American Eagle Outfitters Inc.

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

American Eagle Outfitters Inc. (AEO) Company Business American Eagle Outfitters is an apparel and accessories retailer which currently has over 1,000 stores in Canada and the United States. They operate American Eagle, Aerie by American Eagle, 77kids by American eagle, and their e-commerce business known as AEO Direct. American Eagle Brand: Aerie: 77 Kids: Launched in 2008 for online only and opened 9 stores in 2009 Offers clothing and accessories for kids ages 2 to 10 and also for babies under the brand name little77 Launched in the fall of 2006 and is targeted to the young 21 females preppy, denim clothing targeted to 15 to 25 year olds Plan to build upon number one position in Denim They are reducing production times which will make them capable of reacting more quickly to emerging trends

Additional Notes: They get international growth from their franchise agreements Increased their quarterly dividend from $0.10 to $0.11 per share and paid a special dividend of $0.50 per share for the quarter ended January 29,2011 o Dividends are expected to continue in the future Seasonality: Majority of Sales comes from back-to-school season (August) and Christmas Holiday (November and December) Share buybacks: o Fiscal 2010 - AEO repurchased 15.5 million shares at the average price of $13.94/share o Did not repurchase any shares during Fiscal 2008 and Fiscal 2009 o As of January 29, 2011 ANF has 14.5 million shares available to be repurchased under the stock repurchase program which will expire at the end of fiscal 2012 AEO has stock option compensation programs in place

Income (Loss) From Discontinued Operations MARTIN+OSA (M+O) brand officially closing in the end of January 2011

Same Store Analysis:

Same store sales has been decreasing at a slower rate since 2009 and may result back to 2008 levels o Competitors revenues seem to peak in 2008, and have been growing since their 2009 numbers.

Future Outlook - Expectations Open 14 new AE stores, 10 new aerie stores, and 12 new 77kids stores during fiscal 2011 Remodeling of 55 - 75 AE stores during Fiscal 2011 Closure of 15 - 25 AE stores during Fiscal 2011 International Growth - Opening of 20 new franchised AE stores during fiscal 2011 They will continue with their reduced spending on capital expenditures and for fiscal 2011 it is expected to be around $90 million - $100 million Potential Risks: If Aerie and 77Kids are successful it can mean better growth for ANF International growth is dependent on franchise agreements They have strategies in place to mitigate the rising cost of raw materials They do not hedge their foreign exchange risk

Fiscal 2011 - Quarterly Updates Generally, I just briefly look at quarterly data to confirm it with the annual statement. AEO's Q1 to Q3 data have all been poor in my opinion o Revenues increased but gross profit decreased meaning management was unable to control its costs in an effective way this year o CASH FLOW CONCERN: All quarters have reported a decrease in cash flow as not one quarter has yet produced cash from operating activities Overall, looking at the quarterly reports AEO has still yet been able to bounce back from the 2008 recession

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

21.0% 15.7% 31.8% 5.4%

15.4% 12.0% 23.5% 13.0%

9.3% 6.9% 17.6% 7.7%

22.1% 16.5% 34.9% 18.8%

25.5% 18.3% 37.1% 23.0%

27.3% 19.5% 38.4% 16.3%

29.8% 21.4% 40.1% 17.4%

12.7% 9.1% 19.3% 3.0%

10.7% 7.9% 14.8% 10.9%

10.4% 7.5% 21.3% 13.5%

All profitability ratios are performing about half of what they were in 2008 levels o Assumed to continue for very many years to come due to the economy and also I don't believe they will grow as they did to levels prior 2009 o I still think ROE and ROA can at the least return to 2009 levels
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

1.91 2.52 0.34 0.04 0.01

2.14 3.02 0.28 0.03 0.01

2.14 2.78 0.34 0.02 0.01

2.72 3.27 0.34 0.00 0.00

2.41 2.99 0.39 0.05 0.00

2.03 2.60 0.40 0.00 0.00

1.95 2.71 0.39 0.00 0.01

1.57 2.30 0.39 0.00 0.05

2.06 2.85 0.35 0.00 0.02

2.25 3.03 0.39 0.00 0.00

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue
Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2.04 13.1% 1.3% 24.7% 0.0%

2002

1.97 13.3% 0.9% 24.0% 0.0%

2003

1.76 16.5% 1.5% 25.0% 0.0%

2004

1.45 14.6% 1.4% 23.8% 0.0%

2005

1.44 5.7% 1.3% 23.3% 0.0%

2006

1.41 2.1% 0.9% 23.8% 0.0%

2007

1.64 3.8% 1.0% 23.4% 0.0%

2008

1.52 15.8% 1.4% 24.8% 0.0%

2009

1.40 23.2% 1.2% 25.3% 0.0%

2010

1.58 22.5% 1.2% 24.0% 0.0%

2011

5.98 4.7 17.3 9.05 40.33 4.8% 6.6%

5.68 3.4 20.1 8.53 42.78 4.1% 8.5%

3.30 5.5 27.0 7.87 46.36 1.6% 7.9%

8.66 5.1 27.8 7.76 47.03 1.1% 7.3%

10.59 4.6 41.1 7.09 51.51 0.9% 9.1%

14.04 3.4 43.0 6.13 59.54 0.7% 9.4%

13.80 3.8 35.3 5.93 61.51 0.9% 9.4%

4.88 5.1 30.6 6.24 58.53 0.8% 9.9%

4.44 4.2 35.4 5.89 61.96 0.7% 10.9%

3.94 4.5 34.2 5.71 63.94 0.8% 10.2%

Both the average age of inventory and inventory as a percentage of revenue may raise some inventory concerns

Relative Ratio Comparison American Eagle Outfitters does not classify its direct competitors on their latest's annual statement. However, I believe there competitors to consist of Abercrombie & Fitch (ANF), The Gap (GPS), Aeropostale (ARO), Pacific Sunwear of California (PSUN), and Urban Outfitters (URBN).
Stock Price Mkt Cap ($M) EV 52 Wk High 52 Wk Low % off 52Wk Low $ $ $ $ $ AEO 14.68 2,840.00 2,280.00 16.37 10.00 46.8% 14.9 0.9 2.1 8.5 0.0 5.3 3.1% 2.0% 19.0% 98.8% 10.7% 0.9% 5.0% 59.0% 13.7% -6.5% 1.6 3.0 0.00 0.00 37.4% 42.9% 9.4% 14.8% 6.2% 9.6% 9.8% 14.6% 13.5% 20.2% 74.5 3.9 1.6 ANF $ 47.97 $ 4,120.00 $ 3,500.00 $ 78.25 $ 40.25 19.2% 21.7 1.0 2.1 9.5 58.2 6.8 1.5% 1.3% 3.1% 30.6% 21.5% 1.0% 4.6% 2.1% 67.5% -15.6% 1.1 2.1 0.01 0.01 62.9% 65.8% 7.8% 13.5% 5.0% 8.6% 6.7% 11.4% 10.6% 17.9% 46.3 2.5 1.3 $ $ $ $ $ URBN 29.39 4,240.00 4,150.00 39.26 21.47 36.9% 21.7 1.8 4.1 13.0 44.2 9.5 0.0% 0.0% 0.0% 0.0% 6.3% 1.8% 15.8% -23.8% -15.0% 15.8% 0.9 2.3 0.00 0.00 37.6% 39.5% 14.1% 16.4% 9.2% 11.0% 13.8% 15.4% 18.8% 19.9% 51.1 4.6 1.5 GPS $ 23.52 $ 11,480.00 $ 11,040.00 $ 23.73 $ 15.08 56.0% 14.7 0.8 4.1 8.4 19.5 5.7 2.2% 2.1% 7.1% 28.0% -1.9% 0.8% -1.8% -25.7% -16.9% 10.1% 1.3 2.0 0.58 0.60 36.3% 38.0% 9.9% 11.0% 5.7% 6.8% 11.5% 12.9% 24.4% 23.0% 0.0 5.7 2.0 $ $ $ $ $ ARO 18.01 1,450.00 1,310.00 26.30 9.16 96.6% 11.9 0.6 3.7 7.3 12.1 4.6 0.0% 0.0% 0.0% 0.0% -1.0% 0.6% 14.8% -52.8% -42.2% 30.2% 0.7 1.8 0.00 0.00 29.9% 35.7% 9.1% 14.6% 5.4% 8.9% 15.8% 26.6% 29.0% 51.0% 0.0 6.6 3.0 PSUN $ $ $ $ $ 2.19 147.44 172.07 4.60 1.11 97.1% 0.0 0.2 1.0 0.0 0.0 -5.1 0.0% 0.0% 0.0% 0.0% -6.2% 0.2% -7.7% -149.8% -4.9% 0.0% 0.3 1.4 0.19 0.19 21.1% 27.9% -11.1% -1.1% -11.4% -1.7% -24.5% -3.0% -51.9% -4.7% 0.0 4.5 2.2

Multiples
P/E(TTM) P/S(TTM) P/Tang BV(MRQ) P/CF P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth Payout Ratio(TTM)

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative basis, AEO looks to be about fairly valued in relation to the multiples It offers a 3.1% dividend yield which is above that of all its competitors The margins look slightly more attractive than all its competitors, excluding Urban Outfitters Overall, on a relative basis AEO looks to be fairly valued

Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of 1.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced AEO based on fundamentals. Based on my assumptions the market has currently priced AEO to have a owners earnings FCF growth rate of around a 11.5% year after year for the next 10 years with it gradually decreasing over theyears, where then it will grow at its terminal growth rate. This is a rough estimate number, however this is well above its 5 year and below its 10 year historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. I believe that a more reasonable estimate of around 7% to 8% growth for the next 10 years. In my opinion, AEO is still performing as if it is still in the 2008 recession and has not bounced back as well as competitors. Under my assumptions, I believe the intrinsic value to be around $13.39 on the safe side and on the more optimistic side with increasing growth it can be up to $15.67.

40 30 20 10 0 27/06/2005

5 Yr Price vs Intrinsic Value

27/06/2007
Historical Price

27/06/2009
Intrinsic Value

27/06/2011
Buy Price

Clearly price has been moving sideways since early 2009 signaling that investors may be confused about AEO's potential looking forward

FCFE Valuation The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 26.00%. Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. An adjustment in my opinion is clearly needed as I do not see AEO growing at this high rate and a better growth would be around 12% for the next 10 years with it decreasing as the years progress. According to this model, the intrinsic value is roughly around $15.06, which is in line with our actual owner's earnings DCF. Even 10% growth is on the optimistic side since in the short-term net income growth has not really recovered since the 2008 recession and with increasing material cost it will continue to struggle. Technical Analysis Looking at the chart below, there is little in terms of technicals and fundamentals seem to dominate this stock. I do not see it returning anywhere past the $24.00 level and there is support and resisitance mainly around the $15 level and the $18 level.

Overview AEO has a similar story to gap in that their relative ratios are about average in the industry and their stock is currently priced around a fair value. However, I am unsure as to how much growth can be expected from AEO looking into the future. Rising costs and their large hit they took and struggle they have with the 2008 recession has me standing on the sidelines. At the current price I am not interested in purchasing the stock however, if the price were to retract to below the $11 level, I would re-evaluate the stock. The $11 level may seem like an attractive price to purchase AEO and $15 looks good to exit on both technicals and fundamentals. Best Regards, Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.