American Eagle Outfitters Liu Yi Xu Wenqiang (Wayne) Nov 7, 2013.

American Eagle Outfitters

Liu YiXu Wenqiang (Wayne)

Nov 7, 2013

Agenda

• Introduction & Holding Review• Macroeconomic Factors & Industry Overview• Company Overview• Management Outlook• Financial Analysis• Valuation• Conclusion & Recommendation

Introduction: Founded in 1977 and went public in 1994, AEO is an apparel retailer targeting teenagers and young adults

Source: Company Website

1977:The first AE store opens

1999:First flagship store in San Francisco

2001:Annual sales surpass $ 1 bn;Cross the border to Canada

2007:Traded on NYSE

1994:AE goes public on Nasdaq

2000:AE opens its 500th store

2006:Aerie, an intimates brand just for her, launches

2010:Expands internationally

Holding Review: We’ve been holding AEO for a long time

• Transaction history – Dec 1999 – Buy 200 @ $44– Jan 2000 – Buy 200@ $27– Mar 2000 – Buy 600 @ $15.63– Feb 2001 – 3:2 Split– Mar 2005 – 2:1 Split– Apr 2005 – Sell 600 @ $26.284– Nov 2005 – Sell 700@ $23.33– Nov 2006 – Sell 400 @ $47.15– Dec 2006 – 3:2 Split– Nov 2007 – Sell 450 @ $22– Dec 2008 – Buy 1000 @ $9.07– Nov 2010 – Sell 500 @ $17.00– Apr 2011 – Sell 500 @ $16.04

• Current Price: $ 14.65• Current Position: Long 1500 shares of AEO with a weighted average price of

$5.2252

Source: Yahoo Finance

Macroeconomic Factors: Disposable personal income, retail sales, and etc. are key drivers to apparel retail industry

United States Disposable Personal IncomeYOY %, 2003 – 2012

Source: US Bureau of Economic Analysis

Macroeconomic Factors: Disposable personal income, retail sales, and etc. are key drivers to apparel retail industry (cont’)

United States Retail SalesYOY %, 2003 – 2013

Source: US Census Bureau, www.tradingeconomics.com

Industry Overview: US apparel retail industry is growing at 4.7%, with women’s wear as the largest segment

United States apparel retail industry value$ billion, 2008 – 2017

Source: Market Line Apparel Retail in the United States, Feb 2013, P8 - P11

United States apparel retail industry category segmentation% share, by value, 2012

CAGR (2012 - 2017): 4.7%

Industry Overview: Fairly fragmented market, moderate growth and independent consumers result in a moderate level of competition in the industry

Rivalry Competition

•Strong (4.3)1

The US apparel retail market is fairly fragmentedAll kinds of players are in this market, such as branded retailers, department stores, hypermarkets, discount stores and etc.Fast pace of change in fashion and low level of product differentiation add to competition

Suppliers’ Bargaining Power

•Weak (2.7)Suppliers are clothing manufacturers and wholesalers, who usually are small to medium sized businessesBranded retailers usually source from Asia

Buyers’ Bargaining Power

•Medium (3)All buyers are large amount of individual consumersLow switching cost among brandsRetailers can differentiate themselves through styles, price rangesRetailers need to offer what buyers want

Threat of New Entrants

•Strong (4)Barriers to entry are not highThere is little regulation in this industryLow switching costs and low level of product differentiation make it easier for new entrants to compete with existing players

Substitutes

•Medium (3)Though there is no substitute to apparel, there are some to retail. One option is buying onlineMajor retailers are all building their online storesThere are growing number of online fashion storesHome made and custom made clothing are niche alternatives

Footnote: 1. Number in the brackets is the overall rating for this factor, larger number means stronger power

Apparel Retail Industry Five Forces Analysis

Source: Market Line Apparel Retail in the United States, Feb 2013, P12 – P17

Company Overview: AEO operates 2 major brands, while it also has a fast growing online business

• AEO Brand– Targets 15 to 25-year old men and women– Denim is the cornerstone of the brand’s assortment– Gaining market share through differentiated fashion in key categories is a

primary focus– 921 stores by first half 2013

• aerie by AEO– Collection of intimates and personal care product for AEO girl– 135 stores by first half 2013

• AEO Direct (Online business)– An extension of the lifestyle conveyed in the stores– Currently ship to 81 countries– Comparable sales increased 25% in 2012

Source: 2012 10-K, P3

Company Overview: AEO’s business model focuses on the two ends of the value chain

Manufacture•During fiscal year 2012, purchase all of the merchandise from non-North-American suppliers•Rely on a small number of foreign sources for a significant portion of purchase

Business Model of AEO

Ship & Distribute•Merchandise shipped directly from vendors and routed through 3 rd party trans loaders•US distribution centers in Pennsylvania and Kansas•Canada distribution centers in Ontario•Jan 2013 newly opened 3rd party distribution center in Mexico City to support Mexican stores and e-commerce•Certain products shipped directly to stores

Sell•Through 1044 stores and online channel, as of end of 2012–950 stores in US–94 stores in Canada•Co-branded credit card (AEO Visa Card) and private label credit card (AEO Credit Card)

Source: 2012 10-K, P5 – P7

Company Overview: With number of stores at a ceiling, comparable sales growth is the key for future growth

Revenue Total Comparable Sales1 Growth

Number of stores

Footnote: 1. Comparable sales provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period.

Source: 2012 10-K, P17, 2011 10-K, P17, 2010 10-K, P16

Merchandise improvement, service improvement, store remodeling and etc. are the drivers to increase comparable sales.

Management Outlook: The story in 2013 is not that promising

Management Outlook• Store opening plan 2013

– Approximately 50 AEO stores, primarily in North America, Mexico and China

• Remodel and refurbish plan 2013– Remodel and refurbish

approximately 45 to 55 existing AEO stores and close approximately 20 to 30 AEO stores and 15 to 20 aerie stores

Results• 19 net openings for the

whole company, as of Aug 3, 2013– 10 in US, 1 in Canada– 3 in China, 3 in HK, 2 in

Mexico• Total comparable sales

declined 6% as of Aug 3, 2013

– AE declined 7%, aeire increased 1%, AEO Direct increased 17%

Source: 2012 10-K, P4, Second Quarter 2013 Financial Results, P5, P10

SWOT Analysis

Strengths Weaknesses

•Strong brand with no debt •aerie gains a niche in underserved teen intimate apparel market•Strong in a few categories, such as denim

•Target customer base is small and has limited consumption capability•Relatively small scale

Opportunities Threats

•International expansion– American Eagle Outfitters and aerie

merchandise is available at 49 international franchise store locations in 13 countries, by end of 2012

•Online sales– AEO Direct comparable sales increased 25%

in 2012, increased 17% in the first half of 2013

•Potential raw material inflation and increase in labor cost•Weak back-to-school and holiday sales this year

Source: 2012 10-K, P23, 2013 Second Quarter 10-Q, P5

Financial Analysis – Ratios

Profitability 2009-01 2010-01 2011-01 2012-01 2013-01 TTMNet Margin % 5.99 5.65 4.74 4.8 6.68 6.43Asset Turnover (Average) 1.56 1.46 1.48 1.65 1.88 1.93Return on Assets % 9.35 8.24 7 7.92 12.52 12.41Financial Leverage (Average) 1.39 1.35 1.39 1.38 1.44 1.48Return on Equity % 13.03 11.32 9.6 10.96 17.6 18.36Return on Invested Capital % 12.62 10.93 9.5 10.96 17.6 18.36Liquidity/Financial Health 2009-01 2010-01 2011-01 2012-01 2013-01 Latest QtrCurrent Ratio 2.3 2.85 3.03 3.18 2.62 2.31Quick Ratio 1.31 1.79 1.99 1.94 1.54 0.97Financial Leverage 1.39 1.35 1.39 1.38 1.44 1.48Efficiency 2009-01 2010-01 2011-01 2012-01 2013-01 TTMDays Sales Outstanding 4.48 4.65 4.4 4.45 3.4 4.89Days Inventory 58.47 61.88 63.76 61.06 62.21 80.67Payables Period 31.17 30.93 33.14 31.58 31.56 51.11Cash Conversion Cycle 31.78 35.6 35.01 33.93 34.05 34.45Receivables Turnover 81.45 78.47 83.05 82.04 107.23 74.71Inventory Turnover 6.24 5.9 5.72 5.98 5.87 4.52Fixed Assets Turnover 4.38 4.12 4.38 5.16 6.37 5.78Asset Turnover 1.56 1.46 1.48 1.65 1.88 1.93

Source: Morning Star

Financial Analysis – Dupont

2009-01 2010-01 2011-01 2012-01 2013-01 TTMTax burden 59% 72% 44% 66% 57% 64%Interest Burden 1 1 1 1 1 1Operating Margin 10.11 7.97 10.69 7.31 11.35 10.01Asset Turnover 1.56 1.46 1.48 1.65 1.88 1.93Leverage ratio 1.39 1.35 1.39 1.38 1.44 1.48ROE 13.03 11.32 9.6 10.96 17.6 18.36

Source: 2012 10-K

Dividend Signaling

Market Price Cash Dividends PerFor the Quarters Ended High Low Common ShareFebruary 2,2013 $21.45 $18.49 $ 0.22October 27,2012 $23.80 $19.89 $ 1.61July 28,2012 $20.92 $17.89 $ 0.11April 28,2012 $18.43 $13.58 $ 0.11January 28,2012 $15.72 $12.89 $ 0.11October 29,2011 $13.60 $10.17 $ 0.11JuLy 30,2011 $15.71 $12.49 $ 0.11April 30,2011 $16.18 $14.46 $ 0.11

• During Fiscal year 2012, and Fiscal 2011. American Eagle paid quarterly dividends as shown in the table above. Included in the above table for the quarter ended October 27, 2012 AEO paid a special cash dividend of $1.50 per common share.

• During Fiscal year 2013, American Eagle paid quarter dividends 0.125 each on June 27, 2013 and September 30, 2013.

Source: 2012 10-K

Recent Stock Performance

• After March, 2013 American Eagle’s stock price has consistently been below the 200 day moving average

• While the trend of the 200 day moving average is going downward, there is a slightly increase trend for 20 day moving average

Source: Yahoo Finance

20 & 200 Day Moving Average Stock Chart

Valuation – WACC Calculation

WACC Calculation

Component Weight Explaination

Realized return 12.18% 0.35 5 years realized return

CAPM 9.40% 0.65 Formula

Company Beta 0.96 5 years regression

Risk free Rate 2.70% U.S. 10 years treasury

Market Risk Premium 7% Assumption

Cost of Equity 10.37% Formula

Cost of Debt N/A No debt

WACC 10.37% Premium 0%

• We believe there is not that much volatility in this industry; therefore we add 0% premium into the WACC

• No debt

Source: 2012 10-K

Valuation – Discounted Cash Flow

Cumulative Present Value of FCF $1,354.6 Enterprise Value $2,790.7

Less: Total Debt -

Less: Preferred Securities -

2022 FCF $256.2 Plus: Cash And Equivalents -

Growth Rate 3.00%

Terminal Value $3,578.7

Discount Factor 0.40 Implied Equity Value $2,790.7

Present Value of Terminal Value $1,436.1

% of Enterprise Value 51.5% Number of Shares Outstanding 192.70

Enterprise Value $2,790.7 Implied Share Price $14.48

Sensitive Analysis

$14.48 8.87% 9.37% 9.87% 10.37% 10.87% 11.37% 11.87%

2.00% 16.01 15.06 14.24 13.53 12.91 12.37 11.89 2.50% 16.77 15.68 14.76 13.97 13.29 12.70 12.18 3.00% 17.65 16.41 15.37 14.48 13.72 13.07 12.50 3.50% 18.69 17.26 16.06 15.06 14.21 13.48 12.85 4.00% 19.95 18.26 16.88 15.73 14.77 13.95 13.25

Discount Factor

Growth Rate

Terminal Value

Source: 2012 10-K

Valuation – Comparable Analysis

Company Name Ticker P/E P/B P/S EV/EBITDA

American Eagles Outfitters, Inc AEO 13.17 2.34 0.83 4.94

Abercrombie and Fitch ANF 10.95 1.50 0.59 4.34

Aeropostale, Inc ARO -29.61 1.77 0.28 7.22

Urban Outfitters, Inc URBN 21.51 3.76 1.91 9.58

Gap, Inc GPS 14.01 5.14 1.11 6.07

Mean 4.22 3.04 0.97 6.80

Median 12.48 2.76 0.85 6.64

High 21.51 5.14 1.91 9.58

Low -29.61 1.50 0.28 4.34

Multiple Price Weight

Weighted price

P/E 4.68 0.25 1.17

P/B 19.00 0.25 4.75

P/S 17.17 0.25 4.29

EV/EBITDA 17.94 0.25 4.48

Value 14.70

Source: 2012 10-K

Comparable Stock Chart

• American Eagle’s recent stock performance has been underperformed to S&P 500 and underperformed most of its competitors.

• Retailers catering to the teen set are navigating a rough back-to-school season.

AEO ComparablesAbercrombie & Fitch Co. (NYSE:ANF)

Aéropostale, Inc. (NYSE:ARO)

Urban Outfitters Inc. (NasdaqGS:URBN)

Gap, Inc. (NYSE:GPS)

Source: Yahoo Finance

Decision Drivers

• Strengths– Strong brand with no debt– Above average capability of inventory control

• Concerns– Nov 15, 2013 quarterly results could miss expectation– International expansion risk– Quickly changing fashion trends of teens

Recommendation

• Valuation– Current Price $14.65 per share– Analyzed Price $14.48 based on Discounted Cash Flow– $14.70 based on Comparable Analysis

• Recommendation– Hold

Q&A

Thank you ,any questions?