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American Eagle Outfitters, Inc. AEOS

American Eagle Outfitters, Inc. AEOS. By, Matthew McDonnell Presented 11-15-2005. Outline. Today, I will be discussing American Eagle Outfitters, Inc. (AEOS), which is currently a major part of our client’s portfolio.

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American Eagle Outfitters, Inc. AEOS

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  1. American EagleOutfitters, Inc.AEOS By, Matthew McDonnell Presented 11-15-2005

  2. Outline • Today, I will be discussing American Eagle Outfitters, Inc. (AEOS), which is currently a major part of our client’s portfolio. • In addition to evaluating the firm itself, I will briefly compare American Eagle Outfitters to some of its major competitors. • Third, I will discuss several stock valuation methods, as well as other issues facing the firm. • Finally, I will give a recommendation regarding what should be done, if anything, regarding our holdings in American Eagle Outfitters.

  3. Macroeconomic Review • Currently middle of earnings seasons • Energy prices, although falling, still at relatively high levels • Rising interest rates affecting markets • Energy-driven inflation, questionable consumer confidence • Many retailers reported slow start to 05 holiday season, sales now growing stronger

  4. American Eagle Outfitters- Vision • “We will be a highly profitable, international, multi-channel retail organization” • “We will grow through a portfolio of our own distinct and segmented casual lifestyle apparel brands” Source: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available at http://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf

  5. American Eagle Outfitters- Industry Classifications Sector: Consumer Discretionary Industry Group: Retailing Industry: Specialty Retail Sub-industry: Apparel Retail Industry: Multiline Retail Sub-Industries: Internet Retail, Catalog Retail Adapted from: Standard and Poor’s GICS Map, effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')

  6. American Eagle Outfitters- GICS Sector Description Consumer Discretionary Sector: “The GICS Consumer Discretionary Sector encompasses those industries that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment. The services segment includes hotels, restaurants, and other leisure facilities, media production and services, and consumer retailing and services.”1 1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at: javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')

  7. American Eagle Outfitters’ Business • American Eagle is a “leading lifestyle retailer that markets and sells [its] own brand of relaxed, casual clothing.” • Target audience: 15-25 year-olds • Operates 846 stores in the US & Canada • Located primarily in malls, with emphasis on “A” center stores in especially high-traffic areas • Purchases merchandise from suppliers who either make it themselves or buy from producers. Source: Corporate Profile- About AE, American Eagle Homepage, accessed Nov. 07, 2005, available at: http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-homeprofile

  8. American Eagle Outfitters- Products Sold Source: American Eagle 2004 Annual Report

  9. American Eagle Outfitters- Locations By State Source Data: American Eagle Homepage Map from Yahoo! Travel

  10. American Eagle Outfitters- International Sales Base Source: American Eagle 2004 Annual Report

  11. American Eagle Outfitters- Brand Positioning Source: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available at http://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf

  12. American Eagle Outfitters- 2004 Accomplishments • 31% increase in sales (21% comparable store sales) • 171% increase in operating income • Nearly doubled market share in specialty denim • 2nd most purchased brand by target market • Increased US store base by 5% • 40% of new stores on the West coast Source: American Eagle 2004 Annual Report

  13. American Eagle Outfitters- 1st Half 2005 Performance • Significant gains in teen brand popularity • Seen as “3rd coolest brand for teens” • Second most often shopped specialty brand for denim • Comparable store sales up 20% over 1st half 2004 • 80% growth in EPS • Slow start to holiday season, downgraded Q3 earnings, later upgraded to original projections of $0.45-$0.46 per share Sources: American Eagle Outfitters- Latest Wall Street Presentation, Oct. 27, 2005. available athttp://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf American Eagle Outfitters, Form 8-K filed Sept. 20, 2005

  14. American Eagle Outfitters- Looking ForwardPlans for 2005 and Beyond • Expansion • New “flagship stores in NYC, Seattle” • Expansion into Alaska, Hawaii, Canada, Puerto Rico • Still focused on Western, Southwestern US • Evidenced by purchase of new distribution facility in Ottawa, K.S. • New operating system used to streamline distribution Source: American Eagle Outfitters 2004 Annual Report

  15. American Eagle Outfitters- Looking Forward(cont.) One of American Eagle’s most significant plans for the future is the recent unveiling of its new brand, Martin and Osa • Unveiled 10/20/2005, Scheduled to debut in malls in Fall, 2006 • Will operate as its own business segment separate of American Eagle brand. • Targeted to men, women age 25-40 • This is outside AE’s traditional 18-25 market • Possibly explains move to Southwest US • Will include “classic sportswear” • Described by "a union of everything that is right about classics, denim, and active sportswear” • Using former Abercrombie & Fitch designers to head project Source: American Eagle Outfitters Announces Name of New Concept: MARTIN + OSA, American Eagle Homepage, accessed Nov. 1, 2005, available at: www. http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-newsArticle&ID=770357&highlight=

  16. American Eagle Outfitters- Financial Analysis Items of note include: 1. Increasing Liquidity -- ↑Current Assets, ↓Non-current Assets • Possible Implications: planned expansion, anticipation of bad season. • Decreasing COGS as % Net Income • Implication: Irregularities with respect to inventory management/sales • Stainable decline? Not likely.

  17. American Eagle Outfitters- Stock Performance vs. S&P 500 (5yrs)

  18. American Eagle Outfitters- Stock Performance vs. Competitors (5yrs)

  19. American Eagle Outfitters’ Competitors • The Limited • The Gap • Abercrombie & Fitch • Aeropostale • Pacific Sunwear

  20. American Eagle Outfitters- Comparable Performance Competitor Data: Yahoo! Finance, accessed Oct. 27, 2005, available at http://www.finance.yahoo.com

  21. American Eagle Outfitters- An RCMP Holding • Bought on 3 occasions: 12/1999, 03/2000, 05/2000 • Sold 25% of holdings in 04/2005 • As of Nov. 7, 2005, AEOS constituted 9% of the portfolio’ book value and 20% of the portfolio’s market value. • Since its initial purchase, the stock price has climbed 329% • Realized gain= $11.054.60 • Unrealized gain= $41,620.00

  22. American Eagle Outfitters- Porter’s 5 Forces

  23. American Eagle Outfitters- SWOT Analysis

  24. American Eagle Outfitters- Impact of Tariffs On Inputs

  25. American Eagle Outfitters- Portfolio Diversification Source: Adapted from Dow Jones Indexes, Component Weightings, accessed Nov. 5, 2005, available at http://www.djindexes.com/mdsidx/index.cfm?event=showComponentWeights&rptsymbol=DJI&sitemapid=20 Standard and Poor’s GICS Map, effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')

  26. American Eagle Outfitters- Portfolio Diversification (cont.) Q) Why is RCMP’s concentration in American Eagle Outfitters a cause for concern? • Remember the GISC definition of the Consumer Discretionary Sector: The GICS Consumer Discretionary Sector encompasses those industries that tend to be the most sensitive to economic cycles.1 1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at: javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')

  27. American Eagle Outfitters- Questionable Employee Management • Four American Eagle Outfitters employees Pennsylvania, Illinois, and New Jersey have alleged their former employers “violated certain federal and state minimum wage and related laws.”1 • “American Eagle Outfitters, denying the allegations made by the employees has entered into a Settle Agreement for an unspecified amount.”2 • Although it is unlikely the settlement will have any significant impact on earnings or stock price in the near future, it raises questions regarding pervasive improprieties within the company. 1. Notice to Eligible Employees, Court of Common Pleas, Allegheny County, Penn., p.1, Received Nov. 9, 2005. 2. Id. at 1.

  28. American Eagle Outfitters- Relative Stock Valuation Data from: Yahoo! Finance, accessed Nov. 5, 2005, available at www.finance.yahoo.com

  29. American Eagle Outfitters- EPS Implied Stock Price

  30. American Eagle Outfitters- Intrinsic Value Assume a “reasonable” average growth rate in net income, say 8% Holding costs proportional, this generates an intrinsic value of $21.52. This is below the market price of $25.32 Holding other factors constant, net income would have to grow at a rate of appox. 50% annually!

  31. American Eagle Outfitters- Review Macroeconomic Issues • Relatively high energy prices • Questionable consumer confidence Microeconomic Issues • Firm plan anticipates launch of its new label in fall 2006 • Huge growth in FY 2004 • Questionable management relating to employee compensation • Priced at discount to the market • Overvalued according to EPS method • Overpriced according to Intrinsic Valuation method • Very sensitive to changes in CAPEX spending, an area that may change dramatically with continued expansion, launch of new label Other Issues • Portfolio diversification • With American Eagle constituting 20% of the RCMP market portfolio, we are susceptible to significant idiosyncratic risk • This sector is, by definition, very susceptible to cyclical nature of the economy

  32. American Eagle Outfitters- Recommendation Based on the factors just listed, I feel we should sell 29% of our holdings, or 700 shares of American Eagle Outfitters at the market. American Eagle is a solid firm relative to the industry in which it operates and I believe it provides good exposure to a market that indeed still has potential for growth. Our remaining 1,700 shares should provide us with this exposure

  33. The End Questions?

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