1 / 52

American Eagle Outfitters (AEOS)

American Eagle Outfitters (AEOS). Dan DeRose Matthew McDonnell. 14-November-2006. Presentation Outline. Company overview RCMP Position Macroeconomic/Market overview Industry overview Porter’s 5 forces Firm strategy/development Stock performance Portfolio “fit”

elmo
Download Presentation

American Eagle Outfitters (AEOS)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. American Eagle Outfitters(AEOS) Dan DeRose Matthew McDonnell 14-November-2006

  2. Presentation Outline • Company overview • RCMP Position • Macroeconomic/Market overview • Industry overview • Porter’s 5 forces • Firm strategy/development • Stock performance • Portfolio “fit” • Firm financial performance • Historical cycles and margin analysis • Relative ratio analysis • DuPont Decomposition • Valuation • Margin, ratio & multiple analysis • Discounted cash flow (DCF) • Recommendation

  3. Part 1: Company overview

  4. American Eagle Outfitters- The Business • Business: Specialty clothing retail • Product: Casual clothing (tops, bottoms), intimates, footwear, outerwear, accessories, and fragrances • Target customers: • AEOS= 15-25yrs • Martin + Osa= 25-40 • Venues: Primarily mall-based stores with limited stand-alone stores and internet sales • Geography: • Stores in all 50 states, Puerto Rico, and Canada • Limited online sales to locations outside USA

  5. Company Overview • 1994: • Incorporated as Natco Industries Inc. • 1999: • Adopts present name • 2000: • Bought 3 Canadian businesses • Thriftys/Bluenotes, Braemar, National Logistic Services • 3-2 Stock spit • 2004: • Thriftys/Bluenotes sold • 2-1 Stock split • First ever dividends paid • 2005: • Announces launch of Martin + Osa, Arie • Dividends raised • 2006: • Much of National Logistic Services

  6. Part 2: RCMP Position

  7. RCMP Position • Transaction history • 10-Dec-1999: • BOT 200 shares at $44.00 • 10-Jan-2000: • BOT 200 shares at $27.00 • 3-May-2000: • BOT 600 shares at $15.63 • 23-Feb-2001: • 3-2 split • 8-Mar-2005: • 2-1 split • 25-Apr-2005 • SLD 600 shares at $26.28 • 16-Nov-2005 • SLD 700 shares at $23.33

  8. RCMP Position • Gains/losses • Book value of holdings= $13,504 • Realized capital gains= $21,842 • Unrealized capital gains= $ 65,454 • Market value of holdings= $ 78,778 • Portion of portfolio MV= 22.70%

  9. Part 3: Macroeconomic and Market Overview

  10. Macroeconomic/Market Overview • Macroeconomic overview • Economic growth in Q2, Q3 2006 lower versus previous year

  11. Macroeconomic/Market Overview • Consumption spending • Weak y/y summer • Strong y/y fall

  12. Macroeconomic/Market Overview • Clothing and shoe spending steady since 2003 • 2006 Q1, Q3 stronger y/y, 2006 Q2 significantly weaker

  13. Macroeconomic/Market Overview • Clothing and shoe spending very non-cyclical • Although we do not have data for specialty clothing retailers such as AEOS, we would likely expect much more sensitivity to changes in real GDP growth

  14. Part 4: Industry Overview

  15. Industry Overview- Specialty Clothing Retailers

  16. Part 5: Firm Strategy and Development

  17. Firm strategy/development • Open 45-50 stores per year • Remodel and/or relocate 45-50 stores per year until all 160 stores in old format are updated • Renovated stores achieved an annual sales increase of 46% on a 29% increase in square footage • Sustain momentum and position brand • Jeans became number one specialty store brand purchased – doubling market share since 2003 • Focus on knit business such as polo's, graphic Ts and tank tops

  18. Firm strategy/development • Product Mix • Product mix has remained constant last several years with slight shifts toward women’s apparel and accessories at the expense of men’s apparel and accessories

  19. Firm strategy and development • Continue to develop aerie • Sub-brand of intimates (bras, panties, dormwear, and personal care) that is consistent with the AE lifestyle • Real estate strategy consists of integrated, side-by-side, and stand-alone stores

  20. Firm strategy and development • Develop Martin + Osa • New brand aimed at designing sportswear for the 25-40 year old customer • Opened 4 stores in August, plan on opening 10-15 in 2007

  21. Firm strategy and development • Expanding distribution centers in Kansas to support further growth of AE and Martin + Osa

  22. Firm strategy and development • Recently, the firm has stressed expansion into the Southwest US 2000 2002 2004 2005

  23. Part 6: Stock Performance

  24. Stock Performance • Current Price : 47.50 • 52 Week Range: 19.45 – 47.48 • Stock price up 203% since January 3rd • Dividends • Quarterly dividend increased to $0.113 from $0.075 in 2nd quarter

  25. Stock Performance • AEOS has outperformed S&P and NASDAQ for 5 yr. and 6 mo. intervals

  26. AEOS has outperformed competitors ANN, ANF, and LTD for 5 yr. and 6 mo. intervals Stock Performance

  27. Part 7: Portfolio Fit

  28. Portfolio Fit- Diversification • AEOS, our largest holding, comprises 22% of market value of portfolio (November 7th) • As shown in the graphs on the right, this concentration is due to high relative AEOS appreciation • Our next largest holdings are JPM and FR at 13% each

  29. Portfolio Fit – Correlation Matrix Note: Table assumes equal-weighted portfolio

  30. Portfolio Fit – Appraisal Ratio • Appraisal ratio : Risk-adjusted measure of excess returns provided by a security = alpha/(std error^2) • Suggests user add (short) the security if alpha is significant and appraisal ratio is greater than alternatives

  31. Portfolio Fit – Appraisal Ratio Note: All values are significant at 90% confidence Source Data: Yahoo! Finance

  32. Part 9: Firm Financial Performance

  33. Firm Financial Performance- Cyclicality and Margin Response • As shown in the right, AEOS went through a downturn in FY 2002 and 2003 • "Merchandise assortments not clearly focused on target customers" led to "higher markdowns and increased promotional activity”AEOS 2003 10-k p. 11 • What was margin response? • 2002: “We were also not able to leverage selling, general and administrative expenses as a result of the negative comp store sales”AEOS 2002 10-k p. 11 • 2003: "The decline in our gross profit margin was primarily due to the deleveraging of rent expense as a result of weak comparable store sales…”2003 10-K p. 11

  34. Firm Financial Performance- Relative Ratios • Profitability • Financial Strength/Liquidity

  35. Financial Management- DuPont Breakdown • Increases in ROE due primarily to greater profit margins (positive).

  36. Part 10: Valuation

  37. Valuation Method 1: Trading Multiples • Step 1: Establish list of comparable firms • Criteria used for choosing comparables: • Similar size (market cap) • Similar capital structure (Debt/Assets) • Similar dividend policy (retention rate)

  38. Trading Multiples • Step 2: Calculate average multiples • Step 3: Apply multiples for firm being valued

  39. Valuation Method 2: Discounted Cash Flow (DCF) Analysis- Base Case • Step 1: Forecast FCF • Step 2: Calculate WACC

  40. Discounted Cash Flow (DCF) Analysis- Base Case • Step 3: Calculate Terminal Value and Discount Cash Flows

  41. DCF Analysis- Base Case • Step 4: Subtract debt and divide by shares outstanding to arrive at intrinsic value

  42. DCF Analysis- Base Case Sensitivity Analysis

  43. However…

  44. DCF Analysis- Downside Scenario • The DCF value just presented assumes steady annual growth of approximately 15% • Although AEOS has demonstrated an ability to grow at extremely high rates (over 15%), one cannot forget the firm’s susceptibility to shifts in consumer preference (fashion)

  45. DCF Analysis- Downside Scenario • Let’s assume that for whatever reason, AEOS experiences a 2-year downturn in comparable store sales similar to the one experienced in 2002-2003

  46. DCF Analysis- Downside Scenario • Under this downside scenario, we see that the DCF-generated stock price decreases significantly

  47. DCF Analysis- Downside Scenario Sensitivity Test

  48. Valuation Methods Compared

  49. Part 11: Recommendation

  50. Recommendation • Firm direction • Martin + Osa • Margins • Diversification • Valuation • Trading multiples • The trading multiples approach suggests a price similar to that at which AEOS is currently trading • This price relies on the firm’s past sales, earnings, and free cash flow numbers and thus, would be prone to overvaluation, especially when used in a long-term investment decision • DCF • Although our DCF model is somewhat crude, we feel that the insight added by accounting for a downturn in sales shows, in a very dramatic way, the downside risk inherent in the company • In summary, we believe that American Eagle Outfitters’ strong performance in recent periods has caused unrealistic market expectations for the firm’s future performance, thus inflating the price

More Related