Presentation Transcript

1. American EagleApparel Stores

   Module 4 Simple Analysis & Parsimonious Forecasting By: Nick Cecero
2. Objective of Forecasting The main objective of forecasting for American Eagle is for me to make my best possible forecast while not being overly optimistic or overly conservative. If either of the two are violated then this can lead users of my forecasts to incorrectly rejecting a valuable opportunity or to incorrectly accepting an investment in which its yield is negative. In order to correctly forecast our Revenues, EPAT, & NEA I must use forecast assumptions that are reasonable and consistent within not only American Eagle but what also holds true for the industry going forward as a whole.
3. Macroeconomic Assumptions These assumptions will be later applied to the forecasts which will be calculated later on in the presentation. There has been a lot of concern in emerging markets which have lead to a devaluation in the currencies of some the countries abroad which is worrisome for retailers whom through an increasing presence online have been trying to reach consumers overseas. The devaluation of currencies will only strengthen those pegged against the dollar therefore making American Eagle clothing more expensive and unable to be purchased for foreign consumers. Jobs numbers as of late have proven to show that the United States is far from a full recovery as although the unemployment rate has decreased it has been mainly due to a drop in labor force participation. Also a lack of consumer confidence and a decrease in discretionary spending does not poise the specialty apparel store industry as an industry that poises to grow at a substantial growth rate. All this considered I think there will be a continual flight to off-retailers such as Wal-Mart, TJ Max, and stores such as those.
4. Return on NEA There are two components that measure profitability and asset turnover. This is more commonly referred to as the DuPont Analysis. RNEA = EPM x EATO EPM = Enterprise Profit Margin EATO = Enterprise Asset Turnover
5. EPM & How it Relates to AEO EPM helps us to reveal how much operating profit the firm earns from each sales dollar. A higher EPM is always preferable. EPM is extremely affected by levels of competition and the firm’s ability to control costs. AEO will struggle in the future to compete against off price retailer’s which will attract sales away from them, and this was seen from the data released concerning the holiday season. “Total revenue for the nine week period ending Jan. 4th fell 2 percent while revenue in stores open at least one year (key retail metric), declined 7 percent.” (CNBC)
6. EATO & How it Relates to AEO EATO measure’s productivity of the firm’s enterprise assets. A higher EATO is always preferable. One way to increase EATO is for a firm to reduce long-term net enterprise assets such as property, plant, and equipment. While doing this increases EATO, and also cuts costs such as employee wages, benefits, maintenance costs, and rent there are only so many assets a firm can cut or expenses that can be reduced before they are unable to continue to grow sales at a substantial rate.
7. Form 10K Real Estate Page 4
8. AEO’s Annual EPM Calculation The next question is to ask is whether or not the EPM calculated for American Eagle is accurate and sufficient enough to forecast from. Although their EPM is pretty consistent they did have other comprehensive income which included a gain from foreign currency translation. In the future it is near impossible to forecast changes in foreign currency exchange rates. This would be pure speculation and is something that investors and board members do not want to be told. So we will use their EPM from sales as to give us a better forecast, and smoother results.
9. Comparable’s Annual EPM Calculation This EPM number is pretty unstable at first glance which affirms our decision to utilize a EPM from Sales for more accuracy.
10. AEO’S Annual EPAT & EPM from Sales The EPM from Sales is substantially different from the EPM which is why these numbers will be used. I averaged the EPM from Sales for all three years and came up with 11.42% and decided to reduce that number to 8% to match it up closer to the industry, and also because I believe sales will be affected by the attraction created by off price retailers.
11. Comparable’s Annual EPAT & EPM from Sales The EPM from Sales here are extremely close to the EPM that was initially calculated. The same cannot be said for American Eagle which shows that had we decided to use the EPM and skip calculating EPM from sales that our forecast would be substantially wrong.
12. AEO’s and Comparable’s Annual EATO Calculation The main reason as to why we see more stability with the EATO calculation compared to the EPM calculation is because there are many challenges in altering assets required in generating sales. There is an upward positive trend but it is a general one. I simply averaged the two years for AEO and came up with an EATO of 4.2 to use.
13. Sales Growth Over Time Initially I was going to take the average of the three but it seemed as though .6% was just too low and almost 12% growth was just too high. My justifications for 12% being too high is that after further research the main reason for the turnaround was the appointment of former CEO Robert Hanson whom as able to turn the Company around when he assumed the position less than two years ago. He abruptly left in early Jan. and with his departure I believe that sales will follow suit. This is why I believe that a 6% growth rate for the future which is a more of a realistic number.
14. Comparable Sales Growth The 6% sales growth for AEO reflects an average of all three competitors of the year 2013. Sales have been all over the place for retailers, and I think this trend will continue especially with the lack of discretionary spending increasing.
15. 3 Step Forecasting Process Forecast revenues via forecasts of sales growth rates. Forecast EPAT via forecasts of EPM from Sales and components of EPM. Forecast NEA via forecasts of EATO and components of EATO.
16. Compilation of Forecasts
17. AEO Multiyear Forecasts I only forecasted out five years for a reason. If I were to go any further into the future it would be pure speculation, and therefore my forecasts would be meaningless. Four years is the most accurate projection of Sales, EPAT, & NEA I am able to forecast. Sales were found by taking the preceding sales and multiplying that number by the sales growth rate which I forecasted to be 6%. EPAT was found by taking the estimated sales for that year being calculated and multiplying that number by the EPM from Sales percentage which I forecasted to be 8%. NEA was found by taking the estimated sales and dividing that number by the EATO 4.2.
18. The End Any Questions?