1. American Eagle Outfitters (AEO) Presented December 2, 2008
Brian Bird
Matt Byford
Brandon Lee
Christina Lu

2. Overview Company Overview Industry Overview Macroeconomy Financials
Valuation
RCMP Portfolio
Recommendation

3. Company Overview
American Eagle Outfitters a leading apparel retailer in the US
Design, market, and sell own brand
Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics
Targets ages 15-25
Sell to US (1977), Canada (2001) and 41 foreign countries
Venues: Primarily mall-based, limited stand-alone and internet sales
2006: introduced 2 new brands
Martin+OSA as a separate brand targeting age 25-40
Aerie as a sub brand selling intimates for women
2008:
Targets 2-10 year olds
As of Feb 2008 it operated 987 stores
929 AE stores in US and Canada
39 Aerie stand-alone stores
19 Martin+OSA

4. Growth Strategy Fiscal 2008 goals: 10% expected square footage growth
Open 80 stand alone aerie stores
Open 40 new AE stores
Open 15 Martin + OSA stores
Remodel existing AE stores
10% expected square footage growth

5. Industry Overview
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 olds, high price
Aeropostale: younger teens, low-mid price
GAP: 20-30, mid-high price
American Eagle: 20 year old, mid price

6. Retail Risks Consumer preferences Seasonality
Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns
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.

7. Industry Overview

8. Macro Trends Tight credit markets Retail sector struggling
AEO: $300 million tied up in auction rate securities
Retail sector struggling
Consumer confidence extremely low
Opportunity to benefit from cheaper lease agreements in this economic downturn

9. Macro Trends

10. SWOT Analysis Strengths Weakness Opportunities Threats
Brand Identity/Leading Brand
Strong balance sheet
Weakness
Cyclical business model
Affected by weak economy
Poor consumer confidence
Opportunities
Growth in stores
77Kids
Martin + Osa
Threats
Continuance in poor consumer confidence
Introduction of more competitors
Becoming out of favor

11. Porter 5 Forces The threat of substitute products
There are several substitutes for American Eagle clothing. However, the propensity for buyers to substitute are not as high.
The threat of the entry of new competitors
The barriers of entry are not high. However, AEO has a strong which makes its threat to new competitors lower.
The intensity of competitive rivalry
There are competitive rivalries among stores and the possibility for new companies to add too the rivalries, but because of AEO’s strong brand name the probability of new, competitive rivalries is low.
The bargaining power of customers
Customers have high bargaining power because there are several substitutes to the products that American Eagle provides.
The bargaining power of suppliers
AEO deals mainly with the textile commodities therefore suppliers it is hard for the supplier to have bargaining power over AEO.

12. Marketable Securities
Three Types:
Debt held to maturity
Trading Securities
Assumed to be held for a short term profit
Typically, only financial institutions hold trading securities
Available-for-sale securities
An intermediate class of securities tied to a specific cash need
Ex. AEO purchased available-for-sale securities to finance its repurchase program

13. Auction Rate Securities
A debt security that is sold through a Dutch auction. The auction rate security (ARS) is sold at an interest rate that will clear the market at the lowest yield possible. This ensures that all bidders on an ARS receive the same yield on the debt issue.(source: investopedia.com)
In early 2008, the ARS market had grown to over $200 billion, roughly half of it being owned by corporate investors.
In February 2008, the auction market failed and most ARS have been frozen since then.

14. AEO Auction Rate Securities Exposure
As of August 2, 2008, AEO had $689.0 million in cash and cash equivalents, short-term investments, and long-term investments.
$332.6 million net investments in auction rate securities
In the first half of the year, the company experienced failed auctions for 49 ARS issues.
During the same time period, the company sold 33 ARS issues at par plus accrued interest at $84.9 million.

15. Cash Flow Statement: Investing Activities
2005: Net purchases of $311 million in available for sale securities
2006: Net purchases of $437 million in available for sale securities
2007: Net sales of $354 million in available for sale securities

16. Balance Sheet

17. Cash Flow Statement

18. Ratios and Margins 2003 2004 2005 2006 2007 Average
% Gross margin 5 yr avg
36.46%
46.66%
46.50%
47.97%
46.58%
44.83%
% Operating margin
6.88%
19.28%
19.97%
21.00%
19.60%
17.34%
% Net profit margin
3.95%
11.34%
12.74%
13.86%
13.09%
11.00%
%ROE - 5 yr avg
9.32%
22.14%
25.45%
27.33%
29.84%
22.82%
% ROA - 5 yr avg
6.94%
16.49%
18.32%
19.47%
21.42%
16.53%
Current ratio
2.78
3.27
2.99
2.60
2.71
2.87

19. Dupont Analysis ROE ROA Equity Multiplier 2005 0.25451 0.18318 1.38942
2006 = x
2007
ROA
Profit Margin
Asset Turnover
2005
0.1274
1.44
2006 =
0.1386 x
1.40
2007
0.1309
1.64

20. Multiple Analysis Competitors Market Capital Trailing P/E Forward P/E
Price/Sales
M/B
ANF
1.55B
3.39
6.61
0.51
1.12
GPS
8.20B
8.83
8.49
0.57
2.07
LTD
3.05B
5.26
6.17
0.35
1.48
Trailing P/E
Forward P/E
Price/Sales
M/B
High
9.44
11.49
6.94
10.73
Low
14.30
13.75
8.30
14.27
Average
10.00
5.10
7.72

21. American Eagle Equity Value Using Multiples
Multiple Analysis
AEO
Earning per share
1.62
Sales per share 15
Book value per share
6.89
diluted shares (Mn)
220,280
American Eagle Equity Value Using Multiples
P/E(trailing)
P/E(leading)
P/S
M/B
Using Average
9.44
11.49
6.94
10.73
Using High
14.30
13.75
8.30
14.27
Using Low
10.00
5.10
7.72

22. Football Chart
Implied price
$11.00~13.00

23. Valuation: Earnings Period EPS Estimate EPS Actual Q1 2007 $0.35
$0.36
$0.37
Q3 2007
$0.45
Q4 2007
$0.66
Q1 2008
$0.19
$0.21
Q2 2008
$0.28
$0.29
Q3 2008
$0.30
Q4 2008
$0.47
Feb. 2009

24. DCF: WACC Beta taken from Yahoo! Finance
Share price of $8.59 as of mid-day Tuesday, December 2, 2008.
Total debt includes $75 million in demand borrowings

25. DCF: Assumptions: -10% growth in sales.
Squeeze margins by increasing cost of sales to 55%.

26. DCF:
DCF Price: $12.14
+/- 10%: $ $13.36

27. Sensitivity Analysis:

28. RCMP Portfolio: Current

29. RCMP Portfolio: with Recommendation

30. Correlation

31. Transaction History BOT 200 shares at $44.00 BOT 200 shares at $27.00
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
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
November 2007
SLD 450 shares at $22 31

32. Current Position
Currently own 1500 shares at $8.59 (Mid-day Dec. 2, 2008)
Unrealized gain of $5,000 (64%)

33. Recommendation BUY 1000 Shares of AEO at Market Price
Cost of purchase: $8,590, bringing the total position to $21,475.
The average cost per share: $6.57 (previously $5.23)
The DCF values the company at a range between $10.93 and $13.36.
The company is currently trading at about $8.60 (20% to 35% discount to the model).
Currently represents about 4.75% of the portfolio. The addition would make AEO 7.60% of the portfolio.
Recommend average costing into the position as consumer confidence remains weak.