aeos2011-4

7/30/2019 AEOS2011-4

1/39

American Eagle Outfitters,Inc.

By,

Pratik KamdarRajani Meka

Raj Dhawle PatilShih-Wei Huang

Presented April 5, 2011

7/30/2019 AEOS2011-4

2/39

RCMP Portfolio

Currently, Portfolio holds 2000 shares

1500 shares are held, remaining from three differentpurchases beginning in December 1999, at the splitadjusted price of $5.23 per share. Currently, the

position has an unrealized gain of 203% as on 3rdApril, 2011

Multiple sales of these three original purchaseshave been made since then, each producing sizablecapital gains

500 shares were bought at the price of $9.07 per

share on 3rd Dec. 2008. Currently, the position hasan unrealized gain of 75% as on 3rd April 2011

At present, AEO represents 28% of our portfolioholdings by Market Value

7/30/2019 AEOS2011-4

3/39

The Company

An American clothing and accessories retailerbased in Pittsburg, PA

Sells its merchandise through stand-alone storesin malls and online through www.ae.com

Key Facts: Founded in 1977

Headquarters: Pittsburg, PA

Currently operates 1086 stores in US & Canada; Avg.store size-4700 selling sq.ft.

CEO: James V. O'Donnell

Employs around 39,900 people

Stock trades on NYSE under symbol AEO
http://www.ae.com/http://www.ae.com/http://www.ae.com/

7/30/2019 AEOS2011-4

4/39

Recent News:

On 9thMarch 2011, Company CEO James V.ODonnell expressed his intention to retire.Search for New CEO is on

Recent Speculation regarding Company being anattractive LBO target; Reason: Company postednegative comparable sales growth during quarterfiscal 2010 but still cash rich

On 31st

July 2010, Completed Closure of its brandM+0; Reason: brand was not achievingperformance levels commensurate withinvestments.

7/30/2019 AEOS2011-4

5/39

History

1977-Funded by Mark & Jerry Silverman as a subsidiary of RetailVentures, Inc., which operated Silvermans Menswear

1989- Bothers sold other businesses & decided to focus only onAEO

1991-Schottensteins, 50% owner in AEO bought out remaining

50% interest from Silverman family

2001-Opened AEOs 1st Canadian Store 1994- Company went Public

2006-Company launched new brand M+O for Adults and Aerie

for Women

2008-Launched new brand 77Kids for children

2010-Closed M+O; Opened first International Store in Dubai,UAE

7/30/2019 AEOS2011-4

6/39

What it Does & How?

AEO Designers

AEO Headquarters

Garment

Manufactures

AEO Distribution

Centre

AEO

Stores

7/30/2019 AEOS2011-4

7/39

Business Segments

AEO,Inc.

AE

Apparels & Accessories for Men &Women aged 15-25;

Total 929 stores across US & Canada

aerieApparel & Intimates

Collection forcollege going Girls;

148 Stores across US& Canada

77Kids

Clothing & Accessories for Babies &Kids aged 0-10 years ;

9 Stores across US & Canada

AE Direct

Sells All MerchandiseOnline; Ships to 76

Countries worldwide

7/30/2019 AEOS2011-4

8/39

Management Outlook

Company expects an improvement in sales on thebasis of solid product line up, continued cost cuts &better managed Inventory

Company Expects to Mitigate Rising Product Costswith Targeted Reduction in Mark-downs, SelectivePrice Increases & On-going Cost Savings

Internal Development of New Brands

Expansions Overseas though Franchise route whilekeeping an eye on Acquisition Opportunities

7/30/2019 AEOS2011-4

9/39

Growth Strategy:

International Expansion: The company is entering intoMultiple Franchise Agreements to open Series of AE Storesat International Locations:

* No Capital/ Operational Involvement

Opening New Stores: Depending on Geography andDemographics

Remodel Old Stores to Current Store Format to Offer UniqueShopping Experience

Strengthen e-commerce Operation

Cut Costs & Manage Inventory

Year Party Region

2009 Alshaya Trading Co. Middle East, North Africa, Eastern Europe

2010 Dickson Concepts Ltd. China, Macau (commences 2011)

2011 Sumikin Bussan Co. & Fox

Wizel Ltd.

Japan, Israel (commences 2012)

7/30/2019 AEOS2011-4

10/39

Key Performance Indicators

Comparable Store Sells: Provides measure of SalesGrowth for Stores open more than a Year

Net Sales Per Average Square Feet: Provides Measure ofStore Productivity and Operational Efficiency

Inventory Turnover: Measure how Productively Inventoryis Bought & Sold. Slow Moving Inventory affectsProfitability

Gross Profit: Provides Measure of whether or notCompany is optimizing the Price & Inventory Levels toAchieve Optimal Sales Levels

Sufficient Cash Levels

7/30/2019 AEOS2011-4

11/39

Recent Financial PerformanceFiscal Year ended Jan 29th2011

Net Sales were up 1% over 2009 figures

Annual Comparable Store Sales were down 1% over comparablefigure in 2009

Net Income (from Cont. Operations) was 6% against 7% of Sales

in 2009owed to loss from selling Inv. Securities

Cash Decreased by $155.8 million to $740.6 million

Overall Results were affected by Loss Recognized from Closureof M+O & Selling Investment Securities

Company Paid a Quarterly Dividend of $0.11 per share andSpecial Dividend of $0.50 per share in Fiscal 2010

Repurchased 15.5 million shares in fiscal 2010.

New Store openings were Funded by Operating Cash Flows

7/30/2019 AEOS2011-4

12/39

Recent Stock Performance

Source: finance.yahoo.com

7/30/2019 AEOS2011-4

13/39

SWOT Analysis

Strengths: Weaknesses: Affordability Solid Geographical Presence No Financial Leverage, High

Operating Cash Flow

Good Product Assortment

Fickle Customer Base/LowPricing Power

Excessive Dependence onOne Supplier

Seasonality Slow Moving Inventory

Opportunities: Risks: International Expansion

Internal Development ofNew Brands Economic Recovery

Cotton Prices

Inventory Risk due toMisidentification of Trends Economic Condition and

Growth DiscretionarySpending

Failure of New Brand

Offerings

7/30/2019 AEOS2011-4

14/39

MARKET OVERVIEW

MARKET VALUE:The global apparel retail industry grew by 2.1% in 2009 to reach a value of$1,078.2 billion.

MARKET VALUE FORECAST:In 2014, the global apparel retail industry is forecast to have a value of$1,222.7 billion, an increase of 13.4% since 2009.

MARKET SEGMENTATION:Women's wear is the largest segment of the global apparel retail industry,accounting for 51.3% of the Industrys total value.

GEOGRAPHIC SEGMENTATION:The Americas account for 35.7% of the global apparel retail industry value.

MARKET RIVALRY:Despite the current global economic downturn, the apparel retail industrycontinues to grow at a healthy rate and this, coupled with the absence ofswitching costs for consumers and great product differentiation, means thatrivalry within the industry is no more than moderate.

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

7/30/2019 AEOS2011-4

15/39

Historic Growth

TABLE 1: Global Apparel Industry Value :$ billion

Year $billion % Growth

2005 954.1

2006 1003.4 5.2

2007 1040.8 3.7

2008 1056.0 1.5

2009 1078.2 2.1

CAGR 2005-09 3.1


7/30/2019 AEOS2011-4

16/39

Historic Growth


7/30/2019 AEOS2011-4

17/39

Key Revenue Driver

Consumer Sentiment Index

Higher the consumer confidence higher is the

spending on retail on clothing.

Number of Youth

Disposable Household Income

7/30/2019 AEOS2011-4

18/39

Segmentation by Age


7/30/2019 AEOS2011-4

19/39

Forecasted Growth


7/30/2019 AEOS2011-4

20/39

Forecasted Growth


7/30/2019 AEOS2011-4

21/39

MARKET SEGMENTATION


7/30/2019 AEOS2011-4

22/39

PORTERS FIVE FORCE MODEL

Rivalry among competitors (High) Low entry barriers Extensive price competition

Bargaining Power of Buyers (Moderate) Individual consumers High Product differentiation Price Sensitive Retailers cannot forward integrate

Bargaining power of Suppliers(low) Liberization of trade. Industry is mostly labor intensive Low switching cost for retailers

7/30/2019 AEOS2011-4

23/39

PORTERS FIVE FORCE MODEL

Threat of New Entrants ( Low to Moderate) Setting up single store does not require large capital

outlay.

It might trigger a price war with players with multiplestores and brands.

Economies of scale

Threat of New Substitutes(Low) Signifier of socio economic class

Substitutes for apparel retail include buying directlyfrom manufacturers, which is facilitated by the growthof online sales.

Home-made and custom-made (couture) clothing arealso niche alternatives to retail of ready-made clothes

7/30/2019 AEOS2011-4

24/39

Sales Per Square Feet

American Eagle Abercrombie andFitch

GAP Aeropostale

2010 2011 2010 2011 2009 2010 2009 2010

$422 $420 $339 $390 $365 $383 572 624

American Eagle

(%)

Abercrombie and

Fitch(%)

GAP

(%)

Aeropostale

(%)

2010 2011 2010 2011 2009 2010 2009 2010

-4 -1 -23 7 -3 1 8 10

Same Store Sales Growth

7/30/2019 AEOS2011-4

25/39

Competitors

Abercrombie and Fitch, Inc (Ticker: ANF) Presence in North America, Europe and Asia FY 2010 Revenue : 3.47B

Aeropostale, Inc (Ticker: ARO) Presence only in North America FY 2010 Revenue: 2.40B

Urban Outfitters (Ticker: URBN) Core operating location: US FY 2010 Revenue: 2.27B

Gap, Ins (Ticker: GPS) Presence in United States, Canada, the United Kingdom, France,

Ireland, and Japan. FY 2010 Revenue: $14.66B

7/30/2019 AEOS2011-4

26/39

Stock Price Movements2006 Jan 01 - 2011 Apr 01

Source: http://www.google.com/finance

7/30/2019 AEOS2011-4

27/39

Key Ratios of Retailers

Operational Asst Utilization1/31/2009 1/30/2010 1/29/2011

Net Sales/Working

Capital

5.63 3.88 3.77

Net Sales/Net

Plant&Equip3.98 4.12 4.61

Net Sales/Current Assets 3.19 2.52 2.53

Net Sales/Total Assets 1.50 1.38 1.58

Inventory and A/R Management1/31/2009 1/30/2010 1/29/2011 Industry

Receivables Turnover 80.35 77.17 83.13 32.93

Receivables Days Sales 4.54 4.73 4.39 11.08

Inventories Turnover 6.03 5.69 5.72 4.46

Inventories Days Sales 60.58 64.19 63.76 81.84

Source: http://globalbb.onesource.com/homepage.aspx

7/30/2019 AEOS2011-4

28/39

Ratio Comparisons with Competitors

Inventory and A/R ManagementANF ARO URBN GPS AEO

Receivables Turnover 40.29 136.09 62.48 - 83.13

Receivables Days Sales 9.06 2.68 5.84 - 4.39

Inventories Turnover 3.61 10.46 6.43 5.67 5.72

Inventories Days Sales 101.16 34.89 56.72 64.41 63.76

Operational Asset UtilizationANF ARO URBN GPS AEO

Net Sales/Working Capital 8.01 9.47 3.83 8.01 3.77

Net Sales/Net Plant&Equip 5.72 8.02 3.88 5.72 4.61

Net Sales/Current Assets 3.74 5.11 2.84 3.74 2.53

Net Sales/Total Assets 2.08 3.05 1.27 2.08 1.58


7/30/2019 AEOS2011-4

29/39

Other Ratio Comparisons

Other Ratio ComparablesANF ARO URBN GPS AEO Industry

Operating Margin 8.15% 16.11% 18.21% 13.42% 10.65% 14.49%

Net Margin 4.33% 9.64% 12.00% 8.21% 6.13% 9.11%

ROA 6.12% 30.64% 15.11% 16.35% 9.06% 14.81%

ROE 8.08% 53.36% 20.16% 26.84% 12.42% 28.29%

Payout Ratio 42.00% N/A N/A 21.00% 101.71% 19.60%

PEG Ratio(5 yr expected) 1.08 0.84 0.89 1.15 1.15 N/A


7/30/2019 AEOS2011-4

30/39

Float Number

ANF ARO URBN GPS AEOSharesOutstanding 87.25 87.46 164.41 606 194.69

Float 86.1 86.6 127.7 526.73 172.02% Available forTrading 98.68% 99.02% 77.67% 86.92% 88.36%

Source: http://finance.yahoo.com

7/30/2019 AEOS2011-4

31/39

DuPont Analysis with Competitors

Tax Burden*Interest Burden*Operating Profit Margin*Asset Turnover*Leverage = ROE2008 2009 2010 2011ANF 0.63*1.02*0.21*1.44*1.70=33.01% 0.60*1.02*0.14*1.22*1.64=17.79% 0.66*1.01*0.04*1.04*1.54=4.30% 0.66*0.99*0.07*1.18*1.59=8.08%

ARO 0.62*1.03*0.13*3.09*2.02=50.73% 0.60*1.00*0.13*2.87*2.38=54.09% 0.60*1.00*0.17*2.81*2.01=58.13% 0.60*1.00*0.16*3.05*1.81=53.35%

URBN 0.68*1.04*0.15*1.32*1.49=20.93% 0.64*1.03*0.16*1.38*1.39=20.91% 0.64*1.02*0.17*1.18*1.39=18.71% 0.65*1.01*0.18*1.27*1.32=20.16%

GPS 0.62*1.07*0.08*2.01*1.66=18.35% 0.61*1.02*0.11*1.92*1.75=22.33% 0.61*1.00*0.13*1.78*1.72=23.76% 0.61*1.01*0.13*2.08*1.58=26.84%

AEO 0.63*1.06*0.20*1.64*1.35=28.99% 0.61*1.05*0.12*1.50*1.43=16.70% 0.70*0.98*0.11*1.38*1.43=14.26% 0.62*0.93*0.11*1.58*1.28=12.42%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2008 2009 2010 2011

ANF

ARO

URBN

GPS

AEO


7/30/2019 AEOS2011-4

32/39

Comparable Approach

Company Name Ticker MarketCap($mm) PriceDilutedEPS($/Share)

Book ValuePer Share Revenue PerShare EV($mm) EBITDA($mm)

American EaglesOutfitters, Inc

AEO 3,080 15.84 0.7 6.95 14.8 2410 462.81

Abercrombie andFitch

ANF 5,220 59.7 1.67 21.67 39.39 2310 506.21

Aeropostale, Inc ARO 2,120 24.31 2.49 4.95 26.18 1,900 442.67

Urban Outfitters, Inc URBN 4,970 30.24 1.6 8.58 13.63 4820 514.01

Gap, Inc GPS 13,650 22.71 1.88 6.73 23.06 1,168 253


7/30/2019 AEOS2011-4

33/39

Comparable Approach (Con.)

Company Name Ticker P/E P/B P/S EV/EBITDAAmerican EaglesOutfitters, Inc

AEO 22.63 2.28 1.07 5.21

Abercrombie and Fitch ANF 35.75 2.75 1.52 4.56

Aeropostale, Inc ARO 9.76 4.91 0.93 4.29

Urban Outfitters, Inc URBN 18.90 3.52 2.22 9.38Gap, Inc GPS 12.08 3.37 0.98 4.62

Average Multiple 19.12 3.64 1.41 5.71

Ave P/E* EPS(AEO) 13.39

Ave P/B* BPS(AEO) 25.31

Ave P/S*RPS(AEO) 20.95

Triangulation Price Weight Weighted priceP/E 13.4 0.20 2.68P/B 25.31 0.05 1.27P/S 20.95 0.05 1.05DCF Value 15.49 0.70 10.84

Triangulated Value $15.83


7/30/2019 AEOS2011-4

34/39

Discounted Cash Flow Results

1/29/2012 1/29/2013 1/29/2014 1/29/2015 1/29/2016Net Income 210.51 229.45 245.51 257.79 265.52D&A 148.93 162.33 173.70 182.38 187.85Capex (90.00) (96.19) (102.80) (109.87) (117.42)Changes in NWC (7.77) (9.09) (7.70) (5.89) (3.71)Cash Flow 261.67 286.51 308.71 324.41 332.24Terminal Value 3644.42

Free Cash Flow 261.67 286.51 308.71 324.41 3976.66Enterprise Value $3,098.00Net Debt Outstanding 0Shares Outstanding 199.98

Share Price $15.49

Discount Rate 12.39%Terminal GrowthRate

3.00%

7/30/2019 AEOS2011-4

35/39

Sensitivity Analysis

Discount Factor15.49 11% 11.50% 12% 12.39% 12.5% 13.00% 13.5% 14.0%

2% 16.7 15.8 15.0 14.4 14.3 13.6 13.0 12.4

2.5% 17.4 16.4 15.6 14.9 14.8 14.0 13.4 12.8

3% 18.2 17.1 16.2 15.5 15.3 14.5 13.8 13.2

3.5% 19.1 17.9 16.9 16.1 15.9 15.1 14.3 13.6

4% 20.2 18.8 17.6 16.8 16.6 15.7 14.8 14.1

4.5% 21.4 19.8 18.5 17.6 17.4 16.3 15.4 14.6

TminGowhRe

7/30/2019 AEOS2011-4

36/39

DuPont AnalysisDuPont AnalysisTaxBurdan InterestBurden OperatingProfit Margin AssetTurnover Leverage ROE2009 0.61 0.93 0.11 1.58 1.28 16.70%2010 0.7 0.98 0.11 1.38 1.43 14.26%2011 0.62 0.93 0.11 1.58 1.28 12.42%2012 0.62 1.00 0.11 1.55 1.43 14.88%2013 0.62 1.00 0.11 1.55 1.42 14.80%

2014 0.62 1.00 0.11 1.53 1.41 14.41%

0%

20%

40%

60%80%

100%

120%

140%

160%

180%

200%

2009 2010 2011 2012 2013 2014

Tax Burdan

Interest Burden

Operating Profit

Margin

Asset Turnover

Leverage


7/30/2019 AEOS2011-4

37/39

Recommendation

DCF Valuation Range: $13.08- $19.45 withBase case share price at $15.49

Triangulated Value at : $15.83

Current Market Price: $16.22

Sell 500 shares @ current market price

7/30/2019 AEOS2011-4

38/39

Current Portfolio Allocation

27.51%

10.03%

11.37%12.98%

14.08%

17.70%

6.33%

AEO

DOJKHY

MCD

MOS

WAG

WFR

7/30/2019 AEOS2011-4

39/39

Unrealized Gains

Initial Position500 shares @ $9.07

1500 shares @ $5.23

RecommendationSell 500 shares

78.83%

210.42%

aeos2011-4

Documents