American Eagle presentation

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CEYSU ERTURK FEIFEI XU SANDRA SERRA SYED MOHAMMAD ASHIQULLAH JIANI LIU YI-SHU TSAI AKIHISA NAKAZAWA Take Flight
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Transcript of American Eagle presentation

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CEYSU ERTURKFEIFEI XUSANDRA SERRASYED MOHAMMAD ASHIQULLAHJIANI LIUYI-SHU TSAIAKIHISA NAKAZAWA

Take Flight

COMPANY OVERVIEW

American Eagle Outfitters is one of leading apparel retailers in US

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

In 2006: introduced 3 new brandsMartin + OSAAerie77kids

As of Jan 2011 it operated 1086 stores929 American Eagle Outfitters stores148 Aerie stand-alone stores9 77kids stores

2

1977: AEO is launched

1991: AEO grows to 153 stores

1992: The company focuses on private-label merchandise

1993: AEO is incorporated

1994: AEO goes public

2001: AEO generates record net income of $105.5 million

2010: AEO goes global

KEY DATES

AEO YEARLY STOCK PRICE

Date

Open

High

Low

Close

Volume

Change (%)

11/25/2011

$12.87

$13.15

$12.76

$12.89

13222

-11.89%

12/31/2010

$14.60

$14.75

$14.49

$14.63

41750

-13.84%

12/31/2009

$16.96

$17.21

$16.88

$16.98

24771

81.41%

12/31/2008

$9.11

$9.48

$8.90

$9.36

55991

-54.94%

12/31/2007

$20.65

$20.99

$20.35

$20.77

31469

0%

INDUSTRY COMPETITORS

Retail industry: Has the second growth rate among all the U.S industries

Two-thirds of the U.S. GDP come from retail consumption

Getting hit hard because of recession

Experiencing downward sales in the first part of 2009

Upward trend in 2010 and 2011

COMPETITORS

For the past Five Years

Jeans

Price(AvgunitRetail Price)

Gross Margin

OperatingMargin

Abercrombie & Fitch(ANF)

$80-$90

$35

60.09%

19%

American eagle(AEO)

$50-$60

$20

41.66%

16%

Aeropostale(ARO)

$30-$50

Cheapest

36.66%

10-12%

FORCASTING PERFORMANCE

Difficult task to undertake. Competition and the weather can change projected sales.

Growth is looked at from sales from the past several years for expectations for the current year.

Growth is estimated based on revenue for daily, weekly, quarterly, and yearly sales profits.

FORCASTING PERFORMANCE

Year

Revenue

Percent Change

EBITDA

2008

Feb

$905,713

$870,227

May

$640,302

-29.30%

$547,899

Aug

$688,815

7.58%

$624,806

Nov

$754,036

9.47%

$708,728

Total

$2,988,866

2009

Jan

$995,725

35.05%

$936,065

May

$611,986

-38.54%

$550,507

Aug

$646,798

5.69%

$584,366

Oct

$736,011

13.79%

$683,823

Total

$2,990,520

2010

Jan

$916,088

24.47%

$869,049

May

$648,462

-29.21%

$698,750

July

$651,502

0.47%

$558,215

Oct

$751,507

15.35%

$610,373

Total

$2,967,559

2011

Jan

$920,463

22.48%

$872,404

April

$609,562

-33.78%

$524,875

July

$675,703

10.85%

$584,915

Total

$2,205,728

Arithmetic Mean

1.02%

RISK CHARACTERISTICS

Risk traditionally is portrayed to be negative.

Based on Historical ReturnDiversified RiskCAPM Model

Based on Historical Return

Year

Price end (E)

Price Beginning (B)

End - Beginning (E-B)

Dividend (D)

D+(E-B)

Return on AEO

2011

13.97

14.09

-0.12

0.11

-0.01

-0.00070972

2010

14.26

14.58

-0.32

0.2325

-0.0875

-0.00600137

2009

15.58

8.04

7.54

0.1

7.64

0.95024876

2008

8.35

19.9

-11.55

0.1

-11.45

-0.57537688

2007

17.98

27.61

-9.63

0.09375

-9.53625

-0.34539116

2006

26.61

15.18

11.43

0.062665

11.492665

0.75709256

Average

0.12997703

YEAR

Return on AEO

[R (AEO) - Average R (AEO)]2

2011

-0.00070972

0.017079027

2010

-0.00600137

0.018490125

2009

0.95024876

0.672845708

2008

-0.57537688

0.497524142

2007

-0.34539116

0.225974917

2006

0.75709256

0.393273885

SUM

1.825187804

.

.

Variance

0.36503756

Standard Deviation

0.60418338

60%

Diversified Risk

Firm-specific risk can be reduced, if not eliminated, by increasing the number of investments in your portfolio.

Each investment is a much smaller percentage of the portfolio, muting the effect (positive or negative) on the overall portfolio.

Firm-specific actions can be either positive or negative. In a large portfolio, it is argued, these effects will average out to zero.

Take Flight

RISK CHARACTERISTICS

Take Flight

Capital Asset Pricing Model (CAPM)

The CAPM Pricing model assumes that there are no transaction costs, all assets are traded, and investments are infinitely divisible.

Variance of actual returns around an expected return as a measure of risk is used

Measures the non-diversifiable risk with beta, which is standardized around one and translates beta into expected return:

BIOTTOM-UP

Unlevered Beta = Average Beta/1+(1-Average Tax Rate)*Average Market Debt Equity Ratio

Bottom-up Beta = Unleverd Beta [1 - AEO Tax Rate* AEO Market Debt Equity Ratio]

Step 1

Step 2

DamodaransWebsite

Average Beta

1.35

Average Tax Rate

20.86%

Average Market Debt Equity Ratio

15.8%

10Q

AEO Tax Rate

38.35%

Long Term Debt

$15,938,000

Current Portion of Long Term Debt

$137,023,000

Yahoo Finance

Market Value of Equity

$2,610,000,000

Total Debt

UnleverdBeta

AEO's Debt Equity Ratio

$152,961,000

1.20

5.86%

Bottom Up Beta

1.24

ETA

WHY BOTTOM-UP BETA?

Eliminate Standard Error

Eliminate Problem of a changing Product Mix

Compute from the companys current Financial Statement

Computed from the company's current financial leverage

Take Flight

ESTIMATE COST OF CAPITAL USING BOTTOM-UP BETA

Allow a comparison of different ways of financing its operations.

Permit a company to determine its value of operations and evaluate the effects of alternative strategies.

Cost of capital = cost of debt * market value debt ratio + cost of equity * market value equity ratio

Take Flight

COST OF EQUITY

Risk free rate:5.28%

Market risk premium:6.03%

Cost of equity = Risk free rate + Bottom-up Beta * Risk premium

Cost of equity=12.78%

Take Flight

COST OF DEBT

Pre-tax cost of debt:5.78%

Why using marginal tax rate(35%)?

Cost of debt = Pre-tax cost of debt * (1 marginal tax rate)

Cost of debt=3.76%

Take Flight

DEVELOP COST OF CAPITAL

Weighted approachWhy using market value of debt and equity ratios?Cost of debt:3.76%Cost of equity:12.76%Market value debt ratio:5.54%Market value equity ratio:94.46%

Cost of capital = cost of debt * market value debt ratio + cost of equity * market value equity ratio

Cost of capital=12.28%

Take Flight

VALUE OF FIRM

What is Terminal value?

Step 1: EBIT(1-t) = 182,952.08 Expected Growth rate = 9.065% Stable growth rate = 1.02% Expected operating income in year 6 =$285,214.59 Step 2: Return on capital = 27.07% Expected reinvestment rate from year 5 = g/ROC = 3.65%Step3 : Terminal Value in year 5 = $3,415,953.8

VALUE OF FIRM

Terminal Value = $3,415,953.8

Value of AEO today = $3,237,743.74

YEAR

Cash Flow

Current

$237,372.78

1

$258,890.62

2

$261,531.31

3

$264,198.93

4

$266,893.76

5

$269,616.07

VALUING THE AEO

EBIT (1-T)

YEARS

CURRENT YEAR

AFTER 5 YEARS

Year 1 to 5

Beyond 5 Years

High Growth Period

Cost of equity hg = Risk free rate+ bottom up beta*( Risk premium) 5.28+1.24*(6.03) = 12.76%

Cost of capital hg = (cost of debt*weight of debt)+ (cost of equity*weight of debt) 0.0376*(0.0554) +0.1276*(0.9446) = 12.26%

Growth rate hg=ROC 2011 *average reinvestment rate over past four years 27.90*21.46 = 6.002%

VALUE OF FIRM

HIGH GROWTH PERIOD

Year

EBIT(1-t)

ReinvestmentRate

Reinvestment

FCFF

PV

Current

$237,372,778.50

1

$251,620,751.96

21.46%

53,997,813.37

197,622,938.59

176,042,339.30

2

$266,723,940.35

21.46%

57,238,957.60

209,484,982.75

166,231,166.19

3

$282,733,676.80

21.46%

60,674,647.04

222,059,029.75

156,966,788.33

4

$299,704,375.57

21.46%

64,316,559.00

235,387,816.57

148,218,731.82

5

$317,693,717.12

21.46%

68,177,071.69

249,516,645.43

139,958,221.06

SUM OF PV CASH FLOWS

787,417,246.70

Cost of equity sg = 5.28+1*(6.03) = 11.31%

Cost of capital sg = 0.0376*(0.0554)+0.1131*(0.9446) =10.89 %

Growth rate sg= 1.02%

Reinvestment rate sg = growth rate sg/ROC 2011 1.02% / 27.97 = 3.65%

STABLE GROWTH PERIOD

STABLE GROWTH PERIOD

FCFF year 6= EBIT after taxes in year 5*(1+gowth rate sg)*(1- reinvestment rate sg) 317,693,717.12*(1+1.02%)*(1-3.65%) = $309,230,479.17

Terminal value = FCFF year 6 / (cost of capital sg-growth rate sg)309,230,479.17/ (10.89%-1.02%) = $3,132,485,179

PV of terminal value = 3,132,485,179/(1+12.26%)^5=$1,757,065,354.94

COST OF CAPITAL hg

VALUATION

Value of Operating Assets PV cash flow during hg+ PV of terminal value 1,757,065,354.94 +787,417,246 =$2,544,482,601

Value of the Equity Value of operating assets + Cash and marketable securities Debt 2,544,482,601 + 734,695,000.00 - 528,927,000.00 = $ 2,750,250,601.64

Value of the equity =$ 2,750,250,601.64Shares outstanding is 194,900,000 Stock price =$ 2,750,250,601.64/ 194,900,000

$14.11

$12.99

OUR VALUE

LAST 3 MONTHS AVERAGE

TODAY

14.61

VALUATION

Take Flight

Thank You