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American Eagle Outfitters - PowerPoint

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					American Eagle Outfitters




               November 30th, 2004
Introduction

   We currently own 1,500 shares of American Eagle
    and purchased shares on three separate dates:
    –   300 shares on 12/10/99 at $29.33
    –   300 shares on 3/10/00 at $18
    –   900 shares on 5/3/00 at $10.4167
   Total cost of position – $23,575
   Market value of position - $63,765 for a gain of
    $40,190 as of 11/29/04 market close of $42.51
   Recommendation is to hold
Relevant Financial Statistics

   52 Week Range: $14.80 - $44.59
   Market Cap: 3.12B
   P/E: 31.01
   EPS (ttm): $1.371
   Dividend: $.24
   Dividend Yield: 0.55%
Brief Background

   Lifestyle retailer that designs, markets, and sells
    casual clothing for 15 to 25 year olds
   Distribution
    –   Stores
    –   E-Commerce Business
    –   Catalogs
   Products
    –   Jeans and Cargo Pants
    –   Graphic T-shirts
    –   Accessories
    –   Outerwear
    –   Footwear
Brief Background (cont’d)

   Formerly operated the Bluenotes/Thriftys specialty
    apparel chain in Canada
   Recently agreed to sell Bluenotes to a private
    company controlled by Michael Gold, owner of
    Canadian retailer YM Inc.
   As of fiscal 2003, American Eagle Outfitters
    operated 805 American Eagle Outfitters stores in the
    United States and Canada
    –   AE opened 43 new stores in the United States during fiscal
        2003
Macroeconomic Review

   AE operates in the services sector and the
    retail (apparel) industry
   Competitors include The Limited, The Gap,
    Abercrombie & Fitch, Pacific Sunwear,
    Aeropostale and The Buckle
   Fashions at all these retailers are subject to
    short-term fads as well as long-term trends
Stock Market Prospects

   Entering the holiday season
    –   Walmart revised November sales estimates downward
        recently which negatively affected the entail retail sector
   However, AE posted strong results Thursday,
    November 11th
    –   Quarterly
            Sales up 35% over last year's third quarter,
            Gross margins increased from 38% to 47%,
    –   Year-to-date
            Sales climbed 26%
            Gross margins averaged 43.5%
Stock Market Prospects (cont’d)
Stock Market Prospects (cont’d)
Stock Market Prospects (cont’d)
Stock Market Prospects (cont’d)
Company Strategy

   Code of Ethics
    –   American Eagle Outfitters, Inc. is built based on
        trust, honesty and integrity. These virtues are our
        most important assets
   2003 Annual Report
    –   Challenging year overall, yet the company
        “emerged stronger and more efficient”
Company Strategy (cont’d)

   Significant changes in 2003
    –   Improved merchandising, design, store
        operations, and marketing
    –   Added new creative talent
    –   Streamlined and upgraded processes
    –   Reconnected with core customers
Company Strategy (cont’d)

   2004 – Looking forward
    –   Enthusiastic about the opportunity for sales and
        earnings growth
    –   Return to the level of sales productivity and
        profitability that the company and its brands were
        built to generate
    –   Improve merchandise assortments to provide a
        clear and focused point of view at target
        customers
Company Strategy (cont’d)

   In the fall of 2003, AE conducted the most
    extensive research in company history
    –   Conducted over 3,000 in-depth, face-to-face
        interviews
    –   Made adjustments based on the research and
        business improved measurably in the end of the
        year
    –   “Compelling merchandise assortments combined
        with the power of the American Eagle brand will
        be our winning formula in 2004 and beyond.”
 EPS Sensitivity

                            2004      2005      2006      2007      2008
EPS at 5% Revenue Growth       1.11      1.19      1.28      1.38      1.48
EPS at 15% Revenue Growth      1.27      1.55      1.88      2.25      2.68
EPS at 20% Revenue Growth      1.35      1.75      2.22      2.79      3.47



    Healthy EPS growth at 15% revenue growth, which
     is the Yahoo and Bloomberg estimate for the next
     five years
    Margin estimates are also not aggressive in the
     model
Free Cash Flow Calculation

FCF Price Summary          -10%     Estimate    +10%
5% Revenue Growth         $31.99    $35.54     $39.09
15% Revenue Growth        $46.72    $51.92     $57.11
20% Revenue Growth        $56.24    $62.49     $68.74


   Above is a free cash flow sensitivity analysis for
    various levels of revenue growth
   Note the +/- 10% range
Combined Sensitivity
                                                     2004     2005      2006     2007      2008
Price at Low Revenue Growth / Low P/E               $16.85   $18.16   $19.54   $20.99    $22.51
Price at Moderate Revenue Growth / Low P/E          $19.35   $23.66   $28.62   $34.32    $40.88
Price at Aggressive Revenue Growth / Low P/E        $20.60   $26.60   $33.80   $42.44    $52.80
Price at Low Revenue Growth / Industry P/E          $23.59   $25.43   $27.35   $29.38    $31.51
Price at Moderate Revenue Growth / Industry P/E     $27.09   $33.13   $40.07   $48.05    $57.23
Price at Aggressive Revenue Growth / Industry P/E   $28.84   $37.24   $47.32   $59.41    $73.93
Price at Low Revenue Growth / Current P/E           $34.82   $37.53   $40.38   $43.37    $46.51
Price at Moderate Revenue Growth / Current P/E      $39.99   $48.90   $59.15   $70.93    $84.49
Price at Aggressive Revenue Growth / Current P/E    $42.57   $54.97   $69.85   $87.70   $109.13

    Low P/E = 15
    Industry P/E = 25
    Current P/E in Market = 31
    Wide range of prices when revenue growth and P/Es are
     sensitized
    Low revenue growth caps the price
    The current P/E of 31 may not be sustainable but solid revenue
     growth and growth in EPS should compensate
Considerations

   Add to position
    –   Downsides
              Volatile industry that is very dependent on the overall health of
               the economy and consumer spending
              Short-term fashions, which revenue growth depends on, are
               difficult, if not impossible, to predict
              Already significantly exposed to American Eagle as well as the
               fashion retail sector
   Sell
    –   Downsides
              Recent guidance is very positive
              If AE is able to grow at the expected rates, there is still solid
               growth left in the stock
Recommendation

   Hold 1500 shares of American Eagle
   AE has been a successful purchase and
    appears to be competing very well
   Must reassess AE after the critical holiday
    season to see if it met estimates and
    continued to provide positive guidance for
    the next year

				
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