American Eagle Outfitters

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American Eagle Outfitters
Review for partial sale April 21st, 2005 By Adam
Freda
2
Introduction

• We currently own 3000 shares of American Eagle
  and purchased shares on three separate dates
• 200 shares on 12/10/99 at 44
• 200 shares on 3/10/00 at 27
• 600 shares on 5/3/00 at 15 5/8
• Total cost of position 23,575.00
• Market value of position - 78,140 for a gain of
  54,565 as of 4/20/05 market close of 26.38
• 3/2 stock split on 2/26/01, 2/1 stock split on
  3/8/05

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Relevant Financial Statistics

• 52 Week Range 12.66 - 30.45
• Market Cap 4.04B
• P/E 17.68
• EPS (ttm) 1.49
• Dividend .20
• Dividend Yield 0.72

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Brief Background

• Lifestyle retailer that designs, markets, and
  sells casual clothing for 15 to 25 year olds
• Distribution
• Stores
• E-Commerce Business
• Catalogs
• Products
• Jeans and Cargo Pants
• Graphic T-shirts
• Accessories
• Outerwear
• Footwear

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Brief Background (contd)

• Continue expansion throughout the United States
  and Canada by filling in existing markets
• U.S.
• AE opened 37 new stores in the during fiscal 2004
• Operates a total of 777 stores in 49 states
• Plans on opening 2 new stores in Alaska
• Canada
• Opened 5 stores in Canada in fiscal 2004
• Operates a total of 69
• Looking for a long term potential of 80 stores
  across the country

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Macroeconomic Review

• AE operates in the services sector and the retail
  (apparel) industry
• Competitors include The Limited, The Gap,
  Abercrombie Fitch, Pacific Sunwear,
  Aeropostale, and The Buckle
• Fashions at all these retailers are subject to
  short-term fads as well as long-term trends

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Macroeconomic Review

• March 2005
• Revenue increased 38.5 to a record 184.6
  million, compared to 133.3 last year
• Comparable store sales increased 29.2 for the
  March period
• 1st Quarter
• Revenue increased 39.8 to 311.5 million,
  compared to 222.8 million last year
• Comparable store sales increased 30.5 for the
  nine-week period
• Based on strong March results, the company is
  raising its first quarter earnings guidance to a
  range of 0.30 to 0.31 per share

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Stock Market Prospects (contd)
9
Stock Market Prospects (contd)
10
Stock Market Prospects (contd)
11
Stock Market Prospects (contd)
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Company Strategy

• 2004 Looking forward
• Enthusiastic about the opportunity for sales and
  earnings growth
• Return to the level of sales productivity and
  profitability that the company and its brands
  were built to generate
• Improve merchandise assortments to provide a
  clear and focused point of view at target
  customers

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Company Strategy (contd)

• Remodel stores and increase square footage from
  4,000 to 6,000
• Remodeled 36 stores in fiscal 2004
• Sell merchandise through its e-commerce site,
  www.ae.com
• Ships internationally to 24 countries, allowing
  AE to compete in locations that it doesnt have
  physical stores

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EPS Sensitivity

• Healthy EPS growth at 12 revenue growth, 2 and
  7 are much less attractive
• Cost of goods sold and margin estimates are also
  not aggressive in the model

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Free Cash Flow Calculation

• Above is a free cash flow sensitivity analysis
  for various levels of revenue growth
• Note the /- 10 range

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Combined Sensitivity

• Low P/E 10
• Current P/E in Market 18
• Industry P/E 20
• Wide range of prices when revenue growth and P/Es
  are sensitized
• Low revenue growth caps the price

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Considerations

• Add to position
• Downsides
• Volatile industry that is very dependent on the
  overall health of the economy and consumer
  spending
• Short-term fashions, which revenue growth depends
  on, are difficult, if not impossible, to predict
• Already significantly exposed to American Eagle
  as well as the fashion retail sector
• Sell all
• Downsides
• AE is still posting positive guidance
• If AE is able to grow at the expected rates,
  there is still solid growth left in the stock

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Recommendation

• Sell 600 shares of American Eagle at the market
  as a first step to selling up to one-half of our
  position total
• Due to the fast appreciation, AE represents about
  25 of our total portfolio
• We can lock in some gains and diversify the
  portfolio into other areas in which we have no
  exposure