American Eagle Outfitters, Inc. AEOS

1
American EagleOutfitters, Inc.AEOS

• By, Matthew McDonnell
• Presented 11-15-2005

2
Outline

• Today, I will be discussing American Eagle
  Outfitters, Inc. (AEOS), which is currently a
  major part of our clients portfolio.
• In addition to evaluating the firm itself, I will
  briefly compare American Eagle Outfitters to some
  of its major competitors.
• Third, I will discuss several stock valuation
  methods, as well as other issues facing the firm.
• Finally, I will give a recommendation regarding
  what should be done, if anything, regarding our
  holdings in American Eagle Outfitters.

3
Macroeconomic Review

• Currently middle of earnings seasons
• Energy prices, although falling, still at
  relatively high levels
• Rising interest rates affecting markets
• Energy-driven inflation, questionable consumer
  confidence
• Many retailers reported slow start to 05 holiday
  season, sales now growing stronger

4
American Eagle Outfitters- Vision

• We will be a highly profitable, international,
  multi-channel retail organization
• We will grow through a portfolio of our own
  distinct and segmented casual lifestyle apparel
  brands

Source American Eagle Outfitters- Latest Wall
Street Presentation, Oct. 27, 2005. available at
http//library.corporate-ir.net/library/81/812/81
256/items/169479/Latestwebsitepresentation.pdf
5
American Eagle Outfitters- Industry
Classifications

• Sector Consumer Discretionary
• Industry Group Retailing
• Industry Specialty Retail
• Sub-industry Apparel Retail
• Industry Multiline Retail
• Sub-Industries Internet Retail,
  Catalog Retail

Adapted from Standard and Poors GICS Map,
effective Apr. 30, 2005, available at
javascriptpopup('/spf/xls/index/gics_map_April_20
05.xls')
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American Eagle Outfitters- GICS Sector Description

• Consumer Discretionary Sector
• The GICS Consumer Discretionary Sector
  encompasses those industries that tend to be the
  most sensitive to economic cycles. Its
  manufacturing segment includes automotive,
  household durable goods, textiles apparel and
  leisure equipment. The services segment includes
  hotels, restaurants, and other leisure
  facilities, media production and services, and
  consumer retailing and services.1

1 Standard and Poors GICS Industry
Classification Definitions, effective Apr. 30,
2005 available at javascriptpopup('/spf/pdf/inde
x/GICSSectorDescriptions_April2005.pdf')
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American Eagle Outfitters Business

• American Eagle is a leading lifestyle retailer
  that markets and sells its own brand of
  relaxed, casual clothing.
• Target audience 15-25 year-olds
• Operates 846 stores in the US Canada
• Located primarily in malls, with emphasis on A
  center stores in especially high-traffic areas
• Purchases merchandise from suppliers who either
  make it themselves or buy from producers.

Source Corporate Profile- About AE, American
Eagle Homepage, accessed Nov. 07, 2005, available
at http//phx.corporate-ir.net/phoenix.zhtml?c81
256pirol-homeprofile
8
American Eagle Outfitters- Products Sold
Source American Eagle 2004 Annual Report
9
American Eagle Outfitters- Locations By State
Source Data American Eagle Homepage Map from
Yahoo! Travel
10
American Eagle Outfitters- International Sales
Base
Source American Eagle 2004 Annual Report
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American Eagle Outfitters- Brand Positioning
Source American Eagle Outfitters- Latest Wall
Street Presentation, Oct. 27, 2005. available at
http//library.corporate-ir.net/library/81/812/81
256/items/169479/Latestwebsitepresentation.pdf
12
American Eagle Outfitters- 2004 Accomplishments

• 31 increase in sales (21 comparable store
  sales)
• 171 increase in operating income
• Nearly doubled market share in specialty denim
• 2nd most purchased brand by target market
• Increased US store base by 5
• 40 of new stores on the West coast

Source American Eagle 2004 Annual Report
13
American Eagle Outfitters- 1st Half 2005
Performance

• Significant gains in teen brand popularity
• Seen as 3rd coolest brand for teens
• Second most often shopped specialty brand for
  denim
• Comparable store sales up 20 over 1st half 2004
• 80 growth in EPS
• Slow start to holiday season, downgraded Q3
  earnings, later upgraded to original projections
  of 0.45-0.46 per share

Sources American Eagle Outfitters- Latest Wall
Street Presentation, Oct. 27, 2005. available at
http//library.corporate-ir.net/library/81/812/81
256/items/169479/Latestwebsitepresentation.pdf Ame
rican Eagle Outfitters, Form 8-K filed Sept. 20,
2005
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American Eagle Outfitters- Looking ForwardPlans
for 2005 and Beyond

• Expansion
• New flagship stores in NYC, Seattle
• Expansion into Alaska, Hawaii, Canada, Puerto
  Rico
• Still focused on Western, Southwestern US
• Evidenced by purchase of new distribution
  facility in Ottawa, K.S.
• New operating system used to streamline
  distribution

Source American Eagle Outfitters 2004 Annual
Report
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American Eagle Outfitters- Looking Forward(cont.)

• One of American Eagles most significant plans
  for the future is the recent unveiling of its new
  brand, Martin and Osa
• Unveiled 10/20/2005, Scheduled to debut in malls
  in Fall, 2006
• Will operate as its own business segment separate
  of American Eagle brand.
• Targeted to men, women age 25-40
• This is outside AEs traditional 18-25 market
• Possibly explains move to Southwest US
• Will include classic sportswear
• Described by "a union of everything that is right
  about classics, denim, and active sportswear
• Using former Abercrombie Fitch designers to
  head project

Source American Eagle Outfitters Announces Name
of New Concept MARTIN OSA, American Eagle
Homepage, accessed Nov. 1, 2005, available at
www. http//phx.corporate-ir.net/phoenix.zhtml?c8
1256pirol-newsArticleID770357highlight
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American Eagle Outfitters- Financial Analysis

• Items of note include
• 1. Increasing Liquidity
• -- ?Current Assets, ?Non-current Assets
• Possible Implications planned expansion,
  anticipation of bad season.
• Decreasing COGS as Net Income
• Implication Irregularities with respect to
  inventory management/sales
• Stainable decline? Not likely.

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American Eagle Outfitters- Stock Performance vs.
SP 500 (5yrs)
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American Eagle Outfitters- Stock Performance vs.
Competitors (5yrs)
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American Eagle Outfitters Competitors

• The Limited
• The Gap
• Abercrombie Fitch
• Aeropostale
• Pacific Sunwear

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American Eagle Outfitters- Comparable Performance
Competitor Data Yahoo! Finance, accessed Oct.
27, 2005, available at http//www.finance.yahoo.co
m
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American Eagle Outfitters- An RCMP Holding

• Bought on 3 occasions 12/1999, 03/2000, 05/2000
• Sold 25 of holdings in 04/2005
• As of Nov. 7, 2005, AEOS constituted 9 of the
  portfolio book value and 20 of the portfolios
  market value.
• Since its initial purchase, the stock price has
  climbed 329
• Realized gain 11.054.60
• Unrealized gain 41,620.00

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American Eagle Outfitters- Porters 5 Forces
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American Eagle Outfitters- SWOT Analysis
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American Eagle Outfitters- Impact of Tariffs On
Inputs
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American Eagle Outfitters- Portfolio
Diversification
Source Adapted from Dow Jones Indexes, Component
Weightings, accessed Nov. 5, 2005, available at
http//www.djindexes.com/mdsidx/index.cfm?events
howComponentWeightsrptsymbolDJIsitemapid20 St
andard and Poors GICS Map, effective Apr. 30,
2005, available at javascriptpopup('/spf/xls/inde
x/gics_map_April_2005.xls')
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American Eagle Outfitters- Portfolio
Diversification (cont.)

• Q) Why is RCMPs concentration in American Eagle
  Outfitters a cause for concern?
• Remember the GISC definition of the Consumer
  Discretionary Sector
• The GICS Consumer Discretionary Sector
  encompasses those industries that tend to
• be the most sensitive to economic cycles.1

1 Standard and Poors GICS Industry
Classification Definitions, effective Apr. 30,
2005 available at javascriptpopup('/spf/pdf/inde
x/GICSSectorDescriptions_April2005.pdf')
27
American Eagle Outfitters- Questionable Employee
Management

• Four American Eagle Outfitters employees
  Pennsylvania, Illinois, and New Jersey have
  alleged their former employers violated certain
  federal and state minimum wage and related
  laws.1
• American Eagle Outfitters, denying the
  allegations made by the employees has entered
  into a Settle Agreement for an unspecified
  amount.2
• Although it is unlikely the settlement will have
  any significant impact on earnings or stock price
  in the near future, it raises questions regarding
  pervasive improprieties within the company.

1. Notice to Eligible Employees, Court of Common
Pleas, Allegheny County, Penn., p.1, Received
Nov. 9, 2005. 2. Id. at 1.
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American Eagle Outfitters- Relative Stock
Valuation
Data from Yahoo! Finance, accessed Nov. 5, 2005,
available at www.finance.yahoo.com
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American Eagle Outfitters- EPS Implied Stock Price
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American Eagle Outfitters- Intrinsic Value

• Assume a reasonable average growth rate in net
  income, say 8
• Holding costs proportional, this generates an
  intrinsic value of 21.52. This is below the
  market price of 25.32
• Holding other factors constant, net income would
  have to grow at a rate of appox. 50 annually!

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American Eagle Outfitters- Review

• Macroeconomic Issues
• Relatively high energy prices
• Questionable consumer confidence
• Microeconomic Issues
• Firm plan anticipates launch of its new label in
  fall 2006
• Huge growth in FY 2004
• Questionable management relating to employee
  compensation
• Priced at discount to the market
• Overvalued according to EPS method
• Overpriced according to Intrinsic Valuation
  method
• Very sensitive to changes in CAPEX spending, an
  area that may change dramatically with continued
  expansion, launch of new label
• Other Issues
• Portfolio diversification
• With American Eagle constituting 20 of the RCMP
  market portfolio, we are susceptible to
  significant idiosyncratic risk
• This sector is, by definition, very susceptible
  to cyclical nature of the economy

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American Eagle Outfitters- Recommendation

• Based on the factors just listed, I feel we
  should sell 29 of our holdings, or 700 shares of
  American Eagle Outfitters at the market.
• American Eagle is a solid firm relative to the
  industry in which it operates and I believe it
  provides good exposure to a market that indeed
  still has potential for growth. Our remaining
  1,700 shares should provide us with this exposure

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The End

• Questions?