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American Eagle Outfitters, Inc.

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  1. American Eagle Outfitters, Inc. By, Pratik Kamdar Rajani Meka Raj Dhawle Patil Shih-Wei Huang Presented April 5, 2011

  2. RCMP Portfolio • Currently, Portfolio holds 2000 shares • 1500 shares are held, remaining from three different purchases beginning in December 1999, at the split adjusted price of $5.23 per share. Currently, the position has an unrealized gain of 203% as on 3rd April, 2011 • Multiple sales of these three original purchases have been made since then, each producing sizable capital gains • 500 shares were bought at the price of $9.07 per share on 3rd Dec. 2008. Currently, the position has an unrealized gain of 75% as on 3rd April 2011 • At present, AEO represents 28% of our portfolio holdings by Market Value

  3. The Company • An American clothing and accessories retailer based in Pittsburg, PA • Sells its merchandise through stand-alone stores in malls and online through www.ae.com • Key Facts: • Founded in 1977 • Headquarters: Pittsburg, PA • Currently operates 1086 stores in US & Canada; Avg. store size-4700 selling sq.ft. • CEO: James V. O'Donnell • Employs around 39,900 people • Stock trades on NYSE under symbol ‘AEO’

  4. Recent News: • On 9th March’ 2011, Company CEO James V. O’Donnell expressed his intention to retire. Search for New CEO is on • Recent Speculation regarding Company being an attractive LBO target; Reason: Company posted negative comparable sales growth during quarter fiscal 2010 but still cash rich • On 31st July’ 2010, Completed Closure of its brand ‘M+0’; Reason: brand was not achieving performance levels commensurate with investments.

  5. History • 1977-Funded by Mark & Jerry Silverman as a subsidiary of Retail Ventures, Inc., which operated ‘Silverman’s Menswear’ • 1989- Bothers sold other businesses & decided to focus only on AEO • 1991-Schottensteins, 50% owner in AEO bought out remaining 50% interest from Silverman family • 2001-Opened AEO’s 1st Canadian Store • 1994- Company went Public • 2006-Company launched new brand ‘M+O’ for Adults and Aerie for Women • 2008-Launched new brand 77Kids for children • 2010-Closed ‘M+O’; Opened first International Store in Dubai, UAE

  6. What it Does & How?

  7. Business Segments

  8. Management Outlook • Company expects an improvement in sales on the basis of solid product line up, continued cost cuts & better managed Inventory • Company Expects to Mitigate Rising Product Costs with Targeted Reduction in Mark-downs, Selective Price Increases & On-going Cost Savings • Internal Development of New Brands • Expansions Overseas though Franchise route while keeping an eye on Acquisition Opportunities

  9. Growth Strategy: • International Expansion: The company is entering into Multiple Franchise Agreements to open Series of AE Stores at International Locations: • * No Capital/ Operational Involvement • Opening New Stores: Depending on Geography and Demographics • Remodel Old Stores to Current Store Format to Offer Unique Shopping Experience • Strengthen e-commerce Operation • Cut Costs & Manage Inventory

  10. Key Performance Indicators • Comparable Store Sells: Provides measure of Sales Growth for Stores open more than a Year • Net Sales Per Average Square Feet: Provides Measure of Store Productivity and Operational Efficiency • Inventory Turnover: Measure how Productively Inventory is Bought & Sold. Slow Moving Inventory affects Profitability • Gross Profit: Provides Measure of whether or not Company is optimizing the Price & Inventory Levels to Achieve Optimal Sales Levels • Sufficient Cash Levels

  11. Recent Financial PerformanceFiscal Year ended Jan 29th ’2011 • Net Sales were up 1% over 2009 figures • Annual Comparable Store Sales were down 1% over comparable figure in 2009 • Net Income (from Cont. Operations) was 6% against 7% of Sales in 2009owed to loss from selling Inv. Securities • Cash Decreased by $155.8 million to $740.6 million • Overall Results were affected by Loss Recognized from Closure of “M+O” & Selling Investment Securities • Company Paid a Quarterly Dividend of $0.11 per share and Special Dividend of $0.50 per share in Fiscal 2010 • Repurchased 15.5 million shares in fiscal 2010. • New Store openings were Funded by Operating Cash Flows

  12. Recent Stock Performance Source: finance.yahoo.com

  13. SWOT Analysis

  14. MARKET OVERVIEW MARKET VALUE: The global apparel retail industry grew by 2.1% in 2009 to reach a value of $1,078.2 billion. MARKET VALUE FORECAST: In 2014, the global apparel retail industry is forecast to have a value of $1,222.7 billion, an increase of 13.4% since 2009. MARKET SEGMENTATION: Women's wear is the largest segment of the global apparel retail industry, accounting for 51.3% of the Industry’s total value. GEOGRAPHIC SEGMENTATION: The Americas account for 35.7% of the global apparel retail industry value. MARKET RIVALRY: Despite the current global economic downturn, the apparel retail industry continues to grow at a healthy rate and this, coupled with the absence of switching costs for consumers and great product differentiation, means that rivalry within the industry is no more than moderate. http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  15. Historic Growth http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  16. Historic Growth http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  17. Key Revenue Driver • Consumer Sentiment Index • Higher the consumer confidence higher is the spending on retail on clothing. • Number of Youth • Disposable Household Income

  18. Segmentation by Age http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  19. Forecasted Growth http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  20. Forecasted Growth http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  21. MARKET SEGMENTATION http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

  22. PORTERS FIVE FORCE MODEL • Rivalry among competitors (High) • Low entry barriers • Extensive price competition • Bargaining Power of Buyers (Moderate) • Individual consumers • High Product differentiation • Price Sensitive • Retailers cannot forward integrate • Bargaining power of Suppliers(low) • Liberization of trade. • Industry is mostly labor intensive • Low switching cost for retailers

  23. PORTERS FIVE FORCE MODEL • Threat of New Entrants ( Low to Moderate) • Setting up single store does not require large capital outlay. • It might trigger a price war with players with multiple stores and brands. • Economies of scale • Threat of New Substitutes(Low) • Signifier of socio economic class • Substitutes for apparel retail include buying directly from manufacturers, which is facilitated by the growth of online sales. • Home-made and custom-made (couture) clothing are also niche alternatives to retail of ready-made clothes

  24. Sales Per Square Feet Same Store Sales Growth

  25. Competitors Abercrombie and Fitch, Inc (Ticker: ANF) • Presence in North America, Europe and Asia • FY 2010 Revenue : 3.47B Aeropostale, Inc (Ticker: ARO) • Presence only in North America • FY 2010 Revenue: 2.40B Urban Outfitters (Ticker: URBN) • Core operating location: US • FY 2010 Revenue: 2.27B Gap, Ins (Ticker: GPS) • Presence in United States, Canada, the United Kingdom, France, Ireland, and Japan. • FY 2010 Revenue: $14.66B

  26. Stock Price Movements2006 Jan 01 - 2011 Apr 01 Source: http://www.google.com/finance

  27. Key Ratios of Retailers Source: http://globalbb.onesource.com/homepage.aspx

  28. Ratio Comparisons with Competitors Source: http://globalbb.onesource.com/homepage.aspx

  29. Other Ratio Comparisons Source: http://globalbb.onesource.com/homepage.aspx

  30. Float Number Source: http://finance.yahoo.com

  31. DuPont Analysis with Competitors Source: http://globalbb.onesource.com/homepage.aspx

  32. Comparable Approach Source: http://globalbb.onesource.com/homepage.aspx

  33. Comparable Approach (Con.) Source: http://globalbb.onesource.com/homepage.aspx

  34. Discounted Cash Flow Results

  35. Sensitivity Analysis Terminal Growth Rate

  36. DuPont Analysis Source: http://globalbb.onesource.com/homepage.aspx

  37. Recommendation • DCF Valuation Range: $13.08- $19.45 with Base case share price at $15.49 • Triangulated Value at : $15.83 • Current Market Price: $16.22 • Sell 500 shares @ current market price

  38. Current Portfolio Allocation

  39. Unrealized Gains 210.42% Recommendation Sell 500 shares 78.83% Initial Position 500 shares @ $9.07 1500 shares @ $5.23