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					American Eagle Outfitters, Inc.
        NYSE: AEO
         11/2/2010
                      Ruonan Ding
                      Meiling Liu
                      Cardo Martinez
                      Rajani Meka
                      Prateek Sharma
   Industry Analysis
   Competitors
   Company Overview
   SWOT
   Management Discussion
   Financial Performance Analysis
   DuPont Analysis
   DCF Model
   Multiple Valuation
   Recommendation
   Dec 1999 – BOT 200 @ $44
   Jan 2000 – BOT 200@ $27
   Mar 2000 – BOT 600 @ $15.63
   Feb 2001– 3:2 Split
   Mar 2005– 2:1 Split
   Apr 2005 – Sold 600 @ $26.284
   Nov 2005 – Sold 700@ $23.33
   Nov 2006 – Sold 400 @ $39.19
   Dec 2006 – Splits 3:2
   Nov 2007 – Sold 450 @ $22
   Dec 2008 – BOT 1000 @ $9.07
   RCMP Currently Holds 2500 shares of AEO with a weighted average price
    of $6.766 and an unrealized gain of $22,142 (as of 1-Nov-2010)




                                                            Source: Yahoo! Finance
Market Value (Excl. Cash)                 Cost Basis (Excl. Cash)


                  WFR
                                                            AEO
                  7%
                                                            18%
      WAG                                 WFR
                               AEO
      15%                                 33%
                               34%
                                                                        BGC
                                                                        6%
                                                                              DO
MOS                                                                           4%
13%
                                                                              JKHY
                                                                              4%
                                                                  MCD
            MCD                                 WAG               11%
            14%         JKHY        BGC         13%   MOS
                        9%     DO    5%
                                                      11%
                               3%
   American Eagle Outfitters is a clothing and
    accessories retailer based in Philadelphia, PA.
   It was founded in 1977 by Mark and Jerry
    Silverman as a subsidiary of Retail Ventures,
    Inc.
   The Silverman’s sold their ownership interest
    in 1991
   The company started trading on the NASDAQ
    in 1994 as AEOS
   Targets teens and young adults
   Brands Include
    ◦ The American Eagle Outfitters –
      targets 15-25 year old boys and girls.
      934 stores in US and Canada
    ◦ aerie® by american eagle – offers
      dorm-wear and intimates for girls –
      144 standalone stores in US and
      Canada
    ◦ 77kids by american eagle – targets
      kids up to 14 yrs of age
    ◦ Online via www.ae.com and
      www.aerie.com – ships to more than
      76 countries
                             Source: http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-homeprofile
   Total revenues of Family Clothing Stores
    Industry for 2009 was $2,862 billion.
    Representing a CAGR of 5.1% from
    2005-09
   The breakdown of sales across the globe:
    ◦   Asia Pacific                             46.2%
    ◦   Europe                                   30.4%
    ◦   Americas                                 22.8%
    ◦   Rest of the world                         4.2%

               Source: Industry Report titled "Apparel Retail Industry Profile: Global", Data Monitor- Reference Code-0199-2005
               Persistent Link:
               http://search.ebscohost.com.proxy2.library.uiuc.edu/login.aspx?direct=true&db=bth&AN=51689167&site=bsi-live
Key External Drivers for Demand:
  ◦   Number of young adults
  ◦   Consumer sentiment
  ◦   Per capita disposable income
  ◦   Competition from substitutes such as department
      stores




                       Source: IBISWorld Industry Report 44814 Family Clothing Stores in the US September 2010
   The Family Clothing Stores industry is a
    highly competitive one, facing threats from
    within and from outside the industry.
   Competitive Factors:
       Having a clear market position
       Ability to control stock on hand
       Established brand names
       Production of goods currently favored by the market
       Attractive product presentation
       Experienced workforce
   Industry Rival is High:
     Fickle demographic
     Fast fashion chains
     Depends on trends and seasonality

   Buyer Power is High:
     Demand is highly affected by consumers disposable
      income level
     Fashion taste and product mix
     Sensitive to price change
   Supplier Power is Moderate:
     Purchasing from international suppliers
     Suppliers compete on the price and quality basis
     Eliminate import quotas in 2005

   Threats of Substitutes is High:
     Substitute good from not only the competitors
      but also department stores

   Buyers Bargaining Power is High:
     Low switching cost
   There is a general positive outlook for the
    industry as consumer discretionary income
    increases
   Growth will be lead by the Asia Pacific region
    (CAGR of 8.3%) whilst the European region
    will only face a growth rate of 3.9%. Growth is
    expected to be the slowest in the Americas
   Urban Outfitters (Ticker: URBN)
    ◦ Lifestyle Specialty Retail
      Urban Outfitters, Anthropologie, Free People and
       Terrain Brands
      Retail stores and e-commerce
    ◦ Wholesale Business
      Free People and Leifsdottir brands
    ◦ Core operating location: US
    ◦ FY 2009 Revenue : $1.9378B




                                    Source: Yahoo Finance, http://finance.yahoo.com/q?s=URBN
   Aeropostale, Inc (Ticker: ARO)
    ◦ Mall-based specialty retailer and online sales
      through aeropostale.com
    ◦ Target group: Aeropostale for 14-17 years old
      women and men; P.S for 7-12 years elementary
      school children
    ◦ Presence only in North America
    ◦ FY 2009 Revenue: $2.23B




                                  Source: Yahoo Finance, http://finance.yahoo.com/q?s=ARO
   Gap, Inc (Ticker: GPS)
    ◦ Specialty retailer
      Brands include Gap, Old Navy, Banana Republic,
       Piperlime, and Athleta brand
    ◦ Franchise agreements with unaffiliated franchisees
      Gap and Banana Republic stores
    ◦ Presence in United States, Canada, the United
      Kingdom, France, Ireland, and Japan.
    ◦ FY 2009 Revenue: $14.19B




                                   Source: Yahoo Finance, http://finance.yahoo.com/q?s=GPS
   Abercrombie and Fitch, Inc (Ticker: ANF)
    ◦ Specialty retailer
      Stores and direct-to-consumer operations
      Brands include Abercrombie & Fitch, abercrombie kids,
       Hollister and Gilly Hicks brands
    ◦ Presence in North America, Europe and Asia
      1,096 stores
    ◦ FY 2009 Revenue: $2.928B




                                    Source: Yahoo Finance, http://finance.yahoo.com/q?s=ANF
Strengths:
 Strong brands
 Strong distribution channels
 Little-to-zero debt on Balance Sheet


Weakness:
 Needs to maintain hype to sustain “teen” loyalty.
  Research shows that most teens are not loyal customers
 Currently in excess of 90% of its revenues are generated
  in the USA (stores are now primarily in USA and
  Canada)
Opportunities:
 Increased demand for women’s accessories

 Expansion into global markets (Asia) via franchising
  agreements

Threats:
 Strong dependency on consumer spending.
  Accessories especially dependent on “discretionary
  spending”
 Merchandizes from limited suppliers
1200                                    1103
                                1098
                        987
1000            911
        869

800                     $638
                                                    Total stores

                                $521    $519
600
                $642
        $577
                                                    Net Sales per
400
                                                    average selling   Fy 2007    38%         55%       7%
                                                    sqft
200

                                                                                                                 Men's
  0
                                                                                                                 Apparrel and
       Fy 2005 Fy 2006 Fy 2007 Fy 2008 FY 2009
                                                                      Fy 2008        42%     50%       8%        Accessories
                                                                                                                 Women's
20%                                                                                                              Apparrel and
                                                                                                                 Accessories
15%
                                                                                                                 aerie
                                                                      FY 2009        40%     51%       9%
10%
         16%
 5%
                        1%                       Comparable Store               0%         50%       100%
 0%             12%                              Sales

-5%
                                       -4%
-10%
                               -10%
-15%
       FY 2005FY 2006 FY 2007 FY 2008 FY 2009
                                                                                                 Source: AEO 10-K, pg.17
                                                                                                 http://www.sec.gov/Archives/edgar/dat
                                                                                                 a/919012/000095012310028815/l3923
                                                                                                 7e10vk.htm
   Increase in sales through e-commerce in ‘09
   Depreciation increased by 11% in ‘09 compared to ’08 due to
    greater PP&E driven by their capital expenditures
   Complete closure of Martin +OSA
   2010 Outlook
   Expecting ‘10 to be more favorable than ’09
   Focus on controlling expenses and keep it less than ’09
   Low inventory levels




                                              Source: 2009 Annual 10-K report
   Growth Strategy:
    ◦ Through new internal brands and franchising
    ◦ Open 40 new stores in US and Canada in ’10
    ◦ Franchising in Asia
    ◦ Franchising in the Middle-East
    ◦ Acquisitions
   Capital Expenditures:
    ◦ Reduced to $127.4 million in ‘09 as opposed to $265.3 million in
      ’08
    ◦ Aiming at keeping CAPEX between $100-$120 million in ’10




                                            Source: AEO 10K, FY 2010
• For the Fiscal year ’09, 60% of their sales attributed to women’s apparel and
accessories
• Aerie initiative started in ’06, exclusively for women’s apparel
• International Expansion: Franchising agreements in the Middle-East, China and Hong-
Kong
          Source: Industry Report titled "Apparel Retail Industry Profile: Global", Data Monitor- Reference Code-0199-2005
          Persistent Link:
          http://search.ebscohost.com.proxy2.library.uiuc.edu/login.aspx?direct=true&db=bth&AN=51689167&site=bsi-live
       YEAR            SALES ($MM)   NET INCOME ($MM) EPS ($)
         2010           2,990.52           169.02               0.82
         2009           2,988.87           179.06               0.87
         2008           3,055.42           400.02               1.85
         2007           2,794.41           387.36               1.74
         2006           2,321.97           293.71               1.29
5 YEAR GROWTH RATE %       6.5              -12.9               -10.7




                                      Source: AEO 10-K, FY 2010, ‘09, ‘08
Inventory and A/R management
       FISCAL YEAR END                   1/30/2010 1/31/2009 2/2/2008
       Receivables Turnover                  36.57     29.55    95.78
       Receivables Days Sales                 9.85     12.18     3.76
       Inventories Turnover                   9.16     10.13    10.67
       Inventories Days Sales                 39.3     35.52    33.75


Operational Asset Utilization
       FISCAL YEAR END                   1/30/2010 1/31/2009 2/2/2008
       Net Sales/Working Capital              3.94      5.71     4.74
       Net Sales/Net Plant & Equipment        4.19      4.04     4.88
       Net Sales/Current Assets               2.56      3.23     2.99
       Net Sales/Total Assets                  1.4      1.52     1.64
Amount in $millions, except ratios




                                     Source: Form 10-K, FY 2010, FY 2009
        Metric            Value               Weight           Weighted Value

Cost of Equity           8.31%                  60%                 4.99%
from CAPM
Cost of Equity           22.24%                 10%                2.224%
from ROE
Cost of Equity           18.74%                 30%                5.622%
from HPR (5-
year)
                                               Total              12.836%

RFR is the yield on 10-Year T-Bond
The company has no long-term debt outstanding and does not intend to change its
capital structure in the near future
All amount in $millions, except per share data and ratios

            Company Name                  Ticker Mkt Cap      P/E (ttm)   P/B (mrq) P/S (ttm) ROE (ttm)
     Abercrombie and Fitch                 ANF    3,760         40.56        2.08      1.21     6.62%
     Aeropostale, Inc                      ARO    2,240          9.49        4.58      0.97     53.54%
     Urban Outfitters, Inc                URBN    5,000         19.72        3.77      2.39     20.99%
     Gap, Inc                               GPS      11,840     10.90        2.77      0.81     26.35%


     American Eagles Outfitters, Inc        AEO      3.050      23.52        2.27      1.03    11.58%
     Minimum                                                     9.54        2.04      0.77
     Median                                                     20.35        2.62      1.04
     Mean                                                       21.28        3.04      1.27
     Maximum                                                    40.87        4.38      2.44

     Normalized EPS                        $0.88
     Revenues                              2990.5
     Book Value Per Share                  $8.07
     Shares Outstanding                   206.17m

     Per Share Valuation (Median)                               17.91       21.15      15.91
     Per share Valuation (Mean)                                 18.73       24.52      19.48

     Max                                                        35.97       35.36      37.32
     Min                                                         8.40       16.47      11.78
     max-min                                                    27.57       18.89      25.54




                                                                                               Source: Yahoo! Finance
   DCF model values the stock in the range $16-18.
   The multiples analysis values the stock between
    $18-22.
   At a market price of $15.62 (as of 11/1/2010), we
    think the stock is fairly valued with limited upside
    potential, pending any news event.
   We recommend selling 500 shares (20% of
    current holding) at a limit price of $17/share (Good
    till 12/6/2010)
      Pre-Recommendation                         Post-Recommendation*


                  WFR                                       WFR
                  7%                                        7%

      WAG                                                                  AEO
                                AEO               WAG
      15%                                                                  30%
                                34%               16%




MOS
13%                                            MOS
                                                14%                          BGC
                                                                                 5%
                               BGC
            MCD                5%
                                                         MCD        JKHY         DO
            14%         JKHY
                                                          15%       10%          3%
                        9%     DO
                               3%




                                      *Approximate representation of market value

				
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