Finance of American Eagle Outfitters - Research Paper Example

? Finance Table of Contents Introduction 3 Distribution analysis 3 2. Market analysis 6 3. Financial analysis 11 Fig 9: Efficiency Ratios 11 Liquidity ratios 12 Source: (Henry 8) 12 Profitability ratios 12 Source: (Henry 8) 13 Technical Analysis 13 Source: (Henry 9) 14 Risk analysis through Alpha and Beta testing 14 4. Prediction 15 Conclusion 16 Name of the Student Name of the Professor Subject Date Introduction The research report presents a general study and evaluation of the performance of an American company called American Eagle Outfitters (Bethel 20). The performance of American Eagle Outfitters is evaluated using four different types of analysis which is distribution analysis, marketing analysis, performance analysis and subsequent projection of the results for the future. 1. Distribution analysis American Eagle Outfitters (AEO) has got outlets in USA as well as in Canada. All total there are more than 900 stores in and around USA and Canada. There are more than 150 stand alone stores in USA. The compnay has presence in more than 76 different international countries. AEO produces its own products and also sells them under the same brand name. Although the products itself may have different brand name but it comes from the same fashion house. The supply chain of AEO is a two level process only. Thus, the number of intermeidaries are comparatively low. The raw matrials are sourced from 15 different suppliers and the 5 different manufacturers produce the final products. The products are shipped to the warehouses (Bethel 24). They remain in the warehouse till new order for delivery are received. The products are then shifted to the distribution centre and from the distribution centre to the airports and ports. Most of the time the products are shifted through the ports. This is because of the reason that the waterway offers the most efficient and cost effective way to transport the goods. Once the goods reach the ports, then the goods are trasported from the ports to the distribution centre (Alchain 780). The manufacturing centres are present in Pittsburgh, in USA. The goods are sent using both railway and roadway. The outlets are spread all across the States. As mentioned there are about 150 stand alone shops. The stand alone shops deal with American Eagle Outfitters products only (Betty 602). These outlets have large holding capacity of apparel products. So the products are stored on season basis. The small shops or the multi brand shops are supplied with products on a monthly basis. The stand alone shops sometime also act distribution centres for the smaller outlets or the multi brand shops. Fig 1: Distribution system Source: (Betty 607) The following diagram gives a schematic view of the supply and distribution system of AEO. The orders are processed and then sorted in order of the importance and delivery date. Then the inventory is assesed to find out how much additional orders need to be put with the manufacturers to suffice the demands (Modigliani 262). The products are then packed and kept ready to be shifted to the distribution centres in case of inland distribution (Boyd 20). If overseas distribution is involved then the products get shifted directly from the warehouses to the airports and the ports, for airlifting and transportation through waterways. Fig 2: Value chain Source: (Boyd 24) 2. Market analysis USA has one of the largest apparel market in the world. USA alone constitutes 28% of the total global market. The market value of the USA apparel is USD 331 B. The apparel industry employes about 105, 457 people on an average basis. Although the percentage share of people employed by the USA apparel market is quite small in comparison to the rest of the world (Boyd 30). This is because of the reason that the the percentage share denoted by USA in terms of employment size is significantly small in comparison to the huge percentage share (28%) in terms of market value. The market share is analysed by denoting the total value of all the apparels sold in each quarter as well as by segregating the market into mens, boys, women and girls (Boyd 35). Fig 3: Analysis of the total sales value in each quarter Source: (Alchain 780) The total sales value in year 2012 shows a gradual increasing in the beginning followed by gradual decreasing trend. The sales value showed gradual increase, although it decreased gradually towards the end of the year. Fig 4: Analysis of the total value in men’s and boy’s suits Source: (Alchain 780) The total sales value of the men’s and boy’s suit showed a gradual increase in the first quarter although the same exhibits a decreasing trend towards the end of the quarter. Fig 5: Analysis of the total value of the men’s and boy’s bottom Source: (Henry 2) A steady increase is found in the total sales value of men’s and boy’s bottoms. Fig 6: Analysis of the total value of the men’s and boy’s other garments Source: (Henry 3) The analysis of the total sales value of Men's and boys' other garments indicates that the sales value increased in second quarter bit it decreased gradually towards the end of the fourth quarter. Fig 7: Analysis of total sales value of the women’s and girl’s bottom Source: (Henry 5) The total sales value of women’s and girl’s bottom is significantly more in comparison to the sales value for the same category of clothing for men and boys. Fig 8: Analysis of the market share Source: (Henry 6) The market shares of the competing firms are denoted by the market capitalization of the competing firms. The market shares of the competing firms are more or less equal to the average market capitalization value. 3. Financial analysis The financial analysis is performed by calculating efficiency ratios, liquidity ratios, profitability ratio analysis and technical analysis. The other types of analysis are risk analysis. Fig 9: Efficiency Ratios Source: (Henry 7) The day’s sales outstanding are found to be stable. This also indicates that AEO maintained a strict policy on credit sales and credit turnover cycle. The day’s inventory is found to have increased starting from 2004 to 2013. The payables period indicates the number of days taken to pay the creditors. The payable period has increased substantially. This indicates that the company took more number of days to pay the creditors. The cash conversion cycle has increased substantially starting from 2004 to 2011. The receivable turnover has increased substantially, indicating that the company increased the due payment period of the debtors (Dhalla 110). Liquidity ratios The liquidity ratios indicate that the company has always maintained stable liquidity. This is evident from the fact that current ratio, quick ratio, financial leverage, and debt-equity ratios have all remained stable through the years (Henry 4). The liquidity ratios as a whole indicate that the position of the company is quite stable. Fig 10: Liquidity Ratio Source: (Henry 8) Profitability ratios Most of the profitability ratios like net margin ratio return on assets, return on equity and return on invested capital indicate that AEO has suffered deterioration on the revenue level as well as increase in operational expenses. The profitability ratios as a whole indicate that the company is not able to increase the sales revenue. Fig 11: Profitability Ratio Source: (Henry 8) Technical Analysis The technical analysis gives indication of the historical performance of AEO. The graph presented below indicates the performance of AEO in comparison to other well known market indices like S&P 500 and others. The analysis indicates that that the share performance of AEO has been volatile for the last 20 years. Although other major indexes like S&P 500, BKE and TLYS have shown the same volatility like AEO. On a more general note it can be concluded that share price activity of AEO is quite impressive till 2007 although it deteriorated after the year 2007 and still has not regained yet. Fig 12: Share price activity Source: (Henry 9) Risk analysis through Alpha and Beta testing Table 1: Risk Analysis   American Peer Average   American Peer Average   American Peer Average   American Peer Average Return On Equity 18.53% -7.38% Shares Owned by Insider 19.38% 5.51% EBITDA 559.04 M 1.28 B One Year Low 16.6 24.17 Return On Asset 15.02% -8.60% Shares Owned by Institutions 76.30% 13.87% Net Income 248.04 M 475.29 M Earnings Per Share 1.10 times 2.25 times Profit Margin 6.39% 0.63% Number of Shares Shorted 5.44 M 2.61 M Cash and Equivalents 496.22 M 3.66 B Price to Earnings To Growth 1.28 times 0.34 times Operating Margin 12.49% -4.75% Price to Earning 15.27 times 28.76 times Cash per Share 2.58 times 5.07 times Beta 0.51 0.63 Current Valuation 3.37 B 33.77 B Price to Book 2.72 times 6.74 times Current Ratio 2.99 times 2.70 times Market Capitalization 3.25 B 12.63 B Shares Outstanding 192.67 M 350.01 M Price to Sales 0.95 times 8.75 times Book Value Per Share 6.27 times 15.81 times Total Asset 1.67 B 38.43 B Current Liabilities 347.14 M 11.97 B Revenue 3.45 B 9.8 B Cash Flow from Operations 423.71 M 757.82 M Retained Earnings 1.59 B 9.3 B Z Score 1.998 422.68 Gross Profit 1.39 B 7.6 B Short Ratio 2.40 times 1.67 times Working Capital 689.47 M 1.32 B       Probability Of Bankruptcy 38.01% 31.30% One Year High 23.94 36.73 Current Asset 1.04 B 13.29 B Source: (Henry 10) The above table gives an indication of the different types of risk factors. The cells which are marked yellow in color indicate the ones whose values are more than the values of the peer. While the values marked blue in color indicate the ones whose value are more than the peer average but in a detrimental way (Hill 580). 4. Prediction 3 different types of predictions are done; these are earnings estimation, revenue estimation, earnings per share trend, sales growth. The estimates indicate that the earnings will increase and will become 1.19 by 2015. The highest increase will be in case of revenue, where the estimated revenue will be 3.88B by 2015. The EPS are also estimated across 7 days, 30 days, 60 days and 90 days. The estimates for 7 days, 30 days, 60 days and 90 days will be 1.65, 1.65, 1.64 and 1.68 respectively (Kaufman 60). Table 2: Estimation Earnings Estimation Current Qtr. Next Qtr. Current Year Next Year Jul-13 Oct-13 Jan-14 Jan-15 Avg. Estimate 0.1 0.35 1.19 1.41 Low Estimate 0.1 0.21 0.9 0.9 High Estimate 0.11 0.44 1.32 1.65 Year Ago EPS 0.21 0.41 1.39 1.19           Revenue Estimation Current Qtr. Next Qtr. Current Year Next Year Jul-13 Oct-13 Jan-14 Jan-15 Avg. Estimate 719.25M 884.23M 3.42B 3.62B           Low Estimate 680.42M 810.00M 3.24B 3.26B High Estimate 727.95M 934.00M 3.55B 3.88B Year Ago Sales 739.68M 910.37M 3.48B 3.42B Sales Growth (year/est.) -2.80% -2.90% -1.70% 6.00%                     EPS Trends Current Qtr. Next Qtr. Current Year Next Year Jul-13 Oct-13 Jan-14 Jan-15 Current Estimate 0.1 0.35 1.19 1.41 7 Days Ago 0.21 0.44 1.44 1.65 30 Days Ago 0.21 0.44 1.44 1.65 60 Days Ago 0.21 0.44 1.45 1.64 90 Days Ago 0.24 0.45 1.49 1.68 Source: (Henry 11) Conclusion The distribution analysis, financial analysis and market analysis indicates that American Eagle Outfitters has strong growth prospects as well as strong revenue stream. The financial analysis indicates that the liquidity stat, profitability status and efficiency status of the company is equivalent to the industry average. The share price activity indicates that for the past one decade the share price of AEO is quite stable in comparison to the industry benchmarks. This also indicates that the stock is less volatile and thus presents a good buy. The predictions indicate that the lowest and highest value of EPS will be 0.9 and 1.1.9 respectively. The lowest estimated value of EPS is significantly more than the present EPS. This indicates that the company is offering higher earning in comparison to the price of the stock. If the stock is bought rite now then the stock can be sold later on. Thus it is advisable the stock is bought right away. A close look at the revenue generated in the past, present and future indicates that that the company American Eagle Outfitters will be able to suffice clear and debts and as well as the pay the shareholders and save for the business with enough margin. This indicates that the investors do not have allay any fears that the company will not be able to able to clear the payments and sues. This fact should be taken into confidence and a decision should be reached to make a sizeable investment in AEO. Work Cited Alchain, Demsetz. ‘‘Production, Information Costs and Economic Organization.’’ American Economic Review 6.1 (2012): 777-795. Print. Bethel, Liebeskind. ‘‘The Effects of Ownership Structure on Corporate Restructuring.” Strategic Management Journal 1.4 (2011): 15-31. Print. Betty, Jemison. ‘‘The Importance of an Integrative Approach to Strategic Management Research.” Academy of Management Review 6.4 (2006): 601-608. Print. Boyd, Robertson. ‘‘Confirmation, Semantics and the Interpretation of Scientific Theories.” The Philosophy of Science 9.3 (2010): 3-36. Print. Dhalla, Yuspeh. ‘‘Forget the Product-Life Cycle Concept.” Harvard Business Review 5.4 (2009): 102-12. Print. Henry, Hedley, ‘‘A Fundamental Approach to Strategy Development.” Long Range Planning 7.2 (2013): 2-11. Print. Hill, Snell. ‘‘External Control, Corporate Strategy and Firm Performance in Research Intensive Industries.” Strategic Management Journal 9.6 (2008): 577-590. Print. Kaufman, Englander. ‘‘Kohlberg Kravis Roberts & Co. and the Restructuring of American Capitalism.” Business History Review 6.7 (2012): 52-97. Print. Modigliani, Franco. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review 4.8 (2012): 261-97. Print. Read More