Presentation Transcript

1. American EagleIndustry: Apparel Stores

   By: Nick Cecero
2. Enterprise Operations Enterprise Operations- The business or production activities undertaken by the company. For example, the purchase of bonds as investments for American Eagle would not be considered part of enterprise operations. On the other hand, if J.P. Morgan Chase is purchasing bonds as an investment this would be considered part of their enterprise operations. Financing Activities- The borrowing or lending activities undertaken by a company. Reformulation- is what will separate the income and expenses and the assets and liabilities associated with these two activities. The reformulation will help us arrive at the enterprise value of the company which is the value that should be looked at instead of strictly looking at equity value because enterprise value encompasses not only equity value but also the value owed to creditors or more commonly referred to as net financing liabilities. This is why it is so important to understand the business environment in which the company you are valuing operates in by using ways such as Porter’s Five Forces, SWOT Analysis, and even Life Cycle Stages as analysis tools.
3. Enterprise Operations Net Enterprise Assets (NEA)- We will go item by item on the balance sheet in order to figure out whether the assets or liabilities contained on American Eagle’s balance sheet are associated with their enterprise operations. (Enterprise Assets – Enterprise Liabilities) Net Financing Liabilities (NFL)- Items that are not part of their enterprise such as investments will not be included in the net enterprise asset calculation but it is still important to calculate this number because it can be used a check to compute common shareholder’s equity to make sure it ties out the balance sheet number. (NEA + NFL = Common Shareholder’s Equity) Enterprise Profit After Tax (EPAT)- As opposed to the NEA calculation EPAT entails going through the a firm’s income statement to determine which items are associated with the enterprise operations. Financing Expenses After Tax (FEAT)- The major role this number will play is when we calculate the cost of capital as a part of equity valuation. This number can also be used as a check in order to make sure that when you reformulate your income statement that your comprehensive income ties out to the income statement. (EPAT – FEAT = Comprehensive Income)
4. Overview of American Eagle’s Enterprise This is important because it will enable us to better analyze what items should be included in the our calculation of enterprise operations. This will be especially important as to when we calculate EPAT and why the loss from discontinued operations is included in the enterprise operations for the 2012 fiscal year only. This is important because depending on their growth strategy what may have not been once considered part of their enterprise could very well be included depending on their growth strategy.
5. Enterprise Assets Cash & Cash Equivalents Merchandise Inventory Assets held for Sale Accounts Receivable Prepaid Expenses and other Deferred Income Taxes P,P, & E Intangible Assets Goodwill Non-current deferred income taxes Other Assets
6. Calculation of Cash Cash (2% Threshold) Net Sales = $3,475,802,000 X .02 Necessary Cash = $69,516,040 Current Cash = $509,119,000 - $69,516,040 Excess Cash = $439,602,960 (Financial Asset)
7. 2% Threshold Sufficient? For the current fiscal year and for the year prior the 2% threshold for cash is sufficient although going forward I believe that this number should actually be increased due to certain business risk factors. These risk factors include increased raw materials, labor, and energy costs, consumer preferences, and economic pressures, and lack of consumer confidence.
8. Calculation of EA Cash & Cash Equivalents $69,516,040 Merchandise Inventory $332,452,000 Assets held for Sale $0 Accounts Receivable $46,321,000 Prepaid Expenses and other $73,805,000 Deferred Income Taxes $58,230,000 P,P, & E $509,633,000 Intangible Assets $38,136,000 Goodwill $11,484,000 Non-current deferred income taxes $31,282,000 Other Assets $23,718,000 Total Enterprise Assets = $1,194,577,040
9. Financial Assets Included are two items: Cash and Cash Equivalents (Excess over the 2% of Sales) - $439,602,960 2) Investments- My reasoning behind not including investments as part of AEO’s enterprise operations is because they are not in the business of buying and selling securities but they are in the business of selling high quality clothing and accessories which we were able to infer from the Form 10-k and previous conference calls. $121,873,000 Total Financial Assets = $561,475,960
10. Enterprise Liabilities Accounts Payable $176,874,000 Accrued Compensation $65,533,000 Accrued Rent $77,873,000 Accrued Income & Other Taxes $29,155,000 Unredeemed Gift Cards $46,458,000 Other Liabilities$26,628,000 Non-current accrued income taxes $19,011,000 Other non-current liabilities $20,382,000 Total Enterprise Liabilities = $461,914,000
11. Financial Liabilities Included are two items: Current portion of deferred lease credits $13,381,000 Deferred Lease Credits $59,571,000 Total Financial Liabilities = $72,952,000 - The assumptions that I made as to why I did not include either item as part of enterprise operations is because these leases were simply the financing of transactions. All this represents is a creditor’s claim upon the enterprise operations.
12. Calculation of NEA & NFL Net Enterprise Assets = Enterprise Assets – Enterprise Liabilities NEA = $1,194,577,040 - $461,914,000 NEA = $732,663,040 Net Financial Liabilities = Financial Assets – Financial Liabilities $488,523,960 = $561,475,960- $72,952,000
13. Checking Our Work NFL is added instead of subtracted because AEO has more financial assets than liabilities and are actually net lenders. This was mainly due to excess cash which is usually die to anticipation of future expansion. Check: Net Enterprise Assets $732,663,040 + Net Financial Liabilities+$488,523,960 Common Stockholder’s Equity $1,221,187,000 (Ties Out)
14. Calculation of Enterprise Profit After Tax (EPAT) Revenue $3,475,802,000 Cost of Sales ($2,085,480,000) S,G, & A ($834,601,000) Loss on impairment ($34,869,000) Depreciation ($126,246,000) Other Income $7,432,000 Income Taxes ($137,940,000) Loss from discontinued Oper. ($31,990,000) Foreign Currency Translation $638,000 Enterprise Profit After Tax = $232,746,000
15. Financing Expenses After Tax (FEAT) Included three items: Realized Loss on sale of investment securities $0 Temporary Impairment related to investment securities $0 Reclassification adjustment for realized losses $0 - The reason as to why I did not include these three as part of AEO’s enterprise operations is because this realized loss is not the result of enterprise operating activities but rather just represent changes in value of certain investment securities and are therefore not included in EPAT.
16. Checking Our Work Check: Enterprise Profit After Tax (EPAT) $232,746,000 + Financing Expense After Tax (FEAT) +$0 Comprehensive Income $232,746,000
17. NEA and NFL 3 Years
18. EPAT & FEAT 3 Years
19. The End Any Questions?