- 1. American Eagle outfitters Presented by : Linden Lu Yanlei Xu
Gleb Zarkh Mohamed Ibrahim 11-14-2007
2. Presentation Outline :
- RCMP position and historical transactions
- Firm risks and growth model
3. Company Overview
- American Eagle Outfitters is one of leading apparel retailers
in US
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- Design, market, and sell own brand of laidback
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- Casual clothing including Jeans, Graphic Ts, accessories,
footwear, outwear, basics
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- Sell to US (1977), Canada (2001) and 41 foreign countries
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- Venues: Primarily Mall-based, limited stand-alone and internet
sales
- In 2006: introduced 2 new brands
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- Martin+OSAas a separate brand targeting age 25-40
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- Aerieas a sub brand selling intimates for women
- As of Aug 07 it operated 928 stores
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- 919 AE stores in US and Canada (including 5Aerie )
4. Company Overview Cont.
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- New store opening (Matin+OSA,Aerie )
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- E-commerce (mainly to overseas customers)
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- Womens apparel, accessories, intimates (60%)
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- Footwear for men and women (5%)
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- Slightly shifts to womens apparel from mens apparel
- Economy and Consumer inspired growth
5. Retail Apparel Industry
- Including retail stores and e-commerce is highly competitive:
quality, fashion, service, selection and price
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- Entry of New Competitors: moderate
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- Threat of substitutes: high
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- Bargaining power of buyers: moderate
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- Bargaining power of suppliers: low
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- Rivalry among existing competitors: high
6. Competition
- Competition: individual and chain specialty stores, as well as
the casual apparel and footwear departments of department stores
and discount retailers
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- Abercrombie & Fitch: 20 year old, high price
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- Aeropostale: younger teens, low-mid price
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- GAP: 20-30, mid-high price
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- American Eagle: 20 year old, mid price
7. Transaction History
8. RCMP position:
- Currently own 1,950 shares of AEO, trading at $22 as of Nov 12
th , 2007 for an unrealized gain of $32,710 or 321.04%.
- AEO represents 11.2% of the portfolio
9. Correlation matrix 1.00 -0.11 -0.61 -0.55 0.80 -0.18 0.40
-0.02 0.10 0.28 0.31 DFS 1.00 -0.17 0.09 -0.05 0.24 -0.02 -0.15
0.08 0.13 0.06 WAG 1.00 0.04 0.46 0.00 0.38 0.18 0.41 0.21 0.11 SRZ
1.00 -0.12 -0.01 0.08 -0.06 -0.02 0.11 -0.13 SRCL 1.00 0.03 0.55
0.21 0.32 0.41 0.16 MVSN 1.00 0.31 0.08 0.48 0.10 0.36 KMB 1.00
0.12 0.40 0.38 0.22 JKHY 1.00 0.28 -0.03 0.30 FR 1.00 0.20 0.38
CPRT 1.00 -0.03 AEO 1 AEE DFS WAG SRZ SRCL MVSN KMB JKHY FR CPRT
AEO AEE 10. Macro Economic outlook 2007
- Weakest level since October 2005 (After Hurricane Katrina)
- 3 consecutive declines sum to -15% from July's 6 year
high.
- Housing recession,the financial (sub prime) mess and higher oil
prices are all contributing.
11. Slowdown in 2008 ARMs Reset in 2008 Price of Oil Price of
Corn 12. Business risk
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- The ability to satisfy customers demand and changing
preferences is a primary source of business risk.
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- Changes in fashion trends could lead to lower sales, excess
inventories and higher markdowns, which could negatively affect
AEO.
13. Business risk
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- The fourth and third quarters have historically provided 60%
net sales &65% of net income Due to the year-end holiday season
and back-to-school selling season.
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- The recent credit crunch , higher oil prices would affect the
consumer spending, thus affect over all sales for 2007
14. Growth model
- AEO growth model depends on
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- Growth from new store openings
- For the new store openings
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- AEO is looking for opportunities of growth in its 2 new brands
specially the Aerie Brand
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- They believe that there is strong growth potential in the
intimates market .
48 51 57 60 58 49 Total 22 25 30 30 20 3 Aerie 16 14 12 10 10 5
Martin+Osa 10 12 15 20 28 41 Traditional AE stores2011E 2010E 2009E
2008E 2007E 2006 New stores 15. Growth model
- Based on our view of the economy we expect a slow down in
growth of sales by AEO specially in 2008.
- Refer to excel sheet for further explanation of the growth
model
16. DCF valuation
17. Key assumptions
- 15.91% 11.46% 13.96% 13.16% 12.63%
- Depreciation/Amortization
- 98.8 116.0 126.8 138.1 149.8
DCF valuation 18. DCF valuation
- 23.89% 23.89% 23.89% 23.89% 23.89%
Key assumptions 19. DCF Valuation
- DCF yields stock price $19.74
20. Multiple Valuation: 36 4 1.4 15 Multiple Used 36.02 4.91
1.15 16.17 Industry 37.79 4.35 1.82 15.59 Abercrombie 33.27 2.95
0.97 20.47 GAP 18.27 5.36 1.23 15.4 Aeropostale 38.22 3.4 1.56 11.9
American Eagle Price to FCF Price/Book Price/Sales P/E Company
IMPLIED PRICE: $23- $25 21. Recommendation
- Sell 450 shares atMarket price
- Market price is $22 as of 12 thNov 07
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- DCF shows slightly overvalued although it was based on
optimistic assumptions
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- Growth from new store openings and e commerce.
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- Why not all the position?
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- Multiple valuation shows undervalued
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- The stocks return converge towards the industry mean
return
22. Recommendation 23. Recommendation 24. Sources
- http://www.conference-board.org/economics/ ConsumerConfidence .
cfm
- http://www. bubbleinfo .com/statistics-2007/