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Learn about American Eagle Outfitters, a leading US apparel retailer targeting ages 15-25. Gain insights into its growth strategy, industry competition, macro trends, and financial analysis.
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American Eagle Outfitters (AEO)Presented December 2, 2008 Brian Bird Matt Byford Brandon Lee Christina Lu
Overview • Company Overview • Industry Overview • Macroeconomy • Financials • Valuation • RCMP Portfolio • Recommendation
Company Overview • American Eagle Outfitters a leading apparel retailer in the US • Design, market, and sell own brand • Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics • Targets ages 15-25 • Sell to US (1977), Canada (2001) and 41 foreign countries • Venues: Primarily mall-based, limited stand-alone and internet sales • 2006: introduced 2 new brands • Martin+OSA as a separate brand targeting age 25-40 • Aerie as a sub brand selling intimates for women • 2008: www.77kids.com • Targets 2-10 year olds • As of Feb 2008 it operated 987 stores • 929 AE stores in US and Canada • 39 Aerie stand-alone stores • 19 Martin+OSA
Growth Strategy • Fiscal 2008 goals: • Open 80 stand alone aerie stores • Open 40 new AE stores • Open 15 Martin + OSA stores • Remodel 40-50 existing AE stores • 10% expected square footage growth
Industry Overview • Competition: individual and chain specialty stores, as well as the casual apparel and footwear departments of department stores and discount retailers • Key Competitors: • Abercrombie & Fitch: 20 year olds, high price • Aeropostale: younger teens, low-mid price • GAP: 20-30, mid-high price • American Eagle: 20 year old, mid price
Retail Risks • Consumer preferences • Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns • Seasonality • The fourth and third quarters have historically provided 60% net sales & 65% of net income Due to the year-end holiday season and back-to-school selling season.
Macro Trends • Tight credit markets • AEO: $300 million tied up in auction rate securities • Retail sector struggling • Consumer confidence extremely low • Opportunity to benefit from cheaper lease agreements in this economic downturn
Porter 5 Forces • The threat of substitute products • There are several substitutes for American Eagle clothing. However, the propensity for buyers to substitute are not as high. • The threat of the entry of new competitors • The barriers of entry are not high. However, AEO has a strong which makes its threat to new competitors lower. • The intensity of competitive rivalry • There are competitive rivalries among stores and the possibility for new companies to add too the rivalries, but because of AEO’s strong brand name the probability of new, competitive rivalries is low. • The bargaining power of customers • Customers have high bargaining power because there are several substitutes to the products that American Eagle provides. • The bargaining power of suppliers • AEO deals mainly with the textile commodities therefore suppliers it is hard for the supplier to have bargaining power over AEO.
Marketable Securities • Three Types: • Debt held to maturity • Trading Securities • Assumed to be held for a short term profit • Typically, only financial institutions hold trading securities • Available-for-sale securities • An intermediate class of securities tied to a specific cash need • Ex. AEO purchased available-for-sale securities to finance its repurchase program
Auction Rate Securities • A debt security that is sold through a Dutch auction. The auction rate security (ARS) is sold at an interest rate that will clear the market at the lowest yield possible. This ensures that all bidders on an ARS receive the same yield on the debt issue.(source: investopedia.com) • In early 2008, the ARS market had grown to over $200 billion, roughly half of it being owned by corporate investors. • In February 2008, the auction market failed and most ARS have been frozen since then.
AEO Auction Rate Securities Exposure • As of August 2, 2008, AEO had $689.0 million in cash and cash equivalents, short-term investments, and long-term investments. • $332.6 million net investments in auction rate securities • In the first half of the year, the company experienced failed auctions for 49 ARS issues. • During the same time period, the company sold 33 ARS issues at par plus accrued interest at $84.9 million.
Cash Flow Statement:Investing Activities • 2005: Net purchases of $311 million in available for sale securities • 2006: Net purchases of $437 million in available for sale securities • 2007: Net sales of $354 million in available for sale securities
Multiple Analysis • AEO
Football Chart Implied price $11.00~13.00
DCF: WACC • Beta taken from Yahoo! Finance • Share price of $8.59 as of mid-day Tuesday, December 2, 2008. • Total debt includes $75 million in demand borrowings
DCF: • Assumptions: • -10% growth in sales. • Squeeze margins by increasing cost of sales to 55%.
DCF: DCF Price: $12.14 +/- 10%: $10.93 - $13.36
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 • November 7th 2006 • SLD 400 shares at $39.19 • December 28th, 2006 • 3-2 Split • November 2007 • SLD 450 shares at $22
Current Position • Currently own 1500 shares at $8.59 (Mid-day Dec. 2, 2008) • Unrealized gain of $5,000 (64%)
Recommendation • BUY 1000 Shares of AEO at Market Price • Cost of purchase: $8,590, bringing the total position to $21,475. • The average cost per share: $6.57 (previously $5.23) • The DCF values the company at a range between $10.93 and $13.36. • The company is currently trading at about $8.60 (20% to 35% discount to the model). • Currently represents about 4.75% of the portfolio. The addition would make AEO 7.60% of the portfolio. • Recommend average costing into the position as consumer confidence remains weak.
