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American Eagle outfitters
Presented by : Linden Lu
Yanlei Xu
Gleb Zarkh
Mohamed Ibrahim
11-14-2007
Presentation Outline :
Company overview
Industry and competitors
RCMP position and historical transactions
Macro economic view
Firm risks and growth model
Valuation
Assumptions
DCF
Multiple valuation
Recommendation
Company Overview
American Eagle Outfitters is one of leading apparel
retailers in US
Design, market, and sell own brand of laidback
Casual clothing including Jeans, Graphic T’s, accessories, footwear,
outwear, basics
targeting age: 15-25
Sell to US (1977), Canada (2001) and 41 foreign countries
Venues: Primarily Mall-based, limited stand-alone and internet
sales
In 2006: introduced 2 new brands
Martin+OSA as a separate brand targeting age 25-40
Aerie as a sub brand selling intimates for women
As of Aug 07 it operated 928 stores
919 AE stores in US and Canada (including 5 Aerie)
9 Martin+OSA
Company Overview Cont.
Revenue sources
Traditional AE stores
New store opening (Matin+OSA, Aerie)
E-commerce (mainly to overseas customers)
Merchandise Mix (2006)
Men’s apparel (35%)
Women’s apparel, accessories, intimates (60%)
Footwear for men and women (5%)
Slightly shifts to women’s apparel from men’s apparel
Economy and Consumer inspired growth
Retail Apparel Industry
Including retail stores and e-commerce is
highly competitive: quality, fashion,
service, selection and price
Porter’s Five Force
Entry of New Competitors: moderate
Threat of substitutes: high
Bargaining power of buyers: moderate
Bargaining power of suppliers: low
Rivalry among existing competitors: high
Competition
Competition: individual and chain specialty
stores, as well as the casual apparel and
footwear departments of department
stores and discount retailers
Key Competitors:
Abercrombie & Fitch: 20 year old, high price
Aeropostale: younger teens, low-mid price
GAP: 20-30, mid-high price
American Eagle: 20 year old, mid price
Transaction History
December 10, 1999 March 8th, 2005
BOT 200 shares at 2-1 split
$44.00 April 25th, 2005
January 10, 2000 SLD 600 shares at $26.28
BOT 200 shares at
$27.00 November 16th, 2005
SLD 700 shares at $23.33
May 3, 2000
BOT 600 shares at November 7th 2006
$15.63 SLD 400 shares at $39.19
February 23, 2001 December 28th, 2006
3-2 split
3-2 Split
RCMP position:
Currently own 1,950 shares of AEO, trading at
$22 as of Nov 12th, 2007 for an unrealized gain
of $32,710 or 321.04%.
R C M P p o rtfo lio c o m p o s itio n
AEO represents
SRZ WAG
5% 5%
Cas h
SRC L
11.2% of the
AEE
6%
MVSN C ash AEO
portfolio
3% 36% CPRT
DFS
KMB
FR
5%
JK H Y
JK HY KMB
3%
MVSN
FR SRCL
10% AEE
SRZ
6%
W AG
DFS AEO
C PRT
1%
9% 11%
Correlation matrix
AEE AEO CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFS
AEE 1
AEO -0.03 1.00
CPRT 0.38 0.20 1.00
FR 0.30 -0.03 0.28 1.00
JKHY 0.22 0.38 0.40 0.12 1.00
KMB 0.36 0.10 0.48 0.08 0.31 1.00
MVSN 0.16 0.41 0.32 0.21 0.55 0.03 1.00
SRCL -0.13 0.11 -0.02 -0.06 0.08 -0.01 -0.12 1.00
SRZ 0.11 0.21 0.41 0.18 0.38 0.00 0.46 0.04 1.00
WAG 0.06 0.13 0.08 -0.15 -0.02 0.24 -0.05 0.09 -0.17 1.00
DFS 0.31 0.28 0.10 -0.02 0.40 -0.18 0.80 -0.55 -0.61 -0.11 1.00
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.
Slowdown in 2008
Price of Oil Price of Corn
ARMs Reset in 2008
Business risk
Consumer’s preferences
The ability to satisfy customers’ demand and changing
preferences is a primary source of business risk.
Changes in fashion trends could lead to lower sales, excess
inventories and higher markdowns, which could negatively
affect AEO.
Sales per gross square feet
600
500
400
Sales
300
200
100
0
2002 2003 2004 2005 2006
Years
American eagle Abercrombie Gap
Business risk
Seasonality :
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.
The recent credit crunch , higher oil prices
would affect the consumer spending, thus
affect over all sales for 2007
Growth model
AEO growth model depends on
Growth from new store openings
Comparable sales growth
E-commerce
For the new store openings
AEO is looking for opportunities of growth in its 2 new brands
specially the Aerie Brand
They believe that there is strong growth potential in the intimates
market .
New stores 2006 2007E 2008E 2009E 2010E 2011E
Traditional AE stores 41 28 20 15 12 10
Martin+Osa 5 10 10 12 14 16
Aerie 3 20 30 30 25 22
Total 49 58 60 57 51 48
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
DCF valuation
WACC Calculations:
Beta 1.21
Equity 100%
WACC 12.47
DCF valuation
Key assumptions
Revenue Growth Rate
2007 2008 2009 2010 2011
15.91% 11.46% 13.96% 13.16% 12.63%
Capital Expenditures
2007 2008 2009 2010 2011
250 120 120 125 130
Depreciation/Amortization
2007 2008 2009 2010 2011
98.8 116.0 126.8 138.1 149.8
DCF valuation
Key assumptions
Cost Of Goods Sold
2007 2008 2009 2010 2011
54.5% 55% 55% 55% 55%
SG&A
2007 2008 2009 2010 2011
23.89% 23.89% 23.89% 23.89% 23.89%
Terminal Growth Rate 4%
DCF Valuation
DCF yields stock price $19.74
Sensitivity Analysis
Multiple Valuation:
Price to
Company P/E Price/Sales Price/Book
FCF
American Eagle 11.9 1.56 3.4 38.22
Aeropostale 15.4 1.23 5.36 18.27
GAP 20.47 0.97 2.95 33.27
Abercrombie 15.59 1.82 4.35 37.79
Industry 16.17 1.15 4.91 36.02
Multiple Used 15 1.4 4 36
IMPLIED PRICE: $23- $25
Recommendation
Sell 450 shares at Market price
Market price is $22 as of 12th Nov 07
Why sell ?
DCF shows slightly overvalued although it was based on
optimistic assumptions
Relatively low beta
Growth from new store openings and e commerce.
Why not all the position?
Multiple valuation shows undervalued
The stock’s return converge towards the industry mean return
Diversification benefits
Recommendation
Recommendation
Sources
Briefing.com
http://www.conference-
board.org/economics/ConsumerConfidenc
e.cfm
http://www.bubbleinfo.com/statistics-
2007/
