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Presentation final ACC 602 Document Transcript

  • 1. Financial Statement Comparative Analysis Specialty Apparel Stores Gap, Abercrombie and Fitch, American Eagle, Urban Outfitters Wayne Anderman Adam Berk Rachelle Ginsberg Vince Rubiera
  • 2. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page i Table of Contents Executive Summary.....................................................................................................................................1 Economic Overview: .....................................................................................................................................4 Industry Overview.........................................................................................................................................7 Company Profiles........................................................................................................................................10 Urban Outfitters Inc. (URBN) ..............................................................................................................10 American Eagle Outfitters [AEO].........................................................................................................14 Gap, Inc. [GPS].....................................................................................................................................17 Abercrombie & Fitch [ANF].................................................................................................................21 Common Size Analysis ................................................................................................................................24 Income Statement...............................................................................................................................24 Balance sheet......................................................................................................................................26 Statement of Cash Flows.....................................................................................................................28 Ratio Analysis..............................................................................................................................................30 Activity and Efficiency Ratios..................................................................................................................30 Inventory Turnover .............................................................................................................................30 Days Inventory ....................................................................................................................................33 Receivables Turnover..........................................................................................................................35 Days Receivables.................................................................................................................................36 Total Asset Turnover...........................................................................................................................37 Liquidity Ratios........................................................................................................................................39 Operating Cycle...................................................................................................................................39 Accounts Payable Turnover ................................................................................................................41 Days Payable .......................................................................................................................................43 Cash cycle............................................................................................................................................44 Current Ratio.......................................................................................................................................46 Quick Ratio..........................................................................................................................................48 Solvency Ratios .......................................................................................................................................50 Debt Ratio ...........................................................................................................................................50 Debt to Total Capital Ratio..................................................................................................................53
  • 3. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page ii CFO/Total Liabilities............................................................................................................................55 CFO/Sales............................................................................................................................................57 CFO/Total Assets.................................................................................................................................59 Profitability Ratios...................................................................................................................................61 Gross profit Margin.............................................................................................................................61 Operating Margin................................................................................................................................62 Net profit margin ................................................................................................................................64 ROA .....................................................................................................................................................66 ROA Adjusted for After-Tax Interest...................................................................................................68 Operating ROA ....................................................................................................................................69 ROE......................................................................................................................................................71 DuPont Analysis / ROE Decomposition.......................................................................................................73 Credit Rating Evaluations............................................................................................................................75 Qualitative Credit Analysis Ratings .........................................................................................................75 Quantitative Credit Analysis to derive ratings from ...............................................................................75 Company Ratings ........................................................................................................................76 The Z-Score: Perspectives on Bankruptcy...................................................................................................78 Discounted Cash Flow Valuation – P/E Comments.....................................................................................80 GPS......................................................................................................................................................81 AEO......................................................................................................................................................83 URBN...................................................................................................................................................84 ANF......................................................................................................................................................85 DCF Summary......................................................................................................................................86 Quarterly (10Q) Commentary..................................................................................................................87 GAP:.....................................................................................................................................................87 AEO......................................................................................................................................................87 ANF.....................................................................................................................................................87 URBN ..................................................................................................................................................88 Appendix A: Common Size Statements ......................................................................................................89 Horizontal Common Size Income Statement – Last 5 Fiscal Years .....................................................89 Vertical Common Size Income Statement – Last 5 Fiscal Years..........................................................93
  • 4. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page iii Vertical Common Size Balance Sheet – Last 5 Fiscal Years.................................................................97 Horizontal Common Size Balance Sheet – Last 5 Fiscal Years ..........................................................101 Horizontal Common Size Statement of Cash Flows – Last 5 Fiscal Years .........................................105 Appendix B: Interim Quarterly Common Size Income Statements ..........................................................109 Appendix C: Sources .................................................................................................................................113
  • 5. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 1 Executive Summary The retail apparel industry will be facing a very challenging economic environment in the quarters to come. Competition is fierce; consumers are tightening discretionary and even some non-discretionary spending; there are recessive tendencies across the economy while the large pool of monetary access via refinancing of over priced real-estate for people has dried up. GDP numbers are down significantly, the Whitehouse has admitted to precarious times and layoffs loom on the horizon as financial market volatility make unemployment figures a potential future unknown again. The challenges to specialty retailers in order to keep and grow market share is to say the least, daunting. Gap has spent the past several years getting its hands around an effective management team and with new management finally in place should be able to solve critical issues such as its inventory control, cash flow trends and has already began the process of paying down large debt improving debt to equity ratios and reducing debt service coverage. The past same store sales comparisons have been negative for over 14 quarters, most recently coming in at a -6% and this is ubiquitous across all brands such as Old Navy and Banana Republic. Increases in marketing and advertising expenses for Old navy hopefully will drive sales at the stores as the spring season is already here. The proper indicators are already showing up in its margins and inventory management. Summarily Gap is the mature “mother of apparel retailers” in our group and is experiencing the pains that many mature enterprises do when reinventing themselves to new generations of consumers. American Eagle Outfitters has found its success with excellent target acquisition and refocus of the 15 to 25 year old demographic of both genders. It is one of the largest specialty retailers targeting this group. It‟s inventory flows are helping it keep itself in front of the competition and management‟s operating measures and margins are seen as resulting from rising net sales, same store comps in positive territory and new distributions channels adding immediate return to bottom lines. Sales rose over 9% to 3.06 billion for Fiscal 08 (number in after the finish of this report during editing) they are increasing store space and sales per square foot. If AEO can tactically maneuver through the precipitous times ahead then it is a very attractive proposition for
  • 6. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 2 investment at current levels in regard to its discounted cash flow. However as with all investments proven history is no guaranty of future performance only a forward looking assumption. Currently it has been noted that AEO also is competing with the consumer electronics and entertainment industry for their discretionary dollars. ANF seeking the teen and young 20‟s demographic as well plays in the consolidating world of retail. Department stores are losing share to mass merchandisers and the specialty groups such as ANF. 2006 saw incredible gains in same store (comp) increases at about 26% which quickly dropped off in 2007 to 2% which was driven by increases in transactions per store. Its Hollister chain remains a significant driver of growth and margin changes with over 1.4 billion in 2007 sales at $568 per square foot vs. its over all consolidate retail per square foot number of $500. Organically growing some of the world‟s most recognizable brands, keeping a firm grip on new store growth management has created “great supply and demand” economics within their own “iconic” brands, analysts note, while avoiding brand dilution. Financially it turned a negative same store sales growth number in 06. ROA, ROE and Return on Invested Capital came in at 21%, 34%, and 35% respectively for FY 07. They are successfully reducing operating expenses in SGA which should lend expanded margins for the upcoming year. ANF may be able to also weather the recession as management eyes international expansion with forward looking thoughts of a billion dollar opportunity. Urban Outfitters is last but not the least effective apparel retailer in the following comparative analysis. Its sales growth average of ~29.0% per year over the past five years marks management as being prudently focused. Sales in 2007 came in at only 12.1% increase however so an examination of what trends the company needs to proactively adjust or possibly adjust to might be addressed. There was a $139 million dollar increase in new store net sales. Consistent with GPS, ANF and AEO, URBN delivered increases in direct to consumer sales, of $23 million or 17%. However a decline of $50 million or 6.2% in comp sales (same store) should raise a flag. The question—not unique to the others—becomes what can URBN do to control these negative events in the face of a consolidating, competitive and possibly recessive economy possibly since the 1970‟s or if including currency stability for the dollar, the end of World War II. Margins show room for improvement is needed. In appealing to a market of 18 to 30 year olds as well as new concept launches targeting the 30-45 year old woman at Anthropologie, there is a multi
  • 7. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 3 brand positioning and differentiation platform in marketing URBN needs to manage successfully to. Is URBN reaching its own maturity level with significant declines in Return on Equity, Return on Assets and Return on Capital (30% or more) as of FY 2007? It is showing evidence of planning that may restore it on the path which once favored this retail icon. The market environment for specialty apparel retailers is now competing with consumer electronics in the new generations it serves. The aging generations it once served are moving on to retirement funding and expense planning versus the latest new linen pants, and in the slowing economy consumer spending or the lack of it may be a trying time for this industry in the near term.
  • 8. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 4 Economic Overview: US Economic data since the beginning of the year have generally come in below expectations raising the risk that we would slip into recession. President Bush‟s acknowledgement of faltering growth in the economy reinforces what is being perceived as precipitous economic times. Real GDP is being forecasted at investment banks and other capital market firms to slow to a 0.2% pace in Q1 2008 and a 0.8% growth in the second quarter. Fourth quarter 2007 growth stands a chance of being revised from 0.6% to around 0.3% percent. It is imperative to understand given these events a shock to GDP in the next quarter can push the economy into negative territory. These numbers may also be perceived as optimistic given the present state of affairs in the financial markets. The question of recession or not has many pundits. A popular definition of recession has been two back to back quarters of negative GDP growth. A recession, more broadly termed, is a decline in economic activity across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The National Bureau of Economic Research also defines it as a period beginning just after the economy reaches a peak of activity and ending as the economy reaches its trough. Conversely between trough and peak, the economy is in an expansion. For the past four recessions, the NBER decision has confirmed the definition involving two consecutive quarters of decline. However, the 2000 recession did not involve two consecutive quarters of decline as it was preceded with four quarters of alternating growth and decline. Yet it was a recession. This may be an event horizon we teeter on once again. But we are only students, not prognosticators. Economic conditions that have been noted to precede former recessions and are not rearing their heads presently: 1. Business Inventories were high and rising…not today as inventories are low and declining.
  • 9. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 5 2. The employment cost index was typically high and rising at the onset of most previous recessions leading to massive layoffs. ECI is reported as low and decelerating lessening the need for these. 3. Monetary policy at Bernanke‟s Fed has been expediently pro-active in response to the current slowdown with repeated cuts in fed funds. The economy is hosting conditions that have not prevailed in the past such as the sub-prime mortgage meltdown. “The growth of 3.8% and 3.9% posted, respectively, in the second and third quarters of 2007 could be reduced by more than half in the current three months “it was reported in Value Line at the end of Q3 2007. Following up for fourth quarter 2007 it was posed: “housing again will be a drag; we may see a decline in inventory investment; and it‟s likely that growth in consumer spending will slow markedly, owing to the negative wealth effect from falling home prices across the country. Looking ahead, it is estimated GDP growth will average just 2.0% in 2008, with quarter-to-quarter shifts in consumer spending, the balance of trade, inventories, and government spending leading to occasionally marked changes in growth.” In the present quarter, Q1 2008, the economic news has taken a turn for the worst. January showed weaker than expected employment reports. The Institute for Supply Management‟s manufacturing and non-manufacturing survey indices reflects business activity is at 41.9 for non- manufacturing while continuing a downward trend but a 50.7 for manufacturing shows a reversal with a rise above the 50 line. It is all very indicative of a country sliding towards recession or already in it. On one side this suggests the slowdown in the economy is tied to the major decline in residential construction, new and existing home sales, conservativism in consumer spending picking up, and paring back in inventories. Yet on the manufacturing side “exports are strong, as is commercial construction, government spending and business fixed investment” contributing positively to growth. The passing of the economic stimulus package in Congress will deliver rebate checks in May which directly affects disposable income and can fuel consumer spending to* a sizable jump in Q3 2008. We are truly a globalized economy. Recession has proved itself to be contagious in the past to foreign economies. It is believed that if the US takes a downturn for the worst then we will
  • 10. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 6 probably pull Mexico and Canada into a recession with us. The most direct reason would be weaker exports to the US and that would affect them first and worst in a severe downturn. Exports to the US are probably 25% of GDP in both of our neighbors. The European Union on the other hand is least exposed to the exports to the US as a percentage of GDP. It is suggested they are safe from a modest downturn in the US due to low export exposure. A severe one however would lead to weak growth if not recession. Finally the correlation between Chinese industrial production and US import growth is very low. Chinese economic growth is driven more by capital spending, migrations of workers from farms and rural areas to more productive work in factories. The growth rates would not be as susceptible as some might hope. It would appear that many countries are finally able to better withstand economic downturns in the United States. Such may be the power in economies that no longer incur deficits the way we have.
  • 11. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 7 Industry Overview Apparel Sector Retail family clothing stores originated in America during colonial times and were extensions of tailor shops. Since a variety of clothes was considered a luxury there were few stores relative to the burgeoning population. During the 1800‟s with expansion westward clothing retailers were mostly manufacturers selling through catalogs and with innovations in mass manufacturing stores began to operate separate from tailor shops. In the twentieth century, the small retail family clothing stores were replaced by regional chains and in the 1990‟s the rise of the nationwide chain stores. The industry was consolidating. Stores moved from smaller spaces in cities to the malls of urban spread in the suburbs where quantities of large and inexpensive space meant lower costs and higher profits for clothing retailers. On the heels of this were also the discount price clubs and warehouse stores as well as hypermarkets (Costco and Wal-Mart for example) Despite the growth in store size following the 1970‟s automation did little to change basic store operations. Computerized cash registers increased efficiency of money and inventory but were not fully deployed throughout the industry. The individual retailer did not have the capital to pay for: point of sale scanners that record the exact items sold down to color and size or related technologies as well as the costs of retraining employees. Consolidation helped change this as well. The retail apparel industry has made significant changes and marketing advancements over the years and the ability to do it well was key with research and promotion being primary factors. Marketing research traditionally came from understanding what sells the most or has the highest turnover. Monitoring of merchandise levels and inventory by staff and later supplementing the employee knowledge with electronic inventory controls such as point-of-sale scanners led to great retailer success. Gap is often used as the industry yardstick reflecting its early success as the fastest growing company in the sector during the early 1990‟s due to the high-tech distribution network that kept its than 1200 plus stores (over 3100 today). The industry frequently surveyed the effectiveness of television, radio and magazine advertisements as well.
  • 12. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 8 Low budgeting marketing strategies also work well in this industry from the store retailing such as Wal-Mart to the intra-brand lines of brands to capture wider demographic market share. Sales on one product line and advertising, courtesy and efficiency of staff in service, to location itself on malls where they could utilize off-price retailing allowed for the testing of new merchandise lines. This last strategy was especially helpful during the recessive economy of the late 1970‟s and early 1980‟s. Similarly in the late 1980‟s and early 1990‟s cheaper real-estate helped for the acquiring of large spaces needed to move enough volume to sustain strong profit margins. The weak real estate market helped start a trend of apparel retailers moving back into the cities where downtown areas sought to fill locations emptied during the 1980‟s. In 1992 the Gap was described by Business Week as “taking advantage of recessionary blues by locking up sweet lease deals, moving into downtown and urban neighborhoods and opening on the main streets of mid-size cities.” Currently the retail apparel makers have seen 1993 sales in the industry rise from 103 billion to 170 billion in 1997 to an estimated 3.5 billion in 2007 according to Value Line composite statistics and the Business Company Resource Center. Standard and Poor‟s forecasts a 5% sales growth for apparel retailers in 2007 and 2008 a reflection of slowing consumer spending offset by market share gains. These gains result from an anticipated channel migration from department store to the specialty format stores. Gap, Urban Outfitters, American Eagle Outfitter, and Abercrombie & Fitch are those we will cover in depth in this report. In 2006 the specialty channel expanded at 6.1% to capture 31% of the apparel market up from 30% in 2005. Total Apparel sales rose 5.1% in the same time frame according to FRD Fashion world Consumer estimated data. In the third quarter of 2007 further market share gains show the specialty channel up to 32%. Markups have expanded modestly as retailers abilities to source goods at lower prices have improved. Also SP notes that information technology enables retailers to apply science to markdowns resulting in improved merchandise margins. In rounding up the current state of the industry it is perceived that the demographic and economic underpinnings of a contracting economy lends to probable weak sales going forward. The S&P Apparel Retail Index in 2007, it should be noted, decreased 20% against an increase of 3.6% for the S&P 1500. From a population concerned with funding retirement, tuition costs and
  • 13. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 9 healthcare the larger part of discretionary and disposable income will be garnered. Those companies with strong brands that differentiate their lines, proved price-value propositions as well as superior customer service stand the better chance to prevail over the competition.
  • 14. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 10 Company Profiles Urban Outfitters Inc. (URBN) Urban Outfitters Inc. (URBN) is a merchandising company that operates specialty retail stores under the Urban Outfitters, Anthropologie and Free People brands. It also operates a wholesale division under the Free People brand. URBN has over 35 years of experience creating and managing retail stores that offer highly differentiated collections of fashion apparel, accessories and home goods in inviting and dynamic store settings. In 1970, Urban Outfitters opened its first store in Philadelphia. The first Anthropologie store opened in a suburb of Philadelphia in October 1992. Urban Outfitters expanded into Europe in 1998, with its first store located in London. In November 2002, the first Free People store was launched in the Garden State Plaza Mall in New Jersey. Urban‟s store strategy is to establish an emotional bond with the customer. In addition to the retail stores, they offer direct products through their web sites, www.urbanoutfitters.com, www.anthropologie.com, www.freepeople.com and www.urbanoutfitters.co.uk and also through the Urban Outfitters, Anthropologie and Free People catalogs. In 2007, the Direct-to-consumer sales were 12.6% of the net sales. Urban Outfitters targets young adults aged 18 to 30. URBN‟s target market is culturally sophisticated, self expressive and has a concern for acceptance. The product offering includes fashion apparel, footwear, accessories, and a mix of apartment wares and gifts. Each stores average size is 9,700 square feet and stock 30,000 to 35,000 SKUs. In 2007, URBN circulated approximately 11.4 million Urban Outfitters catalogs. This circulation increase helped expand distribution channels and increase brand awareness. There were 106 Urban Outfitters stores in North America and Europe as of January 31, 2007. They plan to open 16 new Urban Outfitters stores in 2008. For 2007, Urban Outfitters‟ store sales accounted for 38.9% of net sales. The environment at Anthropologie has attracts a sophisticated and contemporary women. Their targeted age group is 30 to 45. Anthropologie‟s products include: women‟s apparel, accessories, home furnishings, and decorative gift items. The home furnishings include: furniture, antiques, rugs, beds, gifts and lighting. Each store average size is 7,600 square feet and stocks 20,000 to
  • 15. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 11 25,000 SKUs. During fiscal 2007, Anthropologie circulated approximately 21.8 million catalogs. There were 93 Anthropologie stores in the United States January 31, 2007. Their expansion plans for 2008 are to open 16 new stores. For 2007, Anthropologie‟s store sales accounted for 35.9% of net sales. Free People retail stores offer Free People branded merchandise. This store targets young contemporary women between the ages of 25 to 30. Free People‟s merchandise is a mix of: women‟s apparel, gifts, and accessories. The average Free People store is 1,600 square feet. They stock 1,600 SKUs. During 2007, they circulated 3.3 million catalogs. As of January 31, 2007, there were eight Free People stores in the United States. Free People retail store sales are 1% of the consolidated net sales for fiscal 2007. The Free People wholesale division was established in 1984. This division‟s goal is to develop private label apparel lines that are sold at Urban Outfitters stores. The Free People wholesale division began selling to other retailers throughout the United States in order to achieve minimum production quantities. Free People‟s product lines are sold at 1,500 better department and specialty stores, including Bloomingdale‟s, Lord & Taylor, Nordstrom, Parisian, and Urban Outfitters. The Free People is label is how it has branded the clothing line. In 2007, Free People wholesale sales were 6% of net sales. 0 5 10 15 20 25 30 35 40 Division Company Sales % Sales Sales 38.9 35.9 1 12.6 6 5.6 Urban Outfitters Anthropologie Free People Direct-to- consumer wholesale division European
  • 16. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 12 Sales - 200 400 600 800 1,000 1,200 1,400 2007 2006 2005 2004 2003 Sales The majority of the merchandise purchased by the retail business of Urban Outfitters Inc. is shipped directly to the 191,000 square foot distribution center in Lancaster County, Pennsylvania. The distribution center is owned by the company and has an advanced computerized materials handling system. In March 2005, Urban Outfitters Inc. executed a long- term operating lease for an additional 459,000 square foot distribution that warehouses merchandised purchased by the wholesale and direct-to-consumer operations. Customer fashion trends change rapidly in the retail sector. URBN‟s success depends on the ability to predict fashion trends and implement them into the product offerings. If URBN is unsuccessful at predicting the trends, it leads to increased inventory levels and a need to markdown stale inventory. The wholesale business is more sensitive than the retail product lines because of increased lead times by the manufacture. URBN had sales growth 29.0% over the past five years. In 2007, sales were $1.2 billion which increased by 12.1% from $1.09 billion in the prior year. The $133 million increase was attributable to a $112 million or 10.7% increase, in retail segment sales. Free People wholesale sales contributed $21 million or 15.8%to the increase. The growth in 2007 was due to a $139 million increase in new store net sales and an increase in direct-to- consumer sales of $23 million or 17.7%. During the same period, however, there was a decline of $50 million or 6.2% in Urban Outfitters store sales. In 2007, Free People store sales increased 11.5% which was due to the opening of 32 new stores. The decrease in store sales was due to less transactions and a reduced sales price as an adjustment to retail trends.
  • 17. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 13
  • 18. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 14 American Eagle Outfitters [AEO] The first American Eagle Outfitters (AE) store was opened in 1977 by two companies, Retail Ventures and Natco Industries, principally owned by the Schottenstein family. The company was incorporated in Ohio in 1993. On January 2, 1994, AE obtained all of the assets and liabilities of the company‟s operations in exchange for stock. On April 13, 1995, the company completed an initial public offering of 10.35 million. The company was reincorporated in Delaware in April, 1999. AE currently operates 852 stores in 50 states, the District Columbia and Puerto Rico, and 74 AE stores in Canada. AE also operates ae.com. Direct sales come from the company's Web site and its AE Magazine, a lifestyle magazine which doubles as a catalog. The Pittsburgh PA based company was once a purveyor of outdoor gear, but AE now feathers its nest with polos and khakis. The mall-based retailer sells casual apparel and accessories (shirts, jeans, shorts, sweaters, skirts, footwear, belts, and bags) aimed at men and women ages 15-25. Virtually all of the company's products bear its private-label brand names: American Eagle Outfitters and AE. In addition to its namesake bran, American Eagle, the company has developed and announced plans for several new brand and concept initiatives poised to drive new growth as the American Eagle brand nears saturation in current markets. One already launched, being Aeire. Management is expanding aerie into centers where the core AE brand is running above average. It is believed that if the assortment holds up, aerie could generate sales per square foot of $450-500, up from $400 now. In 2001, the company acquired a Canada based retail concept called Bluenotes, which has approximately 100 stores. The concept targeted a slightly younger demographic, ages, ages 12- 22. Due to poor performance, the Bluenotes business was sold to YM Inc. in 2004. In 2006, Aerie was announced as intimate apparel lines targeting 15-25 year olds. The company also officially announced 77kids as its new concept and it is expected to greatly leverage off the AE brand in terms of style and value. The company plans to launch solely via the web in mid 08 followed with a handful of brick and mortar stores by the end of 08 and into 2009. In September 2005, American Eagle Outfitters announced the All-Access Pass customer rewards program. Customer‟s in-store through a simple sign-up process is given a physical “All Access Pass”, which is about the size of a credit card. Customers earn points when they present the card
  • 19. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 15 to the cashier at the store or enter the card number while checking out at AE.com. If you collect 50 points, you‟ll receive a 10% off coupon and it increase as you earn more pointes. American Eagle Outfitters is often compared to the clothing companies Aeropostale, Abercrombie and Fitch and Hollister, due to their similar styles, marketing techniques, and targeted consumer demographic. American Eagle emphasizes their date of establishment, 1977, in their marketing and design, branding the majority of their products with the date. 2007 Annual Results Total sales for the 52 weeks ended February 2, 2008 increased to $3.055 billion from $2.794 billion for the 53 week period ended February 3, 2007. Excluding sales from the additional week in fiscal 2006, total sales increased 9% for the 52 weeks ended February 2, 2008. Fiscal 2007 comparable store sales are compared to the 52 week period ended February 3, 2007. On this basis, comparable store sales increased 1%. Gross profit for the year increased to $1.423 billion, or 46.6% as a percent to sales, from $1.340 billion, or 48.0% as a percent to sales last year. Gross profit as a percent to sales declined 140 basis points, reflecting higher markdowns, an increase in delivery costs related to our direct business and the deleveraging of rent. These items were partially offset by lower product costs. Selling, general and administrative expenses of $715.2 million leveraged 40 basis points as a rate to sales to 23.4% from 23.8% last year. Within SG&A, incentive compensation and supplies leveraged, while advertising and professional services increased as a percent to sales. Operating income for the year was $598.8 million, compared to $586.8 million last year. As a percent to sales, operating income was 19.6%, compared to 21.0% last year. For the year, net income was $400.0 million, compared to $387.4 million last year. As a percent to sales net income was 13.1% compared to 13.9% last year. PITTSBURGH, Mar 12, 2008 (BUSINESS WIRE) -- American Eagle Outfitters, Inc. (AEO) today announced that earnings for the 13 weeks ended February 2, 2008 were flat to last year at $0.66 per diluted share, compared to the 14 week period ended February 3, 2007. For the 52
  • 20. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 16 week period ended February 2, 2008, earnings per share increased 7% to $1.82 from $1.70 per diluted share for the 53 weeks ended February 3, 2007.
  • 21. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 17 Gap, Inc. [GPS] In the summer of 1969 Crosby Stills Nash and Young jammed with Carlos Santana from the San Francisco Bay Area on stage in a rain drenched field during the Woodstock concert in Bethel New York. The stages of a Saturn V rocket fell to earth a month earlier propelling Apollo 11 out of earth‟s orbit and mankind took the first walk on the moon. Audiences around the world watched, including Don and Doris Fisher who opened the first GAP store that same summer on Ocean Avenue in San Francisco, just steps from the famous love-in‟s at Golden Gate Park. The first stage of a 40 year adventure in what would become one of the world‟s largest specialty retailers had been birthed. The simple formula recognized by the Fisher‟s was market demand for jeans outweighed the supply. The first small shop near San Francisco State University carried only records and jeans (Levi‟s), a combination that appealed to young people and their success was immediate. One year later in 1970 with sales reaching over $2,000,000 the Fisher‟s opened their second store in San Jose. By 1976 GAP went public with a 1.2 million share initial public offering on the New York and Pacific Stock Exchanges. This growth in the 1970‟s was fueled by the acceptance of jeans as casual wear by people of all ages but baby boomers still made up the majority of Gap‟s customers. The late 1970‟s recession and boomers outgrowing blue jeans fashion lent to financial difficulties for Gap and so Millard “Mickey” Drexler was brought in as president. His restructuring revealed a Gap that now only carried their own labels, emphasizing natural fibers and casual styles appealing to both genders. By 1983 they bought a two store travel and army surplus retail operation in San Francisco and Mill Valley, Ca. called Banana Republic. In 1987 GAP reached annual sales of 1 billion dollars. International sales landed safely in Vancouver B.C., Baby Gap was born in 1990 helping grow the GAP family to the world‟s second largest retail brand two years later. Old Navy opened its doors in 1994 and in 1997 set a retail record of 1 billion in annual revenues in under 4 years of operation. The advent of e-commerce inspires GAP to launch Banana Republic.com in 1999, Old Navy.com in 2000 and by 2006 its first online-only brand: Piperlime. Today with over 3100 stores (see appendix), revenues of 15.8 billion dollars and 36 million square feet of selling space Gap continues to operate as of 2007 four of the most recognized
  • 22. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 18 apparel brands on the globe: Gap, Banana Republic, Old Navy and Piperlime. Gap and GapKids account for approximately 1400 US stores and 170 foreign selling jeans, sweats, sweaters and related apparel. Banana republic‟s 460+ stores sells upscale casual wear while Old Navy‟s nearly 900 stores serve the budget-clothing market share. In each store all merchandise is private label though they once sold Levi‟s, all have internet sites and there is an overall 153,000 employee payroll to be met. With the expansion into European, Japanese and Canadian markets there is sustained competition from regional and national chains. Success depends on developing brand loyalty in these regions. Renewal of existing store leases, and obtaining real estate to open new stores meeting GAPS criteria (traffic, sq.ft., lease economics and demographics) must be met in order to mitigate adverse effects on results of operations. In part the ability to further improve sales, growth and operating margins will be essential for success as there has been recent fluctuation in comparable store sales and margins. For Example comp store sales have ranged from Q1 2004‟s 7% increase to a decrease of 9% in Q1 2006. Factors such as fashion trends, current economic conditions, changes in merchandise mix, and the success of marketing programs may cause material differences in results from prior periods and from expectations. Gross reported margins in the past five years have ranged from a low of 34% in fiscal 2002 to 38% in fiscal 2003 to a high of 39% in fiscal 2004. In addition reported operating margins have ranged from 7% in 2002 to a high of 12% in 2004. Quarterly and other company reports illustrate that the 10 year average operating margin of 10.1% is being estimated “on the street” currently at 8.1% for 2007. Recently from the perspective of stockholders total return has been (benchmarking $100.00 on 2/2/2002 through 2/3/2007) $139.06 for Gap, $182.05 for the DJ US Retail Apparel Index and $138.93 for the S&P. Though Gap has narrowly outperformed the S&P Index it has been a laggard against its own benchmark. As will be discussed further in this report, these are critical times for the company. For example: Net Sales went from 16 billion reported as of 1/31/06 to 15.9 billion on 1/31/07 while comparable store sales decreased by 7% in 07 vs. a decrease of 5% the year prior. Additional promotions and markdowns drove a 4% decrease in gross profit from 5.9 billion in 2005 to 5.6 billion in 2006. Franchise stores were opened in the Middle East and Africa and Piperlime.com was successfully launched. A 9% increase in operating expenses from $4.1 billion in 2005 to
  • 23. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 19 $4.5 billion in fiscal 2006 reflects management‟s investment in stores and marketing to turnaround business performance. The three core priorities for fiscal 2007 addressed by management in the 10k were: “ (1) fixing the core business via the right product and store experience, (2) retaining and developing the best talent in the industry and (3) examination of overall organizational structure to make decisions and expediently effect efficient change.” Quarterly performance in the latter parts of 2007 reflected some interesting progress. Comps were still running below expectations but were more than offset by margins. Does this stem from Gaps improved execution in merchandise and commitment to margin expansion? Have they addressed their inventory numbers? The answers will certainly reveal themselves in the future as we can only ask the right questions in the now.
  • 24. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 20
  • 25. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 21 - 500 1,000 1,500 2,000 2,500 3,000 3,500 2007 2006 2005 2,004 2,003 OperatingIncome Sales Cost of Goods Sold Abercrombie & Fitch [ANF] Established in 1892, Abercrombie & Fitch had its beginnings as a firm focused on professional gear for outdoorsman. By 1907 the partnership between Abercrombie & Fitch suffered irreconcilable differences and Fitch became the sole owner of the firm. Fitch had a vision to expand the targeted demographic of the store towards the general public, while Abercrombie left believing the store should retain its specialty customers. Soon after, Fitch owned the largest sporting goods store in the world. Fitch also chose to risk a huge investment in mail order catalogues, which proved to be a huge success. The firm mailed over 50,000 copies featuring outdoor clothing for women and men, camping gear, and other outdoor equipment. Fitch stayed with the company until 1928. The company continued to grow and by 1972, they were operating in seven states. In 1977 though, they had to declare bankruptcy and were soon purchased by Oshman‟s. In 1980 A&F was rebranded as a clothing store and in 1988 was purchased by Limited Brands and was targeting the upper-class teen demographic. They expanded nationwide and in 1996, they went public. Limited Brands relinquished control of the company soon thereafter. During this time, they released their second brand “Abercrombie” targeted even younger segments. Hollister was a new brand released in 2000 aimed at teens and focused on a „surfer‟ feel. They then relased “RUEHL” in 2004 for the young adults. They now have an international footprint with 1039 stores and a Market Cap of $6.3 billion. They are a high growth company where high sales and good margins are driven.
  • 26. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 22 - 100 200 300 400 500 600 700 800 900 2007 2006 2005 2,004 2,003 Total Liabilities Depreciation and Amortization Capital Expenditures 34% 19% 44% 2% 1% Store Count A&F Abercombie Hollister RUEHL Gilly Hicks As we will discuss in this report, ANF reported revenue of 3.7 billion in 2007. This was an increase from 3.3 billion in 2006 and 2.7 billion in 2005. This revenue growth was mostly due to their large expansion and high prices over the last 5 years. This growth can be seen in their balance sheet under total fixed assets. Here you can see a steady increase year over year. This also contributed to the increases in depreciation, Liabilities, inventory and Capex. The company focuses on the brand identity for each of their companies by designing their stores around each brand. Each brand though, shares a standardized store layout. This leads to a similar experience regardless of which store you are in. They feel the customer experience is crucial to entice higher sales. A&F purchases their merchandise from approximately 258 factories and suppliers. They are extremely diverse in their supplier base; with relationships that extend to 37 different countries. They state their inventory strategy is to keep enough inventory on hand to provide their customers with a full selection of all their merchandise. A&F have remodeled their stores to what they termed as ”canoe stores”. They have added dark borders to their windows to darken the atmosphere by using louvers. This effort costed approximately $10 million. They also spent $40 million on fixtures, new flooring, and music systems. This remodel stretched across all four brands. Abercrombie & Fitch has three main stores (flagship stores). They are located in New York City (opened in fall 2005), Los Angeles (opened in 2006), and London. They also have plans to open a flagship store in Tokyo in 2009. Some of the other expected expansions are in Ireland, Italy, France, Germany, Spain, Denmark and Sweden.
  • 27. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 23
  • 28. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 24 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 AEO URBN ANF GPS Sales 2007 2006 2005 2004 2003 Common Size Analysis Common size statements are used to compare financial statements of different size companies or of the same company over different periods. The line items are expressed as a proportion of a number which reveal trends and make it possible to compare companies. Income Statement Analyzing AEO‟s and ANF‟s horizontal income statement shows that their sales have increased on average 22.5% and 25% respectively over the last three years. This was due to a wide variety of inventory assortments that were well received by their customers. The growth was caused by higher transaction counts and greater transaction value, which was driven by the strength and appeal of the AEO and ANF brands. Over the last four years, URBN had sales increase at an average rate of 31%. This was due to the increase in the number of stores and expansion of the wholesale division. GPS has had sales decrease in 2007 and 2006 by .5% and 1% respectively. This is due to the closing of their Forth and Town division, colosidation of Old Navy Stores and distribution center closings. In reviewing of the trend analysis for AEO, URBN and GPS on the Income Statement, it indicates that the COGS have remained in-line with the revenues received. However, administrative expenses have increased on a percentage of total revenues; In 2008, management will focus on reducing overhead and increasing sales. ANF has the lowest COGS as a % of sales compared to the other companies. In 2007, their COGS is 29% of sales. This low number is due to the increase in the overseas supply of available labor and production facilities. This excess supply resulted in a lower cost of goods sold and higher margins.
  • 29. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 25 0% 10% 20% 30% 40% 50% 60% 70% AEO URBN ANF GPS COGS % of Sales 2007 2006 2005 2004 2003 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% AEO URBN ANF GPS SG&A % of Sales 2007 2006 2005 2004 2003 ANF has had expenses, as a percentage of sales that have continued to increase. Most of ANF‟s distribution is through the malls in the United States. Due to the uncertainty of the economic condition in the world, in order to attract their target market, they have had to invest more capital behind SG &A expenditures. Additionally, this increase is also due to additional store payroll expenditures. Specific store changes that have been made are: additional front-room coverage at all times, and fitting-room coverage, and also, additional manager coverage in the store, to ensure better levels of service.
  • 30. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 26 Balance sheet Analyzing the horizontal common size balance statement for GPS, it is apparent that their assets have decreased from 2004 to 2007 by 3.9%, 12.06% and 3.02% respectively. This is primarily due to a decreased inventory level. In 2003, inventory was $2.05 billion and in 2007, it was $1.79 billion. Conversely, GPS has had growth in its inventory turnover rate from 2004 to 2007 at 13.6%. This efficiency is due to high tech inventory controls, the closing of its Forth & Towne line, converting outlet stores for Old Navy into regular retail stores, and closing a distribution center. Also, assets decreased because of an 11.96% decrease in cash. This can be attributed to a decrease in sales which are mostly categorized as cash. Liabilities have decreased by an average of 15% over the last three years. In 2007 income taxes payable decreased by 81% because of the tax rate changes driven by the impact of a favorable tax settlement related to the U.S.-Japan Income Tax Treaty. In 2007, LT debt also decreased by 63%. In November 2001, GPS issued $500 million aggregate principal amount of debt securities at an original annual interest rate of 8.80%, due December 15, 2008, of which only $138 million remained outstanding as of February 3, 2007. ANF‟s current assets increased in 2006 and 2007 respectively. This was due to an increase in inventories of an average of 26% over the last four years, however, on the vertical analysis, inventories have been a consistent % of total assets. ANF has a lower level of inventory on its balance sheet, as a percentage, than many of its competitors. In an industry that is highly competitive, and in which last quarter‟s merchandise is significantly marked-down, ANF has demonstrated a strong ability to control inventory. ANF had an increase in property, plant, and equipment by 29% throughout 2004-2007. ANF has had expansive store growth which has increased PPE from $445 million to $1.09 billion. In 2004 ANF had a 117% of other liabilities primarily as a result of an increase in accounts receivables related to expected proceeds from an insurance claim pertaining to legal expenses. In 2006, ANF had a 789% increase in income taxes payable because the Company reclassified (a) deferred income tax assets that were previously netted against income tax payable to current assets. Liabilities also increased because of the reclassification of the long-term portion of straight-line rent from an accrued expense to other long-term liabilities and the long-term portion of executive severance from accrued expense to other long-term liabilities.
  • 31. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 27 AEO has had their assets increase in 2007 by 23.78%. This is due to an increase in inventory levels. In 2005, inventory was $210 million and in 2007 it was $263 million. However, sales have increased at a similar rate of 21% over the same period. PPE has increase by 39% from 2006 to 2007. Liabilities have increased by an average of 42% over the last three years. In 2007 income taxes payable increased by 102% possibly due to the deferred taxes from previous periods. URBN has had their assets increase in 2007 by 20%. This is due to an increase in receivables and PP&E. The receivables have increase by 45% due to the increase in sales through the wholesale division which have different credit terms than URBN‟s store customers. PP&E increased by 49% because of the store growth. Liabilities have increased 18% in 2007. The increase is due to a 40% increase in accounts payable. However, accounts payable still represents the about same percentage of total assets as it did in the previous period. In 2006, accounts payable was 5.51% of total assets and in 2007 it was 6.44% of total assets.
  • 32. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 28 Increase/ Decrease in CFO -800 -600 -400 -200 0 200 400 600 800 1000 1200 2007 2006 2005 2004 Year NetCashChange AEO URBN ANF GPS Increase/ Decrease in CFI -1500 -1000 -500 0 500 1000 1500 2007 2006 2005 2004 Year NetCashChange AEO URBN ANF GPS Statement of Cash Flows GPS, URBN, AEO, ANF all have positive cash flows from operations throughout the last five years. GPS has seen a decrease in cash in 2005 by 25%. This shows that the retailer is experiencing difficulty in achieving a persistent healthy cash flow to cover its liabilities which can lead to difficulties with its retail operations and perhaps any future expansions of any retail concepts. GPS is exhibiting inconsistent declines in its cash flows from 2004 to 2007. On the other hand, AEO is seeing an increase in cash flow due to increased profitability. During the last few years, AEO has continued to make significant investments into their business, including a $225 million capital expenditure. These expenditures related to new and remodeled stores in the United States and Canada. They also made expenditures related to building a new distribution hub in Kansas and invested in a technology upgrades at the home office. Additionally, in 2006, they repurchased $146 million of their common stock. ANF generated cash from operations of $453.6 million in 2005 versus $426 million in 2004, resulting primarily from strong sales and income. In 2006 cap ex increased by 38%. ANF used cash from operations to finance its growth strategy, opening 57 new Hollister stores, 15 new Abercrombie & Fitch stores, and four new RUEHL stores. ANF also remodeling 14 Abercrombie & Fitch stores. The Company used excess cash to repurchase 1.8 million shares of common stock for $103.3 million and pay
  • 33. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 29 dividends of $0.60 per share for a total of $52.2 million. The Company believes that share repurchases and dividends are an important way for the Company to deliver shareholder value.
  • 34. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 30 Ratio Analysis Activity and Efficiency Ratios URBN, AEO, GPS, and ANF all utilize inventory valuation as follows and described in annual 10Ks and Qs: “Inventories are principally valued at the lower of average cost or market, on a first-in first-out basis, utilizing the retail method. The retail method of inventory valuation is an averaging technique applied to different categories of inventory.” Aeo utilizes average cost. Inventory Turnover Evaluation of Inventory turnover can be considered a measure of how productively inventory is bought and sold over the course of a year. The equation utilized to define it is Cost of Goods Sold (COGS) divided by the Average Inventory and it serves as a measure of the liquidity of inventory. This ratio is a great commentary on management efficiency. In order to generate the cash necessary to pay bills and return a profit to share holders, apparel retailers must sell the material they have produced or bought. The inventory turnover rate measures how quickly American Eagle, Urban Outfitters, Abercrombie & Fitch, and Gap, Inc. are moving inventory through their warehouses. Combined with measurements of other ratios inventory turnover can provide an accurate barometer of a company‟s success. The more times an enterprise can turn inventory and raise this number the better off the company will be; saving itself from inventory accumulating, becoming out of fashion or season, and saving the need for markdowns and incurring losses. All of our specialty clothing companies have actually decreased the number of inventory turnovers in the past 5 years starting with 2003 fiscal year numbers. These numbers reflect business done in 2002 which is the first full year following 9/11. They are dramatic indeed. AEO inventory turnover decreased 46.6% in 2004 vs. 2003 and similarly the numbers come in as follows on the rest: URBN declined 46.3%, ANF down 51.9%, and GPS down 42.5%. The question becomes was the recessive economy experienced through 2002 and 2003 a contributor to firms reducing their inventory stock at that time? A reduction in total inventory assets as the denominator would have increased the turnover number for the year ending 1/312003. Also the
  • 35. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 31 decrease in turnover by 2004 was consistent (42.5% - 46.6% in 3 cases and just over 50% for ANF) across the retailers, indicating the ubiquitous conditions affecting them all. A different picture emerges starting 2004 through 2007. Gap being the exception, URBN, ANF and AEO reflect small annual but steady decreases in turnover 2004 through 2007. URBN showed a 13% decrease in the same period. ANF showed a 51% decrease in its turnover and GPS showed the only increase in the period at 13.6%. It should be noted that ANF has been experiencing dramatic expansion as it is a young public company and using cash from operations to open many new stores both at home and overseas. We would query if their increase in total inventories which are growing in conjunction with a dramatic drop in COGS from 2004 to 2007 may have a hand in this number. AEO showed a 22% decrease over the 4 year period, though it has grown inventory at close to its rate of sales apparently. Management points to its efficient pricing and merchandise mix and the utilization of investment in markdown optimization technology. Managing inventory efficiently is what makes companies stand out from the competition and can determine profitability in the end. Abercrombie, Urban Outfitters and Gap all take longer to turn their inventory compared to AEO. The company recently regained control of its distribution process which had been outsourced to a third party logistics provider. The opening of a new facility is complete, stocking stores. Management believes this should only grow better. Time shall tell.
  • 36. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 32 We note that the Gap is unique amongst its peers and has shown a trend line of positive growth in its Inventory Turnover rate 2004 to 2007 at 13.6%. This marked efficiency of the mature company that blazed trails of high tech inventory controls in the industry a decade and half ago remains a contender in bringing value to its stakeholders. However it is noted also that Gap closed its Forth & Towne line and has been converting outlet stores for Old Navy into regular retail stores as well as closed a major distribution center in Hebron Kentucky. Since drops in inventory are significantly correlated to increased rates of Inventory turnover it is worth examining if recent and past facility closings provide an answer to this. Inventory Turnover 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 Year #ofTimesInventoryTurnesOverperYear AEO URBN ANF GPS AEO 6.13 7.08 7.76 7.87 14.76 URBN 4.86 5.05 5.64 5.58 10.40 ANF 2.44 2.75 2.69 4.99 10.39 GPS 5.59 5.43 5.27 4.92 8.56 2007 2006 2005 2004 2003
  • 37. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 33 Days Inventory Days Inventory or Days Sales of Inventory is the financial measure of a company's performance that demonstrates how long it takes a company to turn its inventory, including goods that are work in progress, into sales. The shorter amount of time, hence the lower the DSI the better. It is important to note that the average DSI varies from one industry to another. The DSI is calculated as follows: Days Sales of Inventory = (Inventory/Cost of Sales) x 365 “Days Inventory” may be looked at as a variant of Inventory Turnover. It is part of the measure of the cash conversion cycle which allows us to see how long it takes a company to turn its materials into cash. This is stage one of three basic stages. The second stage is Days Sales Outstanding and the third is Days Payable Outstanding. The DSO measures how long it takes a company to receive payment on accounts receivable, while DPO measures how long it takes a company to pay off its accounts payable, or how long we can use other people‟s money. We will focus on Days Inventory for this ratio, as some of our companies may not carry accounts receivable such as Gap, Inc for varying reasons. Most common would be the sale of these receivables, in some cases to a financing division such as a credit card company owned by the enterprise. Days Inventory 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 Year DaysinInventory AEO URBN ANF GPS AEO 59.54 51.56 47.03 46.36 24.72 URBN 75.03 72.32 64.75 65.41 35.10 ANF 149.71 132.83 135.87 73.21 35.12 GPS 65.27 67.22 69.29 74.25 42.66 2007 2006 2005 2004 2003
  • 38. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 34 Days Inventory for all retailers spiked in the years 2003 to 2007 for AEO (2.4 times longer), URBN (2.14 times longer), GPS (1.53 times longer) and ANF skyrocketing (4.2 times longer). We may look to the reasoning for this via our Inventory Turnover explanations and the significance of legal developments. The “Days Inventory” has lengthened across these specialty retailers and others in the sector due to litigation driving production from outsourced suppliers to in-house manufacturing models. The time of raw materials purchased to product sold probably accounts for this. The decrease of the inventory turnover numbers for our companies are producing increases here on our days supply inventory due to an inverse relationship between the two as mentioned before. The increasing “days inventory” number reflected in these companies, and upon further research an industry wide occurrence, may be considered an adverse occurrence. This is because it now takes longer for these companies to turn inventory into cash via sales.
  • 39. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 35 Receivables Turnover The Receivables Turnover indicates how quickly customers are paying the business. The greater the number of times receivables turn over during the year, the shorter the time between sales and cash collection. Receivables turnover is a good way to gauge the effectiveness of your company's payment terms. If the receivables turnover is lower than the industry average, it could mean that the payment terms are too lenient. A company can uncover collection trends by tracking this figure monthly or quarterly. URBN has had steady receivables turnover except for a 28% decline in 2007. This is due to URBN increasing its sales through the wholesale division which has different collection terms than the retail customer paying by credit card. AEO has improved its receivables turnover by 22% from 83.10 in 2006 to 101.25 in 2007. This was due to sales increasing by $485 million and the receivables staying steady at $28 million. ANF had a steep decline in receivables turnover from 2004 to 2005 by 37%. Over this period, sales grew by 18%, but receivables grew by 263%. This was primarily due to the reclassification of credit card receivables from cash and cash equivalents to receivables. Receivables Turnover 0.00 50.00 100.00 150.00 200.00 250.00 Year #ofReceivablesCollectedinaYear AEO URBN ANF GPS AEO 101.25 83.10 76.40 83.47 93.70 URBN 69.59 96.22 109.64 109.67 113.80 ANF 77.98 81.92 121.29 193.41 104.78 GPS 0.00 0.00 0.00 0.00 0.00 2007 2006 2005 2004 2003
  • 40. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 36 Days Receivables The Days Receivable calculation is the average number of days of receivables outstanding. This is the number of days it takes, on average, to collect your accounts receivable. This ratio is the inverse of the receivables turnover ratio. To calculate days receivable, divide the number of days in a year (365) by the receivables turnover ratio. A lower number is preferable, since the fewer the number of days to collect is better. GPS does not recognize a receivables category on its financial statements. The receivables for URBN, AEO, and ANF primarily represent credit card receivables which is part of their normal course of business. These companies have two to four days of transactions outstanding with its third-party credit card vendors at any point. The company‟s classify these outstanding balances as receivables. URBN‟s days receivables increased 38% in 2007 from 3.79 days to 5.25 days because of the increased amount of merchandise they had sold on account through their wholesale division. Days Receivables 0.00 1.00 2.00 3.00 4.00 5.00 6.00 Year DaystoCOllect AEO URBN ANF GPS AEO 3.61 4.39 4.78 4.37 3.90 URBN 5.25 3.79 3.33 3.33 3.21 ANF 4.68 4.46 3.01 1.89 3.48 GPS 0.00 0.00 0.00 0.00 0.00 2007 2006 2005 2004 2003
  • 41. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 37 Total Asset Turnover Total Asset Turnover is the amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars: Asset Turnover = Revenue/Assets It is an efficiency measurement and an indicator of how a firm uses its assets in generating sales or revenue - the higher the number the better. It is also indicative of pricing strategy as it is found companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Much of the turnover amongst our companies is consistent with each other. Fiscal 2003 which covers the majority of 2002 shoes very high numbers relative to the following four years raising the question of profit margins and the correlation to this seeming anomaly. The indications are that margins were very compressed for all four companies during this time. Again the economic slowdown and post September 11th world may account for this in those particular years. We would have to ask what it is that may have delivered the high asset turnover. A company exhibiting low profit margins tends to have high asset turnover. With the corresponding reduction in total asset turnover and a widening of margins across the board it may be safe to ask if general economic conditions played a significant part in this. The greatest reduction can be found in American Eagle Outfitters at 60.5%. Close behind is Urban with a 50.2%, Abercrombie, at 49% and Gap with a 36% reduction. It should be noted that Gap has run more consistently with its numbers in a closer range over the same time period as its competitors. For 2006 controlling margins it might appear that American eagle has the upper hand. Abercrombie‟s robust gross margins of 67% in 2006 for are lost to selling and administrative expenses of 47% vs. AEO‟s 23%. We see AEO continue to hold the same SGA percentage for most reported periods 23 to 25%. ANF increases from 21.5% SGA to 47% 2003 to 2007 which may lend to its higher turnover numbers by shrinking operating margins. AEO has similar, even better net margins than ANF in 2006. However we also see that in 2007 ANF must be getting its own margins back in line as it lowers Total Asset Turnover to a much greater percentage than AEO. This can be seen by the drop on the chart above.
  • 42. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 38 Similarly Gap ran very much in tandem with ANF until 2006 when its turnover continued to increase in 2007 as opposed to Abercrombie‟s success in turning it down a notch. Gaps Management has not pulled in the reins as it needs to. Gaps Asset Turnover has steadily increased over the past 5 years. Recent quarterlies also would indicate that GPS needs to increase their operating margins significantly. This might be done by tightening up inventory management and cost controls across their stores. This might help to reduce Total Asset Turnover for Gap, Inc. Total Asset Turnover 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Year AEO URBN ANF GPS AEO 1.56 1.60 1.77 1.92 3.95 URBN 1.49 1.69 1.85 1.77 3.14 ANF 1.64 1.78 1.59 1.56 3.21 GPS 1.88 1.73 1.61 1.58 2.96 2007 2006 2005 2004 2003
  • 43. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 39 Liquidity Ratios Operating Cycle The operating cycle in the number of days the time the company purchases the inventory for cash, to selling the merchandise on account, to collecting the cash. The operating cycle reveals how long cash is tied up in receivables and inventory. A long operating cycle means that less cash is available to meet short term obligations. The operating cycle is calculated by taking the average collections period of receivables plus the days inventory. In 2007, ANF has an operating cycle 2.4 X greater than AEO, 1.9X greater than URBN and 2.3X greater than GPS. The collection period is similar amongst all four companies; however, ANF has a much higher days inventory. ANF has a low inventory turnover of 2.44. This turnover is on average 2.2X slower than AEO, URBN, and GPS. This means that ANF only turns its inventory 2.3X per year where the other companies turn at least 4.5X per year. ANF product sits on the shelf longer where the other retail stories are able to provide their customers with fresh inventory multiple times a year, AEO not only has the lowest days inventory, but also collects the quickest. AEO has the ability to turn its inventory quicker due to the expansion of its Ottawa, Kansas distribution center, which was completed during 2007. The expansion enhanced operating efficiency and is central to the plan for supporting future growth and managing inventory levels.
  • 44. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 40 Operating Cycle 0.00 50.00 100.00 150.00 200.00 Year #ofDays AEO URBN ANF GPS AEO 63.15 55.95 51.81 50.73 28.62 URBN 80.27 76.11 68.08 68.74 38.30 ANF 154.39 137.28 138.88 75.10 38.61 GPS 65.27 67.22 69.29 74.25 42.66 2007 2006 2005 2004 2003
  • 45. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 41 Accounts Payable Turnover The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A higher number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors. The accounts payable turnover ratio represents the average number of times per year (or per period) that payables are paid for with cash. A higher, more rapid turnover is generally more favorable as payables are being paid more quickly. At the same time, paying debts too quickly can use up needed cash. Many businesses extend payment of payables as much as possible to make the best use of cash. Businesses that manage their payables in this way or that receive extended payment terms from suppliers will, therefore, have a lower, less rapid accounts payable turnover. Likewise, so will businesses that are experiencing cash flow crunches or disputed invoices with their suppliers. ANF accounts payable turnover decreased by 47% from 2004 to 2005. This was due to the accounts payable increase to support the cost of growth in the number of new stores and the timing of payments. Higher payroll expenses increases the accrued expenses category. Both URBN and GPS had consistent accounts payable turnover, however, URBN pays its vendors on average over the last four years 1 times sooner. In 2007, URBN paid its vendors 1.66 times faster. AEO has had a steady decline in accounts payable turnover over the last four years. The average payables ratio has increased 44% in 2007 and 46% in 2006. This is due to the change in payment terms and method with their foreign buying agent.
  • 46. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 42 Accounts Payable Turnover 0.00 5.00 10.00 15.00 20.00 Year #ofTimesInventoryTurnedperYear AEO URBN ANF GPS AEO 9.37 11.45 13.59 15.84 URBN 14.46 15.03 13.75 13.41 ANF 10.27 9.85 6.88 13.06 GPS 8.71 8.03 7.66 7.89 2007 2006 2005 2004
  • 47. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 43 Days Payable A measure of the average time a company takes to pay vendors, equal to accounts payable divided by annual credit purchases times 365. If the days payable increases, it might be due to cash flow problems or a deliberate attempt by management to increase payment terms to suppliers. ANF had a sharp rise in days payable in 2005, 207% because of the large expansion that occurred during that year. AEO has been steadily increasing its days payable. Throughout this period, their inventory turnover has also decreased by 58%. They are turning their inventory over slower, so to offset the slow inventory, they might be paying their suppliers late. URBN and GPS have been fairly consistent except for the spikes they both incurred in 2004. URBN day payable is 1.6 X less than GPS. Days Payable 0.00 20.00 40.00 60.00 Year #ofDays AEO URBN ANF GPS AEO 38.95 31.87 26.86 23.04 10.03 URBN 25.25 24.29 26.55 27.22 13.81 ANF 35.53 37.07 53.06 27.96 10.37 GPS 41.89 45.43 47.62 46.25 24.15 2007 2006 2005 2004 2003
  • 48. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 44 Cash cycle The cash cycle is the length of time between the purchase of raw materials and the collection of accounts receivable generated in the sale of the final product. The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities. It means that capital is tied up while the business waits for customers to pay. A short cash conversion cycle indicates good working capital management. If a business has a negative cash conversion cycle, it is because customer payments are received before having to pay suppliers. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. A firm can delay paying for its own materials which causes it to reduce the amount of cash needed. By analyzing the cash cycle, you can determine more easily why and when the business needs more cash to operate. It also determines when and how it will be able to repay the cash. The cash cycle represents the number of days it takes a company to purchase raw materials, convert them into finished goods, sell the finished product to a customer and receives payment from the customer. Managing the cash cycle affects the bottom line, cash flows and influences the amount of financing needed by the company. AEO, URBN, ANF, and GPS all have positive cash flows cycles. AEO has an average cash cycle of 24 days and has increased throughout the last 5 years at a 30% rate. URBN has an average cash cycle of 43 days and has increased throughout the last 5 years at a 124% rate. ANF has an average cash cycle of 76 days and has increased throughout the last 5 years at a 320% rate. GPS has an average cash cycle of 23 days and has increased throughout the last 5 years at a 26% rate. ANF has the highest cash cycle because it has the highest days in inventory; all the companies have had consistently low receivables. Throughout the last five years, ANF has had a 108% growth in sales and has opened many new stores. They have had to increase inventory rates in order to appropriately stock their new stores.
  • 49. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 45 Cash Cycle 0.00 50.00 100.00 150.00 Year #ofDays AEO URBN ANF GPS AEO 24.19 24.09 24.95 27.69 18.58 URBN 55.03 51.82 41.53 41.53 24.50 ANF 118.86 100.21 85.82 47.14 28.24 GPS 23.38 21.80 21.67 27.99 18.51 2007 2006 2005 2004 2003
  • 50. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 46 Current Ratio The current ratio compares all the current assets of a company to all the current liabilities. This ratio is important because it tells us if the company had to sell all its readily available assets, would it be able to pay off its immediate debt. At a minimum, a company should be able to pay its current liabilities if it were to liquidate all its current assets. This would translate to a current ratio of 1.0 - the point where the current assets equal the current liabilities. The current ratio is one of the best known measures of financial strength: Current Ratio = Total Current Assets / Total Current Liabilities. A generally acceptable current ratio is 2 to 1. Whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. If the business's current ratio is too low, it can be increased by: (1) paying down debts (2) increasing your current assets from loans or other borrowings with a maturity of more than one year (3) converting non-current assets into current assets (4) increasing your current assets from new equity contributions (4) putting profits back into the business. AEO, URBN, ANF & GPS all have a current ratio that has been greater than 1 throughout the last five years. In most cases, the current ratio has been greater than 2 meaning that there is positive net working capital and that there is twice as many assets to cover the liabilities. The chart below shows a 41% decrease of current ratio for ANF: 2.59 in 2004 to 1.58 in 2005. This decrease was due to the decrease in working capital in 2005 versus 2004 as a result of lower cash and marketable securities resulting primarily from the Company's repurchase of 11.2 million shares of common stock at a cost of $434.7 million. Since 2005, ANF has increased their current ratio by 22% in 2006 and 11% in 2007. GPS had a decline of their current ratio in 2007 by 18%; 2.70 in 2006 to 2.21 in 2007. During this period, their current liabilities had increased by 17% and current assets had decreased by 4 %. This was due primarily to lower short-term investments and the reclassification of the current portion of our long-term debt to current liabilities, offset by higher inventory as a result of an increase in stores and square footage. GPS short-term investments decreased as a result of our share repurchases and capital expenditures, offset by cash from operating activities.
  • 51. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 47 AEO had an 18% increase in their current ratio from 2004 to 2005. This change was due to current assets increasing by 57%. The Company‟s major source of cash from operations was merchandise sales which increase through the same period by 199% and deferred income tax doubled as well. AEO also opened 41 new stores in 2005 which accounted heavily for the increase in sales. URBN ratio has remained stable through the five year period. Current Ratio 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Year AEO URBN ANF GPS AEO 2.60 2.99 3.27 2.78 3.02 URBN 2.71 2.89 2.93 3.04 3.35 ANF 2.14 1.93 1.58 2.69 2.84 GPS 2.21 2.70 2.81 2.68 2.11 2007 2006 2005 2004 2003
  • 52. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 48 Quick Ratio The Quick ratio is calculated by taking the current assets subtracting the inventories and dividing by current liabilities. The ratio is calculated in this way because not every company can quickly convert its inventory into cash if it had to pay all its current liabilities. Therefore, the quick ratio is a better way to test the company's ability to meet its current debt. Companies with steadily rising inventories may look good with the current ratio, but will have a deteriorating effect on the quick ratio, since we subtract the inventory out. A rising quick ratio over time is favorable. By excluding inventories, it concentrates on the most liquid assets. The quick ration gives the ability to see if all sales revenues should disappear could the business meet its current obligations with the readily convertible assets on hand. A quick ratio of 1:1 is considered satisfactory unless the majority of your quick assets are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities. AEO had an increase in quick ratio by 28% in 2005. This was due to the quick assets increasing 71% from 2004 to 2005. The most significant change of quick assets was the change of short term investments. AEO had short term investments of $315 million in 2005 which was an increase of 262%. AEO invests primarily in tax-exempt municipal bonds, taxable agency bonds and corporate notes with an original maturity between three and twenty-four months and an expected rate of return of 3% taxable equivalent yield. The Company places an emphasis on investing in tax-exempt and tax-advantaged asset classes. Additionally, all investments must have a highly liquid secondary market. AEO has had a decrease in quick ratio in current years. This decrease has been due to the current liabilities increasing rapidly. AEO had current liabilities in 2005 of $253 million and in 2007 $460 million which is an 83% increase. The largest portion of increase was due to the account payables rising 124% from 2005 to 2007. The chain has had a large expansion and increase sales and payables comes with the growth of the company. ANF decline of quick ratio in 2005 is mirrored by the current ratio decline. As discussed prior this was due to a large stock repurchase. Since 2005, ANF has had consistent quick ratio growth.
  • 53. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 49 GPS had a 26% decline of quick ratio in 2007. This change was due to a sales decrease, higher prepaid taxes and higher inventory levels. Also, current liabilities increase 17% due to a $325 million current maturity of long term debt. URBN has been consistent throughout the last five years. Quick Ratio 0.00 0.50 1.00 1.50 2.00 2.50 3.00 Year AEO URBN ANF GPS AEO 1.85 2.16 2.43 1.91 1.81 URBN 1.33 1.54 1.67 1.62 1.92 ANF 1.12 1.03 0.91 1.89 1.95 GPS 1.14 1.54 1.37 1.34 1.24 2007 2006 2005 2004 2003
  • 54. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 50 Solvency Ratios Debt Ratio Debt Ratio 2007 2006 2005 2004 2003 AEO 28.69% 28.03% 24.77% 23.75% 22.10% URBN 24.91% 25.13% 26.08% 17.11% 16.61% ANF 37.49% 44.40% 50.34% 27.34% 24.66% GPS 38.09% 37.04% 50.20% 53.63% 62.51% Yearly Trend % Period From 2006-2007 2005-2006 2004-2005 2003-2004 AEO 2.3546% 13.16% 4.29% 7.47% URBN -0.8754% -3.64% 52.43% 3.01% ANF -15.5631% -11.80% 84.13% 10.87% GPS 2.8348% -26.22% -6.40% -14.21% Debt Ratio: A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. Highlights:  American Eagle Outfitters: Yearly Trend indicates Debt Ratio constantly increasing year over year with double digit growth in 2005 to 2006. The only retailer that has not experienced declining debt ratio out of the four retailers.  Urban Outfitters debt Ratio rising over 50% during the period of 2004 to 2005 with declines following the next two periods.  Abercrombie and Fitch experiencing similar trend with Debt Ratio rising 70% for the same period followed by declines in the next two periods.  Gap exhibiting declining trends from 2003-2006 periods with a slight positive increase for the 2006-2007 period. In looking at all four retailers, the only retailer that is showing a consistent and constant increasing trend in its debt load is that of AEO. The trend indicates that AEO has and is consistently increasing its debt load of its retail assets and efforts with increasing debt year over year with 2005-2006 having the highest increase thus far. The trend however does indicate that the Debt Ratio has not increased significantly for the 2006-2007 periods which can also imply that the debt level in relation to its operations and assets is declining.
  • 55. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 51 The retailers of Urban Outfitters and Abercrombie & Fitch are showing a mixed and inconsistent trend of their debt ratios with significant increases for the period of 2004 to 2005., The trend is indicating that the period of 2004 to 2005 was a period where the both company‟s increased their debt ratio by more than 50%. The following two periods are indicating negative growth in their debt ratios which implies both companies experienced and reduced their growth of debt associated with their assets. The remaining retailer GAP showed a constant decline in its debt ratio from 2003 to 2006 with a significant decline of 20% for the period 2005 -2006. The constant declines of its debt ratio imply that the company‟s did not put itself at risk by having an increasing debt level associated with its assets. However for the period of 2006 to 2007 the company‟s debt ratio increased slightly which may imply that the company was comfortable enough to increase its debt ratio slightly in light of the constant decreases for the last three periods.
  • 56. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 52 Debt Ratio 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% Year AEO URBN ANF GPS AEO 28.69% 28.03% 24.77% 23.75% 22.10% URBN 24.91% 25.13% 26.08% 17.11% 16.61% ANF 37.49% 44.40% 50.34% 27.34% 24.66% GPS 38.09% 37.04% 50.20% 53.63% 62.51% 2007 2006 2005 2004 2003 Debt Ratio-Yearly Trend -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% Period From 2003 to 2007 % AEO URBN ANF GPS AEO 2.3546% 13.16% 4.29% 7.47% URBN -0.8754% -3.64% 52.43% 3.01% ANF -15.5631% -11.80% 84.13% 10.87% GPS 2.8348% -26.22% -6.40% -14.21% 2006-2007 2005-2006 2004-2005 2003-2004
  • 57. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 53 Debt to Total Capital Ratio Debt to Total Capital 2007 2006 2005 2004 2003 AEO 0.00% 0.00% 0.00% 2.82% 3.44% URBN 0.00% 0.00% 0.00% 0.00% 0.00% ANF 1.91% 5.57% 7.42% 0.00% 0.00% GPS 9.02% 8.64% 27.65% 36.67% 48.14% Yearly Trend % Period From 2006-2007 2005-2006 2004-2005 2003-2004 AEO 0.00% 0.00% -100% -18.02% URBN 0.00% 0.00% 0.00% 0.00% ANF -65.71% -24.93% 0.00% 0.00% GPS 4.40% -68.75% -24.60% -23.83% Debt to Total Capital: A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt. Companies can finance their operations through either debt or equity. The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. A company with high debt-to-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk. The Yearly trends for all four retailers are indicating that all four retailers did not have significant financial leverage in relation to its assets. In fact one retailer did not have any debt to total capital at all that being Urban Outfitters, All retailers exhibited major declines in their debt ratios with the exception of the Gap which saw its debt to total capital ratio increase for the period of 2006-2007. These yearly trends are indicating that all four retailers are not financing there retail operations or expansions into the marketplace with debt. This also implies that with the exception of the GAP all other retailers are fairly healthy financially and are thus strong enough to compete in the marketplace without debt obligations. Furthermore it may also indicate that any expansion or retail operations are being taken out of equity earnings or holdings in order to avoid any debt financing what so ever.
  • 58. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 54 Debt to Total Capital 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Year AEO URBN ANF GPS AEO 0.00% 0.00% 0.00% 2.82% 3.44% URBN 0.00% 0.00% 0.00% 0.00% 0.00% ANF 1.91% 5.57% 7.42% 0.00% 0.00% GPS 9.02% 8.64% 27.65% 36.67% 48.14% 2007 2006 2005 2004 2003 Debt To Total Capital Yearly Trend % -120.00% -100.00% -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% AEO URBN ANF GPS AEO 0.00% 0.00% -100% -18.02% URBN 0.00% 0.00% 0.00% 0.00% ANF -65.71% -24.93% 0.00% 0.00% GPS 4.40% -68.75% -24.60% -23.83% 2006-2007 2005-2006 2004-2005 2003-2004
  • 59. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 55 CFO/Total Liabilities CFO/Total Liabilities 2007 2006 2005 2004 2003 AEO 131.36% 103.53% 119.15% 94.75% 64.08% URBN 83.48% 79.13% 105.71% 116.68% 93.96% ANF 69.06% 57.14% 62.80% 86.00% 119.54% GPS 7.84% 9.68% 9.96% 13.69% 8.56% Yearly Trend % Period From 2006-2007 2005-2006 2004-2005 2003-2004 AEO 26.88% -13.11% 26% 47.86% URBN 5.50% -25.14% -9.40% 24.18% ANF 20.86% -9.01% -26.98% -28.06% GPS -19.01% -2.81% -27.25% 59.93% CFO/Total Liabilities: Cash flow to current liabilities is a measurement of a company's ability to cover current liabilities. The CFO/Total Liabilities is exhibiting mixed trends for all retailers with the dominant trend overall indicating declining cash flows to current liabilities for the periods of 2005-2006 and 2004-2005. The retailer AEO and URBN however are showing healthy cash flows in relation to current liabilities for certain periods which also satisfies the rule of thumb which implies for every dollar in debt you should at least have dollar or more to cover current liabilities. Presently, AEO has been able to satisfy that rule for the periods ranging from 2005 to 2007. URBN has also been able to increase its cash flow to current liabilities as well. This indicates that both retailers are able to meet there current liability and debt obligations overall. However, the retailer ANF have exhibited a constant decline in its cash flow overall with the exception of a sudden increase in the period of 2006-2007. This indicates the retailer may have experienced much better retail environment conditions which lead to the positive increase in its cash flow for the period of 2006 to 2007. The retailer GPS has exhibited an increase in cash flow for the period 2003 to 2004, however for the flowing periods the retailer has shown declining cash flows. This is indicating that the retailer is experiencing difficulty in achieving a persistent healthy cash flow to cover its liabilities which can lead to difficulties with its retail operations and perhaps any future expansions of any retail concepts. Furthermore GPS
  • 60. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 56 is exhibiting inconsistent declines in its cash flows as periods form 2004 to 2007 are mixed in the sense that both single and double digits‟ increases are present. Overall with the exception of GPS, all other retailers are generating sufficient cash flows from there retail operations to cover current liabilities. CFO/ Total Liabilities 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% Year AEO URBN ANF GPS AEO 131.36% 103.53% 119.15% 94.75% 64.08% URBN 83.48% 79.13% 105.71% 116.86% 93.96% ANF 69.06% 57.14% 62.80% 86.00% 119.45% GPS 7.84% 9.68% 9.96% 13.69% 8.56% 2007 2006 2005 2004 2003 CFO/Total Liabilities Yearly Trend % -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% AEO URBN ANF GPS AEO 26.88% -13.11% 26% 47.86% URBN 5.50% -25.14% -9.40% 24.18% ANF 20.86% -9.01% -26.98% -28.06% GPS -19.01% -2.81% -27.25% 59.93% 2006-2007 2005-2006 2004-2005 2003-2004
  • 61. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 57 CFO/Sales CFO/Sales 2007 2006 2005 2004 2003 AEO 26.80% 20.18% 20.09% 12.50% 7.18% URBN 15.27% 13.64% 18.12% 12.77% 9.93% ANF 17.54% 16.30% 21.08% 16.51% 18.36% GPS 14.73% 16.74% 16.02% 21.63% 25.38% Yearly Trend % Period From 2006- 2007 2005- 2006 2004- 2005 2003- 2004 AEO 32.80% 0.45% 61% 74.09% URBN 11.95% -24.72% 41.90% 28.60% ANF 7.61% -22.68% 27.68% -10.08% GPS -12.01% 4.49% -25.94% -14.78% CFO/Sales: A measure of whether or not a company's sales are high in comparison to its cash flow. You want this to be as high as possible. A high value is a sign of a strong company. The CFO/Sales is exhibiting mixed trends as well overall for all four retailers, with retailer AEO being the only retailer maintaining a positive trend for all four periods. It should be noted that for the period of 2005 to 2006 three of the four retailers experienced declines with retailers URBN and ANF specifically experiencing double digit declines. However GPS exhibited a small single digit increase in that period by which previous periods showed double digit declines. For the period of 2006 to 2007 it is indicating that retailers AEO,URBN and ANF returned to a positive growth trend while GFS returned to a negative trend in its Cash Flow to Sales. It is thus indicating that AEO is the strongest company based on generating a healthy cash flow in relation to its Store Sales. All other retailers had very mixed results which may provide for a challenging retail environment and a slowing of the customer base into its retail operations. Thus indicating very mixed sales in general.
  • 62. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 58 CFO/ Sales 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Year AEO URBN ANF GPS AEO 26.80% 20.18% 20.09% 12.50% 7.18% URBN 15.27% 13.64% 18.12% 12.77% 9.93% ANF 17.54% 16.30% 21.08% 16.51% 18.36% GPS 14.73% 16.74% 16.02% 21.63% 25.38% 2007 2006 2005 2004 2003 CFO/Sales Yearly Trend % -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% AEO URBN ANF GPS AEO 32.80% 0.45% 61% 74.09% URBN 11.95% -24.72% 41.90% 28.60% ANF 7.61% -22.68% 27.68% -10.08% GPS -12.01% 4.49% -25.94% -14.78% 2006-2007 2005-2006 2004-2005 2003-2004
  • 63. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 59 CFO/Total Assets CFO/Total Assets 2007 2006 2005 2004 2003 AEO 41.69% 32.29% 35.58% 23.97% 28.33% URBN 22.69% 23.04% 33.55% 22.61% 31.22% ANF 28.83% 28.94% 33.45% 25.71% 58.91% GPS 14.73% 16.74% 16.02% 21.63% 25.38% Yearly Trend % Period From 2006- 2007 2005- 2006 2004- 2005 2003- 2004 AEO 29.11% -9.25% 48.44% -15.39% URBN -1.52% -31.33% 48.39% -27.58% ANF -0.38% -13.48% 30.11% -56.36% GPS -12.01% 4.49% -25.94% -14.78% CFO/Total Assets: This indicates the cash a company can generate in relation to its size and assets. Comparing to previous years is important; if the company's ratio is decreasing then they may eventually run into cash problems. Cash flow is often overlooked when people analyze a company. You can be a profitable company but if you don't have cash moving around to pay bills then you are really in trouble. It relates a company's ability to generate cash compared to its asset size. When the ratio continues to decline over time there may be some cause for concern as the company is having difficulty generating cash from its existing operations specific retail store operations. CFO/Total Assets are exhibiting similar trends as that of CFO/Sales. All four retailers are exhibiting mixed results with AEO again being the only retailer that has produced positive growth in two of the four periods. The trends are also indicating that specifically the period from 2004 to 2005 was a healthy year for cash flow being generated from company assets for three of the four retailers, that not being GPS. This is also indicating that return on company assets is weak in the form of cash flow and retail operations should be viewed with caution as inconsistent trends are prevalent throughout all four periods. It is showing AEO has had the best ability to generate greater cash flow growth from its operations that all other retailers. However it should be emphasized that mixed trends can lead to difficulty in determining cash flow overtime. All in all the period 2004 to 2005 is showing the best period of cash flow generation from company store assets for three of the four retailers.
  • 64. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 60 In conclusion it is indicating that AEO is the strongest retailer at present. Being able to generate positive trends in areas of sales, asset generated income and the ability to meet liabilities with strong cash flow. CFO/ Total Assets 0.00% 20.00% 40.00% 60.00% 80.00% Year AEO URBN ANF GPS AEO 41.69% 32.29% 35.58% 23.97% 28.33% URBN 22.69% 23.04% 33.55% 22.61% 31.22% ANF 28.83% 28.94% 33.45% 25.71% 58.91% GPS 14.73% 16.74% 16.02% 21.63% 25.38% 2007 2006 2005 2004 2003 CFO/Total Assets Yearly Trend % -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% AEO URBN ANF GPS AEO 29.11% -9.25% 48.44% -15.39% URBN -1.52% -31.33% 48.39% -27.58% ANF -0.38% -13.48% 30.11% -56.36% GPS -12.01% 4.49% -25.94% -14.78% 2006-2007 2005-2006 2004-2005 2003-2004
  • 65. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 61 Profitability Ratios Gross profit Margin Gross profit determines how much of your profit is left after your cost of goods sold. A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. The trend for gross profit margins is indicating that the period for 2004 to 2005 was the strongest period for all four retailers in which they all posted positive results. AEO and ANF were the two most dominant retailers out of the four for posting 30% plus profit margins. While URBN and GPS stores posted minimal growth. For the entire periods from 2003 to 2007 all four retailers exhibited very mixed results with a persistent downward trend from the period 2004- 2005. 2007 2006 2005 2004 2003 AEO 47.97% 46.55% 46.66% 36.46% 37.08% URBN 41.45% 44.68% 44.77% 43.02% 39.97% ANF 70.98% 69.89% 70.20% 45.91% 44.68% GPS 38.76% 40.53% 43.04% 41.83% 39.39% 30.00% 35.00% 40.00% 45.00% 50.00% 55.00% 60.00% 65.00% 70.00% 75.00% GrossProfit Margin
  • 66. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 62 Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as "operating profit margin" or "net profit margin". Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better. For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit settlement, are excluded from the operating margin calculation because they don't represent a company's true operating performance. When looking at operating margin it is indicating that for the entire period from 2003 to 2007, was a very mixed period in which all four retailers again exhibited mixed results and results that again followed a pattern of declining growth trends. It can be added that all four retailers had profit margins that were very inconsistent from year to year. The most persistent retailer was that of URBN which posted constant growth from year to year unitl the period of 2006-2007 which saw operating margin decline 31%. Also AEO had a very healthy 2004-2005 period with operating margin growing 137%. However it can be stated that when looking at these four retailers the apparel induatry is very much inconsistent industry in the sense that it is very sensitive to the growth of sales and industry fashion trends. Retailers can have great success one year because of a trend of somekind or a poor year due to changing economic and fashion trends as well.
  • 67. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 63 2007 2006 2005 2004 2003 AEO 21.00% 20.07% 19.35% 8.00% 9.64% URBN 13.39% 19.02% 17.92% 14.72% 10.74% ANF 19.83% 19.97% 19.22% 19.42% 19.59% GPS 7.36% 10.89% 12.82% 11.94% 7.01% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Operating Margin
  • 68. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 64 Net profit margin Also called the Return on Sales Ratio, it shows the after-tax profit (net income) generated by each sales dollar by measuring the percentage of sales revenue retained by the company after operating expenses, creditor interest expenses, and income taxes have been paid. Net profit divided by net revenues, often expressed as a percentage. This number is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit. The net profit margin is a good way of comparing companies in the same industry, since such companies are generally subject to similar business conditions. However, the net profit margins are also a good way to to compare companies in different industries in order to gauge which industries are relatively more profitable. also called net margin. All four retailers showed very similar results in there Net Profit Margins. AEO had a very healthy growth in its profit margin for the period of 2004 to 2005. In addition ANF also had stable growth as well for the periods of 2006-2007 and 2005-2006. As stated above these results are an indication that all four retailers are operating in very similar business conditions and are subject to the success of its fashion item demand by the consumer. However due to the nature of the industry and its highly competitive environment , these results again mimic all of the previous ratio analysis and indicate that the industry is inconsistent from year to year and Net profit margins are usually improved by cost cutting and success in the marketplace with an appealing brand name that spurs consumer demand.
  • 69. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 65 . 2007 2006 2005 2004 2003 AEO 13.86% 12.72% 11.92% 3.95% 6.07% URBN 9.49% 11.98% 10.93% 8.82% 6.48% ANF 12.72% 11.99% 10.71% 12.01% 12.22% GPS 4.88% 7.00% 7.37% 6.80% 3.30% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% Income Margin
  • 70. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 66 ROA An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment. All four retailers are showing inconsistency from period to period in generating a stable and constant return on assets. Year over year periods are showing positive to negative to positive return on assets. This indicates that the industry has a very challenging environment in order to convert investment to profit. It can also indicate that the industry invest great deals of capital to make profit on its products. The only retailer of the four that had some form of consistent return on assets was GPS. Yet for all other retailers it was periods of continued inconsistency with return on assets evolving from a period of growth and then into a period of negative growth.
  • 71. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 67 2007 2006 2005 2004 2003 AEO 21.56% 20.35% 21.10% 7.57% 23.94% URBN 14.10% 20.23% 20.24% 15.63% 20.37% ANF 20.91% 21.29% 16.99% 18.70% 39.19% GPS 9.17% 12.10% 11.86% 10.74% 9.79% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% ROA
  • 72. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 68 ROA Adjusted for After-Tax Interest This is a measure that shows how well a company has done after its income tax expanses and other interest. All four retailers started out in a negative growth pattern for the period of 2003 to 2004. The following period saw three of the four retailers with a very large increase in growth of their ROA with the exception of ANF. However the following two periods led to mixed results overall this time ANF posting a large percentage growth in their ROA while the pother three retailers returned to negative growth. While in the last period AEO had positive growth and the remaining three retailer had negative growth overall. With such mixed results, this indicates that the industry again has a very inconsistent pattern of growth and its very hard to determine which retailer will have a successful strategy. In terms of the actual analysis however AEO was the only retailer that posted two periods of positive growth on their ROA. 2007 2006 2005 2004 2003 AEO 21.56% 20.35% 21.10% 7.57% 23.94% URBN 14.10% 20.23% 20.24% 15.63% 20.37% ANF 20.91% 21.29% 16.99% 18.70% 39.19% GPS 9.52% 12.48% 12.93% 12.22% 12.96% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% ROA Adjusted for After-Tax Interest
  • 73. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 69 Operating ROA This ratio measures how well a company asset base is providing a return and whether the company is actually making a good income based on those assets. This ratio measures the quality of a firm's operations. A firm with a high operating margin in relation to the industry average has operations that are more efficient. Typically, to achieve this result, the company must have lower fixed costs, a better gross margin, or a combination of the two. At any rate, companies that are more efficient than their competitors in their core operations have a distinct advantage. Efficiency is good. Advantages are even better. Most investors will tend to prefer a more efficient company. All in all the Operating ROA was very mixed with in the majority having negative growth for all retailers. The period of 2004 to 2005 had positive growth for all retailers followed by negative growth into the next two periods. However ANF experienced a positive ROA the following period. This implies that the industry is not efficiently using its assets and is generating lack luster results in its return. This also implies that the industry is not a good measure of asset utilization as it has persistently recorded negative growth in this area over time. The industry heavily relies on its product as a source of operating income in order to achieve a positive return on assets.
  • 74. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 70 2007 2006 2005 2004 2003 AEO 32.66% 32.12% 34.27% 15.34% 38.06% URBN 19.90% 32.12% 33.18% 26.07% 33.74% ANF 32.60% 35.46% 30.51% 30.23% 62.85% GPS 13.83% 18.84% 20.62% 18.86% 20.76% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% Operating ROA
  • 75. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 71 ROE A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. The industry has not produced siginificnat growth in its ROE especially for the period of 2003- 2004. However the industry was much better for investor the following period where ROE was very robust in relation to two retailers that being AEO and URBN. The following two period produced mixed results again and again with URBN and ANF still providing a positive grwith in ROW. However with such mixed results the industry is not worth investing for the long term. The industry experiences periods of rapid growth and then period of negative growth . It is a matter of investing at the right time in the business cycle. We take a much more in-depth view of ROE in the following section: ROE Decomposition & DuPont Analysis In conclusion this industry has produced very mixed results for the periods in question. Results have varied widely from very high growth to very high negative growth in all of its profitability and return on assets. This may imply as mentioned before the industry is highly competitive and 2007 2006 2005 2004 2003 AEO 30.11% 27.72% 27.90% 9.83% 30.73% URBN 18.80% 27.16% 26.14% 18.81% 24.43% ANF 35.18% 40.14% 28.10% 25.31% 51.98% GPS 14.68% 21.64% 24.67% 25.54% 26.10% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% ROE
  • 76. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 72 is subject to an economic environment that is highly sensitive to the whims of the consumer tastes and trends. In addition its an industry that is highly sensitive to what ever economic business cycle conditions are present at that time. The overall analysis is indicating that all four retailers tend to experience the same patterns of growth and profitability over time. This in the long run it all depends on which retailers is responding the most quickly to the business cycle and to the taste of the consumer.
  • 77. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 73 DuPont Analysis / ROE Decomposition ROE as we discussed in the section prior is affected by how profitably an enterprises assets are used for generating profits with shareholder’ dollars and the relative value of shareholders' equity to total assets (leverage). In the DuPont Analysis we look at the breakdown of the steps to arrive at ROE. By backing into it (Decomposing) we are able to analyze at extremely efficient levels. The equation is ROE = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑞𝑢𝑖𝑡𝑦 derived from: The following tables and our diagnostics found with them may be confirmed on the Excel Spread Sheet accompanying this document. The 42.85% substantial increase in ROE from 2005 (28.10%) to 2006 (40.14%) for Abercrombie & Fitch (ANF) is a factor of 3 items: An 8.7% increase in financing complied with an 11.84% Asset Turnover increase and a 14.01% increase in leverage. Again this can be seen by replacing 2006 numbers into 2005‟s. Urban Outfitters (URBN) has experienced a decline in its ROE most probably due to the substantial decrease in operating margins from periods 2006 to 2007 with a drop of 19.02% to 13.39% respectively for a decrease of 29.59%. By replacing 2006 operating margins with 2007‟s the culprit becomes clear. )()()( leverageXefficiencyXityprofitabilROE Equity Assets X Assets Sales X Sales NI ROE   0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 2007 2006 2005 2004 2003 ANF Taxes (NI/EBT) Financing (EBT/Operating Profit) OperatingProfit (Op. Profit/Sales) AssetTurnover (Sales/Avg Assets) Leverage (Avg. Assets/Avg. Equity) 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 2007 2006 2005 2004 2003 URBN Taxes (NI/EBT) Financing (EBT/Operating Profit) OperatingProfit (Op. Profit/Sales) AssetTurnover (Sales/Avg Assets) Leverage (Avg. Assets/Avg. Equity) 2007 2006 2005 2004 2003 URBN ROE 18.80% 27.16% 26.14% 18.81% 24.43% Taxes (NI/EBT) 68.29% 61.58% 60.25% 59.51% 59.50% Financing (EBT/Operating Profit) 103.76% 102.26% 101.23% 100.73% 101.48% Operating Profit (Op. Profit/Sales) 13.39% 19.02% 17.92% 14.72% 10.74% Asset Turnover (Sales/Avg Assets) 148.59% 168.89% 185.14% 177.12% 314.20% Leverage (Avg. Assets/Avg. Equity) 133.35% 134.29% 129.16% 120.35% 119.92%
  • 78. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 74 AEO‟s ROE has been making a steady climb for the past four years. The dramatic increase in Net Income from 2004‟s 60 million to 2005‟s 224 million is a 273% increase driving the respective ROE‟s for the company from 9.83% to 25.22% or a 156% increase for shareholders‟ benefit. Gap, Inc. (GPS) has shown a steady decline since 2003 and comparably the lowest of all four companies in 2007. Using the ROE Decomposition the decline in operating margins of 10.89% in 2006 to 7.36% in 2007 resulted in a large dip in ROE of 32.16% correlated to the 32.38% pull back in operating profits. It is apparent that the DuPont equation is an effective “sextant” to navigate the seas of financial analysis. And so we move on… 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 400.00% 450.00% 2007 2,006 2005 2004 2003 AEO Taxes (NI/EBT) Financing (EBT/Operating Profit) OperatingProfit (Op. Profit/Sales) AssetTurnover (Sales/Avg Assets) Leverage (Avg. Assets/Avg. Equity) AEO 2007 2006 2005 2004 2003 ROE 30.11% 27.72% 25.22% 9.83% 30.73% Taxes (NI/EBT) 61.58% 61.58% 61.12% 56.29% 61.79% Financing (EBT/Operating Profit) 107.21% 102.89% 100.75% 87.67% 101.79% Operating Profit (Op. Profit/Sales) 21.00% 20.07% 19.35% 8.00% 9.64% Asset Turnover (Sales/Avg Assets) 155.54% 160.02% 177.06% 191.73% 394.73% Leverage (Avg. Assets/Avg. Equity) 139.66% 136.21% 132.22% 129.84% 128.38% 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 2007 2006 2005 2004 2003 GPS Taxes (NI/EBT) Financing (EBT/Operating Profit) OperatingProfit (Op. Profit/Sales) AssetTurnover (Sales/Avg Assets) Leverage (Avg. Assets/Avg. Equity) GPS 2007 2006 2005 2004 2003 ROE 14.68% 21.64% 24.67% 25.54% 26.10% Taxes (NI/EBT) 61.55% 62.52% 64.05% 64.05% 59.62% Financing (EBT/Operating Profit) 107.67% 102.75% 89.78% 88.91% 79.09% Operating Profit (Op. Profit/Sales) 7.36% 10.89% 12.82% 11.94% 7.01% Asset Turnover (Sales/Avg Assets) 187.85% 172.95% 160.85% 157.98% 296.29% Leverage (Avg. Assets/Avg. Equity) 160.15% 178.83% 208.11% 237.77% 266.72%
  • 79. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 75 Credit Rating Evaluations Credit Agencies‟ jobs are to evaluate and perform analysis on a company‟s ability to cover it payments of its bills to suppliers, debt service coverage on debt financing, and all other obligations. Standard & Poor‟s, Moody‟s Investor Services and Fitch are the agencies which are most commonly recognized and assign ratings accordingly using extensive financial information as well as other qualitative information. The higher the rating of a company the easier it is for that company to secure more favorable costs of capital when borrowing in the issuance of debt and thereby reducing their total debt service coverage requirements. Below is a qualitative comprehensive overview of the rating system followed by a quantitative analysis of each rating‟s ratio. Qualitative Credit Analysis Ratings Quantitative Credit Analysis to derive ratings from AAA AA A BBB BB B CCC EBITA Interest Coverage 21.40 10.10 6.10 3.7 2.1 0.8 0.1 Funds from Operations/Total Debt 26.40 12.90 9.10 5.80 3.4 1.8 1.3 Free Operating Cash Flow/ Total Debt 84.20 25.20 15.00 8.50 2.6 -3.2 -12.9 Return on Capital 128.80 55.40 43.20 30.80 18.8 7.8 1.6 Operating Income/ Sales 34.90 21.70 19.40 13.6 11.6 6.6 1 Long-term Debt/ Capital 27.00 22.10 18.60 15 15.9 11.9 11.9 Total Debt/ Capital 13.30 28.20 33.90 42.5 57.2 69.7 68.8 S&P Issuer & LTD Credit Rating 22.90 37.70 42.50 48.2 62.6 74.8 87.7
  • 80. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 76 Company Ratings GPS BB+ ANF N/A as per S&P Documented from S&P STARS Report S&P Credit Rating Source: S&P, company reports, Vickers. AEO N/A as per S&P Documented from S&P STARS Report S&P Credit Rating Source: S&P, company reports, Vickers. URBN N/A as per S&P Documented from S&P STARS Report S&P Credit Rating Source: S&P, company reports, Vickers. Given the unavailability of S&P ratings for three of the companies, we created charts that follow with information pertinent to potential or future assignments. This may help illustrate the process of achieving ratings. 2007 2006 2005 2004 2003 AAA AA A BBB BB B CCC EBIT Interest Coverage 0 0 0 0 0 21.40 10.10 6.10 3.7 2.1 0.8 0.1 EBITA Interest Coverage 0 0 0 0 0 26.40 12.90 9.10 5.80 3.4 1.8 1.3 Funds from Operations/Total Debt 0 0 0 10.16% 5.09% 84.20 25.20 15.00 8.50 2.6 -3.2 -12.9 Free Operating Cash Flow/ Total Debt 0 0 0 6.73% 2.13% 128.80 55.40 43.20 30.80 18.8 7.8 1.6 Return on Capital 19% 18% 18% 7% 12% 34.90 21.70 19.40 13.6 11.6 6.6 1 Operating Income/ Sales 21% 20% 19% 8% 10% 27.00 22.10 18.60 15 15.9 11.9 11.9 Long-term Debt/ Capital 0 0 0 0 0 13.30 28.20 33.90 42.5 57.2 69.7 68.8 Total Debt/ Capital 22.90 37.70 42.50 48.2 62.6 74.8 87.7 S&P Issuer & LTD Credit Rating 2007 2006 2005 2004 2003 AAA AA A BBB BB B CCC EBITA Interest Coverage 0 0 0 0 0 21.40 10.10 6.10 3.7 2.1 0.8 0.1 EBITA Interest Coverage 0 0 0 0 0 26.40 12.90 9.10 5.80 3.4 1.8 1.3 Funds from Operations/Total Debt 0 0 0 0 0 84.20 25.20 15.00 8.50 2.6 -3.2 -12.9 Free Operating Cash Flow/ Total Debt 0 0 0 0 0 128.80 55.40 43.20 30.80 18.8 7.8 1.6 Return on Capital 13% 17% 17% 14% 10% 34.90 21.70 19.40 13.6 11.6 6.6 1 Operating Income/ Sales 13% 19% 18% 15% 11% 27.00 22.10 18.60 15 15.9 11.9 11.9 Long-term Debt/ Capital 0 0 0 0 0 13.30 28.20 33.90 42.5 57.2 69.7 68.8 Total Debt/ Capital 0 0 0 0 0 22.90 37.70 42.50 48.2 62.6 74.8 87.7 S&P Issuer & LTD Credit Rating AEO URBN
  • 81. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 77 Note: ANF‟s computations were done according to information available. They are for illustrative purposes of how rating the company might be approached and results are not accurate. The high levels of coverage are due to low debt as denominators in our calculations. Gap‟s presence as one of the three top retailers in the country and an apparel institution reflects its ability to maintain the BB+ rating in the face of economic downturns, revolving management and a restructured approach to inventory management. Improvements to operating margins and a turnaround in operations efficiency, reductions in debt, with modest increases in sales would help push Gap into BBB territory, (Investment Quality) reducing costs of capital and investment risk to bond and debt holders. 2007 2006 2005 2004 2003 AAA AA A BBB BB B CCC EBIT Interest Coverage 0 0 0 0 0 21.40 10.10 6.10 3.7 2.1 0.8 0.1 EBITA Interest Coverage 0 0 0 0 0 26.40 12.90 9.10 5.80 3.4 1.8 1.3 Funds from Operations/Total Debt 2125% 773% 795% 0% 0% 84.20 25.20 15.00 8.50 2.6 -3.2 -12.9 Free Operating Cash Flow/ Total Debt 654% 337% 450% 0% 0% 128.80 55.40 43.20 30.80 18.8 7.8 1.6 Return on Capital 10% 9% 6% 8% 13% 34.90 21.70 19.40 13.6 11.6 6.6 1 Operating Income/ Sales 20% 20% 19% 19% 20% 27.00 22.10 18.60 15 15.9 11.9 11.9 Long-term Debt/ Capital 0 0 0 0 0 13.30 28.20 33.90 42.5 57.2 69.7 68.8 Total Debt/ Capital 0.39% 0.96% 0.96% 0 0 22.90 37.70 42.50 48.2 62.6 74.8 87.7 S&P Issuer & LTD Credit Rating ANF
  • 82. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 78 The Z-Score: Perspectives on Bankruptcy Dr. Edward Altman of NYU‟s Stern School of Business developed a formula which has been able to boast a 70- 80% reliability factor in assessing the potential of company entering bankruptcy within a 2 year period. It asserts that financial ratios can give near forensic analysis in determining the financial well being of enterprises. It uses 5 ratios as in a collection of observations for analysis of more than one statistical variable at a time; a multivariate statistic. Each equation is assigned a predetermined coefficient for its corresponding function (Xi). The 5 equations combined for correlation analysis are: (X1) Working Capital: Total Assets (X2) Retained Earnings: Total Assets (X3) EBIT: Total Assets (X4) Market Value: Book Value Total Debt (X5) Sales: Total Assets Z = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 + 1.0X5 In the 30 year period from 1969 to the Millennium ~80% of firms scored as in distress failed the following year and the model predicted failures within the second year ~70% of the time. Table Prediction Scale Z > 2.99 No Bankruptcy, Z < 1.81 Bankruptcy, 2.99 > Z >1.81 Indeterminate Z Scores - 5.00 10.00 15.00 20.00 25.00 2007 2006 2005 2004 2003 Year ZScore AEO URBN ANF GPS
  • 83. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 79 Apparently none of the companies are in present danger of a default. URBN has been trending down but remains high above critical concern. AEO is in an oscillating trend with no cause for alarm. GPS and ANF are in a consistent and steady trend multiple times above levels of concern. The following table illustrates a decomposition of the Z-Score Components and their contribution to the overall score. 2007 2006 2005 2004 2003 ANF 8.99 8.77 8.74 12.15 11.61 URBN 13.39 17.12 19.23 18.57 11.09 AEO 8.80 13.20 10.54 13.72 10.20 GPS 7.51 7.36 5.63 5.59 6.48 Z-score components: ANF 2007 2006 2005 2004 2003 1. (WC/Total Assets) x 1.2 0.31 0.31 0.21 0.47 0.47 2. (RE/Total assets) x 1.4 1.03 1.06 1.12 1.07 1.01 3. (EBIT/Total assets) x 3.3 0.99 1.01 0.86 0.92 1.05 4. ( Mkt. value of Pref. & Common Stk./BV of liabilities) x 0.6 5.03 4.61 4.96 8.13 5.88 5. (Sales/Total assets) x 1.0 1.64 1.78 1.59 1.56 3.21 Total Scores 8.99 8.77 8.74 12.15 11.61 Z-score components: URBN 2007 2006 2005 2004 2003 1. (WC/Total Assets) x 1.2 0.31 0.40 0.42 0.40 0.45 2. (RE/Total assets) x 1.4 0.84 0.80 0.76 0.82 0.81 3. (EBIT/Total assets) x 3.3 0.62 0.94 0.91 0.77 0.56 4. ( Mkt. value of Pref. & Common Stk./BV of liabilities) x 0.6 10.13 13.29 15.29 14.80 6.12 5. (Sales/Total assets) x 1.0 1.49 1.69 1.85 1.77 3.14 Total Scores 13.39 17.12 19.23 18.57 11.09 Z-score components: AEO 2007 2006 2005 2004 2003 1. (WC/Total Assets) x 1.2 0.45 0.54 0.54 0.48 0.46 2. (RE/Total assets) x 1.4 0.92 0.85 0.79 0.88 0.88 3. (EBIT/Total assets) x 3.3 1.04 0.98 0.95 0.42 0.64 4. ( Mkt. value of Pref. & Common Stk./BV of liabilities) x 0.6 4.84 9.23 6.49 10.03 4.27 5. (Sales/Total assets) x 1.0 1.56 1.60 1.77 1.92 3.95 Total Scores 8.80 13.20 10.54 13.72 10.20 Z-score components: GPS 2007 2006 2005 2004 2003 1. (WC/Total Assets) x 1.2 0.40 0.46 0.49 0.49 0.37 2. (RE/Total assets) x 1.4 1.45 1.32 1.01 0.85 0.76 3. (EBIT/Total assets) x 3.3 0.52 0.71 0.68 0.62 0.36 4. ( Mkt. value of Pref. & Common Stk./BV of liabilities) x 0.6 3.26 3.14 1.83 2.06 2.03 5. (Sales/Total assets) x 1.0 1.88 1.73 1.61 1.58 2.96 Total Scores 7.51 7.36 5.63 5.59 6.48
  • 84. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 80 Discounted Cash Flow Valuation – P/E Comments We can estimate the value of a company relative to its current market price to determine its attractiveness as an investment. The analysis uses future-free-cash-flow projections discounting them to the weighted average cost of capital. This helps us to arrive at a present value for the company which is used to evaluate the potential for investment. When the value we calculate through the DCF analysis is higher than the current pricing of the company‟s shares the opportunity may prove to be profitable. Discussion as to the current pricing of the shares in the Retail Apparel sector vs. our assumptions on the DCF is consistent across GPS, AEO, and ANF. We show large DCF premiums (40 to 171%) to current share pricing in all three with the exception of URBN which trades within an approximate 10% range of its DCF. Growth momentum of the stock and its P/E of approximately twice that of the other 3 companies may be indicative of a pricing higher than the industry and competitors averages. Hence this may explain the very small discount in the price to its DCF modeling versus the other retailers. The following Price to Earnings Ratios as of February 2008 Value Line reports: AEO 12.5, GPS 16.7, ANF 14.5 and URBN 28.9. We needed to adjust the “fixed capital investment” and also the second stage growth to arrive at a more accurate DCF model for each. Therefore we are assuming a higher fixed capital investment to drive the values.
  • 85. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 81 GPS MODEL: Discounted Free Cash Flow to Equity Two Stages: Five Years & Perpetuity NOTE: The comments below indicate sources that may be used INPUTS Gap for each estimated variable on the left. Use other values if you think they are better estimates! Sales (TTM) 18,400 May use last four quarters, or most recent FY, if RECENT! Sales growth rate (First Stage) 5.50% Based on Value Line or on column D on Past Facts worksheet Operating profit margin 11.70% Based on Value Line or on column B of the Past Facts Worksheet. Depreciation and amortization (percent of sales) 3.32% Column G of the Past Facts worksheet. Additional fixed capital investment (percent of sales) 3.00% Column F of the Past Facts Worksheet. Additional working capital investment (% of increase in sales) 2.00% Column I of the Past Facts Worksheet. Tax rate 38.00% Assumed for the future Required return 9.33% Based on CAPM or WACC (about the same for Dell due to low debt). Growth rate for second stage 2.50% Assumed. Non operating assets 1,272 Based on the most current balance sheet. Debt 513 Based on the most current balance sheet. Shares outstanding 751.00 YEAR YEAR YEAR YEAR YEAR Terminal 1 2 3 4 5 Value Sales 19,412.00 20,479.66 21,606.04 22,794.37 24,048.06 Operating Profit before tax 2,271.20 2,396.12 2,527.91 2,666.94 2,813.62 Taxes (863.06) (910.53) (960.60) (1,013.44) (1,069.18) Operating Profit after tax 1,408.15 1,485.59 1,567.30 1,653.50 1,744.45 Plus: Depreciation and Amortization 644.48 679.92 717.32 756.77 798.40 Less: Additional Fixed Capital (582.36) (614.39) (648.18) (683.83) (721.44) Less: Additional Working Capital (20.24) (21.35) (22.53) (23.77) (25.07) Estimated Free Cash Flow 1,450.02 1,529.78 1,613.91 1,702.68 1,796.33 1,841.23 Terminal value 26,970.21 Present value 1,326.32 1,279.89 1,235.09 1,191.86 1,150.14 17,268.27 Total present value 23,451.57 Plus non-operating assets 1,272.00 Total value of all assets 24,723.57 Minus financial debt (513.00) Equity value 24,210.57 Per share 32.24 34 35 36 37 38 39 40 41 42 43 44 45 46 47 D E F G H I J Instructions: Change as needed only the numbers in blue . WACC Calculation: Reuters & Risk free rate 0.0475 Clear Station Value Line Beta 1 Beta 1.42 1 Market risk premium 0.047 1.19 0.9 r = required rate of return 9.45% After-tax cost of debt 5.92% Weighted Debt 513 3.49% 5.92% 0.21% Equity 14,200 96.51% 9.45% 9.12% Totals 14,713 100.00% WACC 9.33%
  • 86. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 82 The model gives us a price which reflects a 47.28% premium in Gap‟s pricing as compared to the recent trading range of the 21 dollar per share. We adjusted the growth rate second stage to a conservative 2.5% and additional fixed capital investment to 3% from 1%. It altered GPS DCF by less than 10%. We do not radically adjust GPS‟s fixed capital investment as we do with ANF (at Professor Holzmann‟s suggestion) for illustration purposes.
  • 87. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 83 AEO AEO follows suit with a current pricing of $23 versus the Discounted Cash Flow modeling of 41.18. AEO shows significant pricing discount indicating a potentially attractive investment. AEO MODEL: Discounted Free Cash Flow to Equity Two Stages: Five Years & Perpetuity INPUTS Dell Sales (TTM) 2,794 Sales growth rate (First Stage) 12.00% Operating profit margin 24.50% Depreciation and amortization (percent of sales) 3.20% Additional fixed capital investment (percent of sales) 4.00% Additional working capital investment (% of increase in sales) 1.00% Tax rate 38.50% Required return 10.39% Growth rate for second stage 3.00% Non operating assets 776 Debt - Shares outstanding 213.00 YEAR YEAR YEAR YEAR YEAR Terminal 1 2 3 4 5 Value Sales 3,129.28 3,504.79 3,925.37 4,396.41 4,923.98 Operating Profit before tax 766.67 858.67 961.72 1,077.12 1,206.38 Taxes (295.17) (330.59) (370.26) (414.69) (464.45) Operating Profit after tax 471.50 528.08 591.45 662.43 741.92 Plus: Depreciation and Amortization 100.14 112.15 125.61 140.69 157.57 Less: Additional Fixed Capital (125.17) (140.19) (157.01) (175.86) (196.96) Less: Additional Working Capital (3.35) (3.76) (4.21) (4.71) (5.28) Estimated Free Cash Flow 443.12 496.29 555.85 622.55 697.25 718.17 Terminal value 9,718.15 Present value 401.41 407.27 413.20 419.23 425.35 5,928.36 Total present value 7,994.82 Plus non-operating assets 776.00 Total value of all assets 8,770.82 Minus financial debt 0.00 Equity value 8,770.82 Per share 41.18 34 35 36 37 38 39 40 41 42 43 44 45 46 47 D E F G H I J Instructions: Change as needed only the numbers in blue . WACC Calculation: Reuters & Risk free rate 0.0475 Clear Station Value Line Beta 1.2 Beta 1.42 1 Market risk premium 0.047 1.19 0.9 r = required rate of return 10.39% After-tax cost of debt 0.00% Weighted Debt - 0.00% 0.00% 0.00% Equity 4,900 100.00% 10.39% 10.39% Totals 4,900 100.00% WACC 10.39%
  • 88. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 84 URBN URBN is currently trading at $30.73. In order to get the model close to the share price, increase the second stage growth rate to 5%. This is a 20% premium over the DCF. Momentum growth stocks usually will display this type of performance. URBN MODEL: Discounted Free Cash Flow to Equity Two Stages: Five Years & Perpetuity INPUTS Dell Sales (TTM) 1,225 Sales growth rate (First Stage) 21.00% Operating profit margin 21.00% Depreciation and amortization (percent of sales) 4.00% Additional fixed capital investment (percent of sales) 6.00% Additional working capital investment (% of increase in sales) 1.00% Tax rate 37.00% Required return 11.80% Growth rate for second stage 5.00% Non operating assets 300 Debt - Shares outstanding 166.00 YEAR YEAR YEAR YEAR YEAR Terminal 1 2 3 4 5 Value Sales 1,481.91 1,793.11 2,169.67 2,625.30 3,176.61 Operating Profit before tax 311.20 376.55 455.63 551.31 667.09 Taxes (115.14) (139.32) (168.58) (203.99) (246.82) Operating Profit after tax 196.06 237.23 287.05 347.33 420.27 Plus: Depreciation and Amortization 59.28 71.72 86.79 105.01 127.06 Less: Additional Fixed Capital (88.91) (107.59) (130.18) (157.52) (190.60) Less: Additional Working Capital (2.57) (3.11) (3.77) (4.56) (5.51) Estimated Free Cash Flow 163.85 198.25 239.89 290.26 351.22 368.78 Terminal value 5,423.25 Present value 146.55 158.61 171.67 185.79 201.08 3,104.92 Total present value 3,968.63 Plus non-operating assets 300.00 Total value of all assets 4,268.63 Minus financial debt 0.00 Equity value 4,268.63 Per share 25.71 34 35 36 37 38 39 40 41 42 43 44 45 46 47 D E F G H I J Instructions: Change as needed only the numbers in blue . WACC Calculation: Reuters & Risk free rate 0.0475 Clear Station Value Line Beta 1.5 Beta 1.42 1 Market risk premium 0.047 1.19 0.9 r = required rate of return 11.80% After-tax cost of debt 0.00% Weighted Debt - 0.00% 0.00% 0.00% Equity 4,700 100.00% 11.80% 11.80% Totals 4,700 100.00% WACC 11.80%
  • 89. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 85 ANF Again we note that the adjustment to fixed capital of 15% from a 3-5% level revised the DCF pricing from ~ $190 to within a dollar of its trading range. GPS can be seen as having very little adjustment and therefore remains at a heft discount in current pricing to its DCF model. MODEL: Discounted Free Cash Flow to Equity Two Stages: Five Years & Perpetuity NOTE: The comments below indicate sources that may be used INPUTS Dell for each estimated variable on the left. Use other values if you think they are better estimates! 53,100 Sales (TTM) 5,600 May use last four quarters, or most recent FY, if RECENT! Sales growth rate (First Stage) 14.00% Based on Value Line or on column D on Past Facts worksheet Operating profit margin 24.00% Based on Value Line or on column B of the Past Facts Worksheet. Depreciation and amortization (percent of sales) 4.40% Column G of the Past Facts worksheet. Additional fixed capital investment (percent of sales) 15.00% Column F of the Past Facts Worksheet. Additional working capital investment (% of increase in sales) 2.00% Column I of the Past Facts Worksheet. Tax rate 39.00% Assumed for the future Required return 9.01% Based on CAPM or WACC (about the same for Dell due to low debt). Growth rate for second stage 3.00% Assumed. Non operating assets 676 Based on the most current balance sheet. 6545 Debt 27 Based on the most current balance sheet. Shares outstanding 86.15 74.52 YEAR YEAR YEAR YEAR YEAR Terminal 1 2 3 4 5 Value Sales 6,384.00 7,277.76 8,296.65 9,458.18 10,782.32 Operating Profit before tax 1,532.16 1,746.66 1,991.20 2,269.96 2,587.76 Taxes (597.54) (681.20) (776.57) (885.29) (1,009.23) Operating Profit after tax 934.62 1,065.46 1,214.63 1,384.68 1,578.53 Plus: Depreciation and Amortization 280.90 320.22 365.05 416.16 474.42 Less: Additional Fixed Capital (957.60) (1,091.66) (1,244.50) (1,418.73) (1,617.35) Less: Additional Working Capital (15.68) (17.88) (20.38) (23.23) (26.48) Estimated Free Cash Flow 242.23 276.15 314.81 358.88 409.12 421.40 =year 6 Terminal value 7,010.34 = PV (at beginning of year 6) at this point of all Future Cash Flow Present value 222.21 232.38 243.01 254.14 265.77 4,553.93 Total present value 5,771.43 = DCF of (CFO-CAPEX) aka "Free CF" Plus non-operating assets 675.67 =investments Total value of all assets 6,447.10 Minus financial debt (27.00) Equity value 6,420.10 Per share 74.52 34 35 36 37 38 39 40 41 42 43 44 45 46 47 D E F G H I J Instructions: Change as needed only the numbers in blue . WACC Calculation: Reuters & Risk free rate 0.0475 Clear Station Value Line Beta 0.91 Beta 1.42 1 Market risk premium 0.047 1.19 0.9 r = required rate of return 9.03% After-tax cost of debt 5.00% Weighted Debt 27 0.40% 5.00% 0.02% Equity 6,800 99.60% 9.03% 8.99% Totals 6,827 100.00% WACC 9.01%
  • 90. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 86 DCF Summary More globally the divergence in current pricing and DCF valuations, URBN excluded, may be due to several current factors: 1. US retail environment is under a lot of pressure and recessionary tendencies in the economy are keeping spending in retail family and teen apparel demographic low. Same store sales flat lined in November for many in the industry, sinking 6% for example in Gap‟s case in December. 2. Value line analysts have noted on several of the retail apparel companies that target the 15 to 25 or 30 year old demographic has experienced a drop in spending. 3. This demographic is currently increasing spending on must-have consumer electronics (I-Phones, I-Pods) and has moved apparel spending away. This is possibly the reasoning behind the drop in December 07‟s same store sales by 6% The Value Line timeliness of retailers URBN and GPS are 2, ANF is 3 and AEO is 4 reflecting inconsistencies. Technically the ranges are 1 through 4 also not consistent. Safety ratings at 3 reflect a consistency however and should be monitored for changes due to prevailing adverse economic conditions.
  • 91. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 87 Quarterly (10Q) Commentary With fiscal years ending January 31st for most apparel companies and 10ks not available for FY 2008 until mid to late March we submit some highlights and notes from the available 4 quarterly reports for each company. As well comments on the common sizing are presented. GAP: Q1 2008 revenue surpassed Q1 2007 but trended down consistently in the 2nd through the fourth quarters as seen on the charts. Earnings however increased for the four quarters from .93 in 2007 to 1.09 for 2008. Dividends remained the same. Quarterly same store sales were negative in each of the quarters. Gap has been experiencing this for the past 3 years. Operating income declined for three of the four quarter as percentages of net sales. COG‟s remained consistent and stable in proportion. Sales decreased as mentioned and net income to common shareholders increased in each of the first three quarters with a slight pull back expected in Q4 2008. AEO Sales rose over the past 4 quarters and this is reflected in same store sales growth of 1%. SGA increased from 2007 as a percentage of revenue but over all have been decreasing on a quarterly basis since. COGS increased in the last three quarters and over 2007‟s numbers in general. The increase in sales of 9% according to management was correlated to their selling square footage growth of 10%, a 30% increase in e-commerce to $240 million dollars and the same store 1%. Maintaining the consistent growth AEO‟s common size shows quarter over quarter makes it an attractive proposition. ANF COGS increased over all through out the four quarters of 2008 while SGA expenses skyrocketed from 2007 through out the first 3 quarters of 2008. Probably due to explosive store growth management has successfully brought it back within 1% in Q4 2008 to 2007 levels. Net income also shows steady increases for every quarter in 2008.
  • 92. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 88 URBN Cost of goods sold remained consistent, SGA has decreased, operating income increased quarter over quarter while net income to shareholders declined from Q1 2008 into Q3 recovering significantly in Q4. Management attributes better than 15% growth in square footage, and “direct to consumer sales increases of 38%” to its 29% increase in sales for the quarter.
  • 93. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 89 Appendix A: Common Size Statements Horizontal Common Size Income Statements – Last 5 Fiscal Years Urban Outfitters Inc HORIZONTAL COMMON SIZE For Years Ended 2003 Net Sales or Revenues 1,224.72 12.14% 1,092.11 31.94% 827.75 50.95% 548.36 29.71% 422.75 Cost of Goods Sold 717.08 18.69% 604.16 32.16% 457.14 46.30% 312.47 23.14% 253.76 Gross Profit 507.64 4.04% 487.95 31.66% 370.61 57.11% 235.89 39.59% 168.99 Depreciation, Depletion & Amortization 55.71 41.61% 39.34 23.48% 31.86 42.11% 22.42 23.12% 18.21 Selling, General & Admin Expenses 287.93 19.52% 240.91 26.54% 190.38 43.39% 132.77 25.98% 105.39 Operating Expenses - Total 1,060.73 19.94% 884.41 30.18% 679.38 45.27% 467.66 23.93% 377.36 Operating Income 163.99 -21.04% 207.70 39.99% 148.37 83.83% 80.71 77.78% 45.40 Non-Operating Interest Income 6.53 18.94% 5.49 112.79% 2.58 69.74% 1.52 1.33% 1.5 Earnings Before Interest And Taxes (EBIT) 170.16 -19.89% 212.40 41.42% 150.19 84.74% 81.30 76.47% 46.07 Interest Expense On Debt 0 0 0 0 0 Pretax Income 170.16 -19.89% 212.40 41.42% 150.19 84.74% 81.30 76.47% 46.07 IncomeTaxes 53.95 -33.88% 81.6 36.68% 59.7 81.29% 32.93 76.47% 18.66 Net Income Before Extra Items/Preferred Div 116.21 -11.15% 130.80 44.55% 90.49 87.04% 48.38 76.50% 27.41 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 116.21 -11.15% 130.80 44.55% 90.49 87.04% 48.38 76.50% 27.41 Preferred Dividend Requirements 0 0 0 0 0 Net Income Available 116.21 -11.15% 130.80 44.55% 90.49 87.04% 48.38 76.50% 27.41 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 94. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 90 Abercrombie & Fitch Company HORIZONTAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 3,318.16 19.16% 2,784.71 37.77% 2,021.25 18.35% 1,707.81 7.02% 1,595.76 Cost of Goods Sold 963.00 14.85% 838.49 39.21% 602.32 -34.80% 923.81 4.65% 882.78 Gross Profit 2,355.16 21.01% 1,946.22 37.16% 1,418.93 80.99% 784.00 9.96% 712.98 Depreciation, Depletion & Amortization 146.16 17.67% 124.21 17.39% 105.81 58.87% 66.6 16.99% 56.93 Selling, General & Admin Expenses 1,560.90 22.78% 1,271.31 36.84% 929.08 140.84% 385.76 12.33% 343.43 Operating Expenses - Total 2,660.07 19.37% 2,228.47 36.49% 1,632.72 18.64% 1,376.18 7.25% 1,283.14 Operating Income 658.09 18.31% 556.24 43.16% 388.54 17.16% 331.63 6.08% 312.62 Non-Operating Interest Income 13.9 108.40% 6.67 27.78% 5.22 40.70% 3.71 -1.59% 3.77 Earnings Before Interest And Taxes (EBIT) 671.99 22.31% 549.41 55.71% 352.85 5.22% 335.34 5.99% 316.39 Interest Expense On Debt Pretax Income 671.99 22.31% 549.41 55.71% 352.85 5.22% 335.34 5.99% 316.39 IncomeTaxes 249.8 15.95% 215.43 57.85% 136.48 4.79% 130.24 7.24% 121.45 Net Income Before Extra Items/Preferred Div 422.19 26.41% 333.99 54.35% 216.38 5.50% 205.10 5.21% 194.94 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 422.19 26.41% 333.99 54.35% 216.38 5.50% 205.10 5.21% 194.94 Preferred Dividend Requirements 0 0 0 0 0 Net Income Available 422.19 26.41% 333.99 54.35% 216.38 5.50% 205.10 5.21% 194.94 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 95. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 91 American Eagle Outfitters HORIZONTAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 2,794.41 21.00% 2,309.37 22.76% 1,881.24 23.77% 1,519.97 3.88% 1,463.14 Cost of Goods Sold 1,453.98 17.80% 1,234.32 23.01% 1,003.43 3.90% 965.72 4.90% 920.64 Gross Profit 1,340.43 24.69% 1,075.05 22.47% 877.81 58.38% 554.25 2.17% 542.50 Depreciation, Depletion & Amortization 88.03 18.03% 74.58 9.24% 68.27 21.30% 56.28 11.09% 50.66 Selling, General & Admin Expenses 665.61 23.98% 536.89 20.53% 445.43 18.34% 376.39 7.31% 350.75 Operating Expenses - Total 2,207.62 19.60% 1,845.79 21.66% 1,517.14 8.49% 1,398.39 5.77% 1,322.06 Operating Income 586.79 26.58% 463.58 27.32% 364.11 199.48% 121.58 -13.83% 141.09 Non-Operating Interest Income 0 Earnings Before Interest And Taxes (EBIT) 629.07 31.88% 477.00 29.97% 367.00 242.99% 107.00 -25.69% 144.00 Interest Expense On Debt 0 Pretax Income 629.07 31.89% 476.97 30.02% 366.84 244.16% 106.59 -25.78% 143.61 IncomeTaxes 241.71 31.89% 183.26 28.51% 142.6 206.07% 46.59 -15.11% 54.88 Net Income Before Extra Items/Preferred Div 387.36 31.89% 293.71 30.99% 224.23 273.72% 60.00 -32.39% 88.74 Extr Items & Gain(Loss) Sale of Assets 0 0.44 -10.89 0 0 Net Income Before Preferred Dividends 387.36 31.69% 294.15 37.88% 213.34 255.57% 60.00 -32.39% 88.74 Preferred Dividend Requirements 0 0 0 0 0 Net Income Available 387.36 31.89% 293.71 30.99% 224.23 273.72% 60.00 -32.39% 88.74 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 96. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 92 Gap Inc HORIZONTAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 15,943.00 -0.50% 16,023.00 -1.50% 16,267.00 2.61% 15,854.00 9.68% 14,454.71 Cost of Goods Sold 9,764.00 2.47% 9,529.00 2.84% 9,266.00 0.48% 9,222.00 5.27% 8,760.68 Gross Profit 6,179.00 -4.85% 6,494.00 -7.24% 7,001.00 5.56% 6,632.00 16.47% 5,694.03 Depreciation, Depletion & Amortization 530 -15.20% 625 0.81% 620 -6.63% 664 -14.97% 780.88 Selling, General & Admin Expenses 4,446.00 7.81% 4,124.00 -4.00% 4,296.00 5.42% 4,075.00 4.47% 3,900.52 Operating Expenses - Total 14,740.00 3.24% 14,278.00 0.68% 14,182.00 1.58% 13,961.00 3.86% 13,442.08 Operating Income 1,203.00 -31.06% 1,745.00 -16.31% 2,085.00 10.14% 1,893.00 86.94% 1,012.63 Non-Operating Interest Income 131 40.86% 93 57.63% 59 55.26% 38 3.12% 36.85 Earnings Before Interest And Taxes (EBIT) 1,305.00 -29.00% 1,838.00 -9.86% 2,039.00 6.36% 1,917.00 82.66% 1,049.47 Interest Expense On Debt 49 -12.50% 56 -68.36% 177 -27.16% 243 -6.39% 259.6 Pretax Income 1,264.00 -29.50% 1,793.00 -4.22% 1,872.00 11.23% 1,683.00 110.14% 800.88 IncomeTaxes 486 -28.53% 680 -5.82% 722 10.57% 653 101.90% 323.42 Net Income Before Extra Items/Preferred Div 778 -30.10% 1,113.00 -3.22% 1,150.00 11.65% 1,030.00 115.72% 477.46 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 778 -30.10% 1,113.00 -3.22% 1,150.00 11.65% 1,030.00 115.72% 477.46 Preferred Dividend Requirements 0 0 0 0 0 Net Income Available 778 -30.60% 1,121.00 -6.51% 1,199.00 11.22% 1,078.00 125.78% 477.46 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 97. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 93 Vertical Common Size Income Statements – Last 5 Fiscal Years Urban Outfitters Inc VERTICAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 1,224.72 100.00% 1,092.11 100.00% 827.75 100.00% 548.36 100.00% 422.75 Cost of Goods Sold 717.08 58.55% 604.16 55.32% 457.14 55.23% 312.47 56.98% 253.76 Gross Profit 507.64 41.45% 487.95 44.68% 370.61 44.77% 235.89 43.02% 168.99 Depreciation, Depletion & Amortization 55.71 4.55% 39.34 3.60% 31.86 3.85% 22.42 4.09% 18.21 Selling, General & Admin Expenses 287.93 23.51% 240.91 22.06% 190.38 23.00% 132.77 24.21% 105.39 Operating Expenses - Total 1,060.73 86.61% 884.41 80.98% 679.38 82.08% 467.66 85.28% 377.36 Operating Income 163.99 13.39% 207.70 19.02% 148.37 17.92% 80.71 14.72% 45.40 Non-Operating Interest Income 6.53 0.53% 5.49 0.50% 2.58 0.31% 1.52 0.28% 1.5 Earnings Before Interest And Taxes (EBIT) 170.16 13.89% 212.40 19.45% 150.19 18.14% 81.30 14.83% 46.07 Interest Expense On Debt 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Pretax Income 170.16 13.89% 212.40 19.45% 150.19 18.14% 81.30 14.83% 46.07 IncomeTaxes 53.95 4.41% 81.6 7.47% 59.7 7.21% 32.93 6.01% 18.66 Net Income Before Extra Items/Preferred Div 116.21 9.49% 130.80 11.98% 90.49 10.93% 48.38 8.82% 27.41 Extr Items & Gain(Loss) Sale of Assets 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Before Preferred Dividends 116.21 9.49% 130.80 11.98% 90.49 10.93% 48.38 8.82% 27.41 Preferred Dividend Requirements 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Available 116.21 9.49% 130.80 11.98% 90.49 10.93% 48.38 8.82% 27.41 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 98. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 94 Abercrombie & Fitch Company VERTICAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 3,318.16 100.00% 2,784.71 100.00% 2,021.25 100.00% 1,707.81 100.00% 1,595.76 Cost of Goods Sold 963.00 29.02% 838.49 30.11% 602.32 29.80% 923.81 54.09% 882.78 Gross Profit 2355.16 70.98% 1946.22 69.89% 1418.93 70.20% 784 45.91% 712.98 Depreciation, Depletion & Amortization 146.16 4.40% 124.21 4.46% 105.81 5.23% 66.6 3.90% 56.93 Selling, General & Admin Expenses 1,560.90 47.04% 1,271.31 45.65% 929.08 45.97% 385.76 22.59% 343.43 Operating Expenses - Total 2,660.07 80.17% 2,228.47 80.03% 1,632.72 80.78% 1,376.18 80.58% 1,283.14 Operating Income 658.09 19.83% 556.24 19.97% 388.54 19.22% 331.63 19.42% 312.62 Non-Operating Interest Income 13.9 0.42% 6.67 0.24% 5.22 0.26% 3.71 0.22% 3.77 Earnings Before Interest And Taxes (EBIT) 671.99 20.25% 549.41 19.73% 352.85 17.46% 335.34 19.64% 316.39 Interest Expense On Debt 0.00% 0.00% 0.00% 0.00% Pretax Income 671.99 20.25% 549.41 19.73% 352.85 17.46% 335.34 19.64% 316.39 IncomeTaxes 249.8 7.53% 215.43 7.74% 136.48 6.75% 130.24 7.63% 121.45 Net Income Before Extra Items/Preferred Div 422.19 12.72% 333.99 11.99% 216.38 10.71% 205.10 12.01% 194.94 Extr Items & Gain(Loss) Sale of Assets 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Before Preferred Dividends 422.19 12.72% 333.99 11.99% 216.38 10.71% 205.10 12.01% 194.94 Preferred Dividend Requirements 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Available 422.19 12.72% 333.99 11.99% 216.38 10.71% 205.10 12.01% 194.94 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 99. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 95 American Eagle Outfitters VERTICAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 2,794.41 100.00% 2,309.37 100.00% 1,881.24 100.00% 1,519.97 100.00% 1,463.14 Cost of Goods Sold 1,453.98 52.03% 1,234.32 53.45% 1,003.43 53.34% 965.72 63.54% 920.64 Gross Profit 1340.43 47.97% 1075.05 46.55% 877.81 46.66% 554.25 36.46% 542.5 Depreciation, Depletion & Amortization 88.03 3.15% 74.58 3.23% 68.27 3.63% 56.28 3.70% 50.66 Selling, General & Admin Expenses 665.61 23.82% 536.89 23.25% 445.43 23.68% 376.39 24.76% 350.75 Operating Expenses - Total 2,207.62 79.00% 1,845.79 79.93% 1,517.14 80.65% 1,398.39 92.00% 1,322.06 Operating Income 586.79 21.00% 463.58 20.07% 364.11 19.35% 121.58 8.00% 141.09 Non-Operating Interest Income 0 0.00% 0.00% 0.00% 0.00% Earnings Before Interest And Taxes (EBIT) 629.07 22.51% 477.00 20.65% 367.00 19.51% 107.00 7.04% 144.00 Interest Expense On Debt 0 0.00% 0.00% 0.00% 0.00% Pretax Income 629.07 22.51% 476.97 20.65% 366.84 19.50% 106.59 7.01% 143.61 IncomeTaxes 241.71 8.65% 183.26 7.94% 142.6 7.58% 46.59 3.07% 54.88 Net Income Before Extra Items/Preferred Div 387.36 13.86% 293.71 12.72% 224.23 11.92% 60.00 3.95% 88.74 Extr Items & Gain(Loss) Sale of Assets 0 0.00% 0.44 0.02% -10.89 -0.58% 0 0.00% 0 Net Income Before Preferred Dividends 387.36 13.86% 294.15 12.74% 213.34 11.34% 60.00 3.95% 88.74 Preferred Dividend Requirements 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Available 387.36 13.86% 293.71 12.72% 224.23 11.92% 60.00 3.95% 88.74 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 100. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 96 Gap Inc VERTICAL COMMON SIZE INCOME STATEMENT For Years Ended 2003 Net Sales or Revenues 15,943.00 100.00% 16,023.00 100.00% 16,267.00 100.00% 15,854.00 100.00% 14,454.71 Cost of Goods Sold 9,764.00 61.24% 9,529.00 59.47% 9,266.00 56.96% 9,222.00 58.17% 8,760.68 Gross Profit 6179 38.76% 6494 40.53% 7001 43.04% 6632 41.83% 5694.03 Depreciation, Depletion & Amortization 530 3.32% 625 3.90% 620 3.81% 664 4.19% 780.88 Selling, General & Admin Expenses 4,446.00 27.89% 4,124.00 25.74% 4,296.00 26.41% 4,075.00 25.70% 3,900.52 Operating Expenses - Total 14,740.00 92.45% 14,278.00 89.11% 14,182.00 87.18% 13,961.00 88.06% 13,442.08 Operating Income 1,203.00 7.55% 1,745.00 10.89% 2,085.00 12.82% 1,893.00 11.94% 1,012.63 Non-Operating Interest Income 131 0.82% 93 0.58% 59 0.36% 38 0.24% 36.85 Earnings Before Interest And Taxes (EBIT) 1,305.00 8.19% 1,838.00 11.47% 2,039.00 12.53% 1,917.00 12.09% 1,049.47 Interest Expense On Debt 49 0.31% 56 0.35% 177 1.09% 243 1.53% 259.6 Pretax Income 1,264.00 7.93% 1,793.00 11.19% 1,872.00 11.51% 1,683.00 10.62% 800.88 IncomeTaxes 486 3.05% 680 4.24% 722 4.44% 653 4.12% 323.42 Net Income Before Extra Items/Preferred Div 778 4.88% 1,113.00 6.95% 1,150.00 7.07% 1,030.00 6.50% 477.46 Extr Items & Gain(Loss) Sale of Assets 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Before Preferred Dividends 778 4.88% 1,113.00 6.95% 1,150.00 7.07% 1,030.00 6.50% 477.46 Preferred Dividend Requirements 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 Net Income Available 778 4.88% 1,121.00 7.00% 1,199.00 7.37% 1,078.00 6.80% 477.46 *Note: Gross income changed to gross profit and we moved it above depreciation. Thompson data shows DD&A calculated in gross income. 2007 2006 2005 2004
  • 101. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 97 Vertical Common Size Balance Sheet – Last 5 Fiscal Years Urban Outfitters Inc VERTICAL COMMON SIZE For Years Ended ASSETS Current Assets Cash And ST Investments 159.28$ 17.71% 191.80$ 25.60% 155.68$ 28.61% 87.17$ 24.90% 79.51$ 29.55% Receivables (Net) 20.87 2.32% 14.32 1.91% 8.36 1.54% 6.71 1.92% 3.26 1.21% Total Inventories 154.39 17.17% 140.38 18.74% 99.00 18.19% 63.25 18.07% 48.83 18.15% Other Current Assets 31.87 3.54% 38.69 5.16% 24.82 4.56% 18.70 5.34% 12.99 4.83% Current Assets - Total 366.41$ 40.75% 385.18$ 51.41% 287.87$ 52.91% 175.84$ 50.23% 144.58$ 53.73% Property Plant & Equipment - Net 445.70 49.56% 299.29 39.95% 192.79 35.43% 121.92 34.83% 108.85 40.45% Other Assets 24.83 2.76% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Total Assets 899.25$ 100.00% 749.22$ 100.00% 544.12$ 100.00% 350.07$ 100.00% 269.07$ 100.00% LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 57.93$ 6.44% 41.29$ 5.51% 39.10$ 7.19% 27.35$ 7.81% 19.19$ 7.13% ST Debt & Current Portion of LT Debt 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Income Taxes Payable 10.59 1.18% 12.08 1.61% 10.38 1.91% 2.61 0.75% 4.38 1.63% Other Current Liabilities 61.70 6.86% 67.47 9.01% 39.21 7.21% 20.04 5.73% 14.31 5.32% Current Liabilities - Total 135.32$ 15.05% 133.51$ 17.82% 98.27$ 18.06% 57.76$ 16.50% 43.07$ 16.01% Long Term Debt 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Other Liabilities 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Total Liabilities 223.97$ 24.91% 188.34$ 25.14% 141.87$ 26.07% 59.94$ 17.12% 44.69$ 16.61% Stockholder's Equity Common Equity 675.28$ 75.09% 560.88$ 74.86% 402.24$ 73.93% 290.13$ 82.88% 224.39$ 83.39% Retained Earnings 542.40 60.32% 426.19 56.88% 295.39 54.29% 204.91 58.53% 156.53 58.17% Total stockholder's equity 675.28$ 75.09% 560.88$ 74.86% 402.24$ 73.93% 290.13$ 82.88% 224.39$ 83.39% Total Liabilities & Shareholders' Equity 899.25$ 100.00% 749.22$ 100.00% 544.12$ 100.00% 350.07$ 100.00% 269.07$ 100.00% 2007 2006 2005 2004 2003
  • 102. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 98 Abercrombie & Fitch Company VERTICAL COMMON SIZE For Years Ended ASSETS Current Assets Cash And ST Investments 529.75$ 23.56% 461.85$ 25.81% 350.37$ 26.00% 521.07$ 43.45% 401.04$ 40.31% Receivables (Net) 43.24 1.92% 41.86 2.34% 26.13 1.94% 7.20 0.60% 10.46 1.05% Total Inventories 427.45 19.01% 362.54 20.26% 247.73 18.38% 200.70 16.74% 169.89 17.08% Other Current Assets 91.64 4.08% 80.84 4.52% 28.05 2.08% 23.69 1.98% 19.77 1.99% Current Assets - Total 1,092.08$ 48.58% 947.08$ 52.92% 652.28$ 48.40% 752.66$ 62.77% 601.16$ 60.43% Property Plant & Equipment - Net 1092.28 48.59% 813.60 45.46% 687.01 50.98% 445.96 37.19% 392.94 39.50% Other Assets 45.41 2.02% 29.03 1.62% 8.41 0.62% 0.55 0.05% 0.73 0.07% Total Assets 2,248.07$ 100.00% 1,789.72$ 100.00% 1,347.70$ 100.00% 1,199.16$ 100.00% 994.82$ 100.00% LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 100.92$ 4.49% 86.57$ 4.84% 83.76$ 6.22% 91.36$ 7.62% 50.15$ 5.04% ST Debt & Current Portion of LT Debt 27.39 1.22% 58.74 3.28% 53.58 3.98% 0.00 0.00% 0.00 0.00% Income Taxes Payable 86.68 3.86% 99.48 5.56% 11.18 0.83% 50.41 4.20% 40.88 4.11% Other Current Liabilities 295.64 13.15% 216.51 12.10% 251.39 18.65% 123.64 10.31% 104.58 10.51% Current Liabilities - Total 510.63$ 22.71% 491.55$ 27.47% 413.87$ 30.71% 280.00$ 23.35% 211.47$ 21.26% Long Term Debt 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Other Liabilities 97.81 4.35% 73.33 4.10% 31.24 2.32% 28.39 2.37% 13.04 1.31% Total Liabilities 842.77$ 37.49% 794.60$ 44.40% 678.38$ 50.34% 327.91$ 27.34% 245.30$ 24.66% Stockholder's Equity Common Equity 1,405.30$ 62.51% 995.12$ 55.60% 669.33$ 49.66% 871.26$ 72.66% 749.53$ 75.34% Retained Earnings 1646.29 73.23% 1357.79 75.87% 1076.02 79.84% 919.58 76.68% 714.48 71.82% Total stockholder's equity 1,405.30$ 62.51% 995.12$ 55.60% 669.33$ 49.66% 871.26$ 72.66% 749.53$ 75.34% Total Liabilities & Shareholders' Equity 2,248.07$ 100.00% 1,789.72$ 100.00% 1,347.70$ 100.00% 1,199.16$ 100.00% 994.82$ 100.00% 2007 2006 2005 2004 2003
  • 103. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 99 American Eagle Outfitters VERTICAL COMMON SIZE For Years Ended ASSETS Current Assets Cash And ST Investments 827.11$ 41.62% 751.52$ 46.80% 589.61$ 46.04% 337.81$ 40.02% 241.57$ 32.59% Receivables (Net) 26.05 1.31% 29.15 1.82% 26.43 2.06% 22.82 2.70% 13.60 1.83% Total Inventories 263.64 13.27% 210.74 13.12% 137.99 10.77% 120.59 14.28% 124.71 16.82% Other Current Assets 81.45 4.10% 59.16 3.68% 73.61 5.75% 44.41 5.26% 48.00 6.47% Current Assets - Total 1,198.25$ 60.29% 1,080.67$ 67.30% 827.64$ 64.62% 525.62$ 62.26% 427.88$ 57.72% Property Plant & Equipment - Net 481.65 24.23% 345.52 21.52% 353.21 27.58% 278.69 33.01% 267.48 36.08% Other Assets 55.94 2.81% 33.69 2.10% 15.46 1.21% 15.52 1.84% 45.98 6.20% Total Assets 1,987.48$ 100.00% 1,605.65$ 100.00% 1,280.73$ 100.00% 844.19$ 100.00% 741.34$ 100.00% LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 171.15$ 8.61% 139.20$ 8.67% 76.34$ 5.96% 71.33$ 8.45% 50.61$ 6.83% ST Debt & Current Portion of LT Debt 0.00 0.00% 0.00 0.00% 0.00 0.00% 4.83 0.57% 4.23 0.57% Income Taxes Payable 87.78 4.42% 43.27 2.70% 33.93 2.65% 28.67 3.40% 12.66 1.71% Other Current Liabilities 143.16 7.20% 120.97 7.53% 106.99 8.35% 69.80 8.27% 61.10 8.24% Current Liabilities - Total 460.46$ 23.17% 361.62$ 22.52% 253.27$ 19.78% 189.04$ 22.39% 141.59$ 19.10% Long Term Debt 0.00 0.00% 0.00 0.00% 0.00 0.00% 13.87 1.64% 16.36 2.21% Other Liabilities 44.59 2.24% 28.39 1.77% 76.91 6.01% 18.49 2.19% 5.92 0.80% Total Liabilities 570.17$ 28.69% 450.10$ 28.03% 317.24$ 24.77% 200.52$ 23.75% 163.86$ 22.10% Stockholder's Equity Common Equity 1,417.31$ 71.31% 1,155.55$ 71.97% 963.49$ 75.23% 643.67$ 76.25% 577.48$ 77.90% Retained Earnings 1302.35 65.53% 978.86 60.96% 726.76 56.75% 528.52 62.61% 468.52 63.20% Total stockholder's equity 1,417.31$ 71.31% 1,155.55$ 71.97% 963.49$ 75.23% 643.67$ 76.25% 577.48$ 77.90% Total Liabilities & Shareholders' Equity 1,987.48$ 100.00% 1,605.65$ 100.00% 1,280.73$ 100.00% 844.19$ 100.00% 741.34$ 100.00% 2007 2006 2005 2004 2003
  • 104. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 100 Gap Inc VERTICAL COMMON SIZE For Years Ended ASSETS Current Assets Cash And ST Investments 2,678.10$ 32.05% 3,042.00$ 35.30% 4,077.00$ 41.13% 4,685.00$ 45.42% 3,388.51$ 34.73% Receivables (Net) 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% 0.00 0.00% Total Inventories 1796.00 21.49% 1696.00 19.68% 1814.00 18.30% 1704.00 16.52% 2047.88 20.99% Other Current Assets 554.90 6.64% 501.00 5.81% 413.00 4.17% 300.00 2.91% 303.33 3.11% Current Assets - Total 5,029.00$ 60.18% 5,239.00$ 60.80% 6,304.00$ 63.60% 6,689.00$ 64.85% 5,739.73$ 58.83% Property Plant & Equipment - Net 3197.00 38.26% 3246.00 37.67% 3376.00 34.06% 3368.00 32.65% 3776.84 38.71% Other Assets 131.00 1.57% 132.00 1.53% 232.00 2.34% 257.00 2.49% 240.44 2.46% Total Assets 8,357.00$ 100.00% 8,617.00$ 100.00% 9,912.00$ 100.00% 10,314.00$ 100.00% 9,757.00$ 100.00% LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 1,109.00$ 13.27% 1,132.00$ 13.14% 1,240.00$ 12.51% 1,178.00$ 11.42% 1,159.30$ 11.88% ST Debt & Current Portion of LT Debt 325.00 3.89% 0.00 0.00% 0.00 0.00% 283.00 2.74% 499.98 5.12% Income Taxes Payable 16.00 0.19% 85.00 0.99% 78.00 0.79% 159.00 1.54% #N/A #N/A Other Current Liabilities 525.00 6.28% 500.00 5.80% 801.00 8.08% 872.00 8.45% 1067.29 10.94% Current Liabilities - Total 2,272.00$ 27.19% 1,942.00$ 22.54% 2,242.00$ 22.62% 2,492.00$ 24.16% 2,726.57$ 27.94% Long Term Debt 188.00 2.25% 513.00 5.95% 1886.00 19.03% 2487.00 24.11% 2895.79 29.68% Other Liabilities 381.00 4.56% 212.00 2.46% 488.00 4.92% 329.00 3.19% 322.42 3.30% Total Liabilities 3,183.00$ 38.09% 3,192.00$ 37.04% 4,976.00$ 50.20% 5,531.00$ 53.63% 6,098.79$ 62.51% Stockholder's Equity Common Equity 5,174.00$ 61.91% 5,425.00$ 62.96% 4,936.00$ 49.80% 4,783.00$ 46.37% 3,658.21$ 37.49% Retained Earnings 8646.00 103.46% 8133.00 94.38% 7181.00 72.45% 6241.00 60.51% 5289.48 54.21% Total stockholder's equity 5,174.00$ 61.91% 5,425.00$ 62.96% 4,936.00$ 49.80% 4,783.00$ 46.37% 3,658.21$ 37.49% Total Liabilities & Shareholders' Equity 8,357.00$ 100.00% 8,617.00$ 100.00% 9,912.00$ 100.00% 10,314.00$ 100.00% 9,757.00$ 100.00% 2007 2006 2005 2004 2003
  • 105. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 101 Horizontal Common Size Balance Sheet – Last 5 Fiscal Years Urban Outfitters Inc HORIZONTAL COMMON SIZE For Years Ended 2003 ASSETS Current Assets Cash And ST Investments 159.28$ -16.95% 191.80$ 23.20% 155.68$ 78.59% 87.17$ 9.64% 79.51$ Receivables (Net) 20.87 45.71% 14.32 71.26% 8.36 24.63% 6.71 105.73% 3.26 Total Inventories 154.39 9.98% 140.38 41.80% 99.00 56.52% 63.25 29.54% 48.83 Other Current Assets 31.87 -17.62% 38.69 55.85% 24.82 32.72% 18.70 43.98% 12.99 Current Assets - Total 366.41$ -4.88% 385.18$ 33.81% 287.87$ 63.71% 175.84$ 21.61% 144.58$ Property Plant & Equipment - Net 445.70 48.92% 299.29 55.24% 192.79 58.13% 121.92 12.01% 108.85 Other Assets 24.83 #DIV/0! 0.00 #DIV/0! 0.00 #DIV/0! 0.00 #DIV/0! 0.00 Total Assets 899.25$ 20.02% 749.22$ 37.70% 544.12$ 55.43% 350.07$ 30.10% 269.07$ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 57.93$ 40.31% 41.29$ 5.60% 39.10$ 42.95% 27.35$ 42.57% 19.19$ ST Debt & Current Portion of LT Debt 0.00 0.00 0.00 0.00 0.00 Income Taxes Payable 10.59 -12.28% 12.08 16.33% 10.38 297.70% 2.61 -40.40% 4.38 Other Current Liabilities 61.70 -8.55% 67.47 72.09% 39.21 95.60% 20.04 40.06% 14.31 Current Liabilities - Total 135.32$ 1.36% 133.51$ 35.86% 98.27$ 70.13% 57.76$ 34.11% 43.07$ Long Term Debt 0.00 0.00 0.00 0.00 0.00 Other Liabilities 0.00 0.00 0.00 0.00 0.00 Total Liabilities 223.97$ 18.92% 188.34$ 32.75% 141.87$ 136.70% 59.94$ 34.13% 44.69$ Stockholder's Equity Common Equity 675.28$ 20.40% 560.88$ 39.44% 402.24$ 38.64% 290.13$ 29.30% 224.39$ Retained Earnings 542.40 27.27% 426.19 44.28% 295.39 44.16% 204.91 30.91% 156.53 Total stockholder's equity 675.28$ 20.40% 560.88$ 39.44% 402.24$ 38.64% 290.13$ 29.30% 224.39$ Total Liabilities & Shareholders' Equity 899.25$ 20.02% 749.22$ 37.70% 544.12$ 55.43% 350.07$ 30.10% 269.07$ 2007 2006 2005 2004
  • 106. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 102 Abercrombie & Fitch Company HORIZONTAL COMMON SIZE For Years Ended 2003 ASSETS Current Assets Cash And ST Investments 529.75$ 14.70% 461.85$ 31.82% 350.37$ -32.76% 521.07$ 29.93% 401.04$ Receivables (Net) 43.24 3.31% 41.86 60.20% 26.13 263.03% 7.20 -31.21% 10.46 Total Inventories 427.45 17.90% 362.54 46.34% 247.73 23.44% 200.70 18.13% 169.89 Other Current Assets 91.64 13.36% 80.84 188.22% 28.05 18.40% 23.69 19.82% 19.77 Current Assets - Total 1,092.08$ 15.31% 947.08$ 45.20% 652.28$ -13.34% 752.66$ 25.20% 601.16$ Property Plant & Equipment - Net 1092.28 34.25% 813.60 18.43% 687.01 54.05% 445.96 13.49% 392.94 Other Assets 45.41 56.41% 29.03 245.07% 8.41 1424.09% 0.55 -23.86% 0.73 Total Assets 2,248.07$ 25.61% 1,789.72$ 32.80% 1,347.70$ 12.39% 1,199.16$ 20.54% 994.82$ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 100.92$ 16.57% 86.57$ 3.36% 83.76$ -8.32% 91.36$ 82.17% 50.15$ ST Debt & Current Portion of LT Debt 27.39 -53.37% 58.74 9.64% 53.58 0.00 0.00 Income Taxes Payable 86.68 -12.87% 99.48 789.56% 11.18 -77.81% 50.41 23.31% 40.88 Other Current Liabilities 295.64 36.55% 216.51 -13.87% 251.39 103.32% 123.64 18.23% 104.58 Current Liabilities - Total 510.63$ 3.88% 491.55$ 18.77% 413.87$ 47.81% 280.00$ 32.41% 211.47$ Long Term Debt 0.00 0.00 0.00 0.00 0.00 Other Liabilities 97.81 33.39% 73.33 134.71% 31.24 10.05% 28.39 117.63% 13.04 Total Liabilities 842.77$ 6.06% 794.60$ 17.13% 678.38$ 106.88% 327.91$ 33.68% 245.30$ Stockholder's Equity Common Equity 1,405.30$ 41.22% 995.12$ 48.67% 669.33$ -23.18% 871.26$ 16.24% 749.53$ Retained Earnings 1646.29 21.25% 1357.79 26.19% 1076.02 17.01% 919.58 28.71% 714.48 Total stockholder's equity 1,405.30$ 41.22% 995.12$ 48.67% 669.33$ -23.18% 871.26$ 16.24% 749.53$ Total Liabilities & Shareholders' Equity 2,248.07$ 25.61% 1,789.72$ 32.80% 1,347.70$ 12.39% 1,199.16$ 20.54% 994.82$ 2007 2006 2005 2004
  • 107. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 103 American Eagle Outfitters HORIZONTAL COMMON SIZE For Years Ended 2003 ASSETS Current Assets Cash And ST Investments 827.11$ 10.06% 751.52$ 27.46% 589.61$ 74.54% 337.81$ 39.84% 241.57$ Receivables (Net) 26.05 -10.64% 29.15 10.27% 26.43 15.83% 22.82 67.82% 13.60 Total Inventories 263.64 25.10% 210.74 52.72% 137.99 14.43% 120.59 -3.31% 124.71 Other Current Assets 81.45 37.68% 59.16 -19.63% 73.61 65.77% 44.41 -7.49% 48.00 Current Assets - Total 1,198.25$ 10.88% 1,080.67$ 30.57% 827.64$ 57.46% 525.62$ 22.84% 427.88$ Property Plant & Equipment - Net 481.65 39.40% 345.52 -2.18% 353.21 26.74% 278.69 4.19% 267.48 Other Assets 55.94 66.07% 33.69 117.90% 15.46 -0.38% 15.52 -66.25% 45.98 Total Assets 1,987.48$ 23.78% 1,605.65$ 25.37% 1,280.73$ 51.71% 844.19$ 13.87% 741.34$ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 171.15$ 22.96% 139.20$ 82.33% 76.34$ 7.03% 71.33$ 40.95% 50.61$ ST Debt & Current Portion of LT Debt 0.00 0.00 0.00 4.83 14.37% 4.23 Income Taxes Payable 87.78 102.85% 43.27 27.55% 33.93 18.34% 28.67 126.54% 12.66 Other Current Liabilities 143.16 18.35% 120.97 13.07% 106.99 53.29% 69.80 14.24% 61.10 Current Liabilities - Total 460.46$ 27.33% 361.62$ 42.78% 253.27$ 33.98% 189.04$ 33.51% 141.59$ Long Term Debt 0.00 0.00 0.00 13.87 -15.17% 16.36 Other Liabilities 44.59 57.09% 28.39 -63.09% 76.91 315.90% 18.49 212.63% 5.92 Total Liabilities 570.17$ 26.68% 450.10$ 41.88% 317.24$ 58.21% 200.52$ 22.37% 163.86$ Stockholder's Equity Common Equity 1,417.31$ 22.65% 1,155.55$ 19.93% 963.49$ 49.69% 643.67$ 11.46% 577.48$ Retained Earnings 1302.35 33.05% 978.86 34.69% 726.76 37.51% 528.52 12.81% 468.52 Total stockholder's equity 1,417.31$ 22.65% 1,155.55$ 19.93% 963.49$ 49.69% 643.67$ 11.46% 577.48$ Total Liabilities & Shareholders' Equity 1,987.48$ 23.78% 1,605.65$ 25.37% 1,280.73$ 51.71% 844.19$ 13.87% 741.34$ 2007 2006 2005 2004
  • 108. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 104 Gap Inc HORIZONTAL COMMON SIZE For Years Ended 2003 ASSETS Current Assets Cash And ST Investments 2,678.10$ -11.96% 3,042.00$ -25.39% 4,077.00$ -12.98% 4,685.00$ 38.26% 3,388.51$ Receivables (Net) 0.00 0.00 0.00 0.00 0.00 Total Inventories 1796.00 5.90% 1696.00 -6.50% 1814.00 6.46% 1704.00 -16.79% 2047.88 Other Current Assets 554.90 10.76% 501.00 21.31% 413.00 37.67% 300.00 -1.10% 303.33 Current Assets - Total 5,029.00$ -4.01% 5,239.00$ -16.89% 6,304.00$ -5.76% 6,689.00$ 16.54% 5,739.73$ Property Plant & Equipment - Net 3197.00 -1.51% 3246.00 -3.85% 3376.00 0.24% 3368.00 -10.82% 3776.84 Other Assets 131.00 -0.76% 132.00 -43.10% 232.00 -9.73% 257.00 6.89% 240.44 Total Assets 8,357.00$ -3.02% 8,617.00$ -13.06% 9,912.00$ -3.90% 10,314.00$ 5.71% 9,757.00$ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts Payable 1,109.00$ -2.03% 1,132.00$ -8.71% 1,240.00$ 5.26% 1,178.00$ 1.61% 1,159.30$ ST Debt & Current Portion of LT Debt 325.00 0.00 0.00 -100.00% 283.00 -43.40% 499.98 Income Taxes Payable 16.00 -81.18% 85.00 8.97% 78.00 -50.94% 159.00 #N/A #N/A Other Current Liabilities 525.00 5.00% 500.00 -37.58% 801.00 -8.14% 872.00 -18.30% 1067.29 Current Liabilities - Total 2,272.00$ 16.99% 1,942.00$ -13.38% 2,242.00$ -10.03% 2,492.00$ -8.60% 2,726.57$ Long Term Debt 188.00 -63.35% 513.00 -72.80% 1886.00 -24.17% 2487.00 -14.12% 2895.79 Other Liabilities 381.00 79.72% 212.00 -56.56% 488.00 48.33% 329.00 2.04% 322.42 Total Liabilities 3,183.00$ -0.28% 3,192.00$ -35.85% 4,976.00$ -10.03% 5,531.00$ -9.31% 6,098.79$ Stockholder's Equity Common Equity 5,174.00$ -4.63% 5,425.00$ 9.91% 4,936.00$ 3.20% 4,783.00$ 30.75% 3,658.21$ Retained Earnings 8646.00 6.31% 8133.00 13.26% 7181.00 15.06% 6241.00 17.99% 5289.48 Total stockholder's equity 5,174.00$ -4.63% 5,425.00$ 9.91% 4,936.00$ 3.20% 4,783.00$ 30.75% 3,658.21$ Total Liabilities & Shareholders' Equity 8,357.00$ -3.02% 8,617.00$ -13.06% 9,912.00$ -3.90% 10,314.00$ 5.71% 9,757.00$ 2007 2006 2005 2004
  • 109. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 105 Horizontal Common Size Statement of Cash Flows – Last 5 Fiscal Years HORIZONTAL COMMON SIZE STATEMENT OF CASH FLOWS For Years Ended 2003 Operating Activities Income Bef Extraordinary Items 116.21 130.80 90.49 48.38 27.41 Depreciation, Depletion & Amortn 55.71 39.34 31.86 22.42 18.21 Deferred Taxes -4.96 -6.87 -2.88 -1.13 -3.08 Other Cash Flow -0.50 13.92 14.18 7.58 2.25 Funds From Operations 166.46 177.19 133.64 77.24 44.79 Extraordinary Items 0.00 0.00 0.00 0.00 0.00 Funds From/For Other Oper Activities 20.66 -28.00 16.36 -7.46 -3.00 Net Cash Flow From Operating Activities 187.12 25.42% 149.19 -0.54% 150.00 114.96% 69.78 66.97% 41.79 Investing Activities Capital Expenditures 212.03 127.73 75.14 33.08 22.25 Net Assets From Acquisitions 0.00 0.00 0.00 0.00 0.00 Decrease In Investments 193.27 396.30 530.30 36.75 20.23 Disposal of Fixed Assets 0.00 3.77 0.00 0.00 0.00 Other Use/(Source) - Investing 0.00 0.00 0.00 0.00 0.00 Net Cash Flow From Investing Activities 201.41 40.18% 143.68 9.73% 130.93 56.52% 83.65 83.43% 45.60 Financing Activities Com/Prf Purchased,Retired,Converted,Redeemed 20.80 0.00 0.00 0.00 0.00 Long Term Borrowings 0.00 0.00 0.00 0.00 0.00 Inc(Dec) In ST Borrowings 0.00 0.00 0.00 0.00 0.00 Reduction In Long Term Debt 0.00 0.00 0.00 0.00 0.00 Cash Dividends Paid - Total 0.00 0.00 0.00 0.00 0.00 Other Source/(Use) - Financing 5.39 0.00 0.00 0.00 0.00 Net Cash Flow From Financing Activities -9.06 -159.46% 15.23 120.18% 6.92 -19.02% 8.54 -81.84% 47.04 Exchange Rate Effect 0.70 -0.57 0.43 0.40 0.65 Cash & Cash Equivalents - Inc(Dec) -22.65 20.18 26.41 -4.93 43.88 Com/Pfd Purchased,Retired,Converted,Redeemed 20.80 0.00 0.00 0.00 0.00 Long Term Borrowings 0.00 0.00 0.00 0.00 0.00 Inc./Dec. In S.T. Borrowings 0.00 0.00 0.00 0.00 0.00 Reduction In L.T. Debt 0.00 0.00 0.00 0.00 0.00 Cash Dividends Paid - Total 0.00 0.00 0.00 0.00 0.00 Other Source/(Use) - Financing 5.39 0.00 0.00 0.00 0.00 Net Cash Flow - Financing Activities -9.06 15.23 6.92 8.54 47.04 Exchange Rate Effect 0.70 -0.57 0.43 0.40 0.65 Cash & Cash Equivalents - IncDec -22.65 20.18 26.41 -4.93 43.88 20042007 2006 2005 Urban Outfitters Inc
  • 110. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 106 HORIZONTAL COMMON SIZE STATEMENT OF CASH FLOWS For Years Ended 2003 Operating Activities Income Bef Extraordinary Items 422.19 333.99 216.38 205.10 194.94 Depreciation, Depletion & Amortn 146.16 124.21 105.81 66.60 56.93 Deferred Taxes -11.64 -2.10 3.94 7.31 0.00 Other Cash Flow 58.67 46.81 38.44 5.31 2.29 Funds From Operations 615.37 502.91 364.57 284.32 254.16 Extraordinary Items 0.00 0.00 0.00 0.00 0.00 Funds From/For Other Oper Activities -33.20 -49.32 61.55 -2.43 38.99 Net Cash Flow From Operating Activities 582.17 28.35% 453.59 6.45% 426.13 51.16% 281.90 -3.84% 293.15 Investing Activities Capital Expenditures 403.48 256.42 185.07 99.13 92.98 Net Assets From Acquisitions 0.00 0.00 0.00 0.00 0.00 Decrease In Investments 1,404.81 605.10 4,778.77 10.00 61.22 Disposal of Fixed Assets 0.00 0.00 0.00 0.00 0.00 Other Use/(Source) - Investing 15.26 0.00 0.00 0.00 4.95 Net Cash Flow From Investing Activities 473.76 -29.11% 668.31 -338.99% -279.64 -382.09% 99.13 269.85% 26.80 Financing Activities Com/Prf Purchased,Retired,Converted,Redeemed 0.00 103.30 434.66 115.67 42.69 Long Term Borrowings 0.00 0.00 0.00 0.00 0.00 Inc(Dec) In ST Borrowings -31.77 5.16 20.40 0.00 0.00 Reduction In Long Term Debt 0.00 0.00 0.00 0.00 0.00 Cash Dividends Paid - Total 61.62 52.22 46.44 0.00 0.00 Other Source/(Use) - Financing 16.26 0.00 0.00 23.91 0.28 Net Cash Flow From Financing Activities -77.14 5.19% -73.33 -82.19% -411.77 348.75% -91.76 113.52% -42.97 Exchange Rate Effect #N/A #N/A #N/A #N/A #N/A Cash & Cash Equivalents - Inc(Dec) 31.27 -288.05 294.00 91.01 223.37 Com/Pfd Purchased,Retired,Converted,Redeemed 0.00 103.30 434.66 115.67 42.69 Long Term Borrowings 0.00 0.00 0.00 0.00 0.00 Inc./Dec. In S.T. Borrowings -31.77 5.16 20.40 0.00 0.00 Reduction In L.T. Debt 0.00 0.00 0.00 0.00 0.00 Cash Dividends Paid - Total 61.62 52.22 46.44 0.00 0.00 Other Source/(Use) - Financing 16.26 0.00 0.00 23.91 0.28 Net Cash Flow - Financing Activities -77.14 -73.33 -411.77 -91.76 -42.97 Exchange Rate Effect #N/A #N/A #N/A #N/A #N/A Cash & Cash Equivalents - IncDec 31.27 -288.05 294.00 91.01 223.37 2005 20042007 2006 Abercrombie & Fitch Company
  • 111. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 107 HORIZONTAL COMMON SIZE STATEMENT OF CASH FLOWS For Years Ended 2003 Operating Activities Income Bef Extraordinary Items 387.36 293.71 224.23 60.00 88.74 Depreciation, Depletion & Amortn 88.03 74.58 68.27 56.28 50.66 Deferred Taxes -27.62 4.75 -17.09 7.47 2.79 Other Cash Flow 226.45 45.08 56.76 19.80 3.40 Funds From Operations 674.23 418.12 332.18 143.54 145.58 Extraordinary Items 0.00 0.00 0.00 0.00 0.00 Funds From/For Other Oper Activities 75.04 47.52 36.50 45.93 -41.04 Net Cash Flow From Operating Activities 749.27 60.91% 465.64 26.30% 368.68 94.59% 189.47 81.23% 104.55 Investing Activities Capital Expenditures 225.94 81.55 97.29 64.17 61.41 Net Assets From Acquisitions 0.00 0.00 0.00 0.00 0.00 Decrease In Investments 915.95 876.11 309.20 90.57 84.89 Disposal of Fixed Assets 12.35 0.00 0.00 0.00 0.00 Other Use/(Source) - Investing 0.14 0.07 9.46 1.51 5.10 Net Cash Flow From Investing Activities 651.12 65.65% 393.06 50.18% 261.73 102.13% 129.49 89.11% 68.47 Financing Activities Com/Prf Purchased,Retired,Converted,Redeemed 154.12 171.50 0.00 0.69 19.48 Long Term Borrowings 2.03 0.00 #N/A 0.00 0.00 Inc(Dec) In ST Borrowings 0.00 0.00 #N/A 0.00 0.00 Reduction In Long Term Debt 3.02 0.75 19.57 5.43 9.56 Cash Dividends Paid - Total 61.52 42.06 8.84 0.00 0.00 Other Source/(Use) - Financing 19.65 0.00 0.00 0.00 4.78 Net Cash Flow From Financing Activities -168.76 1.60% -166.10 -670.36% 29.12 -684.31% -4.98 -77.76% -22.41 Exchange Rate Effect -0.18 4.68 1.90 1.80 0.47 Cash & Cash Equivalents - Inc(Dec) -70.79 -88.84 137.97 56.80 14.13 Com/Pfd Purchased,Retired,Converted,Redeemed 154.12 171.50 0.00 0.69 19.48 Long Term Borrowings 2.03 0.00 #N/A 0.00 0.00 Inc./Dec. In S.T. Borrowings 0.00 0.00 #N/A 0.00 0.00 Reduction In L.T. Debt 3.02 0.75 19.57 5.43 9.56 Cash Dividends Paid - Total 61.52 42.06 8.84 0.00 0.00 Other Source/(Use) - Financing 19.65 0.00 0.00 0.00 4.78 Net Cash Flow - Financing Activities -168.76 -166.10 29.12 -4.98 -22.41 Exchange Rate Effect -0.18 4.68 1.90 1.80 0.47 Cash & Cash Equivalents - IncDec -70.79 -88.84 137.97 56.80 14.13 20042007 2006 2005 American Eagle Outfitters
  • 112. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 108 HORIZONTAL COMMON SIZE STATEMENT OF CASH FLOWS For Years Ended 2003 Operating Activities Income Bef Extraordinary Items 778.00 1,113.00 1,150.00 1,030.00 477.46 Depreciation, Depletion & Amortn 530.00 625.00 620.00 664.00 780.88 Deferred Taxes -41.00 -46.00 -80.00 103.00 6.09 Other Cash Flow 67.00 -28.00 52.00 77.00 161.48 Funds From Operations 1,334.00 1,664.00 1,742.00 1,874.00 1,425.90 Extraordinary Items 0.00 0.00 0.00 0.00 0.00 Funds From/For Other Oper Activities -84.00 -113.00 -122.00 297.00 -187.54 Net Cash Flow From Operating Activities 1,250.00 -19.41% 1,551.00 -4.26% 1,620.00 -25.38% 2,171.00 75.31% 1,238.36 Investing Activities Capital Expenditures 572.00 600.00 442.00 272.00 303.28 Net Assets From Acquisitions 0.00 0.00 0.00 0.00 0.00 Decrease In Investments 1,841.00 1,745.00 2,072.00 442.00 0.00 Disposal of Fixed Assets 22.00 27.00 0.00 1.00 8.51 Other Use/(Source) - Investing 19.00 982.00 343.00 5.00 3.42 Net Cash Flow From Investing Activities 150.00 -152.45% -286.00 78.75% -160.00 -115.59% 1,026.00 252.15% 291.36 Financing Activities Com/Prf Purchased,Retired,Converted,Redeemed 1,050.00 1,971.00 976.00 0.00 0.00 Long Term Borrowings 0.00 0.00 0.00 0.00 1,345.50 Inc(Dec) In ST Borrowings 0.00 0.00 0.00 0.00 0.00 Reduction In Long Term Debt 0.00 0.00 871.00 668.00 41.94 Cash Dividends Paid - Total 265.00 179.00 79.00 79.00 78.35 Other Source/(Use) - Financing 23.00 0.00 0.00 1,303.00 0.00 Net Cash Flow From Financing Activities -1,102.00 -45.98% -2,040.00 13.59% -1,796.00 -7.37% -1,939.00 -240.66% 1,378.48 Exchange Rate Effect -3.00 -7.00 #N/A 28.00 27.29 Cash & Cash Equivalents - Inc(Dec) -5.00 -210.00 -16.00 -766.00 2,352.77 Com/Pfd Purchased,Retired,Converted,Redeemed 1,050.00 1,971.00 976.00 0.00 0.00 Long Term Borrowings 0.00 0.00 0.00 0.00 1,345.50 Inc./Dec. In S.T. Borrowings 0.00 0.00 0.00 0.00 0.00 Reduction In L.T. Debt 0.00 0.00 871.00 668.00 41.94 Cash Dividends Paid - Total 265.00 179.00 79.00 79.00 78.35 Other Source/(Use) - Financing 23.00 0.00 0.00 1,303.00 0.00 Net Cash Flow - Financing Activities -1,102.00 -2,040.00 -1,796.00 -1,939.00 1,378.48 Exchange Rate Effect -3.00 -7.00 #N/A 28.00 27.29 Cash & Cash Equivalents - IncDec -5.00 -210.00 -16.00 -766.00 2,352.77 2005 20042007 2006 Gap Inc
  • 113. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 109 Appendix B: Interim Quarterly Common Size Income Statements Exchange NASDAQ Nat'l List Country UNITED STATES Industry General Retailers Market Cap 4909.15 CUSIP 917047102 Sedol 2933438 ISIN US9170471026 Shares Outstanding 166.02 10/31/2007 7/31/2007 4/30/2007 1/31/2007 10/31/2006 Income Statement Net Sales or Revenues 100 100 100 100 100 Operating Expenses - Total - - - - - Cost of Goods Sold 55.8 57.8 58.9 58.7 57.1 Selling, General & Admin Expenses 23.4 23.7 24.4 23.3 23 Depreciation, Depletion & Amortization 4.7 4.9 5.3 4.6 4.6 Other Operating Expenses 0 0 0 0 1 Operating Income 16.2 13.6 11.5 13.4 14.2 Non-Operating Interest Income - - - - - Interest Expense On Debt 0 0 0 0 0 Pretax Equity In Earnings 0 0 0 0 0 Other Income/Expense - Net 0.6 0.6 0.6 0.5 1 Interest Capitalized - - - - - Pretax Income 16.7 14.2 12 13.8 15.2 Income Taxes 4.8 5 2.7 3.9 4 Minority Interest 0 0 0 0 0 Equity In Earnings 0 0 0 0 0 Income Before Extraordinary Items & Discont'd Ops 12 9.1 9.3 9.9 11.2 Discontinued Operations 0 0 0 0 0 Net Income Before Extra Items/Preferred Div 12 9.1 9.3 9.9 11.2 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 12 9.1 9.3 9.9 11.2 Preferred Dividend Require 0 0 0 0 0 Net Income to Common Shareholders 12 9.1 9.3 9.9 11.2 EPS Incl Extraordinary Items 0 0 0 0 0 EPS - Continuing Operations 0 0 0 0 0 Dividend Per Share 0 0 0 0 0 Common Shares Used to Calc Diluted EPS 44.8 48.7 53.7 46.7 54.6 Interim Income Statement Common Size URBAN OUTFITTERS INC (URBN)
  • 114. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 110 Exchange New York Country UNITED STATES Industry General Retailers Market Cap 6289.13 CUSIP 2896207 Sedol 2004185 ISIN US0028962076 Shares Outstanding 86.15 2/2/2008 preliminary Income Statement Net Sales or Revenues 100 100 100 100 100 Operating Expenses - Total - - - - - Cost of Goods Sold 32.8 29 25.6 28.7 26.1 Selling, General & Admin Expenses 40 47.2 53.8 53.7 39.6 Depreciation, Depletion & Amortization - 4.8 5.6 5.7 3.6 Other Operating Expenses -0.2 -0.1 -0.4 -0.5 3.5 Operating Income 27.4 19.2 15.4 12.5 27.1 Non-Operating Interest Income - - - - - Interest Expense On Debt 0 0 0 0 0 Pretax Equity In Earnings 0 0 0 0 0 Other Income/Expense - Net 0.5 0.5 0.5 0.5 0.4 Interest Capitalized - - - - - Pretax Income 27.9 19.6 15.9 13 27.5 Income Taxes 10.3 7.6 5.8 4.9 10.1 Minority Interest 0 0 0 0 0 Equity In Earnings 0 0 0 0 0 Income Before Extraordinary Items & Discont'd Ops 17.6 12.1 10.1 8.1 17.4 Discontinued Operations 0 0 0 0 0 Net Income Before Extra Items/Preferred Div 17.6 12.1 10.1 8.1 17.4 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 17.6 12.1 10.1 8.1 17.4 Preferred Dividend Require 0 0 0 0 0 Net Income to Common Shareholders 17.6 12.1 10.1 8.1 17.4 EPS Incl Extraordinary Items 0 0 0 0 0 EPS - Continuing Operations 0 0 0 0 0 Dividend Per Share 0 0 0 0 0 Common Shares Used to Calc Diluted EPS 7.3 9.4 11.5 12.4 8.1 Interim Income Statement Common Size ABERCROMBIE & FITCH (ANF) 11/3/2007 8/4/2007 5/5/2007 2/3/2007
  • 115. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 111 Exchange New York Country UNITED STATES Industry General Retailers Market Cap 3637.34 CUSIP 2.55E+109 Sedol 2048592 ISIN US02553E1064 Shares Outstanding 213.96 2/2/2008 preliminary Income Statement Net Sales or Revenues 100 100 100 100 100 Operating Expenses - Total - - - - - Cost of Goods Sold 54.3 52.6 55 51.3 52.1 Selling, General & Admin Expenses 21.9 23.4 23.7 25.6 22.4 Depreciation, Depletion & Amortization 2.9 3.6 3.6 3.7 2.3 Other Operating Expenses 0 0 0 0 0 Operating Income 21 20.4 17.7 19.4 23.3 Non-Operating Interest Income - - - - - Interest Expense On Debt 0 0 0 0 0 Pretax Equity In Earnings 0 0 0 0 0 Other Income/Expense - Net 1.1 0.9 1.2 1.8 1.7 Interest Capitalized - - - - - Pretax Income 22.1 21.2 18.7 20.8 25 Income Taxes 8 7.8 7.1 7.9 9.5 Minority Interest 0 0 0 0 0 Equity In Earnings 0 0 0 0 0 Income Before Extraordinary Items & Discont'd Ops 14.1 13.4 11.6 12.9 15.4 Discontinued Operations 0 0 0 0 0 Net Income Before Extra Items/Preferred Div 14.1 13.4 11.6 12.9 15.4 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 14.1 13.4 11.6 12.9 15.4 Preferred Dividend Require 0 0 0 0 0 Net Income to Common Shareholders 14.1 13.4 11.6 12.9 15.4 EPS Incl Extraordinary Items 0 0 0 0 0 EPS - Continuing Operations 0 0 0 0 0 Dividend Per Share 0 0 0 0 0 Common Shares Used to Calc Diluted EPS 21.5 29.4 31.6 36.8 23.4 Interim Income Statement Common Size AMERICAN EAGLE OUTFITTERS (AEO) 11/3/2007 8/4/2007 5/5/2007 2/3/2007
  • 116. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 112 Exchange New York Country UNITED STATES Industry General Retailers Market Cap 14783.69 CUSIP 364760108 Sedol 2360326 ISIN US3647601083 Shares Outstanding 751.2 2/2/2008 8/4/2007 preliminary preliminary Income Statement Net Sales or Revenues 100 100 100 100 100 Operating Expenses - Total - - - - - Cost of Goods Sold 62.2 58.8 62.1 58.2 64.9 Selling, General & Admin Expenses - 27.9 - 29.7 25.4 Depreciation, Depletion & Amortization 3 3.6 3.6 3.8 2.6 Other Operating Expenses 25.8 9.5 28.2 0 0 Operating Income 8.9 0.1 6.1 8.3 7.1 Non-Operating Interest Income - - - - - Interest Expense On Debt 0.1 0 0.3 0.3 0.2 Pretax Equity In Earnings 0 0 0 0 0 Other Income/Expense - Net 0.4 10.3 1 0.9 0.7 Interest Capitalized - - - - - Pretax Income 9.3 10.2 6.8 8 7.5 Income Taxes 3.6 4 2.5 3 3.1 Minority Interest 0 0 0 0 0 Equity In Earnings 0 0 0 0 0 Income Before Extraordinary Items & Discont'd Ops 5.7 6.2 4.3 5 4.4 Discontinued Operations 0 0 -0.2 0 0 Net Income Before Extra Items/Preferred Div 5.7 6.2 4.1 5 4.4 Extr Items & Gain(Loss) Sale of Assets 0 0 0 0 0 Net Income Before Preferred Dividends 5.7 6.2 4.1 5 4.4 Preferred Dividend Require 0 0 0 0 0 Net Income to Common Shareholders 5.7 6.2 4.1 5 4.4 EPS Incl Extraordinary Items 0 0 0 0 0 EPS - Continuing Operations 0 0 0 0 0 Dividend Per Share 0 0 0 0 0 Common Shares Used to Calc Diluted EPS 16 20.5 22.2 23 16.6 Interim Income Statement Common Size GAP INC (GPS) 11/3/2007 5/5/2007 2/3/2007
  • 117. Financial Statement Comparative Analysis Specialty Apparel Companies ACC 602-62 Analysis of Financial Statements Page 113 Appendix C: Sources 1. Fiscal 2003 – 2007 10K’s & 10 Q’s URBN, ANF, GPS, AEO 2. EDGAR Online. 3. www.wikipedia.org 4. Standard and Poor’s: Various resources available 5. Standard and Poor’s STAR Reports 6. Value Line Research 7. www.bloomberg.com 8. Thomson Financial Services 9. National Bureau of Economic Research 10. Wachovia Economic Group 11. Wachovia Capital Markets Equity Desk 12. Lehman Brothers Equity Research 13. Business and Company Resource Center 14. FPD Fashion World Consumer Data Estimates 15. www.gap.com 16. www.abercrombie.com 17. www.ae.com 18. www.urbanoutfitters.com 19. www.americanvulture.org 20. www.seekingalpha.com 21. www.forbes.com 22. Reuters 23. www.businessweek.com