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American Eagle Outfitters. Review for partial sale April 21 st , 2005 By Adam Freda. 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
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American Eagle Outfitters Review for partial sale April 21st, 2005 By Adam Freda
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
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%
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
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
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
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
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
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
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
Free Cash Flow Calculation • Above is a free cash flow sensitivity analysis for various levels of revenue growth • Note the +/- 10% range
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
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
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