Olamide EsanRon Yang

Michael LavinAndy Gaur

Kuralay SeitalinaAkrati Johari

Presented on October 29, 2009

I. Company OverviewII. Business StrategyIII. AssumptionsIV. ValuationV. Client PortfolioVI. Recommendation

Engages 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

AEO has branched out from its 15 to 27 year old customer segment in order to diversify and enhance the company's scope and scale. During 2006, AEO launched its sub-brands: aerie (lingerie) and Martin + OSA (sportswear) to target a broader customer base.

Aerie (lingerie)

MARTIN + OSA (Sportswear line targeting 28-40 year old women and men)

77 Kids (New Children’s apparel Brand)

Management meets expectations well.

http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-reportsannual( Accessed on October 15, 2009)

• Capstone strategy-• provide affordable clothing, accessories, and personal care

products that are of high quality and fashionable for kids, adults, and several demographics in-between.

• Primary growth strategies-• focus on real estate, effective branding and innovative new lines,

e-commerce, and procurement. The real estate strategy is two-fold in that American Eagle continues to open new stores-though this has slowed down due to the economy, and they are re-modeling (creating more square footage) their stores to enhance the customer experience.

• Through this strategy/business model American Eagle has been successful in gaining quality brand recognition and plans to reinforce their customer connection and increase focus on identifying emerging fashionable trends.

http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-reportsannual( Accessed on October 15, 2009)

As of January 31, 2009, American Eagle operated 1,098 stores in the United States and Canada including 954 American Eagle Outfitters stores116 Aerie stand-alone stores28 Martin + OSA stores

Opened 122 stores in 2008 vs 28 new stores in 2009

The company plans to remodel 25-35 stores to 7,000 sq.f. in 2009 either within the existing location or by upgrading the store location within the mall Square Footage Growth 3%

http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

Negative conditions in global credit markets and auction rate securities (ARS). ◦ Impacts AEO’s ability to liquidate its ARS holdings.

Global recession◦ High unemployment and decline in discretionary consumer

spending

Highly volatile energy prices

Interest rate risk

Foreign exchange rate risk

Government / Regulation◦ Disruption of imports affects merchandise sourcing.

http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

US apparel retail industry accounts for 30% of global apparel retail industry’s value with a compound annual growth rate of 4.4% from 2004 – 2008.

Generated total revenues of $307.5 billion in 2008, a growth of 3.8%

Womenswear sales is leading segment with $162 billion in total revenues and 52.7% of industry revenues.

Menswear generated $98.2 billion in 2008 and 31.9% of industry revenues.

Due to economic downturn, the performance of the industry is forecast to decelerate, with an anticipated CAGR of 3.6% for the five-year period 2008-2013.

http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

American Eagle- has branched out from its 15 to 27 year old customer segment in order to diversify and enhance the company's scope and scale. aerie (lingerie) and Martin + OSA (sportswear) to target a broader customer base. In order to enter new markets, the company has also entered into a partnership with an international retail operator (Alshaya) to open stores in the Middle East. This decision has the added benefit of reducing the effects of U.S. economic cycles on the company's bottom line.◦ Alshaya will open American Eagle Outfitter stores in the Middle East, with the first one set to

open in early 2010. The franchise will require no capital investment from AEO and will be operated primarily by Alshaya, however the deal promises substantial revenues for the company, which is attempting to target young, wealthy consumers in that region.

Abercrombie & Fitch- sells its clothing and accessories at a price premium. In addition, unlike almost every one of its competitors, the company has not engaged in "sales" (i.e., price discounting), which helps retain its image and keep its profit margins high. However, as the American economy entered a recession in 2008 which has continued into 2009 the company has found itself reassessing its pricing strategy and considering lowering average unit price in its stores.

Aeropostale- business model relies heavily on sales and promotions, something that AEO is trying to move away from in order to keep margins high.

The Gap Inc.- providing stylish clothes at affordable prices has been made more difficult due to the proliferation of fast fashion brands such as Zara, which specialize in trendier, more fashion-forward clothing which is more attractive to young consumers than Gap's affordable basics.

http://www.wikinvest.com/ (Accessed October 15, 2009)

American Eagle Outfitters- For the twenty six weeks ended 1 August 2009, revenues decreased 4% to $1.27B. Net income decreased 51% to $50.5M. Revenues reflect a decrease in comparable store sales. Net income also reflects a rise in cost of sales, including certain buying, occupancy & warehousing expenses, lower gross profit margin, an increase in depreciation & amortization expenses and the presence of other expenses vs. an income. AEO is revamping existing stores to improve operating efficiency. Additionally, analysts forecast greater inventory control contributing to lower costs and greater operating margins in the medium term.

Aeropostale, Inc.- For the twenty-six weeks ended 1 August 2009, Aeropostale, Inc.'s revenues increased 21% to $861M. Net income increased 82% to $70.3M. Revenues reflect an increase in same store sales. Net income also reflects an increase in gross margins.

Abercrombie & Fitch Co.- revenues decreased 23% to $1.26B. Revenues reflect a decrease in sales of Abercrombie & Fitch brand and lower sales of Abercrombie & Hollister brand. Net loss reflects a decline in the gross profit margins, higher stores & distribution expenses and a decline in the interest income, net.

The Gap Inc.- For the twenty six weeks ended 1 August 2009 revenues decreased 7% to $6.37B. Net income decreased 7% to $443M. Revenues reflect a decrease in sale volumes. Net income reflects decreased interest income and lower operating gross margins.

http://www.wikinvest.com/ (Accessed October 15, 2009)

http://www.wikinvest.com/ (Accessed October 15, 2009)

http://www.google.com/finance?q=aeo (Accessed October 23, 2009)

http://www.google.com/finance?q=aeo (Accessed October 23, 2009)

Cost of Equity, WACC and other AssumptionsSustainable growth rate g 3%             

Beta (google) 1.19        Wd = 2.37% 

Beta (yahoo) 1.08             

Beta (MSN money) 1.2        We = 97.63% 

Risk Free Rate 3.5%             

Equty risk premium 6%        WACC = 13.03%                  

Cost of equity 10.44%             

ROE average 20%             

Avg cost of Equity 13.31%             

                 

Market value of Equity 3,091,752             

Cost of Debt 2.90%             

                 

Market value of Debt 75,000             

Cash n equivlnts 473,342             

                 

Free Cash Flow calculations

                 

      Estimates  Fiscal Year 2007 2008 2009 2010 2011 2012 2013 2014

Net Income 400,019 179,061 308,258 312,598 342,011 374,760 411,145 

+ Depreciation and Amortization 109,203 131,219 142,113 154,363 166,613 178,863 191,113 

NWC 160,477 109,331 134,684 138,725 151,210 164,819 179,653  - changes in NWC   -51,146 25,353 4,041 12,485 13,609 14,834 

- Capex   -265,335 -122,500 -122,500 -122,500 -122,500 -122,500                   FCF   96,091 302,517 340,421 373,639 417,514 464,925  Terminal Value             4,645,639                  

Total FCF   96,091 302,517 340,421 373,639 417,514 5,110,563 

                                  

        Intr value Shares In Val/Share    

  NPV 3,874,684   3874684.2 207582 18.67    

                 

Company Ticker

Share Price

@ 10/26/

09MarketCapital

Trailing P/E

Forward P/E

Price/Sales

Price/Book

The Gap Inc. GPS 22.49 15.5 B 17.00 14.70 1.10 3.23

Abercrombie & Fitch

Co. ANF 36.14 3.18B 68.84 22.04 1.01 1.83

Aeropostale, Inc. ARO 42.33 2.84B 15.85 12.34 1.40 6.63

Trailing P/E Forward P/E Price/Sales Price/Book

Low 15.85 12.34 1.01 1.83

Average 33.90 16.36 1.17 3.90

High 68.84 22.04 1.40 6.63

http://finance.yahoo.com/ (Accessed October 24, 2009)

American Eagle Outfitters

Earning per share 0.93

Revenue per share 14.251

Book value per share 7.123

Diluted shares 207.38 m

American Eagle Stock Price Using Multiples

  Trailing P/E Forward P/E Price/Sales Price/Book

Using Min 14.74 11.48 14.39 13.03

Using Average 31.52 15.21 16.67 27.76

Using High 64.02 20.49 19.95 47.22

Current Share Price: $18.82

http://finance.yahoo.com/ (Accessed October 24, 2009)

Valuation Methods Stock Price WeightsDCF 18.67 60.00%

Trailing P/E 31.52 10.00%Forward P/E 15.21 10.00%Price/Sales 16.67 10.00%Price/Book 27.76 10.00%

     

 Triangulation

Value $20.32

  AEO WAG AEE CPRT DO FR JKHY KMB SRCL WFRAEO 1.00WAG 0.29 1.00AEE -0.02 0.32 1.00CPRT 0.14 0.07 0.13 1.00DO 0.18 0.14 0.27 0.25 1.00FR 0.31 0.33 0.55 0.20 0.24 1.00JKHY 0.21 0.13 0.27 0.22 0.10 0.41 1.00KMB 0.12 0.32 0.43 0.35 0.30 0.43 0.21 1.00SRCL 0.18 0.08 0.09 0.11 0.02 0.09 0.18 0.07 1.00WFR 0.19 0.14 0.13 0.28 0.44 0.14 0.16 0.07 0.08 1.00

Hold current position – 2,500 shares DCF values AEO between $17 - $20 AEO currently trading at $17.66

(Within the range of DCF on low end)

Multiples analysis puts AEO between $15-$30

AEO already ~ 14.3% of portfolio Remains a strong company with a light debt

load and an ability to generate ample cash flows.

I. Porter’s Five ForcesII. Auction Rate Securities

•Larger companies can take advantage of economies of scale, strong purchasing power, and strong brand names and engage in price wars.•Due to numerous players, each company has to continue reinventing itself by keeping ahead of consumer trends, and cultivating and maintaining customer loyalty. •Companies have to focus on efficiencies and inventory control. INTENSE RIVALRY

Large number of buyers weakens buyer power, but negligible switching costs strengthens it. MODERATE THREAT

•Clothing is a necessity. •Counterfeit clothing adversely affects revenues. LOW THREAT

•Many competitive suppliers. •Larger buyers purchase significant quantities and are in a position to dictate supplier prices. •Fairly low buyer switching costs and buyers can easily switch suppliers. LOW THREAT

•Entry does not require large capital outlay. •Readily available distribution channels. •Narrow profit margins due to high costs of materials, shipping and labor may deter entrants. LOW to MODERATE THREAT

http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

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.