american eagle presentation

26
CEYSU ERTURK FEIFEI XU SANDRA SERRA SYED MOHAMMAD ASHIQULLAH JIANI LIU YI-SHU TSAI AKIHISA NAKAZAWA Take Flight

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Page 1: American Eagle presentation

CEYSU ERTURKFEIFEI XUSANDRA SERRASYED MOHAMMAD ASHIQULLAHJIANI LIUYI-SHU TSAIAKIHISA NAKAZAWA

Take

Flight

Page 2: American Eagle presentation

COMPANY OVERVIEW

American Eagle Outfitters is one of leading apparel retailers in US

Targeting age: 15-25Sell to US (1977), Canada (2001) and 41 foreign countries

In 2006: introduced 3 new brands–Martin + OSA– Aerie– 77kids

As of Jan 2011 it operated 1086 stores– 929 American Eagle Outfitters stores– 148 Aerie stand-alone stores– 9 77kids stores

Page 3: American Eagle presentation

• 1977: AEO is launched

• 1991: AEO grows to 153 stores

• 1992: The company focuses on private-label merchandise

• 1993: AEO is incorporated

• 1994: AEO goes public

• 2001: AEO generates record net income of $105.5 million

• 2010: AEO goes global

KEY DATES

Page 4: American Eagle presentation

AEO YEARLY STOCK PRICE

Date Open High Low Close Volume Change (%)

11/25/2011 $12.87 $13.15 $12.76 $12.89 13222 -11.89%

12/31/2010 $14.60 $14.75 $14.49 $14.63 41750 -13.84%

12/31/2009 $16.96 $17.21 $16.88 $16.98 24771 81.41%

12/31/2008 $9.11 $9.48 $8.90 $9.36 55991 -54.94%

12/31/2007 $20.65 $20.99 $20.35 $20.77 31469 0%

Page 5: American Eagle presentation

INDUSTRY COMPETITORS

Retail industry: • Has the second growth rate among all the U.S

industries

• Two-thirds of the U.S. GDP come from retail consumption

• Getting hit hard because of recession

• Experiencing downward sales in the first part of 2009

• Upward trend in 2010 and 2011

Page 6: American Eagle presentation

COMPETITORS

For the past Five Years Jeans Price

(Avg unit Retail Price)Gross

MarginOperating

Margin

Abercrombie & Fitch(ANF) $80-$90 $35 60.09% 19%

American eagle(AEO) $50-$60 $20 41.66% 16%

Aeropostale (ARO) $30-$50 Cheapest 36.66% 10-12%

Page 7: American Eagle presentation

FORCASTING PERFORMANCE

Difficult task to undertake. Competition and the weather can change projected sales.

Growth is looked at from sales from the past several years for expectations for the current year.

Growth is estimated based on revenue for daily, weekly, quarterly, and yearly sales profits.

Page 8: American Eagle presentation

FORCASTING PERFORMANCEYear Revenue Percent Change EBITDA

2008

Feb $905,713 $870,227 May $640,302 -29.30% $547,899 Aug $688,815 7.58% $624,806 Nov $754,036 9.47% $708,728 Total $2,988,866

2009

Jan $995,725 35.05% $936,065 May $611,986 -38.54% $550,507 Aug $646,798 5.69% $584,366 Oct $736,011 13.79% $683,823

Total $2,990,520

2010

Jan $916,088 24.47% $869,049 May $648,462 -29.21% $698,750July $651,502 0.47% $558,215Oct $751,507 15.35% $610,373

Total $2,967,559

2011

Jan $920,463 22.48% $872,404April $609,562 -33.78% $524,875July $675,703 10.85% $584,915Total $2,205,728

Arithmetic Mean 1.02%

Page 9: American Eagle presentation

RISK CHARACTERISTICS

Risk traditionally is portrayed to be negative.

Based on Historical ReturnDiversified RiskCAPM Model

Based on Historical Return

YearPrice end

(E)Price Beginning

(B)End - Beginning

(E-B)Dividend (D) D+(E-B)

Return on AEO

2011 13.97 14.09 -0.12 0.11 -0.01 -0.00070972

2010 14.26 14.58 -0.32 0.2325 -0.0875 -0.00600137

2009 15.58 8.04 7.54 0.1 7.64 0.95024876

2008 8.35 19.9 -11.55 0.1 -11.45 -0.57537688

2007 17.98 27.61 -9.63 0.09375 -9.53625 -0.34539116

2006 26.61 15.18 11.43 0.062665 11.492665 0.75709256

Average 0.12997703

YEAR Return on AEO [R (AEO) - Average R (AEO)]2

2011 -0.00070972 0.017079027

2010 -0.00600137 0.018490125

2009 0.95024876 0.672845708

2008 -0.57537688 0.497524142

2007 -0.34539116 0.225974917

2006 0.75709256 0.393273885

SUM 1.825187804

 .  .    

Variance 0.36503756    

Standard Deviation 0.60418338 60%  

Diversified Risk

• Firm-specific risk can be reduced, if not eliminated, by increasing the number of investments in your portfolio.

• Each investment is a much smaller percentage of the portfolio, muting the effect (positive or negative) on the overall portfolio.

• Firm-specific actions can be either positive or negative. In a large portfolio, it is argued, these effects will average out to zero.

Take

Flight

Page 10: American Eagle presentation

RISK CHARACTERISTICS

Take

Flight

Capital Asset Pricing Model (CAPM)The CAPM Pricing model assumes that there are no transaction costs, all assets are traded, and investments are infinitely divisible.

Variance of actual returns around an expected return as a measure of risk is used

Measures the non-diversifiable risk with beta, which is standardized around one and translates beta into expected return:

Page 11: American Eagle presentation

BIOTTOM-UP

Unlevered Beta = Average Beta/1+(1-Average Tax Rate)*Average Market

Debt Equity Ratio

Bottom-up Beta = Unleverd Beta [1 - AEO Tax Rate* AEO Market Debt

Equity Ratio]

Step 1

Step 2

Damodaran’s Website

Average Beta 1.35

Average Tax Rate 20.86%

Average Market Debt Equity Ratio 15.8%

10Q

AEO Tax Rate 38.35%

Long Term Debt $15,938,000

Current Portion of Long Term Debt $137,023,000

Yahoo Finance Market Value of Equity $2,610,000,000

Total Debt Unleverd Beta AEO's Debt Equity Ratio

$152,961,000 1.20 5.86%

Bottom Up Beta1.24

βETA

Page 12: American Eagle presentation

WHY BOTTOM-UP BETA?

• Eliminate Standard Error

• Eliminate Problem of a changing Product Mix

• Compute from the company’s current Financial Statement

• Computed from the company's current financial leverage

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Flight

Page 13: American Eagle presentation

ESTIMATE COST OF CAPITAL USING BOTTOM-UP BETA

• Allow a comparison of different ways of financing its operations.

• Permit a company to determine its value of operations and evaluate the effects of alternative strategies.

• Cost of capital = cost of debt * market value debt ratio + cost of equity * market value equity ratio

Take

Flight

Page 14: American Eagle presentation

COST OF EQUITY

Risk free rate:5.28%

Market risk premium:6.03%

Cost of equity = Risk free rate + Bottom-up Beta * Risk premium

Cost of equity=12.78%

Take

Flight

Page 15: American Eagle presentation

COST OF DEBT

Pre-tax cost of debt:5.78%

Why using marginal tax rate(35%)?

Cost of debt = Pre-tax cost of debt * (1 – marginal tax rate)

Cost of debt=3.76%

Take

Flight

Page 16: American Eagle presentation

DEVELOP COST OF CAPITAL

• Weighted approach• Why using market value of debt and equity ratios?• Cost of debt:3.76%• Cost of equity:12.76%• Market value debt ratio:5.54%• Market value equity ratio:94.46%

• Cost of capital = cost of debt * market value debt ratio + cost of equity * market value equity ratio

• Cost of capital=12.28%Take

Flight

Page 17: American Eagle presentation

VALUE OF FIRM

• What is Terminal value?

• Step 1: EBIT(1-t) = 182,952.08

Expected Growth rate = 9.065%

Stable growth rate = 1.02%

Expected operating income in year 6 =$285,214.59

• Step 2: Return on capital = 27.07%

Expected reinvestment rate from year 5 = g/ROC = 3.65%

• Step3 : Terminal Value in year 5 = $3,415,953.8

Page 18: American Eagle presentation

VALUE OF FIRM

Terminal Value = $3,415,953.8

Value of AEO today = $3,237,743.74

YEAR Cash Flow

Current $237,372.78

1 $258,890.62

2 $261,531.31

3 $264,198.93

4 $266,893.76

5 $269,616.07

Page 19: American Eagle presentation

VALUING THE AEOEB

IT (1

-T)

YEARSCURRENT YEAR AFTER 5 YEARS

Year

1 to 5

Beyond 5 Years

Page 20: American Eagle presentation

High Growth Period

• Cost of equity hg = Risk free rate+ bottom up beta*( Risk premium)

5.28+1.24*(6.03) = 12.76%

• Cost of capital hg = (cost of debt*weight of debt)+ (cost of equity*weight of debt)

0.0376*(0.0554) +0.1276*(0.9446) = 12.26%

• Growth rate hg=ROC 2011 *average reinvestment rate over past four years

27.90*21.46 = 6.002%

Page 21: American Eagle presentation

VALUE OF FIRM

HIGH GROWTH PERIOD

Year EBIT(1-t) Reinvestment Rate Reinvestment FCFF PV

Current $237,372,778.50

1 $251,620,751.96 21.46% 53,997,813.37 197,622,938.59 176,042,339.30

2 $266,723,940.35 21.46% 57,238,957.60 209,484,982.75 166,231,166.19

3 $282,733,676.80 21.46% 60,674,647.04 222,059,029.75 156,966,788.33

4 $299,704,375.57 21.46% 64,316,559.00 235,387,816.57 148,218,731.82

5 $317,693,717.12 21.46% 68,177,071.69 249,516,645.43 139,958,221.06

SUM OF PV CASH FLOWS 787,417,246.70

Page 22: American Eagle presentation

Cost of equity sg = 5.28+1*(6.03) = 11.31%

Cost of capital sg = 0.0376*(0.0554)+0.1131*(0.9446) =10.89 %

Growth rate sg= 1.02%

Reinvestment rate sg = growth rate sg/ROC 2011 1.02% / 27.97 = 3.65%

STABLE GROWTH PERIOD

Page 23: American Eagle presentation

STABLE GROWTH PERIOD

• FCFF year 6= EBIT after taxes in year 5*(1+gowth rate sg)*(1- reinvestment rate sg) 317,693,717.12*(1+1.02%)*(1-3.65%) = $309,230,479.17

• Terminal value = FCFF year 6 / (cost of capital sg-growth rate sg)309,230,479.17/ (10.89%-1.02%) = $3,132,485,179

• PV of terminal value = 3,132,485,179/(1+12.26%)^5=$1,757,065,354.94

COST OF CAPITAL hg

Page 24: American Eagle presentation

VALUATION

• Value of Operating Assets PV cash flow during hg+ PV of terminal value 1,757,065,354.94 +787,417,246 =$2,544,482,601

• Value of the Equity Value of operating assets + Cash and marketable securities – Debt 2,544,482,601 + 734,695,000.00 - 528,927,000.00 = $ 2,750,250,601.64

Page 25: American Eagle presentation

• Value of the equity =$ 2,750,250,601.64• Shares outstanding is 194,900,000 Stock price =$ 2,750,250,601.64/ 194,900,000

$14.11 $12.99

OUR VALUE LAST 3 MONTHS AVERAGE TODAY

VALUATION

Page 26: American Eagle presentation

Take

Flight

Thank

You