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American Eagle outfitters

American Eagle outfitters. Presented by : Linden Lu Yanlei Xu Gleb Zarkh Mohamed Ibrahim 11-14-2007. Presentation Outline :. Company overview Industry and competitors RCMP position and historical transactions

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American Eagle outfitters

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  1. American Eagle outfitters Presented by : Linden Lu Yanlei Xu Gleb Zarkh Mohamed Ibrahim 11-14-2007

  2. Presentation Outline : • Company overview • Industry and competitors • RCMP position and historical transactions • Macro economic view • Firm risks and growth model • Valuation • Assumptions • DCF • Multiple valuation • Recommendation

  3. Company Overview • American Eagle Outfitters is one of leading apparel retailers in US • Design, market, and sell own brand of laidback • Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics • targeting age: 15-25 • Sell to US (1977), Canada (2001) and 41 foreign countries • Venues: Primarily Mall-based, limited stand-alone and internet sales • In 2006: introduced 2 new brands • Martin+OSA as a separate brand targeting age 25-40 • Aerie as a sub brand selling intimates for women • As of Aug 07 it operated 928 stores • 919 AE stores in US and Canada (including 5 Aerie) • 9 Martin+OSA

  4. Company Overview Cont. • Revenue sources • Traditional AE stores • New store opening (Matin+OSA, Aerie) • E-commerce (mainly to overseas customers) • Merchandise Mix (2006) • Men’s apparel (35%) • Women’s apparel, accessories, intimates (60%) • Footwear for men and women (5%) • Slightly shifts to women’s apparel from men’s apparel • Economy and Consumer inspired growth

  5. Retail Apparel Industry • Including retail stores and e-commerce is highly competitive: quality, fashion, service, selection and price • Porter’s Five Force • Entry of New Competitors: moderate • Threat of substitutes: high • Bargaining power of buyers: moderate • Bargaining power of suppliers: low • Rivalry among existing competitors: high

  6. Competition • Competition: individual and chain specialty stores, as well as the casual apparel and footwear departments of department stores and discount retailers • Key Competitors: • Abercrombie & Fitch: 20 year old, high price • Aeropostale: younger teens, low-mid price • GAP: 20-30, mid-high price • American Eagle: 20 year old, mid price

  7. Transaction History • March 8th, 2005 • 2-1 split • April 25th, 2005 • SLD 600 shares at $26.28 • November 16th, 2005 • SLD 700 shares at $23.33 • November 7th 2006 • SLD 400 shares at $39.19 • December 28th, 2006 • 3-2 Split • December 10, 1999 • BOT 200 shares at $44.00 • January 10, 2000 • BOT 200 shares at $27.00 • May 3, 2000 • BOT 600 shares at $15.63 • February 23, 2001 • 3-2 split

  8. RCMP position: • Currently own 1,950 shares of AEO, trading at $22 as of Nov 12th, 2007 for an unrealized gain of $32,710 or 321.04%. • AEO represents 11.2% of the portfolio

  9. Correlation matrix

  10. Macro Economic outlook 2007 •  Weakest level since October 2005 (After Hurricane Katrina) • 3 consecutive declines sum to -15% from July's 6 year high. • Housing recession, the financial (sub prime) mess and higher oil prices are all contributing. 

  11. Slowdown in 2008 Price of Oil Price of Corn ARMs Reset in 2008

  12. Business risk • Consumer’s preferences • The ability to satisfy customers’ demand and changing preferences is a primary source of business risk. • Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could negatively affect AEO.

  13. Business risk • Seasonality : • The fourth and third quarters have historically provided 60% net sales & 65% of net income Due to the year-end holiday season and back-to-school selling season. • The recent credit crunch , higher oil prices would affect the consumer spending, thus affect over all sales for 2007

  14. Growth model • AEO growth model depends on • Growth from new store openings • Comparable sales growth • E-commerce • For the new store openings • AEO is looking for opportunities of growth in its 2 new brands specially the Aerie Brand • They believe that there is strong growth potential in the intimates market .

  15. Growth model • Based on our view of the economy we expect a slow down in growth of sales by AEO specially in 2008. • Refer to excel sheet for further explanation of the growth model

  16. DCF valuation WACC Calculations: Beta 1.21 Equity 100% • WACC 12.47

  17. Key assumptions DCF valuation • Revenue Growth Rate 2007 2008 2009 2010 2011 15.91% 11.46% 13.96% 13.16% 12.63% • Capital Expenditures 2007 2008 2009 2010 2011 250 120 120 125 130 • Depreciation/Amortization 2007 2008 2009 2010 2011 98.8 116.0 126.8 138.1 149.8

  18. DCF valuation Key assumptions Cost Of Goods Sold 2007 2008 2009 2010 2011 54.5% 55% 55% 55% 55% • SG&A 2007 2008 2009 2010 2011 23.89% 23.89% 23.89% 23.89% 23.89% • Terminal Growth Rate 4%

  19. DCF Valuation • DCF yields stock price $19.74 • Sensitivity Analysis

  20. Multiple Valuation:

  21. Recommendation • Sell 450 shares at Market price • Market price is $22 as of 12th Nov 07 • Why sell ? • DCF shows slightly overvalued although it was based on optimistic assumptions • Relatively low beta • Growth from new store openings and e commerce. • Why not all the position? • Multiple valuation shows undervalued • The stock’s return converge towards the industry mean return • Diversification benefits

  22. Recommendation

  23. Recommendation

  24. Sources • Briefing.com • http://www.conference-board.org/economics/ConsumerConfidence.cfm • http://www.bubbleinfo.com/statistics-2007/

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