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December 5th, 2019
Students: Kai Zhang, Charlotte Wang, Carter Goman
American Eagle Outfitters (AEO): LONG
2 Year Price Target: $26 (88% total return)
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2
3
American Eagle (AEO)
Source: Company data, Bloomberg
• American Eagle is a retail brand of men's and women's casual apparel, footwear, outerwear, and accessories. The Company's products include jeans, khakis, t-shirts, sweaters, bras, underwear and hoodies.
• AEO mostly caters to young customers in their teens or twenties
• AEO has two main store brands: American Eagle (~1000) and Aerie (~130 standalone & ~150 side-by-side)
BUY now for 80%+ return in 2 years (Target Price $26)
Current snapshot ($mm)
Sector Consumer
Industry Softline Retail
Price as of 11/20/2019 $14.45
% 52-week high 59%
Market cap $2,442
+ Debt $0
- Cash ($317)
Enterprise value $2,124
Revenue $4,326
% growth 7%
EBITDA $541
% margin 13%
EPS $1.60
PE ratio 9.0x
Dividend $0.55
% dvd yield 3.8%
FCF Yield (Levered) 9.2%
2020E op. stats and valuation ($mm)
1-year stock price vs. S&P
$8
$13
$18
$23
$28
11/23 2/21 5/22 8/20 11/18
AEO S&P (indexed)+18%
-26%
4
Background
Sentiment, and one-time headwinds
Source: Bloomberg
“Retail apocalypse”
Retail sector in 2019 = The perfect storm
Cold weather in May Forever 21 bankruptcy
1-year retail performance has lagged vs. S&P
▪ Colder weather in 2Q yoy
▪ Lower comps
▪ Markdowns, impact margin
and inventory
▪ AEO Mgmt did not quantify impact
▪ Precedence suggests 200 – 400
bps headwind to comps.
(Aeropostale’s liquidation in
2016)
▪ Refreshed woes at retailors
▪ Stock underperformance,
driven by vanishing mall
traffic, macro risks and tariffs
1-year retail performance vs. S&P 500, Indexed
Note: Retail peer group includes 8 US retailers, including AEO, LB, GPS, GES, TPR, LULU, ANF, RL
80%
90%
100%
110%
120%
Nov/2018 Feb/2019 May/2019 Aug/2019 Nov/2019
Retail peers S&P 500+18%
-12%
(-22% if exc'l LULU)
5
Investment Thesis
• Aerie – an underappreciated growth story• Rest of AE: steady growth on strong execution
Current price provides great opportunity for entrance
6
Growth
Margin• Margin contraction transitory; fears unjustified• Margin is the result, not the cause!
Thesis 1. Growth not done yet
Current price provides great opportunity for entrance
www.ae.com
Growth drivers Current situation Near-term drivers
▪ ~1000 physical stores
▪ 2% same-store sales growth
▪ Curvy Jeans
▪ New Product lines, inc’l the MOOD
collection
▪ ~130 standalone stores
▪ ~160 side-by-side stores (w/ AE)
▪ 3-5% sss growth (physical store)
▪ >20% overall sales growth
▪ Penetration into American Eagle
physical stores
▪ Standalone expansions in virgin ZIP
codes
▪ Aerie digital growing @ 30%+
▪ American digital growing @ 5%
▪ Benefiting from “showroom effect”
of physical stores opening,
especially for Aerie
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Thesis 1. Growth not done yet (continued)
Breakdown of 5-Year (F2019A to F2024E) growth forecast
Total Revenue 5Y CAGR: 6%
Aerie Digital 5Y CAGR: 20% (Aerie physical pf 19% + “Digital Halo” of 1%)
Aerie Physical 5Y CAGR: 19% (16% store count increase + 3% comps)
AE Physical 5Y CAGR: 1.5% (1.5% comps + 0% increase in store count)
AE Digital 5Y CAGR: 5% ( Primarily driven by increased penetration)
Aerie will be a $1.6 bn business!(vs $2bn LT target)
8
2,544 2,754
846
1,096 362
866
284
709
$4,036
$5,425
F2019 A F2024 E
7%
9%
21%
63%
100%
100%
13%
16%
20%
51%
Thesis 2. Margin: the result, not the cause
Revenue growth has historically been a leading indicator for margin
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%Revenue growth
Operating margin
American Eagle growth vs. margin▪ Graph: Margin trends historically
lagged ~6months compared to
revenue growth
▪ Retail profitability is highly
dependent on volume
▪ Fixed investment recouped through
accurate sales projections
▪ Inventory turnover ~2.0 months,
equivalent to 1 to 2 batches per Qtr
▪ [5-6 months] design investment
prior to sales means high operating
leverage, only if sales target is
achieved
▪ Little room for adjustment in the
middle of the seasonInvestors should focus on revenue growth as a
leading indicator of operating margin expansion
9
Valuation
AEO: Current price attractive compared to both historical and peers’ range
Source: Company data, Bloomberg
Current price at low end of 5-year historical range, despite of ample growth potentials
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
11/1/2014 5/1/2015 11/1/2015 5/1/2016 11/1/2016 5/1/2017 11/1/2017 5/1/2018 11/1/2018 5/1/2019 11/1/2019
Mean + SD: 20.2x
Mean - SD: 11.0x
Mean = 15.6x
Current: 9.0x, 5-ile%
Valuation also attractive compared to retail peers, even of lower growth
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Net Debt / Dividend '20 EBITDACompany (Brands) EBITDA yield margin % '19A-'20E '20E-'21E 2020E 2021E 2020E 2021E 2020E 2021E
American Eagle (AE, Aerie) $14.5 59% $2.4 -0.6x 3.8% 12.2% 7% 4% 9.2% 11.3% 4.0x 3.9x 9.0x 9.1xGap, Inc (GAP, Old Navy, Banana Republic) $16.3 52% $6.1 -0.1x 6.0% 9.6% -2% 0% 11.4% 9.8% 3.8x 3.9x 9.3x 9.3x
Guess $17.2 71% $1.1 0.8x 2.6% 8.0% 4% 4% - - 6.0x 5.7x 12.9x 10.5xL Brands (Vic' Skrt, PINK, B&BWs) $15.9 46% $4.4 2.5x 7.6% 14.1% -1% 2% 14.2% 15.6% 4.9x 4.9x 6.6x 6.5xTapestry (Coach, SW, Kate Spade) $26.1 64% $7.2 0.7x 5.2% 19.6% 1% 3% 11.0% 11.9% 6.7x 6.4x 10.3x 9.6xAbercrombie & Fitch $15.9 52% $1.0 -1.0x 5.0% 6.9% 1% 2% 2.2% 4.3% 3.0x 2.6x 21.4x 12.2xLululemon $217.0 99% $28.3 -0.6x 0.0% 25.6% 18% 15% 1.5% 2.3% 27.8x 24.0x 45.7x 38.4xRalph Lauren $106.9 80% $8.0 -1.1x 2.6% 16.1% 1% 3% 6.1% 8.9% 6.7x 6.4x 13.9x 12.6x
Zara 27.3 € 95% 85 € -0.9x - 26.8% 7% 6% 5.6% 5.9% 10.4x 9.9x 22.3x 21.0xH&M SEK 180 86% SEK 298 0.2x - 11.9% 11% 5% 4.3% 5.1% 10.9x 10.2x 22.7x 20.9x
Average 4.1% 15.1% 4.7% 4.4% 7.3% 8.3% 8.4x 7.8x 17.4x 15.0x
Median 4.4% 13.1% 2.5% 3.5% 6.1% 8.9% 6.4x 6.1x 13.4x 11.3x
P/EPrice
% 52 wk
high
Mkt cap
(bn)
EV/EBITDAFCF YieldSales Growth
Valuation Summary
Buy now for >80% total returns in 2 years
Price target calculation
DCF method FCF Yield method PE method
WACC 8.6% Target dvd yield 7.0% Target multiple 14.0x
Terminal UFCF growth 1.5% 3Y CAGR (F21 to F24) 5.5% 3Y CAGR (F21 to F24) 5.8%
DCF valuation $29.00 FCF yield valuation $23.00 PE valuation $25.00
Weight 33% 33% 33%
Price target $26.00
Current price $14.45
Potential upside 80%
Current dividend $0.55
Dividend yield 3.8%
Potential total return (plus 2 years of dvd) 88%
Date 11/20/19
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Environmental, Social, and Governance
The Strengths and Opportunities in each of the three aspects
Source: FactSet, SEC, Company Responsibility Report12
Aspects Strengths Opportunities
▪ Responsible sourcing and manufacturing
▪ Energy and water conservationEnvironmental
Social
Governance
▪ Brand built on equality and inclusiveness
▪ Women well-ness
▪ Balanced mix of board: 50% female
▪ Reasonable pay and incentive metrics▪ LT pay on ROIC?
▪ Mental health
▪ More effort in textile
recycling
Dynamic of apparel retail
Some half-baked takeaways from our team’s long tenure (21 days) of covering apparel retailers. (AKA why we think the street is wrong.)
The unpredictability of retail…
$975
… means we’d need to plan for it
Management
Investors
✓ Stay close to customers
✓ Experiment, small and fast
✓ Long-term mentality; identify
good management teams
ꭗ Overly focused on margin or
working capital.
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Field trips to American Eagle vs GAP
14
Jeans vs Jeans – the Grand Showdown
Plus-sized mannequins at AEO: signal of true commitment to its “#REAL” ideal
Easter egg: a story of American Beagle
A reality coming from an April Fool’s Hoax
Source: American Eagle Blog
“American Beagle” -- April Fool’s joke 2014
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Q&A
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Appendix
5-year financial forecast
US$ millions, except per share data Actual
F2019 A F2020 E F2021 E F2022 E F2023 E F2024 E 3Y CAGR 5Y CAGR
Estimates F'19A - F'22E F'19A - F'24E
Revenue 4,036 4,313 4,594 4,876 5,149 5,425 6.5% 6.1%
Growth %, yoy 6.3% 6.9% 6.5% 6.1% 5.6% 5.4%
EBITDA 511 547 585 618 644 667 6.6% 5.5%
Margin % 12.7% 12.7% 12.7% 12.7% 12.5% 12.3%
Growth %, yoy 3.6% 7.2% 6.8% 5.8% 4.2% 3.5%
EBIT 340 366 392 414 428 439 6.7% 5.2%
Margin % 8.4% 8.5% 8.5% 8.5% 8.3% 8.1%
Growth %, yoy 5.2% 7.7% 7.0% 5.6% 3.5% 2.6%
EPS $1.47 $1.59 $1.75 $1.88 $1.98 $2.07 8.5% 7.1%
Net margin % 6.5% 6.4% 6.4% 6.4% 6.2% 6.1%
FCF 242.4 227 269 275 289 299 4.3% 4.3%
Margin % 6.0% 5.3% 5.8% 5.6% 5.6% 5.5%
FCF per share $1.41 $1.31 $1.60 $1.67 $1.78 $1.88 5.8% 5.9%
Growth %, yoy (7.1%) 22.0% 4.4% 6.7% 5.5%
Valuation
PE (Current price to est earnings) 9.8x 9.1x 8.3x 7.7x 7.3x 7.0x
FCF Yield 9% 11% 12% 12% 13%
Estimates Estimates
18
Appendix
Analyst estimates vs consensus
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US$ millions, except per share data Actual
F2019 A F2020 E F2021 E F2022 E F2023 E F2024 E 3Y CAGR 5Y CAGR
Consensus vs Estimates
Consensus Revenue - 4,324 4,497 4,659 4,975 - 4.9% -
Growth %, yoy 7.1% 4.0% 3.6% 6.8%
Analyst estimate vs consensus (0.2%) 2.2% 4.7% 3.5%
Consensus EBITDA - 527 539 558 601 - 3.0% -
Margin % 12.2% 12.0% 12.0% 12.1%
Analyst estimate vs consensus 4.0% 8.6% 10.8% 7.2%
Consensus EBIT - 348 355 384 397 - 4.1% -
Margin % 8.1% 7.9% 8.2% 8.0%
Analyst estimate vs consensus 5.2% 10.3% 7.7% 7.8%
Consensus EPS - 1.60 1.59 1.64 1.75 - 3.6% -
Analyst estimate vs consensus (0.8%) 9.9% 14.8% 13.2%
Source: Company data, analyst estimates, Bloomberg consensus
Estimates Estimates
Return on invested capital
20
ROIC: industry declining, AEO increasing
AEO maintains upward trend on ROIC while peers’ decline
Note: Peers include two comparable groups: youth-oriented concepts, including GPS, GES and ANF;
underwear / bra comprable, LB
32%
23%
21%
19%
17%15%
14%
29%
15%13%
19% 21%
18%19%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
F2013 F2014 F2015 F2016 F2017 F2018 F2019
AEO
AEO