1. American Eagle Outfitters
Liu Yi
Xu Wenqiang (Wayne)
Nov 7, 2013

2. Agenda
Introduction & Holding Review
Macroeconomic Factors & Industry Overview
Company Overview
Management Outlook
Financial Analysis
Valuation
Conclusion & Recommendation

3. Introduction: Founded in 1977 and went public in 1994, AEO is an apparel retailer targeting teenagers and young adults
2010:
Expands internationally
2007:
Traded on NYSE
2006:
Aerie, an intimates brand just for her, launches
2001:
Annual sales surpass $ 1 bn;
Cross the border to Canada
2000:
AE opens its 500th store
1999:
First flagship store in San Francisco
1994:
AE goes public on Nasdaq
1977:
The first AE store opens
Source: Company Website

4. Holding Review: We’ve been holding AEO for a long time
Transaction history
Dec 1999 – Buy $44
Jan 2000 – Buy $27
Mar 2000 – Buy $15.63
Feb 2001 – 3:2 Split
Mar 2005 – 2:1 Split
Apr 2005 – Sell $26.284
Nov 2005 – Sell $23.33
Nov 2006 – Sell $47.15
Dec 2006 – 3:2 Split
Nov 2007 – Sell $22
Dec 2008 – Buy $9.07
Nov 2010 – Sell $17.00
Apr 2011 – Sell $16.04
Current Price: $ 14.65
Current Position: Long 1500 shares of AEO with a weighted average price of $5.2252
Source: Yahoo Finance

5. Macroeconomic Factors: Disposable personal income, retail sales, and etc. are key drivers to apparel retail industry
United States Disposable Personal Income
YOY %, 2003 – 2012
Source: US Bureau of Economic Analysis

6. Macroeconomic Factors: Disposable personal income, retail sales, and etc. are key drivers to apparel retail industry (cont’)
United States Retail Sales
YOY %, 2003 – 2013
Source: US Census Bureau,

7. Industry Overview: US apparel retail industry is growing at 4
Industry Overview: US apparel retail industry is growing at 4.7%, with women’s wear as the largest segment
United States apparel retail industry value
$ billion, 2008 – 2017
United States apparel retail industry category segmentation
% share, by value, 2012
CAGR ( ): 4.7%
Source: Market Line Apparel Retail in the United States, Feb 2013, P8 - P11

8. Industry Overview: Fairly fragmented market, moderate growth and independent consumers result in a moderate level of competition in the industry
Apparel Retail Industry Five Forces Analysis
Rivalry Competition
Suppliers’ Bargaining Power
Strong (4.3)1
The US apparel retail market is fairly fragmented
All kinds of players are in this market, such as branded retailers, department stores, hypermarkets, discount stores and etc.
Fast pace of change in fashion and low level of product differentiation add to competition
Weak (2.7)
Suppliers are clothing manufacturers and wholesalers, who usually are small to medium sized businesses
Branded retailers usually source from Asia
Substitutes
Medium (3)
Though there is no substitute to apparel, there are some to retail. One option is buying online
Major retailers are all building their online stores
There are growing number of online fashion stores
Home made and custom made clothing are niche alternatives
Buyers’ Bargaining Power
Medium (3)
All buyers are large amount of individual consumers
Low switching cost among brands
Retailers can differentiate themselves through styles, price ranges
Retailers need to offer what buyers want
Threat of New Entrants
Strong (4)
Barriers to entry are not high
There is little regulation in this industry
Low switching costs and low level of product differentiation make it easier for new entrants to compete with existing players
Footnote: 1. Number in the brackets is the overall rating for this factor, larger number means stronger power
Source: Market Line Apparel Retail in the United States, Feb 2013, P12 – P17

9. Company Overview: AEO operates 2 major brands, while it also has a fast growing online business
AEO Brand
Targets 15 to 25-year old men and women
Denim is the cornerstone of the brand’s assortment
Gaining market share through differentiated fashion in key categories is a primary focus
921 stores by first half 2013
aerie by AEO
Collection of intimates and personal care product for AEO girl
135 stores by first half 2013
AEO Direct (Online business)
An extension of the lifestyle conveyed in the stores
Currently ship to 81 countries
Comparable sales increased 25% in 2012
Source: K, P3

10. Company Overview: AEO’s business model focuses on the two ends of the value chain
Business Model of AEO
Manufacture
During fiscal year 2012, purchase all of the merchandise from non-North-American suppliers
Rely on a small number of foreign sources for a significant portion of purchase
Sell
Through 1044 stores and online channel, as of end of 2012
950 stores in US
94 stores in Canada
Co-branded credit card (AEO Visa Card) and private label credit card (AEO Credit Card)
Ship & Distribute
Merchandise shipped directly from vendors and routed through 3rd party trans loaders
US distribution centers in Pennsylvania and Kansas
Canada distribution centers in Ontario
Jan 2013 newly opened 3rd party distribution center in Mexico City to support Mexican stores and e-commerce
Certain products shipped directly to stores
Source: K, P5 – P7

11. Company Overview: With number of stores at a ceiling, comparable sales growth is the key for future growth
Revenue
Total Comparable Sales1 Growth
Number of stores
Merchandise improvement, service improvement, store remodeling and etc. are the drivers to increase comparable sales.
Footnote: 1. Comparable sales provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period.
Source: K, P17, K, P17, K, P16

12. Management Outlook: The story in 2013 is not that promising
Results
Store opening plan 2013
Approximately 50 AEO stores, primarily in North America, Mexico and China
Remodel and refurbish plan 2013
Remodel and refurbish approximately 45 to 55 existing AEO stores and close approximately 20 to 30 AEO stores and 15 to 20 aerie stores
19 net openings for the whole company, as of Aug 3, 2013
10 in US, 1 in Canada
3 in China, 3 in HK, 2 in Mexico
Total comparable sales declined 6% as of Aug 3, 2013
AE declined 7%, aeire increased 1%, AEO Direct increased 17%
Source: K, P4, Second Quarter 2013 Financial Results, P5, P10

13. SWOT Analysis Strengths Weaknesses Strong brand with no debt
aerie gains a niche in underserved teen intimate apparel market
Strong in a few categories, such as denim
Target customer base is small and has limited consumption capability
Relatively small scale
Opportunities
Threats
International expansion
American Eagle Outfitters and aerie merchandise is available at 49 international franchise store locations in 13 countries, by end of 2012
Online sales
AEO Direct comparable sales increased 25% in 2012, increased 17% in the first half of 2013
Potential raw material inflation and increase in labor cost
Weak back-to-school and holiday sales this year
Source: K, P23, 2013 Second Quarter 10-Q, P5

14. Financial Analysis – Ratios
Above average capability of inventory control, a lot of cash at hand
Source: Morning Star

15. Financial Analysis – Dupont
Source: K

16. Dividend Signaling
CEO Robert Hanson, who joined American Eagle from Levi Strauss & Co., has been cutting back inventory, pushing for faster fashion-item turnaround and improving product assortments to boost sales and reduce markdowns.
“The special cash dividend is a component of our capital allocation plan, which balances continued investment in our business with top tier shareholder returns,”
During Fiscal year 2012, and Fiscal American Eagle paid quarterly dividends as shown in the table above. Included in the above table for the quarter ended October 27, 2012 AEO paid a special cash dividend of $1.50 per common share.
During Fiscal year 2013, American Eagle paid quarter dividends each on June 27, 2013 and September 30, 2013.
Source: K

17. Recent Stock Performance
20 & 200 Day Moving Average Stock Chart
After March, 2013 American Eagle’s stock price has consistently been below the 200 day moving average
While the trend of the 200 day moving average is going downward, there is a slightly increase trend for 20 day moving average
Source: Yahoo Finance

18. Valuation – WACC Calculation
We believe there is not that much volatility in this industry; therefore we add 0% premium into the WACC
No debt
Source: K

19. Valuation – Discounted Cash Flow
Source: K

20. Valuation – Comparable Analysis
Source: K

21. Comparable Stock Chart
American Eagle’s recent stock performance has been underperformed to S&P 500 and underperformed most of its competitors.
Retailers catering to the teen set are navigating a rough back-to-school season.
Source: Yahoo Finance

22. Decision Drivers Strengths Strong brand with no debt
Above average capability of inventory control
Concerns
Nov 15, 2013 quarterly results could miss expectation
International expansion risk
Quickly changing fashion trends of teens

23. Recommendation Valuation Current Price $14.65 per share
Analyzed Price $14.48 based on Discounted Cash Flow
$14.70 based on Comparable Analysis
Recommendation
Hold

24. Thank you ,any questions?
Q&A
Thank you ,any questions?