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Company Profile

By Kathy Garcia,2014-05-20 17:36
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Company Profile

    Luke Parkhurst

    Andrew Swanson Buy Report

    Matt Unger

    American Eagle Outfitters Inc. (NYSE: AEO)

     General Stock Info Recent Price: $16.75 P/E (ttm): 9.27 Beta: 1.28 52 Week High: $31.23 (April ‟07) 52 Week Low: $16.00 (April‟08) Shares Out.: 204.9 million Shares Short: 9.78 million Market Cap.: 3.33 billion Enterprise value: 2.71 billion

    1Company Profile

    American Eagle Outfitters, Inc. is a retailer that markets and sells its own brand of laidback,

    current clothing targeting 15 to 25 year-olds, providing high-quality merchandise at affordable

    prices. The original collection includes standards like jeans and graphic t-shirts as well as

    essentials like accessories, outerwear, footwear, basics and swimwear. The American Eagle brand also includes Aeriebrands, MARTIN + OSA brands, and 77Kids by American Eagle. As of ndFebruary 2, 2008, the company operated 929 stores in the United States and Canada, 39 Aerie

    stand-alone stores and 19 MARTIN + OSA stores. American Eagle also operates ae.com, which

    ships to more than 40 countries around the world.

    Recommendation: Buy 3,500 Shares

    Bull Summary - Undervalued on a multiple and cash flow basis

    - Worst case scenario already priced in the stock

    - Should outperform more expensive peers in a consumer slowdown

    - High potential for growth with aerie brand, yet

    we remain conservative on our estimation of the brands performance

    -Outstanding target market brand recognition

    - Trading at 52-week low

     General Company Info Sector: Consumer Discretionary Industry: Apparel Stores Headquarters: Pittsburg, PA Index Memberships: S&P 400 Mid Caps, S&P 1500 Super Comp

    Established: 1977

    1 American Eagle Outfitters, Inc. 10-K Report

     2Company Profile

American Eagle Outfitters, Inc. is a retailer that markets and sells its own brand of laidback,

    current clothing targeting 15 to 25 year-olds, providing high-quality merchandise at affordable

    prices. The original collection includes standards like jeans and graphic t-shirts as well as

    essentials like accessories, outerwear, footwear, basics and swimwear. The American Eagle brand also includes Aeriebrands, MARTIN + OSA brands, and 77Kids by American Eagle. As of ndFebruary 2, 2008, the company operated 929 stores in the United States and Canada, 39 Aerie

    stand-alone stores and 19 MARTIN + OSA stores. American Eagle also operates ae.com, which

    ships to more than 40 countries around the world.

     3Segments

Aerie Brand

    “During Fiscal 2006, American Eagle launched its new intimates brand, aerie by American Eagle

    (“aerie”). The aerie collection is available in aerie stores, predominantly all American Eagle

    stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers,

    sweats, leggings, fitness apparel and personal care for the AE girl. Designed to be sweetly sexy,

    comfortable and cozy, the aerie brand offers AE customers a new way to express their personal

    style everyday, from the dorm room to the coffee shop to the classroom.”

MARTIN + OSA Brands

    “The company also introduced MARTIN + OSA during Fiscal 2006, a concept targeting 28 to 40

    year-old men and women, which offers refined casual clothing and accessories, designed to be

    valuable, irresistible, inspiring, authentic and adventurous. MARTIN + OSA is sold exclusively at

    their respective stores and at martinandosa.com.”

77Kids

    “In January 2008, the company announced plans to launch a new children‟s apparel brand.

    77Kids by American Eagle (“77Kids”) will offer on-trend, high-quality clothing and accessories for kids age two to 10. The brand will debut worldwide online at 77Kids.com during Fiscal 2008, with

    stores in the U.S. expected during 2010.”

    Revenue Breakdown by Segmentation (Units: Millions)

    2000

    1500

    Women's Apparel

    1000Men's Apparel

    Footwear500

    0

    2005200620072008

     2 Page 2 of 22 American Eagle Outfitters, Inc. 10-K Report 3 American Eagle Outfitters, Inc. 10-K Report

     4Company History

1977: American Eagle Outfitters (AE) is launched as segment of Silvermans Menswear, Inc.

    1980: Company struggles financially throughout the „80‟s, changes company focus.

    1992: The Company focuses on private-label merchandise.

    1994: American Eagle Outfitters goes public, listed on the NASDAQ stock exchange (AEO).

    1998: Abercrombie and Fitch sues AEO for copying concept; case dismissed 3 times in 4 years.

    2005: Company expands to all 50 states

    2006: AEO launches MARTIN + OSA (28 to 40 year-old target) and Aerie by American Eagle

    (female-focused brand).

     5Recent News

     thApril 10, 2008: AEO cut Q1 earnings forecast to 18 to 20 cents a share, down from its previous expectation of 25 to 28 cents a share. The cut was in response to the company‟s decline in same store sales for the month of March. rdApril 3, 2008: AEO launches MARTIN + OSA website to enhance the online shopping

    experience of the company‟s 28 to 40 year-old brand. thMarch 7, 2008: American Eagle Outfitters Inc approved a dividend of $0.10 per share. thJanuary 9, 2008: American Eagle Outfitters, Inc. Lowers Q4 2007 EPS Guidance thOctober 10, 2007: American Eagle Outfitters, Inc. Lowers Q3 2007 EPS Guidance

     6Management

Jay L. Schottenstein Chairman of the Board

    Mr. Schottenstein has served as Chairman of the American Eagle Outfitters and its predecessors

    since March 1992. He served the Company as Chief Executive Officer from March 1992 until

    December 2002 and prior to that time, he served as a Vice President and Director of the

    Company‟s predecessors since 1980. He has also served as an officer and director of various

    other corporations owned or controlled by members of his family since 1976.

James V. O’Donnell Chief Executive Officer, Director

    Mr. O‟Donnell has been with AEO since 1999 (CEO since 2002). Prior to coming to AEO he was

    the COO of The GAP, as well as working with various technology retailing companies. He has

    been successful in implementing his IT knowledge to enhance the efficiency of AEO.

Susan McGalla President, Chief Merchandising Officer

    Ms. McGalla has served as President and Chief Merchandising Officer of American Eagle

    Outfitters, Inc. since March 2007. She has been with the company and held various

    merchandising positions since 1994.

Joan Hilson Chief Financial Officer, Executive Vice President

    Ms. Hilson has served as Executive Vice President, Chief Financial Officer, AE Brand, and

    Principal Financial Officer of American Eagle Outfitters, Inc since April 2006. Prior thereto, Ms.

    Hilson served the Company as Senior Vice President, Finance since September 2005. Prior to

    joining the Company, Ms. Hilson held various positions at the Victoria‟s Secret Stores division of

    Limited Brands, Inc., including Executive Vice President and Chief Financial Officer

     4 American Eagle Outfitters, Inc. Investor Relations website 5 Page 3 of 22 Yahoo! Finance 6 http://stocks.us.reuters.com/stocks/officersDirectors.asp?symbol=AEO

     7Competitors

Abercrombie & Fitch Co. (NYSE: ANF)

    Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel for men, women, and kids. Its stores offer casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear, as well as personal care products and accessories under Abercrombie & Fitch, abercrombie, Hollister, and RUEHL brands. As of February 2, 2008, it operated 1,035 stores in the United States, Canada, and the United Kingdom. Abercrombie & Fitch Co. also sells its products through Web-based stores, as well as through a catalogue.

The Gap Inc. (NYSE: GPS)

    The Gap, Inc., through its subsidiaries, operates as a specialty retailing company. It operates retail and online stores that sell casual apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, Banana Republic, and Piperlime names. The company's products include wardrobe basics, such as denim, khakis, and T-shirts; women's underwear, sleepwear, loungewear, and yoga gear; fashion apparel; shoes and accessories; maternity apparel; and personal care products. As of February 2, 2008, it operated 3,167 store locations in the United States, Canada, the United Kingdom, France, Ireland, and Japan.

J. Crew Group, Inc. (NYSE: JCG)

    J. Crew Group, Inc. operates as a multi-channel specialty retailer of women's, men's, and children's apparel and accessories in the United States. Its retail products include wedding and special occasion attire, weekend clothes, swimwear, loungewear, outerwear, shoes, bags, belts, hair accessories, and jewelry. The company also sells its products through catalogs and Internet. As of February 2, 2008, it operated 199 retail stores and 61 factory stores in 40 states and the District of Columbia.

    8Ownership

    We feel the 22% decrease in ownership in the last 12 months was in response to the weakening macro-economy and fear of recession. In general, the consumer discretionary sector and retailing industry tends to underperform the market in times of economic slowdown.

     7 Page 4 of 22 Yahoo! Finance 8 Fidelity.com

     91011SWOT Analysis,,

Strengths

    ? AEO designs their own lines and works with third party manufacturers abroad to get their final

    products to inventory. To date, management has been successful with predicting trends and

    offering a compelling product which consumers are willing to buy.

    ? The company‟s excellent brand recognition provides a slight moat to the firm‟s revenues. It ndwas ranked 2 in terms of brand recognition in a recent teen research survey from kids aged

    12-19.

    ? AEO‟s management team has numerous years experience both with the company and the

    retailing industry. The CEO, James O‟Donnell, has exposure to the IT industry and been

    successful implementing various systems which have improved the efficiency of the company. ? They have improved inventory mix and are in the process of testing new sales tools in some

    stores to enhance the shopping experience and drive more sales. AEO has over $600M in

    cash and cash equivalents with $0 in debt, which is ample to help support their new concepts

    like Martin + OSA and Aerie as they are in start-up stages. These have potential to be future

    cash cows over the next ten years as they begin to mature.

    ? The company is working to improve turnovers and current operations through the use of

    capex, which is funded purely through revenues and equity, thus leaving the company free of

    debt at a turbulent time in the economy.

Weakness

    ? The company‟s core brand is becoming saturated in the US and Canada, which is only

    represented by the online presence today.

    ? The new brand concepts could prove to be a distraction to its core brand in the short-term if

    these projects are not resourced appropriately.

    ? The company is not considered “best in breed” in a sense of quality, as many consumers

    believe the company to be a tier below its main competitors like Abercrombie & Fitch and

    JCrew.

    ? There has been some concern that MARTIN + OSA are dragging the profitability of AEO, but

    management reaffirmed their commitment to the new brand this week.

    Opportunities ? The MARTIN + OSA brand also presents an opportunity because there is a possibility of a

    sale of the brand.

    ? The fact that AEO has limited international exposure allows for expansion into many markets

    in which they have not yet entered. It appears as though AEO is currently looking for a

    partner that may have local experience in Europe.

    ? A more recent brand launch, 77Kids, possesses a large possible to gain market share in a

    new age bracket for the company. This new concept will be launched online during late 2008

    and opening stores as soon as 2009.

    ? The company has several initiatives to improve its operating margins, such as limiting

    promotional activities, implementing a price-optimization system, and fine-tuning its supply

    chain.

    ? The Aerie brand targets the core 15 to 25 year old market, but adds additional variety

    (intimate apparel) that will draw more customers and may increase the average ticket sales

    driving up same store sales. In addition to these three new concepts that could easily turn

    into $1billion brands, each are beginning to look at additional international expansion. Threats

     9 http://seekingalpha.com/article/71655-american-eagle-ready-to-fly-high 10 Page 5 of 22 American Eagle Outfitters 10-K Report 11 Teenresearch.com

? The fashion industry is constantly changing, which leads to the potential for change without

    AEO following. An example of this is the decline in personal spending on apparel since the 1980s.

    Young adults will continue to spend more on gadgets like mobile phones and digital music players.

    ? Poor inventory planning could lead to larger than expected write downs, thus drastically

    reducing margins and adding the potential risk of diluting equity through the offering of more shares.

    ? Low barriers into the clothing retail market leads to increased competition which could offer

    cooler brands and/or better pricing, thus reducing AEO‟s profit share. ? Lastly, we are experiencing a slowing economy. Last time that happened, AEO saw sales

    slow, thus margins declined which is the current situation for the industry.

Economic Outlook for Consumer Discretionary 2008

Consumer Discretionary was the second worst performing sector of the S&P 500, beating only the

    meltdown by the Financials. Consumer Discretionary took the brunt of the slow-down in the U.S.

    economy during the later part of 2007. Since this slow-down is expected to continue for at least the

    first half of 2008, these companies will most likely continue to encounter difficult times, especially as

    unemployment rises. Consumers are also controlling their spending due the problems in the credit

    markets and the negative wealth effect from declining home prices. Politics will have an impact on

    some parts of this sector as well as the economy. For example, the economic stimulus package the

    federal government is planning is supposed to help stimulate the economy through a $146 to $157

    billion bill that would give tax credits and rebates to 117 million people. This money from the

    stimulus package is expected to add 0.2% to the GDP in the quarter it is distributed. Although the

    jump in GDP may increase sales in the short-run, this sector is likely to continue to under perform

    the S&P 500 until investors believe the U.S. economy is at, or near a bottom. The important

    indicators to watch will be consumer sentiment and the unemployment rate.

Analyst Recommendations

     “We are tempted by AEO‟s valuation and strong cash position; however, 1) continued weakness

    across women‟s categories, 2) a lack of product newness, 3) 1H margin pressure from a denim re-

    assortment, and 4) the absence of a significant catalyst will likely pressure the shares in the near

    term.” -Morgan Stanley Equity Analyst Michelle Clark, Position: Hold (Target Price: $18)

“AEO is clearly not immune to the soft retail environment. However, with 1) very low valuation, 2)

    very strong balance sheet and 3) strong teen brand positioning, we continue to believe in this story.

    We believe the core brand is structurally in great shape and do not think this is a broken story. Also,

    while mgmt remains committed to the struggling MARTIN + OSA concept, we think the potential

    closure of this business (maybe as soon as this summer) provides some implied support to the

    stock.” -Bear Stearns Equity Analyst Randal Konik, Position: Buy (Target Price: $27)

    “We believe AEO's first half will be tough due to a soft women's business, especially in bottoms. The company plans to clear through inventories to be totally forward facing for new denim trends by

    back-to-school '08. We're encouraged by conservative inventory planning but remain cautious

    ahead of several quarters of low top-line visibility and meaningful margin erosion.” -Lehman

    Brothers Equity Analyst Jeff Black, Position: Hold (Target Price: $20)

“Based on weaker than expected March comps, we are reducing our 1Q08E from $0.26 to $0.18.

    Longer-term, we believe the company has good growth prospects from aerie, though the rapid pace

    of store expansion in 2008 may prove difficult. In addition, given challenges in the overall business

    and macroeconomic environment, MARTIN & OSA seems to be an unnecessary distraction.” -Credit

    Suisse Equity Analyst Paul LeJuez, Position: Hold (Target Price: $17)

     Page 6 of 22

    FINANCIAL STRENGTH

    American Eagle Outfitters vs Competitiors

    AEOIndustryPeer Avg.ANFGPSJCG

    Quick Ratio 1.95 0.96 1.10 1.36 1.03 0.90

    Current Ratio 2.71 2.08 1.83 2.10 1.68 1.71

    LT Debt to Equity - 0.39 0.89 - 0.01 0.89

    Interest Coverage (TTM) - 2.65 9.84 - 0.04 9.84 The company is in great financial health, with no long-term debt and over three dollars a share in

    cash. Essentially, American Eagle has been able to generate enough cash internally to fund its

    expansion plans. Although this shows that they are not utilizing all of their potential leverage

    during recessionary periods, during our current slowdown, zero or minimal debt is an extremely

    good situation to be in.

Financial Strength Rating: Very Good

ASSET MANAGEMENT ANALYSIS

    American Eagle vs Competitiors

    AEOIndustryPeer Avg.ANFGPSJCG

    Total Asset Turnover (ttm) 1.59 1.95 2.08 1.56 1.92 2.77

    Receivables Turnover (ttm) 105.42 47.28 111.21 77.28 - 145.13

    Inventory Turnover (ttm) 5.93 4.67 4.59 2.79 5.98 4.99

    Days Sales in Inventory (ttm) 64.06 - 77.60 98.18 57.08 77.55

    American Eagle Historical Trends

    AEO 2007AEO 2006AEO 2005AEO 2004

    Total Asset Turnover 1.59 1.56 1.58 1.66

    Receivables Turnover 105.42 101.26 83.56 74.41

    Inventory Turnover 5.93 6.13 6.53 6.89

    Day’s Sales in Inventory 64.06 66.18 61.82 62.05

    American Eagle has been trying to improve its efficiency, especially in its merchandise

    transportation system. For example, in order to cut cost and grow at the same time, American

    Eagle during Fiscal 2007 entered into a lease of a 294,000 square foot building to house a

    Canadian distribution center which they plan to place into service in May 2008. This will be used

    to reduce cost northern division. American Eagle has also been focusing on the allocation of

    merchandise among stores varying based on a number of factors, such as geographic location,

    customer demographics and store size.

Also, during Fiscal 2007, American Eagle completed the first phase of expansion at our Ottawa,

    Kansas distribution center. The expansion of the distribution center enabled AEO to bring the

    fulfillment services for AEO Direct in house. Previously, AEO Direct utilized a third party vendor

    for its fulfillment services. The second phase of the expansion will be completed in Fiscal 2008

    and is designed to enhance AEO operating efficiency. Additionally, the expansion is central to

    plans for supporting future growth, especially in areas such as AEO Direct, aerie, MARTIN + OSA Page 7 of 22 and 77kids.

Everything in this analysis looks relatively average except Receivables Turnover. By maintaining

    Accounts Receivable, firms are indirectly extending interest-free loans to their clients. A high ratio

    implies that a company either operates on a cash basis or that its extension of credit and

    collection of accounts receivable is efficient. Assuming that much of their sales are on credit,

    Receivables Turnover ratio does not look very good and seems to be getting worse, but they still

    outperform peers.

Asset Management: Average

PROFITABILITY ANALYSIS

    American Eagle vs Competitiors

    AEOIndustryPeer Avg.ANFGPSJCG

    Gross Margin (ttm)46.58%37.66%48.11%66.97%35.11%42.26%

    Operating Margin (ttm)19.60%9.94%13.86%19.75%8.92%12.92%

    Net Profit Margin (ttm)13.09%6.35%8.49%12.69%5.50%7.27%

    American Eagle Historical Trends

    AEO 2007AEO 2006AEO 2005AEO 2004

    Gross Margin46.58%47.97%46.42%46.66%

    Operating Margin19.60%21.00%19.75%19.28%

    Profit Margin13.09%13.86%12.67%11.34% American Eagle has reduced markdown selling and leveraged fixed cost like occupancy and

    payroll over higher sales. Although Gross Margin and Profit Margin have not increased much,

    they still outperform the industry and Peer average. Operating income as a percent to net sales

    was 19.6% for Fiscal 2007 compared to 21.0% for Fiscal 2006. The decrease was driven by a

    decline in gross profit and increased depreciation and amortization expense. This was partially

    offset by an improvement in selling, general and administrative expenses as a percent to net

    sales. Overall it is evident margins remain considerably impressive relative to the industry and

    American Eagle‟s direct peers.

Profitability Rating: Very Good

    MANAGEMENT EFFECTIVENESS ANALYSIS

    American Eagle vs Competitiors

    AEOIndustryPeer Avg.ANFGPSJCG

    ROA (TTM)20.80%11.81%16.83%19.76%10.58%20.15%

    ROE (TTM)29.01%25.76%60.95%31.47%18.35%133.03%

    ROI (TTM)26.61%16.68%24.01%25.29%14.85%31.90%

     Page 8 of 22

    American Eagle Historical Trends

    AEO 2007AEO 2006AEO 2005AEO 2004

    ROA (TTM)20.80%21.61%20.05%18.87%

    ROE (TTM)29.01%30.11%27.76%26.65%

    ROI (TTM)29.01%30.11%27.76%26.65%

American Eagle‟s returns are very solid and show strong management effectiveness. Return on

    Equity is about average excluding the extremely high Return on Equity JCrew has. Overall,

    average in this industry is still very good being that the industry has such high returns. Even

    though returns are lower than ‟06, this is mainly due to the decline in margins as a result of a

    slowdown in the economy.

Management Effectiveness: Average

GROWTH ANALYSIS

    American Eagle vs Competitiors

    AEOIndustryPeer Avg.ANFGPSJCG

    Sales last 5YR17.18%12.02%10.69%18.63%1.75%11.68%

    Sales (ttm vs. prior ttm)9.34%7.43%9.29%13.01%-1.00%15.85%

    EPS last 5YR31.81%2.73%21.85%21.85%15.03%-

    EPS (ttm vs. prior ttm)7.67%7.76%9.34%13.94%13.91%0.17%

    American Eagle Historical Trends

    AEO 2007AEO 2006AEO 2005AEO 2004

    Sales Growth9.34%20.35%23.43%31.06%

    EPS Growth7.67%34.92%32.63%351.85%

    Sales growth has almost averaged 18% annually over the past five years. This is mainly due to

    rapid new store growth and generally positive same-store sales. Even though sales growth as

    well as EPS growth has slowed, we mainly contribute the decline to current U.S. conditions. We

    believe growth will return when the economy strengthens. Furthermore, although American Eagle

    slowed, they are still in positive territory at an extremely turbulent time for consumer discretionary.

Growth Rating: weak

VALUATION ANALYSIS

    American Eagle vs Competitiors

    AEOIndustryPeer Avg.ANFGPsJCG

    P/E (ttm) 9.27 18.19 21.23 14.16 18.18 28.29

    P/B (mrq) 2.58 4.72 8.71 3.94 3.24 18.94

    P/S (ttm) 1.14 1.19 1.52 1.70 0.88 1.99

    P/CF (ttm) 7.44 12.27 14.54 10.02 12.18 21.43 Page 9 of 22

    American Eagle Historical Trends

    Current5 Yr AvgAEO 2007AEO 2006AEO 2005AEO 2004

    P/E9.27 14.31 12.92 18.99 13.78 16.61

    P/B2.58 3.68 3.59 5.04 3.33 3.84

    P/S1.14 1.80 1.66 2.57 1.70 1.91

    P/CF7.44 9.19 10.95 9.59 8.49 9.50

    As you can see through the P/E graph below, the company has never been valued so cheaply on

    a P/E basis in the past 5 years. This obviously shows the pessimism that is associated with the

    company at this time and presents tremendous opportunity for multiple expansion.

Compared to peers and five year averages, American Eagle is clearly trading at severe discount

    on all multiples. It is reasonable that the market is trading AEO at a discount to its historical

    averages, but not to the severity that the company is discounted. A 54% discount from its

    historical P/E is one example showing the severity of the discount. The price to book ratio also

    shows the massive discount AEO is currently trading. With AEO‟s 5 year average equivalent to

    competitors current P/B, it is trading at a 43% discount to its competitors and 5 year average

    while maintaining equal or better margins and returns.

    Value Rating: Very Good

    Consumer Preferences

    AEO sells cheaper merchandise then its toughest rivals ANF and JCG. With less money teens

    will still shop, but it is more likely that they will search for more attractive prices. They offer lower

    prices for similar quality merchandise then J. Crew or Abercrombie. Gap also offers better value

    but does not have the fashion appeal or growth potential that AEO exhibits. Researching an

    online chat room we asked some kids where the best bargains are when they have less money.

    American Eagle is definitely cheaper than Abercrombie & Fitch. I think the highest AE jeans are

    like 68 dollars and the highest Abercrombie & Fitch jeans are 89.50. Also in 2007 a survey done

    by teen Research unlimited on the “Coolest Brand” showed that kids 12-17 prefer American 12Eagle second only to Nike. Last Fall analysts from Piper Jaffrey visited malls in eight different cities around America and surveyed a total of 1000 teens age 12-19. The results are as 13follows…

     12 Page 10 of 22 Teenresearch.com 13 answer@yahoo.com

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