Retail Comparison Project

Retail Company Comparison

AMERICAN EAGLE

OUTFITTERS, INC.

COACH INC.

Darrin Nandhavan

Table of Contents

• Retail Industry Overview • Company Overview • Financials• Valuation and Ratios• SWOT Analysis• Stock Price History• Discounted Cash Flow• Questions and Comments

Retail Industry Overview

• Retail multinationals expanding to middle class outside of US

• Consumer spending remains fragile and depends on job creation and income growth

• Input costs increasing– Must increase prices to maintain

margins– Must cut costs by finding cheaper inputs

and suppliers• Companies discounting heavily to drive

sales

American Eagle Outfitters, Inc.

– Stock price: $12.49– Consists of AE brand, 77kids, Aerie and

Aerie Fit• Closed down MARTIN+OSA operations by end

of June

– Opening new stores outside of North America

– Significant market share in denim• Denim price points between competitors

Aeropostale and Hollister

– Targets15-25 year olds for AE and 2-10 year olds for 77kids

– Implements aggressive promotional strategies

Coach Inc. Overview– Stock Price: $37.28– Coach operates factory and Coach

stores– Expanding in Western Europe with

growing market in China and Japan• Partnership with Printemps and

Hackett Ltd.– Opened distribution center in China– Sweet spot of price points between

$298-$358– Poppy line, released in April extremely

successful – Launching Reed Krakoff Collection

American Eagle OutfittersSnapshot of Income Statement

American Eagle OutfittersSnapshot of Balance Sheet

American Eagle Outfitters Snapshot of Statement of Cash Flows

2Q09 3Q09 4Q09 1Q10 2Q10-200

-100

0

100

200

300

400

500

-18.89-36.36

-78.63

-119.81 -122.53

-23.77 -23.74 -30.35-49.07

-12.62

-14.16

80.91145.4

386.46

-24.88

Operating, Investing and Financing Activities (In Millions $)

Financing Investing Operating

American Eagle OutfittersMargins

Coach Inc.Snapshot of Income Statement

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11E0

200

400

600

800

1000

1200

136.3 140.8241

157.6 195.527 157.9

777.7 761.4

1065

830.7

950.5

826.5

Revenue and Net Income(In Millions)

Net Income Revenue

Coach Inc.Snapshot of Balance Sheet

Coach Inc.Snapshot of Statement of Cash Flows

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11E-600

-400

-200

0

200

400

600

270.2 240.5

363.7

205.1 181.7 179.7

-35.5 -20 -18.1

-219.6

82.3

-50

9.2

-32.4-236.9

-384-475.2

-170.4

Operating, Investing and Financing Activities(In Millions $)

Operating Investing Financing

Coach Inc.Margins

American Eagle Outfitters Valuation and Ratios

American Eagle

Abercrombie & Fitch

Valuation Ratios     Market Cap. 2.68 Bn 3.21 Bn Enterprise Value 2.11 Bn 2.65 Bn Earnings per Share 0.75 0.54

Dividend and Yield 0.44 (3.60%) 0.70 (2.00%) EV/EBITDA 4.94 6.47 EV/Revenue 0.7 0.88 Trailing P/E 17.42 67.77 Forward P/E 11.55 14.61 PEG Ratio (5 yr expected) 1.02 1.01 Price/Sales (ttm) 0.89 1.04 Price/Book (mrq) 1.79 1.75 Mgmt. Effectiveness     Return on Assets 8.92% 4.03% Return on Equity 10.75% 5.05% Balance Sheet     Total Cash (mrq) 544.26 Mn 632.81 Mn

(TTM) American

Eagle

RetailIndust

ry

Quick Ratio

2.22 1.32 Current Ratio

3.23 1.89 Receiva

bleTurnove

r

59.68

5.70

Inventory

Turnover

6.12 0.52

Asset Turnove

r

1.56 0.22

Retail-Specific Ratios

COACH Inc. Valuation and Ratios

Coach Nike Valuation Ratios Market Cap. 11.24 Bn 34.42 Bn Enterprise Value 10.80 Bn 30.34 Bn EPS 2.33 3.86

Div & Yield0.60

(1.60%)1.08

(1.50%) EV/EBITDA 8.46 10.57 EV/Revenue 2.99 1.6 Trailing P/E 16.03 18.46 Forward P/E 12.69 14.94 PEG Ratio (5 yr expected) 0.99 1.37 Price/Sales (ttm) 3.1 1.81 Price/Book (mrq) 7.44 3.54 Mgmt. Effectiveness Return on Assets 28.57% 11.18% Return on Equity 45.92% 20.67% Balance Sheet

Total Cash (mrq)696.40

Mn 5.15 Bn

(TTM) Coach RetailIndust

ry

Quick Ratio

1.78 1.32 Current Ratio

2.46 1.89 Receiva

bleTurnove

r

33.13

5.70

Inventory

Turnover

2.83 0.52

Asset Turnove

r

1.43 0.22

Retail-Specific Ratios

American Eagle Outfitters SWOT Analysis

• Strengths– Retains significant market share in denim category– Strong brand awareness– Implemented aggressive stock buyback program –

6M shares YTD; 24 M remaining• Weaknesses

– Struggling for market share in women’s knit top category

– Weak comp sales in most recent quarter– Gross margins under pressure in 2011

• Threats– Struggle for market share in teen space with

Aeropostale’s high brand awareness and Hollister’s more promotional business

• Opportunities– Opening stores in Middle East

Coach Inc.SWOT Analysis

• Strengths– Affordable high quality leather products– More design innovative than competitors– Positive handbag comps – 22% more units sold– High brand awareness– $1.2 billion stock repurchase plan

• Weaknesses– Cannibalization – factory stores stealing sales

from Coach stores– Small men’s market share in global market

• Threats– Gross margin pressures in 2011

• Opportunities– Expansion into Western Europe– Initiative to expand men’s line

Stock Price History and Movement

20

40

60

80

100

120

140

160

180

S&P 5001071.69 0.00 0.00% High: 1303.04 Low: 666.79 Chg: -15.92%

(INDEX) S&P 500 - Price (INDEX) Coach Inc. - Price (INDEX) American Eagle Outfitters Inc. - Price

10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/100

2

4

6

8

10

12

14S&P 500 - Volume

10/08

1/09 4/09 10/09

7/09 4/101/10 7/10

COACH vs. AMERICAN EAGLE vs. S&P500

(Index, 2 year period)

Discounted Cash Flow Analysis

American Eagle Outfitters, Inc.

• Neutral, Underpriced– Stock highly

undervalued; most undervalued in teen space – seen in EV/EBITDA measure

– Currently has high levels of inventory and low comps, trouble with operating margins

– Stock price will look up next quarter with decrease in inventory (back to school and holiday season)

– Solid balance sheet with little debt

Coach, Inc.

• Overpriced – More pricey but stock

has beaten S&P500; upward trend

– Many opportunities for growth abroad will increase market share and sales

– Margin pressure will be mitigated with Coach‘s new distribution center in China

– More innovative in design than competitors

– Solid balance sheet

Discounted Cash Flow Analysis

• American Eagle Outfitters Outputs (In Millions)

• Conclusion: Neutral• Enterprise Value:

$2,510.62• Fair Value of Equity:

$2,493.12• Fair Value Per Share:

$11.87 • Current Stock Price:

$12.49• Target Price: $9.50

• Coach, Inc. Outputs (In Millions)

• Conclusion: Neutral• Enterprise Value:

$13,804.50• Fair Value of Equity:

$13,775.00• Fair Value Per Share:

$45.16• Current stock price:

$37.28• Target Price: $31.61

Works Cited

• Yahoo Finance• Google Finance• FactSet CallStreet• Reuters.com• EDGAR SEC Filings• Lots of help from Amory and Thad