March 19, 2015 American Eagle Outfitters Inc. (AEO-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 06/19/2014 Current Price (03/18/15) $17.04 Target Price $18.00 52-Week High $17.32 52-Week Low $10.28 One-Year Return (%) 34.62 Beta 1.13 Average Daily Volume (sh) 5,391,619 Shares Outstanding (mil) 195 Market Capitalization ($mil) $3,323 Short Interest Ratio (days) 8.88 Institutional Ownership (%) 94 Insider Ownership (%) 6 Annual Cash Dividend $0.50 Dividend Yield (%) 2.93 5-Yr. Historical Growth Rates Sales (%) 2.7 Earnings Per Share (%) -7.7 Dividend (%) 4.4 using TTM EPS 27.0 using 2015 Estimate 20.3 using 2016 Estimate 18.1 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY American Eagle s robust fourth-quarter fiscal 2014 results and a favorable guidance for fiscal 2015 triggered an uptrend in estimates. The company s initiatives to strengthen product assortments, store rationalization plans, diligent inventory management, cost-control efforts and ecommerce upgrade hint at strong long-term growth. Additionally, we believe that plans to expand globally, along with omni-channel growth, will enable the company to further its business and efficiently cater to international demand. However, high dependence on external suppliers, stiff competition and macroeconomic headwinds may dampen the company s results. Also, the attempt to grow globally exposes it to adverse foreign currency fluctuations and other international risks, which remain concerns. Risk Level * Average, Type of Stock Mid-Blend Industry Retail-App/Shoe Zacks Industry Rank * 158 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 679 A 727 A 857 A 1,042 A 3,306 A 2014 646 A 711 A 854 A 1,072 A 3,283 A 2015 690 E 740 E 871 E 1,071 E 3,372 E 2016 3,452 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.18 A $0.10 A $0.19 A $0.27 A $0.74 A 2014 $0.02 A $0.03 A $0.22 A $0.36 A $0.63 A 2015 $0.11 E $0.10 E $0.26 E $0.37 E $0.84 E 2016 $0.94 E Projected EPS Growth - Next 5 Years % 9 (Note: Qtly. fig. may not add up to annual fig. due to rounding off and earnings fig. exclude the 77Kids business) 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 111 North Canal Street, Chicago IL 60606
OVERVIEW Based in Pittsburgh, PA, American Eagle Outfitters Inc. is a specialty retailer of casual apparel, accessories and footwear for men and women in the age group of 15 25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company s assortment includes jeans, cargo pants, graphic T-shirts as well as a range of accessories, outerwear and footwear. American Eagle currently operates under AE Brand, Aerie by American Eagle and an online retailing channel AEO Direct. AE Brand: Under this brand, the company sells America s latest fashionable apparel and accessories for men and women in the age group of 15 25 years, including sweaters, graphic T- shirts, fleece, outerwear and accessories. Aerie by American Eagle: Launched in 2006, Aerie is a lifestyle brand providing simple and stylish apparel, especially for young girls. The company sells this apparel through its standalone Aerie stores across the United States and Canada, and globally through its online channel, aerie.com. AEO Direct: AEO Direct is American Eagle s online retailing channel, through which the company sells its wide range of apparel and accessories under its different brands. The company merchandises its products through ecommerce operations, ae.com and aerie.com. REASONS TO BUY Strong Brand Portfolio the Growth Driver: American Eagle is one of the major specialty retailers of fashionable apparel and accessories in the U.S. and Canada. The company has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of target customers. Solid Fourth-Quarter Results and Favorable Outlook Raise Estimates: American Eagle delivered robust fourth-quarter fiscal 2014 results, as both top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. Results benefitted from the company s enhanced merchandise collection along with superior customer experience. The strong quarter encouraged management to issue a favorable outlook for fiscal 2015, which in turn triggered an uptrend in the Zacks Consensus Estimate over the past 30 days. Strategic Initiatives Bode Well: American Eagle plans to focus on strengthening its product assortments, adding more compelling brands, managing inventory levels diligently and augmenting ecommerce business. Moreover, it remains committed toward enhancing store sales productivity by rationalizing its brick and mortar store fleet that includes closing underperforming stores and expanding profitable ones. Further, the company s fundamentals remain strong, given its rewards program and strategic store expansion plan. In order to boost its bottom line, American Eagle is continuously undertaking initiatives to reduce costs through supply chain efficiencies and its updated product allocation system. We believe that these strategic initiatives will drive the company s top line and profitability. Digital, Omni-channel & International Growth to Boost Top Line: With the boom of ecommerce and m-commerce, the company is striving toward the development of its omni-channel platform to reach customers in every possible way. Thus, it is working toward enhancing customers shopping experience on the web as well as on mobile by upgrading its mobile app and website. A totally Equity Research AEO Page 2
redesigned version of the company s digital site is expected to be launched this year. The company is also gaining from its pilot programs like buy online, ship from store that have resulted in incremental sales and efficient use of inventory. Alongside, American Eagle is strengthening its global presence as it has witnessed strong profitability from its overseas licensed stores of late, with little capital requirements. We believe that the international expansion plans, together with its omnichannel growth, provide the company with significant opportunity to expand business and cater to its incredible global demand. REASONS TO SELL High Dependence on Outside Suppliers: American Eagle does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from outside. The company s operations may be adversely affected in case of any import disruptions like manufacturers failure to ship orders on time or meet its standards. Macroeconomic Challenges & Seasonality of Business: The apparel retail industry is a consumer-driven one and hence, very sensitive to the health of the economy. Spending on apparel and accessories is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumers spending on these items. Further, the seasonal and cyclical nature of the company s business puts it at risk as failure to perform well during the peak season is likely to weigh on the company s yearly performance. Risks Involved with Operating Internationally: As mentioned above, the company is making aggressive efforts to expand internationally. This, in turn, exposes it to political and economic risks in the international markets, which may impact results. Also, the prevalent foreign currency headwinds remain a concern. Stiff Competition: American Eagle, operating in the retail apparel industry, faces stiff competition both in stores and online. The intense pressure from big players, including Abercrombie & Fitch, Gap and Aeropostale among others, on the basis of fashion, quality, assortments, pricing and service, may dampen the company s results. RECENT NEWS American Eagle Beats on Q4 Earnings; Q1 View Strong Mar 4, 2015 American Eagle s fourth-quarter fiscal 2014 adjusted earnings of $0.36 per share were up 33% from $0.27 per share recorded in the prior-year quarter. Earnings also beat the Zacks Consensus Estimate of $0.34. The improvement in earnings reflects the impact of strong sales in the quarter and lower promotions. American Eagle's net sales in the quarter rose nearly 3% to $1,071.9 million from $1,041.7 million in the prior-year quarter. The figure also surpassed the Zacks Consensus Estimate of $1,054 million. The rise came on the back of the company s enhanced merchandise collection and superior customer experience. Comparable-store sales (comps) in the quarter remained flat year over year. Brand-wise, comps rose 13% at the company's Aerie stores and fell 1% at AE Total Brand stores. Equity Research AEO Page 3
Quarter in Detail Gross profit for the quarter rose 13% to $376 million and gross margin expanded 320 basis points (bps) to 35.1% owing to lower markdowns, partially offset by higher rent expenses and delivery costs related to increased direct orders. Selling, general and administrative (SG&A) expenses rose 5% to roughly $227 million. As a percentage of sales, SG&A expenses contracted 50 bps to 21.2%, reflecting higher planned investments in marketing and incentive compensation, offset by lower overhead and miscellaneous expenses. The company s operating income rose 31% to $112 million. Operating margin expanded 230 bps to 10.5% primarily due to higher gross margin, partly offset by lower expenses Fiscal 2014 Synopsis For fiscal 2014, the company s adjusted earnings came in at $0.63 per share, down nearly 15% from fiscal 2013 but ahead of the Zacks Consensus Estimate of $0.61. Revenues for fiscal 2014 fell approximately 1% to $3,282.9 million but surpassed the Zacks Consensus Estimate of $3,264 million. Financial Position American Eagle ended fiscal 2014 with cash and short-term investments of nearly $411 million compared with $429 million a year ago. During fiscal 2014, the company incurred $254 million as capital expenditure. For fiscal 2015, the company maintained its capital expenditure guidance of $150 million, mainly to be allocated to new and renovated outlets, roll-out of the point of sale system across all stores, supporting technologies and the completion of its new fulfillment center. As of Jan 31, 2015, American Eagle s total inventory was $279 million, down 4% from the same period a year ago. Inventory at cost per foot declined 5%. American Eagle expects inventory per foot in firstquarter fiscal 2015 to decline in the low single-digits range. Store Update During the fourth quarter, American Eagle opened 6 stores, including 3 stores in the U.K., 2 stores in Mexico and 1 store in Asia. The company shut down 42 stores, including 39 AE and 3 Aerie stores. Alongside, on the global platform, the company opened 5 international licensed stores. At quarter-end, the company operated 99 international licensed stores across 16 countries. For fiscal 2015, the company plans to open 20 25 new stores. However, at the same time, it intends to reduce its North American store count by closing nearly 70 stores. Outlook For first-quarter fiscal 2015, American Eagle projects earnings per share in the band of $0.09 $0.12 compared with $0.02 earned in the same period a year ago. The guidance is based on the company s anticipation of mid-single-digit rise in comps. Equity Research AEO Page 4
American Eagle Holiday Comps Dip, Ups Q4 EPS View Jan 8, 2015 American Eagle reported a 2% decline in its consolidated comps for the 9-week period ended Jan 4, 2015. However, total sales over the holiday period inched up 1% year over year to $893 million, despite management s conservative fourth-quarter outlook on grounds of weak store traffic and a highly competitive retail backdrop. We observe that the company successfully battled the challenging retail environment by efficiently managing inventories and offering fewer discounts, leading to better-than-expected margins. Although overall comps for the holiday period slipped, the company delivered positive comps for December on the back of lesser promotions and its fresh assortments which were embraced well by customers. Moreover, analysts believe that December comps gained from a fall in oil prices and an improvement in unemployment rate, which boosted consumer spending. Following its better-than-expected holiday sales results, American Eagle had upgraded its earnings projection for the fourth quarter. Equity Research AEO Page 5
VALUATION Currently, American Eagle s trailing 12-month earnings is 27.0x compared with 23.7x, the industry average and 18.1x for the S&P 500. Over the last five years, American Eagle s shares have traded in the range of 11.3x to 28.5x trailing 12-month earnings. The stock is trading at a discount to the industry average, based on 2015 estimate and on a premium, based on 2016 forward earnings estimates. Our target price of $18.00 based on 21.4x 2015 EPS reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low American Eagle Outfitters Inc. (AEO) 20.3 18.1 11.2 12.6 27.0 28.5 11.3 Industry Average 30.0 17.6 12.7 13.9 23.7 N/A 17.3 S&P 500 16.5 15.4 10.7 14.5 18.1 18.4 12.0 Fossil Group Inc. (FOSL) 14.4 12.5 12.7 8.8 11.4 30.5 12.0 Genesco Inc. (GCO) 13.1 11.6 9.5 8.6 14.4 18.9 11.2 Urban Outfitters Inc. (URBN) 21.9 18.7 17.0 15.7 26.1 30.0 15.3 The Men s Wearhouse Inc. (MW) 18.1 12.1 16.5 9.0 20.0 25.1 11.0 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow American Eagle Outfitters Inc. (AEO) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 2.6 3.4 1.6 9.2 0.0 3.3 9.6 Industry Average 4.2 4.2 4.2-12.2 0.0 1.0 12.3 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research AEO Page 6
Earnings Surprise and Estimate Revision History Equity Research AEO Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AEO. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 16.0%, Neutral - 77.7%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AEO Page 8