american eagle outfitters presented december 5, 2002
TRANSCRIPT
American Eagle American Eagle Outfitters Outfitters
Presented December 5, 2002
SummarySummary
Purchasing History– 300 shares on December 10, 1999 for $29.33– 300 shares on March 10, 2000 for $18– 900 shares on May 3, 2000 for $10.42
Current Trading Price – Past 30 days has fluctuated between $15.48 and $20.17– Today’s trading price has fluctuated between $15.91
and $17.90
Summary (cont.)Summary (cont.)
Prior reasons for purchasing – Constant increase in EPS– Better performance and margins than its peers– Excellent website for convenient shopping– P/E ratio below the historic average– Strength in the industry
Specialty Store Retail IndustrySpecialty Store Retail Industry
Traditionally ….– Specialty store retails have been more volatile
than other retail sectors– Customers are more fashion sensitive than
department store and discounter store customers
Specialty Stores in the Present Specialty Stores in the Present Economic EnvironmentEconomic Environment
Recently the shopping environment in this sector has been mostly promotionally driven rather than due to any underlying strength in the consumer
Current markdowns in the industry have provided a boost to volume and total sales, yet margins are suffering
What is American Eagle What is American Eagle Outfitters?Outfitters?
Specialty retailer of casual apparel, accessories, and footwear for men and women ages 16-34.
Vertically-integrated retailer that designs and markets a versatile line of timeless and relaxed clothing like jeans, khakis and t-shirts.
Located in urban mall settings.
Past GrowthPast Growth
During fiscal year 2001 AE Outfitters … – Opened 81 new stores in the US, initiating their
presence in Southern California– Opened 46 new stores in Canada– Renovated 40 stores in the US– Opened a new design center– Established a network between AE stores for improved
customer service and store communication.– Ran their first national TV ads during back-to-school
and holiday seasons
Past Growth (cont.)Past Growth (cont.)
AE Outfitters also …– Successfully absorbed their first major acquisition and
now operates 112 Bluenotes/Thriftys stores in Canada. Bluenotes/Thriftys has a younger more urban-inspired teen
demographic (ages 12-22)
– Expanded their website AE.com to include expanded size ranges, easier checkout and a Wish List function
AE.com was ranked by a third party research firm (comScore Networks) as generating the highest conversion rate among their direct competitors.
Potential GrowthPotential Growth
2002 plan to open 80 new stores in US and 10 stores in Canada
AE has opened 22 new stores in the US this fiscal year and 10 in Canada
Long-term goal is to operate 1,000-1,200 stores in the U.S. giving several more years of expansion possibilities
Total stores in operation in the US is now 700
Porters 5 ForcesPorters 5 Forces Bargaining Power of Suppliers – LOW
– Vertically Integrated System– Suppliers are wools, dyes, etc.
Bargaining Power of Customers – LOW– No one customer is big enough to influence price– The influence comes from the economy as a whole
Threat of New Entrants – LOW– Takes a lot of time and capital to build up a name brand like AE
Threat of Substitutes – MEDIUM to HIGH– Other name brands– Other style of clothing
Rivalry Between Existing Players - HIGH
Net Sales ’97-’01Net Sales ’97-’01
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Stock MovementStock Movement
Stock Movement (cont.)Stock Movement (cont.)
American Eagle OutfittersAmerican Eagle Outfittersin the Newsin the News
Citing weak performance in its men's clothing line, AE Outfitters same-store sales fell 6.5%, including a 30.1% decline for their Bluenotes/Thriftys chain.
American Eagle expects a low single-digit decline in comparable store sales in December and reaffirmed that it expects to post earnings of 56 cents per share for the fourth quarter. The company earned 60 cents per share in last years fourth quarter.
The Word on the StreetThe Word on the Street
Lehman Bros : Taking down the full-year EPS estimate to $1.23 per share, following the company's sub-par November sales results. AEOS ended the month on a poor note. We expect higher promotional activity in December. Maintain Equal-weight rating.
Warburg Dillon Read : AEOS' consolidated November same store sales declined 6.5%, below our expectations of a comps decline of 2-4% and versus easy year-ago comps of (10)%. We continue to recommend shares of AEOS as we continue to believe that opportunity for improvement in Spring 2003 is significant.
Common-Size Balance SheetCommon-Size Balance SheetFiscal Year 2000 and 2001 (Ended Feb. 3, 2001 and Feb. 2, 2002)As a % of Total Assets
2000 2001ASSETSCurrent Assets:Cash & Equiv 24.57% 26.82%Short Term Investments 5.14% 6.70%Accounts Receivable 5.43% 2.62%Inventories 15.48% 13.54%Deferred inc. taxes 4.58% 3.02%Prepaid expense 3.47% 3.49%TOTAL Current Assets 58.68% 56.19%Property Plant & Equipt 33.77% 38.31%Goodwill, net 4.90% 3.56%Other Assets 2.66% 1.93%TOTAL ASSETS 100.00% 100.00%
LIABILITIESCurrent Liabilities:Accounts payable 7.74% 5.81%Current portion of note payable 0.79% 0.60%Accrued Compensation and payroll taxes 4.70% 4.09%Accrued Rent 4.16% 4.43%Accrued Income and Other Taxes 5.47% 3.63%Unredeemed stored gift certificates 2.41% 2.61%Other Liabilities and Accrued Expenses 2.19% 1.11%Total Current Liabilities 27.46% 22.29%Notes Payable 4.58% 2.88%Other long-term liabilities 0.24% 0.20%TOTAL LIABILITIES 32.29% 25.37%
Shareholders' EquityPreferred Stock 0.00% 0.00%Common stock 0.13% 0.11%Additional pain in capital 21.86% 22.48%Retained Earnings 50.51% 56.46%Accumulated other comprehensive income (loss) 0.07% -0.28%Treasury Stock 4.11% 3.69%Deferred Compensation 0.74% 0.44%Total Shareholders Equity 67.71% 74.63%
Liabilities + Shareholder Equity 100.00% 100.00%
Consolidated Income StatementsConsolidated Income StatementsYears ended February 1, 2000, 2001 and 2002(In thousands, except per share amounts)
1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Sales 832,104 1,093,477 1,371,899 1,454,213 1,599,634 1,871,572 2,189,739 2,518,200 2,870,748 Year over year sales growth 41.61% 31.41% 25.46% 6.00% 10.00% 17.00% 17.00% 15.00% 14.00%Cost of goods sold 475,596 657,252 824,531 901,612 991,773 1,160,375 1,357,638 1,561,284 1,779,864 % of sales 57.16% 60.11% 60.10% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00%Gross profit 356,508 436,225 547,368 552,601 607,861 711,197 832,101 956,916 1,090,884Gross Margin 42.84% 39.89% 39.90% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%
Depreciation and Amortization Expense 12199 23200 41875 46,443 51,087 59,772 69,934 80,424 91,683 % of PPE 12.65% 16.25% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%Selling, General and Administrative Expenses 194,795 266,474 339,020 363,553 399,909 467,893 547,435 629,550 717,687 % of sales 23.41% 24.37% 24.71% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%Operating Income 149,514 146,551 166,473 142,605 156,865 183,532 214,733 246,942 281,514 Year over year growth (gross income) 71.75% -1.98% 13.59% -14.34% 10.00% 17.00% 17.00% 15.00% 14.00%Net Operating Margin 17.97% 13.40% 12.13% 9.81% 9.81% 9.81% 9.81% 9.81% 9.81%
Other, net (160) 6,249 2,772 1,141 0 0 0 0 0Income before provision for income taxes (EBT) 149,354 152,800 169,245 143,746 156,865 183,532 214,733 246,942 281,514Provision for income taxes 58,694 59,042 63,750 54,623 59,609 69,742 81,598 93,838 106,975Tax Rate 39.30% 38.64% 37.67% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%Net income 90,660 93,758 105,495 89,122 97,256 113,790 133,134 153,104 174,539Year Over Year Net Income Growth 3.42% 12.52% -15.52% 9.13% 17.00% 17.00% 15.00% 14.00%
Weighted Avg. Shares outstanding 69,555 69,652 71,529 72,244 72,967 73,696 74,433 75,178 75,929Basic earnings per common share 1.30 1.35 1.47 1.23 1.33 1.54 1.79 2.04 2.30Diluted earnings per common share 1.24 1.30 1.43 1.24Cash dividends per common share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
FORECAST>>
CompetitorsCompetitorsAEOS ARO ANF GPS Industry
P/E (ttm) 15.02 NA 14.1 74.13 31.21EPS (5 yr growth rate) 75.05% NA 43.54% NA 20.49%Current Ratio (mrq) 2.57 1.84 2.14 1.82 2.1ROA (ttm) 13.96% NA 23.19% 2.23% 9.85%ROE (ttm) 18.80% 15.96% 30.86% 6.20% 19.11%Gross Margin (ttm) 39.11% 33.53% 40.89% 31.03% 33.89%Profit Margin (ttm) 6.53% NA 11.90% 1.40% 4.48%Operating Margin (ttm) 10.91% 10.11% 19.60% 2.62% 7.85%
AEOS = American Eagle OutfittersARO = AeropostaleANF = Abercrombie & FitchGPS = Gap
DuPont AnalysisDuPont Analysis
ROE (NI/Equity) NI/Pretax NI Pretax NI/Sales Sales/Assets Assets/Equity2000* 34.28% 60.70% 17.95% 2.35 1.342001* 25.50% 61.36% 13.97% 2.01 1.482002* 21.01% 62.33% 12.34% 2.04 1.34
* For fiscal years ending January 29, 2000; February 3, 2001; February 2, 2002
American Eagle Outfitters
DuPont Analysis (cont.)DuPont Analysis (cont.)
ROE (NI/Equity) NI/Pretax NI Pretax NI/Sales Sales/Assets Assets/Equity2000* 48.09% 59.97% 24.20% 2.25 1.472001* 37.41% 60.56% 21.10% 2.10 1.392002* 28.33% 60.88% 20.30% 1.77 1.29
* For fiscal years ending January 29, 2000; February 3, 2001; February 2, 2002
ROE (NI/Equity) NI/Pretax NI Pretax NI/Sales Sales/Assets Assets/Equity2000* 34.28% 60.70% 17.95% 2.35 1.342001* 25.50% 61.36% 13.97% 2.01 1.482002* 21.01% 62.33% 12.34% 2.04 1.34
* For fiscal years ending January 29, 2000; February 3, 2001; February 2, 2002
American Eagle Outfitters
Abercrombie & Fitch
Weighted Average Cost of CapitalWeighted Average Cost of Capital
Terminal WACC used is 16.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007Beta 2.33 2.33 2.33 2.33 2.33 2.33 2.33 2.33 2.33Risk-Free Rate (10-Year Treasury) 5.80% 5.90% 5.01% 4.50% 4.50% 4.65% 4.90% 5.15% 5.15%Market Rate of Return 10% 10% 10% 10% 10% 10% 10% 10% 10%Cost of Equity k=rf + B[E(rm) - rf] 15.59% 15.45% 16.64% 17.32% 17.32% 17.12% 16.78% 16.45% 16.45%Cost of Debt 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%Notes Payable (Debt) 0 24889 19361 20135 20941 21778 22650 23556 24498Other Non-Current Liabilities 0 1315 1366 8700 9048 9410 9786 10178 10585Total Debt 0 26,204 20,727 28,835 29,989 31,188 32,436 33,733 35,083 Mkt Value Equity (#shares x $market price, all split adjusted) 1,627,587 2,605,503 1,782,550 1,343,880 1,466,534 1,715,844 2,007,538 2,308,668 2,631,882 Total Firm Value (V) 1,627,587 2,631,707 1,803,277 1,372,715 1,496,522 1,747,033 2,039,974 2,342,402 2,666,965 (Debt)/(Debt+Equity) Based on Book 0.00% 6.34% 3.71% 3.29% 2.95% 2.64% 2.36% 2.12% 1.90%(Equity)/(Equity+Debt) Based on Book 100.00% 93.66% 96.29% 96.71% 97.05% 97.36% 97.64% 97.88% 98.10%WACC 15.59% 14.60% 16.10% 16.81% 16.87% 16.72% 16.44% 16.15% 16.18%
Discounted Cash Flow AnalysisDiscounted Cash Flow Analysis
1999 2000 2001 2002 2003 2004 2005 2006 2007 Terminal
Net Income $90,660 $93,758 $105,495 $89,122 $97,256 $113,790 $133,134 $153,104 $174,539Minus changes in Net Working Capital $69,656 $29,553 $32,508 $38,034 $44,500 $51,175 $58,339Minus Capital Expenditures $87,825 $119,347 $72,711 $79,982 $93,579 $109,487 $125,910 $143,537Equals Free Cash Flow $294,498 $191,385 $209,746 $245,403 $287,121 $330,189 $376,416 $2,982,370
Terminal growth rate 3.00%
Present value of FCF at WACC $191,385 $179,474 $180,132 $181,884 $181,437 $177,847 $1,224,091Sum of PV of FCF $2,316,252Less Outstanding Debt -$28,835Present value of Equity $2,287,416Divide by Outstanding shares=value/share $31.50read this as a range +or- 10% to the value $28.35 $34.65
RecommendationRecommendation On the positive side …
– Constant increases in net sales, gross profit and EPS– Better performance and margins than its peers– Excellent website for convenient shopping– Growth opportunities created through acquisitions
On the negative side …– Pressure being put on the industry– Constant decrease in % increases in net sales, gross
profit and EPS– Setbacks created by acquisitions
RECOMMENDATION: HOLD