American Eagle

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American Eagle

  1. 1. American Eagle Outfitters, Inc. AEOS By, Matthew McDonnell Presented 11-15-2005
  2. 2. Outline <ul><li>Today, I will be discussing American Eagle Outfitters, Inc. (AEOS), which is currently a major part of our client’s portfolio. </li></ul><ul><li>In addition to evaluating the firm itself, I will briefly compare American Eagle Outfitters to some of its major competitors. </li></ul><ul><li>Third, I will discuss several stock valuation methods, as well as other issues facing the firm. </li></ul><ul><li>Finally, I will give a recommendation regarding what should be done, if anything, regarding our holdings in American Eagle Outfitters. </li></ul>
  3. 3. Macroeconomic Review <ul><li>Currently middle of earnings seasons </li></ul><ul><li>Energy prices, although falling, still at relatively high levels </li></ul><ul><li>Rising interest rates affecting markets </li></ul><ul><li>Energy-driven inflation, questionable consumer confidence </li></ul><ul><li>Many retailers reported slow start to 05 holiday season, sales now growing stronger </li></ul>
  4. 4. American Eagle Outfitters- Vision <ul><li>“We will be a highly profitable, international, multi-channel retail organization” </li></ul><ul><li>“We will grow through a portfolio of our own distinct and segmented casual lifestyle apparel brands” </li></ul>Source: American Eagle Outfitters- Latest Wall Street Presentation , Oct. 27, 2005. available at http://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf
  5. 5. American Eagle Outfitters- Industry Classifications <ul><li>Sector: Consumer Discretionary </li></ul><ul><li>Industry Group: Retailing </li></ul><ul><li>Industry: Specialty Retail </li></ul><ul><li>Sub-industry: Apparel Retail </li></ul><ul><li>Industry: Multiline Retail </li></ul><ul><li>Sub-Industries: Internet Retail, Catalog Retail </li></ul>Adapted from: Standard and Poor’s GICS Map , effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')
  6. 6. American Eagle Outfitters- GICS Sector Description <ul><li>Consumer Discretionary Sector: </li></ul><ul><li>“ The GICS Consumer Discretionary Sector encompasses those industries that tend to be the most sensitive to economic cycles . Its manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment. The services segment includes hotels, restaurants, and other leisure facilities, media production and services, and consumer retailing and services .” 1 </li></ul>1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at: javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')
  7. 7. American Eagle Outfitters’ Business <ul><li>American Eagle is a “leading lifestyle retailer that markets and sells [its] own brand of relaxed, casual clothing.” </li></ul><ul><li>Target audience: 15-25 year-olds </li></ul><ul><li>Operates 846 stores in the US & Canada </li></ul><ul><li>Located primarily in malls, with emphasis on “A” center stores in especially high-traffic areas </li></ul><ul><li>Purchases merchandise from suppliers who either make it themselves or buy from producers. </li></ul>Source: Corporate Profile- About AE , American Eagle Homepage, accessed Nov. 07, 2005, available at: http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-homeprofile
  8. 8. American Eagle Outfitters- Products Sold Source: American Eagle 2004 Annual Report
  9. 9. American Eagle Outfitters- Locations By State Source Data: American Eagle Homepage Map from Yahoo! Travel
  10. 10. American Eagle Outfitters- International Sales Base Source: American Eagle 2004 Annual Report
  11. 11. American Eagle Outfitters- Brand Positioning Source: American Eagle Outfitters- Latest Wall Street Presentation , Oct. 27, 2005. available at http://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf
  12. 12. American Eagle Outfitters- 2004 Accomplishments <ul><li>31% increase in sales (21% comparable store sales) </li></ul><ul><li>171% increase in operating income </li></ul><ul><li>Nearly doubled market share in specialty denim </li></ul><ul><ul><ul><ul><ul><li>2 nd most purchased brand by target market </li></ul></ul></ul></ul></ul><ul><li>Increased US store base by 5% </li></ul><ul><ul><ul><ul><ul><li>40% of new stores on the West coast </li></ul></ul></ul></ul></ul>Source: American Eagle 2004 Annual Report
  13. 13. American Eagle Outfitters- 1 st Half 2005 Performance <ul><li>Significant gains in teen brand popularity </li></ul><ul><ul><li>Seen as “3 rd coolest brand for teens” </li></ul></ul><ul><ul><li>Second most often shopped specialty brand for denim </li></ul></ul><ul><li>Comparable store sales up 20% over 1 st half 2004 </li></ul><ul><li>80% growth in EPS </li></ul><ul><li>Slow start to holiday season, downgraded Q3 earnings, later upgraded to original projections of $0.45-$0.46 per share </li></ul>Sources: American Eagle Outfitters- Latest Wall Street Presentation , Oct. 27, 2005. available at http://library.corporate-ir.net/library/81/812/81256/items/169479/Latestwebsitepresentation.pdf American Eagle Outfitters, Form 8-K filed Sept. 20, 2005
  14. 14. American Eagle Outfitters- Looking Forward Plans for 2005 and Beyond <ul><li>Expansion </li></ul><ul><ul><li>New “flagship stores in NYC, Seattle” </li></ul></ul><ul><ul><li>Expansion into Alaska, Hawaii, Canada, Puerto Rico </li></ul></ul><ul><ul><li>Still focused on Western, Southwestern US </li></ul></ul><ul><ul><ul><li>Evidenced by purchase of new distribution facility in Ottawa, K.S. </li></ul></ul></ul><ul><li>New operating system used to streamline distribution </li></ul>Source: American Eagle Outfitters 2004 Annual Report
  15. 15. American Eagle Outfitters- Looking Forward (cont.) <ul><li>One of American Eagle’s most significant plans for the future is the recent unveiling of its new brand, Martin and Osa </li></ul><ul><li>Unveiled 10/20/2005, Scheduled to debut in malls in Fall, 2006 </li></ul><ul><ul><li>Will operate as its own business segment separate of American Eagle brand. </li></ul></ul><ul><li>Targeted to men, women age 25-40 </li></ul><ul><ul><li>This is outside AE’s traditional 18-25 market </li></ul></ul><ul><ul><li>Possibly explains move to Southwest US </li></ul></ul><ul><li>Will include “classic sportswear” </li></ul><ul><ul><li>Described by &quot;a union of everything that is right about classics, denim, and active sportswear” </li></ul></ul><ul><ul><li>Using former Abercrombie & Fitch designers to head project </li></ul></ul>Source: American Eagle Outfitters Announces Name of New Concept: MARTIN + OSA, American Eagle Homepage, accessed Nov. 1, 2005, available at: www. http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-newsArticle&ID=770357&highlight=
  16. 16. American Eagle Outfitters- Financial Analysis <ul><ul><li>Items of note include: </li></ul></ul><ul><ul><li>1. Increasing Liquidity </li></ul></ul><ul><ul><li>-- ↑Current Assets, ↓Non-current Assets </li></ul></ul><ul><ul><ul><ul><li>Possible Implications: planned expansion, anticipation of bad season. </li></ul></ul></ul></ul><ul><ul><li>Decreasing COGS as % Net Income </li></ul></ul><ul><ul><ul><li>Implication: Irregularities with respect to inventory management/sales </li></ul></ul></ul><ul><ul><ul><li>Stainable decline? Not likely. </li></ul></ul></ul>
  17. 17. American Eagle Outfitters- Stock Performance vs. S&P 500 (5yrs)
  18. 18. American Eagle Outfitters- Stock Performance vs. Competitors (5yrs)
  19. 19. American Eagle Outfitters’ Competitors <ul><li>The Limited </li></ul><ul><li>The Gap </li></ul><ul><li>Abercrombie & Fitch </li></ul><ul><li>Aeropostale </li></ul><ul><li>Pacific Sunwear </li></ul>
  20. 20. American Eagle Outfitters- Comparable Performance Competitor Data: Yahoo! Finance, accessed Oct. 27, 2005, available at http://www.finance.yahoo.com
  21. 21. American Eagle Outfitters- An RCMP Holding <ul><li>Bought on 3 occasions: 12/1999, 03/2000, 05/2000 </li></ul><ul><li>Sold 25% of holdings in 04/2005 </li></ul><ul><li>As of Nov. 7, 2005, AEOS constituted 9% of the portfolio’ book value and 20% of the portfolio’s market value. </li></ul><ul><li>Since its initial purchase, the stock price has climbed 329% </li></ul><ul><li>Realized gain= $11.054.60 </li></ul><ul><li>Unrealized gain= $41,620.00 </li></ul>
  22. 22. American Eagle Outfitters- Porter’s 5 Forces
  23. 23. American Eagle Outfitters- SWOT Analysis <ul><li>T hreats </li></ul><ul><li>Unpredictable industry, subject to fashion </li></ul><ul><li>trends </li></ul><ul><li>Higher materials prices as the result of US </li></ul><ul><li>de-facto reimposition of Multifiber Agreement </li></ul><ul><li>in summer 2005 </li></ul><ul><li>GAP pursuing similar strategy as Martin and </li></ul><ul><li>Osa, possibly increased competition </li></ul><ul><li>Dependency on holiday sales, consumer </li></ul><ul><li>confidence. Both are in question for 2005. </li></ul><ul><li>O pportunities </li></ul><ul><li>New clothing line, Martin and Osa debuting </li></ul><ul><li>fall 2006 </li></ul><ul><li>--Also reaches out to new demographic </li></ul><ul><li>Continued expansion into new geographic </li></ul><ul><li>areas including SW USA, HI, Canada, </li></ul><ul><li>Puerto Rico </li></ul><ul><li>Slowly increasing online, international sales </li></ul><ul><li>W eaknesses </li></ul><ul><li>Inconsistent growth in historical income </li></ul><ul><li>Overvalued compared to intrinsic value, </li></ul><ul><li>P/E pricing methods </li></ul><ul><li>High liquidity= questionable use </li></ul><ul><li>of financial resources </li></ul><ul><li>Questionable compensation of retail </li></ul><ul><li>associates </li></ul><ul><li>S trengths </li></ul><ul><li>Significant increase in comps </li></ul><ul><li>More efficient distribution </li></ul><ul><li>Strong EPS growth </li></ul><ul><li>Increasing margins </li></ul><ul><li>Trading at discount to its competitors, industry </li></ul><ul><li>New, proven design team </li></ul><ul><li>Seen as a “cool” brand by teens </li></ul>
  24. 24. American Eagle Outfitters- Impact of Tariffs On Inputs
  25. 25. American Eagle Outfitters- Portfolio Diversification Source: Adapted from Dow Jones Indexes, Component Weightings, accessed Nov. 5, 2005, available at http://www.djindexes.com/mdsidx/index.cfm?event=showComponentWeights&rptsymbol=DJI&sitemapid=20 Standard and Poor’s GICS Map , effective Apr. 30, 2005, available at javascript:popup('/spf/xls/index/gics_map_April_2005.xls')
  26. 26. American Eagle Outfitters- Portfolio Diversification (cont.) <ul><li>Q) Why is RCMP’s concentration in American Eagle Outfitters a cause for concern? </li></ul><ul><li>Remember the GISC definition of the Consumer Discretionary Sector: </li></ul><ul><li>The GICS Consumer Discretionary Sector encompasses those industries that tend to </li></ul><ul><li>be the most sensitive to economic cycles . 1 </li></ul>1 Standard and Poor’s GICS Industry Classification Definitions, effective Apr. 30, 2005 available at: javascript:popup('/spf/pdf/index/GICSSectorDescriptions_April2005.pdf')
  27. 27. American Eagle Outfitters- Questionable Employee Management <ul><li>Four American Eagle Outfitters employees Pennsylvania, Illinois, and New Jersey have alleged their former employers “violated certain federal and state minimum wage and related laws.” 1 </li></ul><ul><li>“ American Eagle Outfitters, denying the allegations made by the employees has entered into a Settle Agreement for an unspecified amount.” 2 </li></ul><ul><li>Although it is unlikely the settlement will have any significant impact on earnings or stock price in the near future, it raises questions regarding pervasive improprieties within the company. </li></ul>1. Notice to Eligible Employees, Court of Common Pleas, Allegheny County, Penn., p.1, Received Nov. 9, 2005. 2. Id. at 1.
  28. 28. American Eagle Outfitters- Relative Stock Valuation Data from: Yahoo! Finance, accessed Nov. 5, 2005, available at www.finance.yahoo.com
  29. 29. American Eagle Outfitters- EPS Implied Stock Price
  30. 30. American Eagle Outfitters- Intrinsic Value <ul><li>Assume a “reasonable” average growth rate in net income, say 8% </li></ul><ul><li>Holding costs proportional, this generates an intrinsic value of $21.52 . This is below the market price of $25.32 </li></ul><ul><li>Holding other factors constant, net income would have to grow at a rate of appox. 50% annually! </li></ul>
  31. 31. American Eagle Outfitters- Review <ul><li>Macroeconomic Issues </li></ul><ul><ul><ul><li>Relatively high energy prices </li></ul></ul></ul><ul><ul><ul><li>Questionable consumer confidence </li></ul></ul></ul><ul><li>Microeconomic Issues </li></ul><ul><ul><ul><li>Firm plan anticipates launch of its new label in fall 2006 </li></ul></ul></ul><ul><ul><ul><li>Huge growth in FY 2004 </li></ul></ul></ul><ul><ul><ul><li>Questionable management relating to employee compensation </li></ul></ul></ul><ul><ul><ul><li>Priced at discount to the market </li></ul></ul></ul><ul><ul><ul><li>Overvalued according to EPS method </li></ul></ul></ul><ul><ul><ul><li>Overpriced according to Intrinsic Valuation method </li></ul></ul></ul><ul><ul><ul><ul><li>Very sensitive to changes in CAPEX spending, an area that may change dramatically with continued expansion, launch of new label </li></ul></ul></ul></ul><ul><li>Other Issues </li></ul><ul><ul><ul><li>Portfolio diversification </li></ul></ul></ul><ul><ul><ul><ul><li>With American Eagle constituting 20% of the RCMP market portfolio, we are susceptible to significant idiosyncratic risk </li></ul></ul></ul></ul><ul><ul><ul><ul><li>This sector is, by definition, very susceptible to cyclical nature of the economy </li></ul></ul></ul></ul>
  32. 32. American Eagle Outfitters- Recommendation <ul><li>Based on the factors just listed, I feel we should sell 29% of our holdings, or 700 shares of American Eagle Outfitters at the market. </li></ul><ul><li>American Eagle is a solid firm relative to the industry in which it operates and I believe it provides good exposure to a market that indeed still has potential for growth. Our remaining 1,700 shares should provide us with this exposure </li></ul>
  33. 33. The End <ul><li>Questions? </li></ul>

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