AEO Market Research & Analysis Report
Updated Apr 22, 2014

Growth and Balance Sheet

The company reported a net income of $10.5 million, or 5 cents diluted earnings per share, for the fourth quarter of fiscal year 2013 ending February 1. That's down from a net income of $94.8 million, or 47 cents diluted earnings per share for the same quarter last year. EPS included an asset impairment and asset write-offs of 22 cents per share, also this year’s fourth quarter was shorter for a week in comparison to the previous year fourth quarter. Diluted EPS for the fiscal year 2013 was 43 cents compared to EPS of $1.16 for the previous fiscal year. Revenues for the fourth quarter were $1,042 million, slightly down from $1,117 million for the same quarter last year. Comparable store sales decreased 7% over the same quarter last year. AE total brand comparable sales was down by 7% in comparison to the same quarter last year; aerie total brand comparable sale was down 4%; and AEO Direct comparable sales were up 8%. AEO opened 64 stores, including 39 factory stores, six stores in Mexico and seven stores in China and Hong Kong. Gross margin for the quarter was 29.38%, down from 41.16% for the same quarter last year, primarily due to higher promotional activity and the deleverage of rent on negative comparable sales. Operating profit margin for the quarter was 2.30% compared to 12.53% for the same quarter last year. AEO forecasted first quarter EPS of fiscal year 2014 are expected to be from -1 cents to 0 cents, compared to actual EPS of 14 cents for the first quarter of fiscal year 2013. The financial strength indicators of the company look satisfying at the moment. The current ratio of 2.22 is better than the industry average of 1.75. Moreover, the quick ratio of 1.52 is also better than the industry average of 1.02. In terms of efficiency, the asset turnover ratio of 1.92 is better than the industry average of 1.42; also, the inventory turnover ratio of 7.03 is better than the industry average of 3.05; and the ROE of 6.95% is lagging behind the industry average of 18.2%. 

Valuation

AEO PE stands at 25.53 above the industry average of 20.55, and above the stock market average represented by the S&P 500 average of 17.90. The company is currently trading above maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 12.08x to 33.48x trailing 12-month earnings. AEO's current Price/Sales of 0.64 is same as the average of its industry of 0.64. AEO’s head to head comparison to its main competitors shows that the company has one of the lowest gross margin, and one that is also below the industry average. However, the operating margin is one of the highest results when compared to the selected competitors’ achieved margins, and close to the industry average. AEO, along with all of the selected peers, has achieved negative quarterly revenue growth due to the bad weather during the quarter. AEO trades at middle range P/E ratio in comparison to the selected competitors, and at a comparable P/S ratio. With the highest (worst) PEG ratio the price might be up for further downgrade. AEO’s twelve trailing months EBITDA is $355.97 million, above the industry average of $164.07 million. The stock is currently trading close its intrinsic value of $10.84, this suggests that the stock is currently correctly valued at these levels. The beta of 0.84 implies lower volatility of the stock with respect to the S&P 500. AEO has not shown favorable earnings consistency over the last five years. Moreover, the company earnings have decreased by 17.35% over the last five years. The current quarter earnings in comparison to the same quarter last year have declined by 89.36%. The company currently does not have any outstanding debt. AEO’s current price levels are above the maximum level, 47.89% below the 52 week high of $21.07, and the technical analysis give a neutral to negative view of the stock. The majority of the analyst ratings are hold. AEO has an average 6 year dividend payout ratio of 52% and twelve months trailing annual dividend yield of 4.60%.

About AEO

American Eagle Outfitters, Inc., together with its subsidiaries, operates as an apparel and accessories retailer in the United States and Canada. The company’s retail stores offer denims, sweaters, fleece, outerwear, graphic T-shirts, footwear, and accessories for 15 to 25-year old men and women under the American Eagle Outfitters brand name; and intimates and personal care products for girls under the aerie brand name. As of February 2, 2013, it operated 893 American Eagle Outfitters stores and 151 aerie stand-alone stores, as well as 49 franchised stores in 13 countries. The company also sells and ships merchandise through its e-commerce Websites, including ae.com and aerie.com to 81 countries worldwide. American Eagle Outfitters, Inc. was founded in 1977 and is headquartered in Pittsburgh, Pennsylvania.

Competitor Comparison

American Eagle Outfitters, Inc. (NYSE: AEO) N.V.

Highlights

American Eagle Outfitters, Inc. is a specialty retailer that operates in the United States and Canada, and online at ae.com. The stock closed yesterday’s trading session at $10.98. In the past year, the stock has hit a 52-week low of $10.83 and 52-week high of $21.07. The intrinsic value of the stock is close to the current price. AEO has a market cap of $2.13 billion and is part of the Services sector.

• Strong brand with no debt outstanding         
• Multi-channel operations
• Aerie is a niche in the underserved teen intimate apparel market  

• Weak competitive position

AEO Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. AEO's 52 week high is $21.07, current price is $10.98, is 47.89% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.  The company has a P/E ratio of 25.53 the average industry P/E ratio is 20.55 and is above the S&P 500 P/E ratio of 17.90.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 19.38% of AEO stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

AEO is trading in the range of $10.83 - $13.09 in the past 30 days. The stock has been showing support around the level of $11 and resistance in the $20 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 30.02. The stock is in a bearish trend ever since September 2012. As can be seen from the chart on page 1, the trend continued well into 2013 and 2014. Currently the stock is coming close to the psychological level of $10 which proved to be a strong support level back in September 2011. If the stock goes below that support level, it would be a definitive sign that the bullish trend is not over. However, if the support stands it might be a good idea to buy the stock at these low levels. Our indicators give a neutral to negative view of AEO.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 2 Buy, 5 Outperform, 17 Hold, and 2 Underperform.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. AEO’s annual EPS for the last 5 years were 0.81, 0.70, 1.48, 1.20 and 1.01 this type of earnings action is not favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry.  AEO’s currently does not have any outstanding debt.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. AEO’s EPS growth for this quarter relative to the same quarter a year earlier is -89.36%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. AEO’s annual earnings growth rate over the past five years is -17.35%, below our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.