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American Eagle Outfitters, Inc.
(AEO)Presented April 26, 2007
Presentation Outline The Company
Company Overview Store Expansion Business Risks
RCMP Position Role in Portfolio Correlation Matrix
Comparable Analysis Competitors 1&5 Year Comparables Ratio Analysis
DCF Analysis Assumptions DCF Model Sensitivity Analysis
Recommendation
Company Overview American Eagle Outfitters was founded in 1972 and
is headquartered in Warrendale, Pennsylvania. In 1977 and 2001, the first American and Canadian
stores were opened, respectively. As of February, 2007, AEO operated 911 stores in
Canada and the U.S. Designs, markets, and sells its own brand of
laidback, current clothing targeting 15 to 25 year-olds. Sells jeans, graphic Ts, accessories, outerwear, footwear,
basics, and swimwear. Provides high-quality merchandise at affordable prices.
Distributes merchandise via e-commerce in 41 countries.
Merchandise Groups
FY 2006 FY 2005 FY 2004
Men’s apparel and accessories 35% 35% 34%
Women’s apparel, accessories & intimates 60% 60% 61%
Footwear – men’s and women’s 5% 5% 5%
Total 100% 100% 100%
Company Overview
In 2006, American Eagle launched its new aerieTM intimates sub-brand. This collection sells dormwear and intimates including
bras, undies, camis, hoodies, robes, boxers, and sweats for girls.
In the fall of 2006, American Eagle introduced MARTIN +OSA. Encompasses a new sportswear concept targeting
25-40 year old men and women which sells apparel, accessories, and footwear for sports.
Store Expansion
In fiscal 2006, total store based increased by 5% and gross square footage increased by 8%.
Currently targeting the western and southwestern U.S., with these regions accounting for 66% of store openings in 200650% of AEO store base is in these regions
Store Expansion
In Fiscal 2007, AEO plans to open 45-50 new stores, 15 aerie stores, and 12 MARTIN + OSA stores. Square footage growth is expected to be 10%.
Fiscal 2002 Fiscal 2003 Fiscal 2004 Fiscal 2005 Fiscal 2006Stores at beg. of per. 678 753 805 846 869Stores opened during per. 79 59 50 36 50Stores closed during per. (4) (7) (9) (13) (8)Total stores at end of per. 753 805 846 869 911
Business Risks Changing consumer preferences and
fashion trendsThe specialty retail apparel business
fluctuates according to changes in the economy and customer preferences, dictated by fashion and season.
Retail must be ordered well in advance of the selling season.
Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could negatively affect AEO’s financial condition.
Business Risks
Current level of sales and earnings growthThe 12th consecutive quarters of record high
sales and earnings was recorded in the 4th quarter of Fiscal 2006. Gross margin & operating margin rates are near historic highs.
“It is difficult to maintain this level of performance and to continue to reach higher levels.”
AEO has in place growth initiatives to increase earnings by at least 15% per year long-term.
Business Risks The success of American Eagle operations depends
significantly on discretionary consumer spending
Personal Consumption Expenditures(Clothing & Shoes)
280290300310320330340350360370
2002
Q1
2002
Q2
2002
Q3
2002
Q4
2003
Q1
2003
Q2
2003
Q3
2003
Q4
2004
Q1
2004
Q2
2004
Q3
2004
Q4
2005
Q1
2005
Q2
2005
Q3
2005
Q4
2006
Q1
2006
Q2
2006
Q3
2006
Q4
Quarter
Ex
pe
nd
itu
re (
In B
illi
on
s)
U.S. Department of Commerce, Bureau of Economic Analysis
Business Risks
Growth through the development of new brandsMARTIN + OSA and aerie by American Eagle
were launched in FY 2006. Ability to succeed in these new brands requires
significant expenditures and management attention.
These new brands are subject to risks of customer acceptance, competition, product differentiation, and the ability to obtain suitable sites for new stores.
Business Risks
SeasonalityThe fourth and third quarters have historically
provided a large portion of net sales & income to American Eagle due to the year-end holiday season and back-to-school selling season, respectively.
60% of sales and 65% of income are accounted for in these quarters.
Any factors affecting the performance in these quarters can have adverse financial effects.
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
December 28th, 2006 3-2 Split
RCMP Position
Currently own 1,950 shares of AEO, trading at $29.93 as of April 25th, 2007 for an unrealized gain of $48,174.36 or 472.80%.
American Eagle Outfitters accounts for 19% of our portfolio.
Market Portfolio
6%
19%
8%
13%3%14%
6%
10%
2%
5%
7%7%
AEE
AEO
CPRT
FR
JKHY
JPM
KMB
MS
MVSN
SRCL
SRZ
WAG
Correlation Matrix
AEE AEO CPRT FR JKHY JPM KMB MS MVSN SRCL SRZ WAGAEE 1.00AEO -0.08 1.00CPRT 0.35 0.21 1.00FR 0.49 -0.02 0.36 1.00JKHY 0.17 0.40 0.38 0.21 1.00JPM 0.32 0.47 0.45 0.15 0.55 1.00KMB 0.30 0.08 0.47 0.14 0.31 0.22 1.00MS 0.17 0.50 0.39 0.11 0.46 0.68 0.15 1.00MVSN 0.21 0.44 0.33 0.20 0.57 0.51 0.06 0.57 1.00SRCL -0.25 0.13 -0.08 -0.03 0.09 0.04 -0.07 0.06 -0.11 1.00SRZ 0.14 0.21 0.43 0.20 0.40 0.40 0.01 0.48 0.50 0.07 1.00WAG 0.07 0.09 0.11 -0.18 0.02 0.16 0.26 0.18 -0.07 0.07 -0.17 1.00
Competition
The retail apparel industry, including retail stores and e-commerce, is highly competitive.
Competitors Who
Abercrombie & Fitch, Co. (ANF)Aeropostale Inc. (ARO)Gap Inc. (GPS)
Why Industry SpecificSimilar SizeSimilar Target Market
5-Year Comparables
1-Year Comparables
Ratio AnalysisAmerican
Eagle Outfitters, Inc.
Abercrombie & Fitch, Inc.
Gap Inc.Aeropostale
Inc.Industry
Market Cap 6.59B 7.27B 15.17B 2.21B 1.11B
P/E 17.65 18.07 19.98 21.58 20.03
Profit Margin 13.86% 12.72% 4.88% 7.55% 3.78%
Operating Margin 21.22% 19.83% 7.36% 12.29% 10.63%
ROE 30.11% 35.18% 14.68% 35.73% 16.76%
Price/Sales 2.37 2.18 0.96 1.56 1.50
Current Ratio 2.60 2.14 2.21 2.42 2.30
Payout Ratio 16.00% 15.00% 34.00% N/A 17.02%
Ratio Analysis DuPont Breakdown
FY 2001 2002 2003 2004 2005 2006
Total assets over 672,721 741,339 932,414 1,328,926 1,605,649 1,987,484Total equity 496,792 571,590 637,377 963,486 1,155,552 1,417,312
=Equity multiplier 1.35 1.30 1.46 1.38 1.39 1.40
Sales over 1,371,899 1,382,923 1,435,436 1,881,241 2,309,371 2,794,409Total assets 672,721 741,339 932,414 1,328,926 1,605,649 1,987,484
=Total asset turnover 2.04 1.87 1.54 1.42 1.44 1.41
Net income over 147,370 141,469 119,587 281,616 368,731 387,359Sales 1,371,899 1,382,923 1,435,436 1,881,241 2,309,371 2,794,409
=Profit margin 10.74% 10.23% 8.33% 14.97% 15.97% 13.86%
EM*TAT*PM =Return on equity 29.66% 24.75% 18.76% 29.23% 31.91% 27.33%
Assumptions1 2 3 4 5 6 7 8 9 10 11 12
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 EIncome StatementSales% y/y comp sales 5.80% 2.30% -4.30% -6.60% 21.40% 15.50% 12.00% 7% 4% 3% 3% 3%
% y/y new store sales 0.00% 23.16% 5.10% 10.40% 9.66% 7.26% 9.00% 6.00% 5.00% 4.00% 4.00% 4.00%
Expenses
COGS as % sales 47.32% 48.56% 49.85% 50.09% 43.56% 44.22% 44.52% 46.00% 46.00% 45.00% 45.00% 45.00%
Stores, beginning of period 466 554 678 753 805 846 869 911 948 984 1014 1039Rent expense per store open 222 204 159 162 177 190 190 190 190 190 190 190
Advertising expense as % sales 3.32% 3.30% 3.21% 3.12% 2.20% 2.32% 1.61% 2.50% 2.50% 2.50% 2.50% 2.50%
SG&A as % sales 22.25% 21.66% 19.91% 20.64% 20.12% 20.07% 23.82% 22% 21% 20% 20% 20%
% dep. & ammort as % property and equipment13% 13% 16% 20% 18% 22% 18% 18% 18% 18% 15% 15%
y/y growth in other net income 0% -56% -13% -17% 105% 285% 166% 3% 3% 3% 3% 3%
Total deferred tax as % total tax -8% 14% 12% 25% -9% 2% 4% 5% 6% 7% 7% 7%
Provision for tax as % inc. before tax 34% 30% 29% 27% 33% 33% 32% 31% 30% 29% 29% 29%
Assumptions1 2 3 4 5 6 7 8 9 10 11 12
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 EBalance SheetAssetsCash and equivalents as % total assets24.57% 26.82% 26.24% 14.70% 16.51% 8.13% 3.01% 6.00% 6.00% 6.00% 6.00% 6.00%
Marketable equity securities as % sales2.55% 3.29% 3.40% 13.98% 19.68% 26.89% 27.46% 26.46% 25.46% 24.46% 22.46% 19.46%
Inventory as % sales 8% 7% 9% 8% 9% 9% 9% 8% 9% 8% 7% 7%
Acts rec. as % sales 3% 1% 1% 2% 1% 1% 0% 0% 0% 0% 0% 0%
Prepaid expenses as % total expenses 2% 2% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2%
L-T investments y/y increase 0 0 0 0 247% 73% 73% 63% 53% 48% 45% 43%
LiabilitiesAccounts payable as % expenses 4.55% 3.36% 4.32% 5.74% 7.51% 7.85% 7.75% 7.80% 7.90% 8.00% 8.10% 8.10%
Accrued compensation as % of expenses3% 2% 1% 1% 2% 3% 3% 3% 3% 4% 4% 4%
Accrued rent % y/y increase 0 32% -4% 43% 11% 16% 10% 10% 10% 10% 10% 10%
Accrued taxes as % total tax expense 50% 38% 21% 55% 24% 24% 36% 36% 36% 36% 36% 36%
Unredeemed value cards as % sales 1.20% 1.28% 1.65% 1.80% 1.74% 1.86% 1.95% 1.95% 1.95% 1.95% 1.95% 1.95%
Other liabilities as % other current liabilities9% 5% 7% 7% 6% 4% 4% 4% 4% 4% 4% 4%
Deferred lease credits as % rent expense0% 0% 0% 8% 7% 7% 7% 7% 7% 7% 7% 7%
Other non-current liabilities y/y growth 0% 4% 333% 209% 37% 13% 14% 14% 14% 14% 14% 14%
EquityTotal shareholder equity y/y growth 0% 35% 15% 12% 51% 20% 23% 23% 23% 23% 22% 21%
Discounted Cash FlowStep 1: Forecast FCF
FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E
Net Sales 2,986,409 3,109,691 3,206,997 3,318,541 3,422,441
Less: Operating Costs 2,389,466 2,465,466 2,482,930 2,541,270 2,611,466 Taxes Paid 208,936 214,353 227,475 242,790 252,875 Net Investment (200,000) (160,000) (150,000) (130,000) (100,000) Δ Working Capital (150,644) (217,409) (329,280) (420,691) (521,703)= FCF 338,651 487,280 675,872 825,172 979,804
Step 2: Calculate WACC
we= 100% ke= 16% β= 1.73
wd= 0 kd= Tax= 38%MRP= 6.50%rf= 4.6%
Discounted Cash FlowStep 3: Calculate Enterprise Value
L-T Growth Rate= 4%WACC= 16%
1 2 3 4 5FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E
FCF 338,651 487,280 675,872 825,172 979,804 Terminal 8,602,754 =PV FVF 252,347 313,435 375,280 395,510 4,592,985
Total Equity Value= 5,929,557
Step 4: Subtract L-T Debt and Divide by Shares Outstanding
Total Equity Value= 5,929,557 Less: L-T Debt 0
=Firm intrinsic value 5,929,557 Over: Common shares outstanding 221,284
+ 10% 29.48$
=Value per common share $26.80- 10% 24.12$
Sensitivity Analysis
2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%12% 34.98 36.46 38.11 39.95 42.02 44.36 47.04 50.14 53.74 13% 31.31 32.49 33.78 35.21 36.80 38.57 40.57 42.83 45.42 14% 28.26 29.21 30.24 31.38 32.63 34.01 35.54 37.25 39.18 15% 25.68 26.46 27.30 28.22 29.22 30.32 31.52 32.85 34.33
16% 23.48 24.12 24.82 25.57 26.39 27.28 28.24 29.30 30.46 17% 21.58 22.12 22.70 23.33 24.00 24.73 25.51 26.37 27.30 18% 19.92 20.38 20.87 21.40 21.96 22.56 23.21 23.92 24.68 19% 18.46 18.86 19.27 19.72 20.19 20.70 21.24 21.83 22.46 20% 17.17 17.51 17.87 18.25 18.65 19.08 19.54 20.04 20.56
Long-term growth rate
WA
CC
Recommendation HOLD
Management expects there to be a significant amount of success with the launch of their new brands, MARTIN + OSA and aerie.
AEO continues to expand their store base, with the goal to open 45-50 stores in FY 2007
Relatively good diversifier against other holdings HOWEVER
We expect there to be a significant slow of growth in the future. Historically, AEO has realized growth rates that are not possible to sustain in the long-term.
THEREFORE It is important to watch AEO with a close eye, especially to see if
the expected success of the two new brands is realized. Upon this success, we foresee AEO continuing to grow at a relatively pleasing rate that will prove profitable to our investor.