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American Eagle

American Eagle. Presented April 5, 2006 by Kevin Cowell and Narayan Subramanian

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American Eagle

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  1. American Eagle • Presented April 5, 2006 by Kevin Cowell and Narayan Subramanian • American Eagle Outfitters is a leading retailer that designs, markets and sells its own brand of laidback, current clothing for 15 to 25 year-olds, providing high-quality merchandise at affordable prices. AE's original collection includes standards like jeans and graphic T's as well as essentials like accessories, outerwear, footwear, basics and swimwear. • 798 stores in US and Puerto Rico • 71 stores in Canada

  2. Our AEOS Position • Our Original Position: • 12/10/1999 – Bought 200 Shares @ $44 • 3/10/2000 – Bought 200 Shares @ $27 • 5/3/2000 – Bought 600 Shares @ $15 5/8 • Stock Splits • 2/23/2001 – 3:2 • 3/28/2005 – 2:1 • Shares Sold: • 4/25/2005 – Sold 200 @ $26.28 and 400 @ $26.284 • 11/16/2005 – Sold 700 @ 23.33 • Average Position: • Adjusting for Splits and Buying at Different Prices our Position is equivalent to buying 1700 Shares @ $7.84 on Dec. 10, 1999

  3. Our Position (cont.) • Sold 1300 shares out of 3000 in the past year • Diversification of risk • Stock Price = $29.86 a/o March 31, 2006 • Current Value of AEOS position is $50,762 out of 294,749 for the Portfolio • ~17% of current portfolio • 280.97% Gain

  4. Macroeconomic Trends • Increased Energy Costs Causing Inflation • Consumer Confidence down from 106.8 to 101.7 • Consumers worried about job prospects and short-term health of economy • Increasing Interest Rates • Could Affect Spring Retail Sales Accordingly

  5. Retail Industry Outlook • Predicted 4.7% growth in retail sales for 2006 • Down from 6.1% from 2005 • Clothing retailers expected to see solid sales growth • 4.0 – 5.0% range * According to National Retail Federation’s 2006 Retail Sales Forecast

  6. Demographic Changes • 25-39 age group expected to grow 11% to 67 million people between 2005-2025 • 15-19 only expected to grow by 6% • New Opportunity for Retailers

  7. Store Openings/Closings • 2005 [CapEx = $83 m] • 36 Opened • 11 Closed • 43 Remodeled • 2006 (est.) [CapEx = $175] • Open 50 • Remodel 50 • 7% increase in sq. footage

  8. Martin + Osa • New stores owned by AE to target the 25-39 year old population • 4 Definite locations for Fall 2006 with 2 more stores pending • Tysons Corner Center (McLean, VA), Fashion Island (Newport Beach, CA), NorthPark Center (Dallas, TX) and San Francisco Center • Not test stores • Plan on opening 10-17 more stores in 2007 • 6,500 to 7,500 square feet/store • Possible $1B opportunity per year (about 50% of current Rev) • Long-term goal

  9. Product Life Cycle AE M+O

  10. Martin + Osa - Challenges • Very challenging demographic: • Different Tastes • Different Incomes • Already proven difficult for Abercrombie and GAP • Increasing Competition • Abercrombie- Ruehl • GAP- Forth and Towne • Polo- Rugby • Aeropostale- Jimmy’Z • J Crew • Banana Republic

  11. Ruehl by ANF • Failing entry into the 25-35 y.o. niche market • Already adjusting their strategy • Possibly falling into Gap’s blunders • Same products, different price tag • Can AE avoid this pitfall?

  12. Aerie by American Eagle • Focuses on bras, panties, and casual dormwear for girls and young women. • “Take girls from the dorm room to the coffee shop.” • Will incorporate the Aerie brand in existing stores through renovations to create a “store within a store.” • Also plan on constructing side-by-side and free-standing stores with about 900-1000 sq. feet per store • Short-term goal

  13. More Expansion • Many online sales going to Japan • AE is considering forming a partnership with an established Japanese retailer • 80-100 Stores • AE International • 530,000 sq foot increase in Kansas distribution center (est. $55M)

  14. AE Stock Prospects

  15. Cyclical Nature of Industry

  16. Q4 Conference Call • Overall Sales Increased 13.4% in 2005 from 2004 • Same-Store Sales up 8% • Margins Down • Gross Margin Down 2.97% • Op. Margin Down 2.68% • Net Margin Down .9% • Margins Decreased Due to Markdowns and Increased Warehousing Costs

  17. Valuation • See Spreadsheet • Intrinsic Value using Discounted Cash Flow Analysis = $24.49 +- 10% • Implied Stock Price Using EPS*P/E = $27.82 +- 10%

  18. Sensitivity Analysis

  19. Summary • Martin + Osa Uncertainty • Does Market Exist? • Other Ventures: • Aerie Intimate Brand • AE International • COGS Sensitivity • Forecasting Trends and Inventory • Can CAPEX Increases Drive More Sales?

  20. Recommendation • Final Recommendation: HOLD all 1700 shares • Too early to determine the impact of Martin + Osa, Aerie, and AE International on sales • Projects have the potential to become huge growth opportunities and profit drivers in the future • Share price was slightly overvalued using DCF Model and fairly priced using EPS Approach but both techniques did not account for potential sales growth due expansion activities but did take into account increased capital expenditures

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