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Brandon McArthur Shivam Khanna Bobby Schuster Ganapati Raman. American Eagle (AEO) April 2, 2009. Agenda. Company Overview Industry Overview Growth Strategy SWOT Auction Rate Securities Financial Projections. American Eagle Overview.

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brandon mcarthur shivam khanna bobby schuster ganapati raman
Brandon McArthur

Shivam Khanna

Bobby Schuster

Ganapati Raman

American Eagle (AEO)April 2, 2009

agenda
Agenda
  • Company Overview
  • Industry Overview
  • Growth Strategy
  • SWOT
  • Auction Rate Securities
  • Financial Projections
american eagle overview
American Eagle Overview
  • Engage in the design, marketing, and sale of clothing in the United States and Canada
  • Product Line: Jeans, Graphic Ts, accessories, outerwear, footwear, basics, and swimwear
  • Target Market: Males and Females Ages 15-25
  • Operate in Both U.S since 1977 and Canada since 2001
  • Aerie
    • New Intimates line opened in 2006, available at most AE stores as well as online
  • MARTIN + OSA
    • Line opened in 2006 targeting 28-40 year old women and men
  • 77 Kids
    • New Children’s apparel Brand launched online in 2008 and available in stores in 2010
aeo growth since 2008
AEO Growth Since 2008
  • Net Sales are down 2.2% in the last year.
  • Comparable Store Sales (stores opened in the last 53 weeks) are down 10%.
  • Net Profit Margins are down about 7%
    • 13% (2007) to 6% (2008)
  • AEO sold $393.6M of Auction Rate Securities in 2008.
summary of the clothing retail industry
Summary of the Clothing Retail Industry
  • 100,000 stores in clothing retail
    • Not including shoe and jewelry stores
  • Highly concentrated
    • 50 largest companies account for 65% of sales
  • Competition
    • Large retailers, wholesalers, and internet retailers
  • Demand driven by personal income and fashion trends
  • Labor intensive
    • Average annual sales per worker: 130,000
summary cont d
Summary (Cont’d)
  • Highest unemployment has consumers slashing discretionary spending on clothing
  • Top Competitors
    • Abercrombie & Fitch
      • UBS AG analyst expects ANF to close Ruehl concept by EOY (not announced by ANF)
    • The Gap
current events
Current Events
  • AEO concept, Martin + Osa, sales up 30% in 2008 probably due to promotions
    • AEO expected to forecasts opening 28 new American Eagle and aerie concepts, no Martin + Osa
  • AEO suing Citi for auction rate securities
    • Claims to have been “lured” in to buying $258 million while the market for these securities was falling
growth strategy
Growth Strategy
  • Fiscal 2008 goals:
    • Open 80 stand alone aerie stores
    • Open 40 new AE stores
    • Open 15 Martin + OSA stores
  • Fiscal 2008 Actual:
    • Opened 77 stand alone aerie stores
    • Opened 34 new AE stoes
    • Opened 9 Martin + OSA sores
  • As of January 31, 2009:
    • 954 American Eagle Outfitters stores in the United States and Canada
    • 116 aerie stand-alone stores
    • 28 MARTIN + OSA stores.
porter 5 forces
Porter 5 Forces
  • The threat of substitute products
    • There are several substitutes for American Eagle clothing. However, the propensity for buyers to substitute are not as high.
  • The threat of the entry of new competitors
    • The barriers of entry are not high. However, AEO has a strong Brand Recognition which makes its threat to new competitors lower.
  • The intensity of competitive rivalry
    • There are competitive rivalries among stores and the possibility for new companies to add too the rivalries, but because of AEO’s strong brand name the probability of new, competitive rivalries is low.
  • The bargaining power of customers
    • Customers have high bargaining power because there are several substitutes to the products that American Eagle provides, although generally at higher prices.
  • The bargaining power of suppliers
    • AEO deals mainly with mainly with one supplier, but does not have any exclusive contracts and has access to other suppliers
slide14

Strengths

Weaknesses

  • Brand Identity/Leading Brand
  • Better positioned Pricing Strategy in
  • weak economies to comparables
  • Cyclical business model (Seasonality)
  • Affected by weak economy
  • Poor consumer confidence

Threats

Opportunities

  • Continuance in poor consumer confidence
  • Significant Write-Downs from ARS
  • Introduction of more competitors
  • Becoming out of favor -“Fashion is Fad”
  • Customs Regulation
  • Growth in stores
  • 77Kids
  • Martin + OSA
  • Aerie
  • Flagship Store In Times Square
auction rate securities
Auction Rate Securities
  • Auction rate securities are long-term debt instruments with interest rates reset through periodic short-term auctions.
  • Holders of ARS can either sell into the auctions; bid based on a desired interest rate or hold and accept the reset rate.
  • If there are insufficient buyers, then the auction fails and holders are unable to liquidate their investment through the auction.
  • The result of a failed auction is that the ARS continues to pay interest in accordance with its terms; however, liquidity for holders is limited until there is a successful auction or until such time as another market for ARS develops.
  • ARS are generally callable at any time by the issuer. Auctions continue to be held as scheduled until the ARS matures or until it is called.
  • Recorded a net temporary impairment of $35.3 million ($21.8 million, net of tax).
slide16

• Level 1  — Quoted prices in active markets for identical assets or liabilities. Quoted current market prices are readily available.  

  •   Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

  •   Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

.

credit lines
Credit Lines
  • Have borrowing agreements with two separate financial institutions under which we may borrow an aggregate of $350.0 million.
  • $150.0 million can be used for demand letter of credit facilities and $100.0 million can be used for demand line borrowings.
  • As of January 31, 2009, we had outstanding demand letters of credit of $57.3 million and demand line borrowings of $75.0 million.
  • The demand line facilities comprising the $100.0 million borrowing capacity expire on April 22, 2009.
    • Currently working with our lenders to renew these facilities or to obtain committed credit lines of a comparable amount.
valuation cost of equity
Valuation – Cost of Equity
  • Beta: 1.08 (Bloomberg, Yahoo, Google)
  • Rf: 4%
  • Risk Premium: 6%
  • Capm Ke: 10.48%
  • Average ROE (10 years): 17.92%
  • Ke: 15%
valuation wacc
Valuation - WACC
  • Kd: 2.9%
  • Tax Rate: 39%
  • Debt/ TV: 2.8%
  • Equity/TV: 97.2%
  • WACC: 14.92%
comparables
Comparables

ANF

  • Market Cap: $2.13b
  • Current Ratio: 2.4
  • Profit Margins: 7.6%
  • EBIT Margins: 13%
  • ROE: 15.72%
  • ROA: 10.6%
  • Payout Ratio: 23%
  • 52 week decline: -69%
  • EPS: 3.05
  • Cash: $522m
  • QoQ Rev change: -19%

GPS

  • Market Cap: $9.55b
  • Current Ratio: 1.85
  • Profit Margins: 6.6%
  • EBIT Margins: 10.69%
  • ROE: 22.23%
  • ROA: 12.6%
  • Payout Ratio: 25%
  • 52 week decline: -37%
  • EPS: 1.35
  • Cash: $1.72b
  • QoQ Rev change: -13%

Industry

  • Market Cap: $381M
  • Current Ratio:
  • Profit Margins:
  • EBIT Margins: 2.08%
  • ROE:
  • ROA:
  • Payout Ratio:
  • 52 week decline:
  • EPS: 0.43
  • Cash:
  • QoQ Rev change: -4%

AEO

  • Market Cap:$2.5b
  • Current Ratio: 2.3
  • Profit Margins: 6%
  • EBIT Margins: 10.3%
  • ROE: 13.03%
  • ROA: 10.08%
  • Payout Ratio: 29%
  • 52 week decline: -33%
  • EPS: 0.86
  • Cash: 483.85
  • QoQ Rev change: -9%
slide28

Recommendation

  • Hold current position – 2,500 shares
  • DCF values AEO between $9.37 - $11.45
  • AEO currently trading at $12.61
  • (10% - 25% premium to DCF)
  • Multiples analysis puts AEO between $15 - $17
  • (16% - 26% premium to market)
  • AEO already ~ 7.5% of portfolio
  • Shaky consumer confidence