American Eagle outfittersAmerican Eagle outfitters

Presented by : Linden LuPresented by : Linden Lu Yanlei XuYanlei Xu

Gleb ZarkhGleb Zarkh Mohamed Mohamed

IbrahimIbrahim11-14-200711-14-2007

Presentation Outline :Presentation Outline :

Company overviewCompany overview Industry and competitorsIndustry and competitors RCMP position and historical transactionsRCMP position and historical transactions Macro economic view Macro economic view Firm risks and growth modelFirm risks and growth model ValuationValuation

Assumptions Assumptions DCFDCF Multiple valuationMultiple valuation

RecommendationRecommendation

Company OverviewCompany Overview American Eagle Outfitters is one of leading American Eagle Outfitters is one of leading

apparel retailers in USapparel retailers in US Design, market, and sell own brand of laidbackDesign, market, and sell own brand of laidback

Casual clothing including Jeans, Graphic T’s, accessories, Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basicsfootwear, outwear, basics

targeting age: 15-25targeting age: 15-25 Sell to US (1977), Canada (2001) and 41 foreign Sell to US (1977), Canada (2001) and 41 foreign

countriescountries Venues: Primarily Mall-based, limited stand-alone and Venues: Primarily Mall-based, limited stand-alone and

internet salesinternet sales In 2006: introduced 2 new brandsIn 2006: introduced 2 new brands

Martin+OSA as a separate brand targeting age 25-40Martin+OSA as a separate brand targeting age 25-40 Aerie as a sub brand selling intimates for womenAerie as a sub brand selling intimates for women

As of Aug 07 it operated 928 storesAs of Aug 07 it operated 928 stores 919 AE stores in US and Canada (including 5 919 AE stores in US and Canada (including 5 AerieAerie)) 9 Martin+OSA9 Martin+OSA

Company Overview Cont.Company Overview Cont. Revenue sourcesRevenue sources

Traditional AE storesTraditional AE stores New store opening (Matin+OSA, New store opening (Matin+OSA, AerieAerie) ) E-commerce (mainly to overseas customers)E-commerce (mainly to overseas customers)

Merchandise Mix (2006)Merchandise Mix (2006) Men’s apparel (35%)Men’s apparel (35%) Women’s apparel, accessories, intimates (60%)Women’s apparel, accessories, intimates (60%) Footwear for men and women (5%)Footwear for men and women (5%) Slightly shifts to women’s apparel from men’s Slightly shifts to women’s apparel from men’s

apparelapparel Economy and Consumer inspired growthEconomy and Consumer inspired growth

Retail Apparel IndustryRetail Apparel Industry Including retail stores and e-commerce Including retail stores and e-commerce

is highly competitive: quality, fashion, is highly competitive: quality, fashion, service, selection and priceservice, selection and price

Porter’s Five ForcePorter’s Five Force Entry of New Competitors: moderateEntry of New Competitors: moderate Threat of substitutes: highThreat of substitutes: high Bargaining power of buyers: moderateBargaining power of buyers: moderate Bargaining power of suppliers: lowBargaining power of suppliers: low Rivalry among existing competitors: highRivalry among existing competitors: high

CompetitionCompetition Competition: individual and chain Competition: individual and chain

specialty stores, as well as the casual specialty stores, as well as the casual apparel and footwear departments of apparel and footwear departments of department stores and discount retailers department stores and discount retailers

Key Competitors: Key Competitors: Abercrombie & Fitch: 20 year old, high priceAbercrombie & Fitch: 20 year old, high price Aeropostale: younger teens, low-mid priceAeropostale: younger teens, low-mid price GAP: 20-30, mid-high priceGAP: 20-30, mid-high price American Eagle: 20 year old, mid priceAmerican Eagle: 20 year old, mid price

Transaction HistoryTransaction History December 10, 1999December 10, 1999

BOT 200 shares at BOT 200 shares at $44.00$44.00

January 10, 2000January 10, 2000 BOT 200 shares at BOT 200 shares at

$27.00$27.00 May 3, 2000May 3, 2000

BOT 600 shares at BOT 600 shares at $15.63$15.63

February 23, 2001February 23, 2001 3-2 split3-2 split

March 8March 8thth, 2005, 2005 2-1 split2-1 split

April 25April 25thth, 2005, 2005 SLD 600 shares at SLD 600 shares at

$26.28$26.28 November 16November 16thth, 2005, 2005

SLD 700 shares at SLD 700 shares at $23.33$23.33

November 7November 7thth 2006 2006 SLD 400 shares at SLD 400 shares at

$39.19$39.19 December 28December 28thth, 2006, 2006

3-2 Split3-2 Split

RCMP position:RCMP position: Currently own 1,950 shares of AEO, Currently own 1,950 shares of AEO,

trading at $22 as of Nov 12trading at $22 as of Nov 12thth, 2007 for an , 2007 for an unrealized gain of $32,710 or 321.04%.unrealized gain of $32,710 or 321.04%.

RCMP portfolio composition

Cash36%

DFS1%

FR10%

JKHY3%

KMB5%

MVSN3%

CPRT9%

AEO11%

AEE6%

SRCL6%

SRZ5%

WAG5%

Cash

AEE

AEO

CPRT

DFS

FR

JKHY

KMB

MVSN

SRCL

SRZ

WAG

AEO represents AEO represents 11.2% of the 11.2% of the portfolioportfolio

Correlation matrix

　 AEE AEO CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFS

AEE 1

AEO -0.03 1.00

CPRT 0.38 0.20 1.00

FR 0.30 -0.03 0.28 1.00

JKHY 0.22 0.38 0.40 0.12 1.00

KMB 0.36 0.10 0.48 0.08 0.31 1.00

MVSN 0.16 0.41 0.32 0.21 0.55 0.03 1.00

SRCL -0.13 0.11 -0.02 -0.06 0.08 -0.01 -0.12 1.00

SRZ 0.11 0.21 0.41 0.18 0.38 0.00 0.46 0.04 1.00

WAG 0.06 0.13 0.08 -0.15 -0.02 0.24 -0.05 0.09 -0.17 1.00

DFS 0.31 0.28 0.10 -0.02 0.40 -0.18 0.80 -0.55 -0.61 -0.11 1.00

Macro Economic outlookMacro 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. 

Slowdown in 2008Slowdown in 2008

ARMs Reset in 2008

Price of Oil Price of Corn

Business riskBusiness risk Consumer’s preferencesConsumer’s preferences

The ability to satisfy customers’ demand and changing The ability to satisfy customers’ demand and changing preferences is a primary source of business risk.preferences is a primary source of business risk.

Changes in fashion trends could lead to lower sales, Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could excess inventories and higher markdowns, which could negatively affect AEO.negatively affect AEO.

Sales per gross square feet

0

100

200

300

400

500

600

2002 2003 2004 2005 2006Years

Sa

les

American eagle Abercrombie Gap

Business riskBusiness risk

Seasonality :Seasonality : The fourth and third quarters have The fourth and third quarters have

historically provided 60% net sales & 65% historically provided 60% net sales & 65% of net income Due to the year-end holiday of net income Due to the year-end holiday season and back-to-school selling season.season and back-to-school selling season.

The recent credit crunch , higher oil prices The recent credit crunch , higher oil prices would affect the consumer spending, thus would affect the consumer spending, thus affect over all sales for 2007affect over all sales for 2007

Growth modelGrowth model AEO growth model depends onAEO growth model depends on

Growth from new store openingsGrowth from new store openings Comparable sales growth Comparable sales growth E-commerceE-commerce

For the new store openingsFor the new store openings AEO is looking for opportunities of growth in its 2 new AEO is looking for opportunities of growth in its 2 new

brands specially the Aerie Brand brands specially the Aerie Brand They believe that there is strong growth potential in the They believe that there is strong growth potential in the

intimates market .intimates market .

New stores 2006 2007E 2008E 2009E 2010E 2011E

Traditional AE stores 41 28 20 15 12 10

Martin+Osa 5 10 10 12 14 16

Aerie 3 20 30 30 25 22

Total 49 58 60 57 51 48

Growth modelGrowth model

Based on our view of the economy Based on our view of the economy we expect a slow down in growth of we expect a slow down in growth of sales by AEO specially in 2008.sales by AEO specially in 2008.

Refer to excel sheet for further Refer to excel sheet for further explanation of the growth modelexplanation of the growth model

DCF valuationDCF valuation

WACC Calculations:WACC Calculations:

BetaBeta 1.211.21

EquityEquity 100%100%

WACCWACC 12.4712.47

Key assumptionsKey assumptions Revenue Growth RateRevenue Growth Rate20072007 20082008 20092009 20102010 20112011

15.91%15.91% 11.46%11.46% 13.96%13.96% 13.16%13.16% 12.63%12.63%

Capital ExpendituresCapital Expenditures20072007 20082008 20092009 20102010 20112011

250250 120120 120120 125125 130130

Depreciation/AmortizationDepreciation/Amortization20072007 20082008 20092009 20102010 20112011

98.898.8 116.0116.0 126.8126.8 138.1138.1 149.8149.8

DCF valuationDCF valuation

DCF valuationDCF valuation

Cost Of Goods SoldCost Of Goods Sold20072007 20082008 20092009 20102010 20112011

54.5%54.5% 55%55% 55%55% 55%55% 55%55%

SG&ASG&A20072007 20082008 20092009 20102010 20112011

23.89%23.89% 23.89%23.89% 23.89%23.89% 23.89%23.89% 23.89%23.89%

Terminal Growth RateTerminal Growth Rate 4%4%

Key assumptionsKey assumptions

DCF ValuationDCF Valuation

DCF yields stock price $19.74DCF yields stock price $19.74 Sensitivity AnalysisSensitivity Analysis

Multiple Valuation:Multiple Valuation:

Company P/E Price/Sales Price/BookPrice to

FCF

American Eagle 11.9 1.56 3.4 38.22

Aeropostale 15.4 1.23 5.36 18.27

GAP 20.47 0.97 2.95 33.27

Abercrombie 15.59 1.82 4.35 37.79

Industry 16.17 1.15 4.91 36.02

Multiple Used 15 1.4 4 36

IMPLIED PRICE: $23- $25

RecommendationRecommendation

Sell 450 shares at Market price Sell 450 shares at Market price

Market price is $22 as of 12Market price is $22 as of 12thth Nov 07 Nov 07

Why sell ? Why sell ? DCF shows slightly overvalued although it was based DCF shows slightly overvalued although it was based

on optimistic assumptionson optimistic assumptions Relatively low betaRelatively low beta Growth from new store openings and e commerce.Growth from new store openings and e commerce.

Why not all the position?Why not all the position? Multiple valuation shows undervalued Multiple valuation shows undervalued The stock’s return converge towards the industry mean The stock’s return converge towards the industry mean

returnreturn Diversification benefitsDiversification benefits

RecommendationRecommendation

RecommendationRecommendation

SourcesSources

Briefing.comBriefing.com http://www.conference-board.org/ecohttp://www.conference-board.org/eco

nomics/nomics/ConsumerConfidenceConsumerConfidence..cfmcfm

http://www.http://www.bubbleinfobubbleinfo.com/statistics-2007/.com/statistics-2007/