american eagle outfitters presented by : linden lu yanlei xu yanlei xu gleb zarkh gleb zarkh mohamed...
DESCRIPTION
Company Overview American Eagle Outfitters is one of leading apparel retailers in US American Eagle Outfitters is one of leading apparel retailers in US Design, market, and sell own brand of laidback Design, market, and sell own brand of laidback Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics targeting age: targeting age: Sell to US (1977), Canada (2001) and 41 foreign countries Sell to US (1977), Canada (2001) and 41 foreign countries Venues: Primarily Mall-based, limited stand-alone and internet sales Venues: Primarily Mall-based, limited stand-alone and internet sales In 2006: introduced 2 new brands In 2006: introduced 2 new brands Martin+OSA as a separate brand targeting age Martin+OSA as a separate brand targeting age Aerie as a sub brand selling intimates for women Aerie as a sub brand selling intimates for women As of Aug 07 it operated 928 stores As of Aug 07 it operated 928 stores 919 AE stores in US and Canada (including 5 Aerie) 919 AE stores in US and Canada (including 5 Aerie) 9 Martin+OSA 9 Martin+OSATRANSCRIPT
American Eagle outfittersAmerican Eagle outfitters
Presented by : Linden LuPresented by : Linden Lu Yanlei XuYanlei Xu
Gleb ZarkhGleb Zarkh Mohamed Mohamed
IbrahimIbrahim11-14-200711-14-2007
Presentation Outline :Presentation Outline : Company overviewCompany overview Industry and competitorsIndustry and competitors RCMP position and historical transactionsRCMP position and historical transactions Macro economic view Macro economic view Firm risks and growth modelFirm risks and growth model ValuationValuation
Assumptions Assumptions DCFDCF Multiple valuationMultiple valuation
RecommendationRecommendation
Company OverviewCompany Overview American Eagle Outfitters is one of leading American Eagle Outfitters is one of leading
apparel retailers in USapparel retailers in US Design, market, and sell own brand of laidbackDesign, market, and sell own brand of laidback
Casual clothing including Jeans, Graphic T’s, accessories, Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basicsfootwear, outwear, basics
targeting age: 15-25targeting age: 15-25 Sell to US (1977), Canada (2001) and 41 foreign Sell to US (1977), Canada (2001) and 41 foreign
countriescountries Venues: Primarily Mall-based, limited stand-alone and Venues: Primarily Mall-based, limited stand-alone and
internet salesinternet sales In 2006: introduced 2 new brandsIn 2006: introduced 2 new brands
Martin+OSA as a separate brand targeting age 25-40Martin+OSA as a separate brand targeting age 25-40 Aerie as a sub brand selling intimates for womenAerie as a sub brand selling intimates for women
As of Aug 07 it operated 928 storesAs of Aug 07 it operated 928 stores 919 AE stores in US and Canada (including 5 919 AE stores in US and Canada (including 5 AerieAerie)) 9 Martin+OSA9 Martin+OSA
Company Overview Cont.Company Overview Cont. Revenue sourcesRevenue sources
Traditional AE storesTraditional AE stores New store opening (Matin+OSA, New store opening (Matin+OSA, AerieAerie) ) E-commerce (mainly to overseas customers)E-commerce (mainly to overseas customers)
Merchandise Mix (2006)Merchandise Mix (2006) Men’s apparel (35%)Men’s apparel (35%) Women’s apparel, accessories, intimates (60%)Women’s apparel, accessories, intimates (60%) Footwear for men and women (5%)Footwear for men and women (5%) Slightly shifts to women’s apparel from men’s Slightly shifts to women’s apparel from men’s
apparelapparel Economy and Consumer inspired growthEconomy and Consumer inspired growth
Retail Apparel IndustryRetail Apparel Industry Including retail stores and e-commerce Including retail stores and e-commerce
is highly competitive: quality, fashion, is highly competitive: quality, fashion, service, selection and priceservice, selection and price
Porter’s Five ForcePorter’s Five Force Entry of New Competitors: moderateEntry of New Competitors: moderate Threat of substitutes: highThreat of substitutes: high Bargaining power of buyers: moderateBargaining power of buyers: moderate Bargaining power of suppliers: lowBargaining power of suppliers: low Rivalry among existing competitors: highRivalry among existing competitors: high
CompetitionCompetition Competition: individual and chain Competition: individual and chain
specialty stores, as well as the casual specialty stores, as well as the casual apparel and footwear departments of apparel and footwear departments of department stores and discount retailers department stores and discount retailers
Key Competitors: Key Competitors: Abercrombie & Fitch: 20 year old, high priceAbercrombie & Fitch: 20 year old, high price Aeropostale: younger teens, low-mid priceAeropostale: younger teens, low-mid price GAP: 20-30, mid-high priceGAP: 20-30, mid-high price American Eagle: 20 year old, mid priceAmerican Eagle: 20 year old, mid price
Transaction HistoryTransaction History December 10, 1999December 10, 1999
BOT 200 shares at BOT 200 shares at $44.00$44.00
January 10, 2000January 10, 2000 BOT 200 shares at BOT 200 shares at
$27.00$27.00 May 3, 2000May 3, 2000
BOT 600 shares at BOT 600 shares at $15.63$15.63
February 23, 2001February 23, 2001 3-2 split3-2 split
March 8March 8thth, 2005, 2005 2-1 split2-1 split
April 25April 25thth, 2005, 2005 SLD 600 shares at $26.28SLD 600 shares at $26.28
November 16November 16thth, 2005, 2005 SLD 700 shares at $23.33SLD 700 shares at $23.33
November 7November 7thth 2006 2006 SLD 400 shares at $39.19SLD 400 shares at $39.19
December 28December 28thth, 2006, 2006 3-2 Split3-2 Split
RCMP position:RCMP position: Currently own 1,950 shares of AEO, Currently own 1,950 shares of AEO,
trading at $22 as of Nov 12trading at $22 as of Nov 12thth, 2007 for an , 2007 for an unrealized gain of $32,710 or 321.04%.unrealized gain of $32,710 or 321.04%.
RCMP portfolio composition
Cash36%
DFS1%
FR10%
JKHY3%
KMB5%
MVSN3%
CPRT9%
AEO11%
AEE6%
SRCL6%
SRZ5%
WAG5%
Cash
AEE
AEO
CPRT
DFS
FR
JKHY
KMB
MVSN
SRCL
SRZWAG
AEO represents AEO represents 11.2% of the 11.2% of the portfolioportfolio
Correlation matrix AEE AEO CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFS
AEE 1AEO -0.03 1.00CPRT 0.38 0.20 1.00FR 0.30 -0.03 0.28 1.00JKHY 0.22 0.38 0.40 0.12 1.00KMB 0.36 0.10 0.48 0.08 0.31 1.00MVSN 0.16 0.41 0.32 0.21 0.55 0.03 1.00SRCL -0.13 0.11 -0.02 -0.06 0.08 -0.01 -0.12 1.00SRZ 0.11 0.21 0.41 0.18 0.38 0.00 0.46 0.04 1.00WAG 0.06 0.13 0.08 -0.15 -0.02 0.24 -0.05 0.09 -0.17 1.00DFS 0.31 0.28 0.10 -0.02 0.40 -0.18 0.80 -0.55 -0.61 -0.11 1.00
Macro Economic outlookMacro Economic outlook 2007
• Weakest level since October 2005 (After Hurricane Katrina)
• 3 consecutive declines sum to -15% from July's 6 year high.
• Housing recession, the financial (sub prime) mess and higher oil prices are all contributing.
Slowdown in 2008Slowdown in 2008
ARMs Reset in 2008
Price of Oil Price of Corn
Business riskBusiness risk Consumer’s preferencesConsumer’s preferences
The ability to satisfy customers’ demand and changing The ability to satisfy customers’ demand and changing preferences is a primary source of business risk.preferences is a primary source of business risk.
Changes in fashion trends could lead to lower sales, Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could excess inventories and higher markdowns, which could negatively affect AEO.negatively affect AEO.
Sales per gross square feet
0100200300400500600
2002 2003 2004 2005 2006Years
Sale
s
American eagle Abercrombie Gap
Business riskBusiness risk Seasonality :Seasonality :
The fourth and third quarters have The fourth and third quarters have historically provided 60% net sales & 65% historically provided 60% net sales & 65% of net income Due to the year-end holiday of net income Due to the year-end holiday season and back-to-school selling season.season and back-to-school selling season.
The recent credit crunch , higher oil prices The recent credit crunch , higher oil prices would affect the consumer spending, thus would affect the consumer spending, thus affect over all sales for 2007affect over all sales for 2007
Growth modelGrowth model AEO growth model depends onAEO growth model depends on
Growth from new store openingsGrowth from new store openings Comparable sales growth Comparable sales growth E-commerceE-commerce
For the new store openingsFor the new store openings AEO is looking for opportunities of growth in its 2 new AEO is looking for opportunities of growth in its 2 new
brands specially the Aerie Brand brands specially the Aerie Brand They believe that there is strong growth potential in the They believe that there is strong growth potential in the
intimates market .intimates market .
New stores 2006 2007E 2008E 2009E 2010E 2011ETraditional AE stores 41 28 20 15 12 10
Martin+Osa 5 10 10 12 14 16
Aerie 3 20 30 30 25 22
Total 49 58 60 57 51 48
Growth modelGrowth model Based on our view of the economy Based on our view of the economy
we expect a slow down in growth of we expect a slow down in growth of sales by AEO specially in 2008.sales by AEO specially in 2008.
Refer to excel sheet for further Refer to excel sheet for further explanation of the growth modelexplanation of the growth model
DCF valuationDCF valuationWACC Calculations:WACC Calculations:
BetaBeta 1.211.21EquityEquity 100%100%
WACCWACC 12.4712.47
Key assumptionsKey assumptions Revenue Growth RateRevenue Growth Rate20072007 20082008 20092009 20102010 2011201115.91%15.91% 11.46%11.46% 13.96%13.96% 13.16%13.16% 12.63%12.63%
Capital ExpendituresCapital Expenditures20072007 20082008 20092009 20102010 20112011250250 120120 120120 125125 130130
Depreciation/AmortizationDepreciation/Amortization20072007 20082008 20092009 20102010 2011201198.898.8 116.0116.0 126.8126.8 138.1138.1 149.8149.8
DCF valuationDCF valuation
DCF valuationDCF valuation
Cost Of Goods SoldCost Of Goods Sold20072007 20082008 20092009 20102010 2011201154.5%54.5% 55%55% 55%55% 55%55% 55%55%
SG&ASG&A20072007 20082008 20092009 20102010 2011201123.89%23.89% 23.89%23.89% 23.89%23.89% 23.89%23.89% 23.89%23.89%
Terminal Growth RateTerminal Growth Rate 4%4%
Key assumptionsKey assumptions
DCF ValuationDCF Valuation DCF yields stock price $19.74DCF yields stock price $19.74 Sensitivity AnalysisSensitivity Analysis
Multiple Valuation:Multiple Valuation:
Company P/E Price/Sales Price/Book Price to FCF
American Eagle 11.9 1.56 3.4 38.22
Aeropostale 15.4 1.23 5.36 18.27
GAP 20.47 0.97 2.95 33.27
Abercrombie 15.59 1.82 4.35 37.79
Industry 16.17 1.15 4.91 36.02
Multiple Used 15 1.4 4 36
IMPLIED PRICE: $23- $25
RecommendationRecommendation Sell 450 shares at Market price Sell 450 shares at Market price
Market price is $22 as of 12Market price is $22 as of 12thth Nov 07 Nov 07 Why sell ? Why sell ?
DCF shows slightly overvalued although it was based DCF shows slightly overvalued although it was based on optimistic assumptionson optimistic assumptions
Relatively low betaRelatively low beta Growth from new store openings and e commerce.Growth from new store openings and e commerce.
Why not all the position?Why not all the position? Multiple valuation shows undervalued Multiple valuation shows undervalued The stock’s return converge towards the industry mean The stock’s return converge towards the industry mean
returnreturn Diversification benefitsDiversification benefits
RecommendationRecommendation
RecommendationRecommendation
SourcesSources Briefing.comBriefing.com http://www.conference-board.org/ecohttp://www.conference-board.org/eco
nomics/nomics/ConsumerConfidenceConsumerConfidence..cfmcfm
http://www.http://www.bubbleinfobubbleinfo.com/statistics-2007/.com/statistics-2007/