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American Eagle Outfitters Review: Financial Analysis & Market Prospects

Detailed review of American Eagle Outfitters' financial statistics, market performance, growth strategies, and stock market prospects. Includes company background, macroeconomic analysis, EPS sensitivity, free cash flow calculation, combined sensitivity, considerations, and a strategic recommendation.

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American Eagle Outfitters Review: Financial Analysis & Market Prospects

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  1. American Eagle Outfitters Review for partial sale April 21st, 2005 By Adam Freda

  2. Introduction • We currently own 3000* shares of American Eagle and purchased shares on three separate dates: • 200 shares on 12/10/99 at $44 • 200 shares on 3/10/00 at $27 • 600 shares on 5/3/00 at $15 5/8 • Total cost of position = $23,575.00 • Market value of position - $78,140 for a gain of $54,565 as of 4/20/05 market close of $26.38 • *3/2 stock split on 2/26/01, 2/1 stock split on 3/8/05

  3. Relevant Financial Statistics • 52 Week Range: $12.66 - $30.45 • Market Cap: 4.04B • P/E: 17.68 • EPS (ttm): $1.49 • Dividend: $.20 • Dividend Yield: 0.72%

  4. Brief Background • Lifestyle retailer that designs, markets, and sells casual clothing for 15 to 25 year olds • Distribution • Stores • E-Commerce Business • Catalogs • Products • Jeans and Cargo Pants • Graphic T-shirts • Accessories • Outerwear • Footwear

  5. Brief Background (cont’d) • Continue expansion throughout the United States and Canada by filling in existing markets • U.S. • AE opened 37 new stores in the during fiscal 2004 • Operates a total of 777 stores in 49 states • Plans on opening 2 new stores in Alaska • Canada • Opened 5 stores in Canada in fiscal 2004 • Operates a total of 69 • Looking for a long term potential of 80 stores across the country

  6. Macroeconomic Review • AE operates in the services sector and the retail (apparel) industry • Competitors include The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear, Aeropostale, and The Buckle • Fashions at all these retailers are subject to short-term fads as well as long-term trends

  7. Macroeconomic Review • March 2005 • Revenue increased 38.5% to a record $184.6 million, compared to $133.3 last year • Comparable store sales increased 29.2% for the March period • 1st Quarter • Revenue increased 39.8% to $311.5 million, compared to $222.8 million last year • Comparable store sales increased 30.5% for the nine-week period • Based on strong March results, the company is raising its first quarter earnings guidance to a range of $0.30 to $0.31 per share

  8. Stock Market Prospects (cont’d)

  9. Stock Market Prospects (cont’d)

  10. Stock Market Prospects (cont’d)

  11. Stock Market Prospects (cont’d)

  12. Company Strategy • 2004 – Looking forward • Enthusiastic about the opportunity for sales and earnings growth • Return to the level of sales productivity and profitability that the company and its brands were built to generate • Improve merchandise assortments to provide a clear and focused point of view at target customers

  13. Company Strategy (cont’d) • Remodel stores and increase square footage from 4,000 to 6,000 • Remodeled 36 stores in fiscal 2004 • Sell merchandise through its e-commerce site, www.ae.com • Ships internationally to 24 countries, allowing AE to compete in locations that it doesn’t have physical stores

  14. EPS Sensitivity • Healthy EPS growth at 12% revenue growth, 2% and 7% are much less attractive • Cost of goods sold and margin estimates are also not aggressive in the model

  15. Free Cash Flow Calculation • Above is a free cash flow sensitivity analysis for various levels of revenue growth • Note the +/- 10% range

  16. Combined Sensitivity • Low P/E = 10 • Current P/E in Market = 18 • Industry P/E = 20 • Wide range of prices when revenue growth and P/Es are sensitized • Low revenue growth caps the price

  17. Considerations • Add to position • Downsides • Volatile industry that is very dependent on the overall health of the economy and consumer spending • Short-term fashions, which revenue growth depends on, are difficult, if not impossible, to predict • Already significantly exposed to American Eagle as well as the fashion retail sector • Sell all • Downsides • AE is still posting positive guidance • If AE is able to grow at the expected rates, there is still solid growth left in the stock

  18. Recommendation • Sell 600 shares of American Eagle at the market as a first step to selling up to one-half of our position total • Due to the fast appreciation, AE represents about 25% of our total portfolio • We can lock in some gains and diversify the portfolio into other areas in which we have no exposure

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