251,007
12.8%
180,636
202,604
228,360
260,435
299,182
865,071
1,293,659
1,605,649
1,987,484
1,867,680
1,963,706
2,054,968
2,304,872
2,597,885
2,962,783
3,403,573
2003
2004
Current assets:
Cash & cash equivalents
% of total assets
% of total sales
251,324
29.1%
16.5%
275,061
21.3%
14.6%
Short-term investments
% of total assets
86,488
10.0%
Merchandise inventory
% of COGS
Accounts receivable
% of total sales
Total current assets
PPE
% of total assets
% of total sales
Long-term investments
% of total assets
Total assets
Actual
2005
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Beta: 1.08 (Bloomberg, Yahoo, Google)
Rf: 4%
Risk Premium: 6%
Capm Ke: 10.48%
Average ROE (10 years): 17.92%
Ke: 15%
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Kd: 2.9%
Tax Rate: 39%
Debt/ TV: 2.8%
Equity/TV: 97.2%
WACC: 14.92%
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
2,236,441
75,000
2,161,441
207,582
$10.41
$9.37 / $11.45
ANF
AEO
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Market Cap: $2.5b
Current Ratio: 2.3
Profit Margins: 6%
EBIT Margins: 10.3%
ROE: 13.03%
ROA: 10.08%
Payout Ratio: 29%
52 week decline: -33%
EPS: 0.86
Cash: 483.85
QoQ Rev change: -9%
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Market Cap: $2.13b
Current Ratio: 2.4
Profit Margins: 7.6%
EBIT Margins: 13%
ROE: 15.72%
ROA: 10.6%
Payout Ratio: 23%
52 week decline: -69%
EPS: 3.05
Cash: $522m
QoQ Rev change: -19%
GPS
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Market Cap: $9.55b
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Current Ratio: 1.85
•
Profit Margins: 6.6% •
EBIT Margins: 10.69% •
ROE: 22.23%
•
ROA: 12.6%
•
Payout Ratio: 25%
•
52 week decline: -37% •
EPS: 1.35
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Cash: $1.72b
•
QoQ Rev change: -13% •
Industry
Market Cap: $381M
Current Ratio:
Profit Margins:
EBIT Margins: 2.08%
ROE:
ROA:
Payout Ratio:
52 week decline:
EPS: 0.43
Cash:
QoQ Rev change: -4%
Multiples Analysis
Company
Ticker
Abercrombie & Fitch Co.
The Gap Inc.
Urban Outfitters, Inc.
ANF
GPS
URBN
4/1/09 Stock Price
Market Cap
Trailing P/E Forward P/E Price/Sales Price/Book
$24.27 2.17B
$13.73 9.23B
$15.38 2.78B
High
Low
Average
American Eagle Outfitters
AEO
$12.61 2.65B
AEO
8.18
9.71
14.22
11.76
11.36
11.94
0.63
0.63
1.48
1.22
2.10
2.58
14.22
8.18
10.70
11.94
11.36
11.69
1.48
0.63
0.91
2.58
1.22
1.97
14.88
14.76
0.88
1.87
Implied
Implied
AEO
AEO
Share
Share
Price
Price
Using
Using
Peer
Peer
Multiples
Multiples
Earnings per share
Sales per share
Book value per share
Diluted shares (mm)
$1.82
14.57
6.86
2,203
Trailing P/E Forward P/E Price/Sales Price/Book
$25.82
$21.68
$21.56
$17.71
$14.85
$20.63
$9.18
$8.37
$19.44
$21.22
$13.31
$13.50
High
Low
Average
AEO Football Chart
Price/Book
Price/Sales
Forw ard P/E
Trailing P/E
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
Recommendation
• Hold current position – 2,500 shares
• DCF values AEO between $9.37 - $11.45
• AEO currently trading at $12.61
(10% - 25% premium to DCF)
• Multiples analysis puts AEO between $15 - $17
(16% - 26% premium to market)
• AEO already ~ 7.5% of portfolio
• Shaky consumer confidence