Financial Analysis of American Eagle Outfitters - Term Paper Example

BUS 360 W- Independent Research Project Fall Financial Analysis of American Eagle outfitters, Inc. and ‘The Gap, Inc Table of Contents Section 1 – Introduction 2 Section 2 - Company Specific Focus 4 SWOT analysis - American Eagle Outfitters, Inc. 4 SWOT analysis - The Gap, Inc., 5 Section 3 - Summary Financial Statements 7 American Eagle Outfitters, Inc. Financial Statements 8 The Gap, Inc. Financial Statements 9 Cash Flow (All numbers in thousands) 9 American Eagle Outfitters, Inc. Financial Ratios 10 Graph showing three-year trend in the Financial Ratios of American Eagle Outfitters, Inc. 10 The Gap, Inc. Financial Ratios 10 Graph showing three-year trend in the Financial Ratios of The Gap, Inc. 11 Section 4 – Financial Analysis Commentary 11 Section 5 – Conclusion 13 Works Cited 15 Section 1 – Introduction The textile and apparel industry has been thriving across the globe because of its dynamic trend that necessitates the invariable change of fashion. The fashion trends of the 21st century are different from those of the previous centuries because of changing and fusion of different cultures. The contemporary world is a global village with a vibrant fashion and apparel industry that is unique in the various countries. Apparel comprises of clothing, shoes, and jewelry while fashion is the design and trend with which the utility of such items change over time (Arrigo 178). This paper takes an in-depth analysis of the fashion and apparel industry, conducting a financial analysis on the American Eagle Outfitters, Inc. and The Gap, Inc in order to determine their financial performance and industry prospects. The apparel industry is vast in the sense that it has many product lines and market segments just as it has threats and opportunities. Textile and apparel has many distributors including wholesalers, retailers, and importers. The service providers in the textile and apparel industry include law firms, consultants, freight forwarders, logistics providers, and customs brokers. Academic institutions and promoting agencies also play a primary role in ensuring the smooth operation of the apparel industry, particularly because they provide crucial services to textile suppliers and manufactures (Gap, Inc.). The apparel market of the United States is the biggest globally, making a third of the global textile and apparel market. Since both American Eagle Outfitters, Inc. and The Gap, Inc. are U.S. based apparel companies, they contribute a huge chunk of textile products to the market. Currently, the apparel market of the U.S. fetches a market value of over U.S. $300 billion. In 2010 alone, the manufacturing sector of the apparel industry provided employment to over 100,000 people. Although the vast majority of the apparel conglomerates have their headquarters in the United States, it is worth noting that Asia hosts most of their manufacturing plants. In particular, China takes the largest percentage of the manufacturing plants of most U.S. based apparel conglomerates. China exported 9.738 million units of apparel to the United States, valued at about U.S. $30 billion. With its headquarters in Beaverton, Oregon, Nike is the leading clothing company globally. The company employs over 44,000 people and has a revenue base of about U.S. $25 billion. Other American-based companies such as The Gap, Inc. and American Eagle Outfitters, Inc. have also invested heavily in the apparel market. The United States clothing market is dynamic and only the most competitive, of the companies, will survive harsh economic storms. New technology and trends have also changed the dynamics of the apparel market, especially to apparel conglomerates with a global presence. The Gap, Inc. focuses on retail and it has its headquarters in San Francisco, California while American Eagle Outfitters, Inc. has its headquarters in Pittsburgh, Pennsylvania. The U.S. apparel industry has many opportunities for growth just as it faces a number of challenges. Since, China, Vietnam, Honduras, and Thailand are the major exporters of textile and apparel to the United States, the U.S. faces the threat of noncooperation from its Asian trading bloc in case of misunderstanding. Nonetheless, the United States enjoys many opportunities in the apparel market since it has some of the best performing and largest apparel conglomerates in the world. It implies that the United States controls the global apparel industry with companies such as The Gap, Inc., and American Eagle Outfitters, Inc. being in the front line (Reuters). Section 2 - Company Specific Focus SWOT analysis - American Eagle Outfitters, Inc. Since American Eagle Outfitters Inc. operates in a competitive market where some of the leading companies in the apparel market thrive, it faces opportunities and threats in equal measure. It implies that the enterprise has to maximize in strength in order to minimize the adverse financial impacts of its weaknesses. The SWOT analysis involves the financial analysis of American Eagle Outfitters Inc. in terms of strengths, weaknesses, opportunities, and threats (American Eagle Outfitters, Inc.). American Eagle Outfitters Inc. has a number of strengths, including a strong brand and absence of minimal debt, which have kept the company on the top of its top rivals. In addition, the company has numerous stores all over America with at least one store in the major cities. American Eagle Outfitters Inc. retails apparel that is unisex in the sense that they appeal to both men and women. In this regard, the company has a strong customer loyalty, and they customers tend to stick with the firm even if they move to other cities. This strength, coupled with e-commerce that American Eagle Outfitters Inc. has adopted, enabled the company to ship its clothing products to over 40 countries worldwide (Arrigo 178). Besides having a weak competitive advantage, American Eagle Outfitters Inc. has many other weaknesses. Since American Eagle Outfitters Inc. charges higher rates that most of its rivals like Express, it is unable to attract and retain as many customers as its competitors. Moreover, the target group of American Eagle Outfitters Inc. is the young people who may not have enough disposal money like their old counterparts to purchase the expensive apparel. The company caters only for the 25 to 30 years old age bracket although they have expansion plans. American Eagle Outfitters Inc. focuses on highly populated areas such as cities of Canada and the U.S. thus forsaking their rural and suburb customers (Reuters). Despite the numerous weaknesses, American Eagle Outfitters Inc. enjoys many opportunities that are likely to boost its expansion and revenue significantly in the next five years. The demand for fashionable apparel and footwear keeps on growing in the United States thus providing American Eagle Outfitters Inc. with limitless opportunities, both in financial and non-financial terms (American Eagle Outfitters, Inc.). Every organization faces some level of threat, and American Eagle Outfitters Inc. is no exception. Intense competition is one of the major threats that American Eagle Outfitters, Inc. faces, especially from Nike, Express, and other top performing apparel companies based in the United States. Fitch & Abercrombie have sued American Eagle Outfitters Inc. three times in the past for copyright violations, but American Eagle Outfitters Inc. has emerged victorious. Additionally, the retail of a similar product at low prices by competitors paint a dim picture, as far as the financial projections of American Eagle Outfitters Inc. are concerned (American Eagle Outfitters, Inc.). SWOT analysis - The Gap, Inc., The SWOT analysis shows positive and negative factors that affect the company in its operation. The factors may be either internal or external, depending on their nature. In this respect, the strength and weaknesses are the internal factors while the opportunities and threats are the external factors that The Gap, Inc. is predisposed to in its retail operations. Conversely, the strengths and opportunities are the positive aspects while the weaknesses and threats are the negative aspects that limit the financial prospects of The Gap, Inc (Gap, Inc.). The Gap, Inc. has many high points because of its reputation that it has built and protected over the years. In essence, the company has numerous opportunities for franchising because its brand is recognized globally. This strength has ensured that The Gap, Inc. maintains its strong margins unlike some apparel firms that have dwindling returns. Its online presence, coupled with opening of new stores, has diversified the market for the company, ensuring that it attracts and retains global clientele. The Gap, Inc. has a strong brand and strong financial portfolio, both of which are key factors that determine the financial position of the company in the near future (Gap, Inc.). When it comes to weaknesses, it is worth noting that The Gap, Inc. has heavily underutilized its assets. Despite the online participation by the company, it still has low global presence as compared to other companies in the apparel industry like Nike. Besides, The Gap, Inc. has been heavily dependent on third party vendors, the majority of whom operates outside the United States. Since the company sources most of its apparel from China, it is highly susceptible to the foreign policy of China. Another weakness of the business is that most of its customers are old people. This weakness is financially adverse in the sense that the old people do not embrace fashion that keeps on changing over time (Reuters). The Gap, Inc. has many opportunities that widen its financial horizons despite the weaknesses that it has exhibited in the past. The company’s shift towards apparel for plus size women is an opportunity to the company considering the dieting habits of many Americans who are becoming obese by the day. The falling price of cotton provides an ideal opportunity for the company to exploit the industry. In addition, online trends have been improving for the company, especially for kids wear, making the company one of the largest suppliers of kids wear in the United States (Gap, Inc.). Competition for established companies remains a significant threat to the survival and growth of The Gap, Inc., especially from Nike and American Eagle Outfitters, Inc. The availability and growing demand for counterfeit products have affected the profits and the image of The Gap, Inc. adversely. With a business approximated to be $8.2 billion, counterfeit goods have so far lead to financial loss by The Gap, Inc. to the tune of $200 in revenue. In addition, the firm has also laid off more than 750,000 of its employees because of the growing demand and availability of counterfeit products. Rising labor costs in some countries and slow economic recovery have persistently affected the revenues earned by The Gap, Inc. All these threats limit the financial success of the company because they predict an awkward financial position of the company if the company fails to take mitigating measures (Wahba). Section 3 - Summary Financial Statements Income statement, balance sheet, and cash flow statement are the major predictors of the financial position of the company. They give accurate projections of the company’s future based on its financial status. Comparing the financial statements of the two companies reveals a distinct scenario in the sense that both companies have been improving for the last three fiscal years. From the financial statements, one can deduce that The Gap, Inc. is financially solvent than American Eagle Outfitters, Inc. It is so especially because of its higher net income, total tangible assets and change in cash (Wahba). American Eagle Outfitters, Inc. Financial Statements Income Statement (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Total Revenue 3,305,802   3,475,802   3,120,065   Gross Profit 1,113,999   1,390,322   1,144,594   Operating Income or Loss 141,055   394,606   269,335   Net Income 82,983   232,108   151,705   Source: Yahoo Finance Balance Sheet (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Total Current Assets 923,560   1,141,800   1,287,488   Total Assets 1,694,164   1,756,053   1,950,802   Total Current Liabilities 415,478   435,902   405,401   Total Liabilities 527,986   534,866   533,951   Total Stockholder Equity (Tangible Assets) 1,166,178   1,221,187   1,416,851   Source: Yahoo Finance Cash Flow (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Net Income 82,983   232,108   151,705   Total Cash Flow From Operating Activities 229,856   499,671   278,137   Total Cash Flows From Investing Activities (195,365) (190,650) (76,701) Total Cash Flows From Financing Activities (116,526) (494,555) (100,726) Change In Cash and Cash Equivalents (90,186) (210,426) 51,952   Source: Yahoo Finance The Gap, Inc. Financial Statements Income Statement (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Total Revenue 16,148,000   15,651,000   14,549,000   Gross Profit 6,293,000   6,171,000   5,274,000   Operating Income or Loss 2,149,000   1,942,000   1,438,000   Net Income 1,280,000   1,135,000   833,000   Source: Yahoo Finance Balance Sheet (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Total Current Assets 4,430,000   4,132,000   4,309,000   Total Assets 7,849,000   7,470,000   7,422,000   Total Current Liabilities 2,445,000   2,344,000   2,128,000   Total Liabilities 4,787,000   4,576,000   4,667,000   Total Stockholder Equity (Tangible Assets) 3,062,000   2,894,000   2,755,000   Source: Yahoo Finance Cash Flow (All numbers in thousands) Fiscal Year (FY) Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Net Income 1,280,000   1,135,000   833,000   Total Cash Flow From Operating Activities 1,705,000   1,936,000   1,363,000   Total Cash Flows From Investing Activities (624,000) (844,000) (454,000) Total Cash Flows From Financing Activities (1,004,000) (1,481,000) (602,000) Change In Cash and Cash Equivalents 50,000   (425,000) 324,000   Source: Yahoo Finance American Eagle Outfitters, Inc. Financial Ratios Period Ending: 2/1/2014 2/2/2013 1/28/2012 Current Ratio 222% 262% 318% Quick Ratio 152% 186% 227% Cash Ratio 103% 145% 184% Gross Margin 34% 40% 37% Operating Margin 4% 11% 9% Pre-Tax Margin 4% 12% 9% Profit Margin 3% 7% 5% After Tax ROE 7% 19% 11% Graph showing three-year trend in the Financial Ratios of American Eagle Outfitters, Inc. The Gap, Inc. Financial Ratios Period Ending: 2/1/2014 2/2/2013 1/28/2012 Current Ratio 181% 176% 202% Quick Ratio 102% 101% 127% Cash Ratio 62% 64% 89% Gross Margin 39% 39% 36% Operating Margin 13% 12% 10% Profit Margin 8% 7% 6% Pre-Tax Margin 4% 12% 9% After Tax ROE 42% 39% 30% Graph showing three-year trend in the Financial Ratios of The Gap, Inc. Section 4 – Financial Analysis Commentary Although the profit margins of the two companies have improved over the last three years, it is worth noting that The Gap, Inc. has recorded more profit margins than its rival has. Perhaps its franchising opportunities have enabled it to collaborate with more companies and retailers across the globe. In essence, The Gap, Inc. has performed exceptionally well virtually in all financial aspects than American Eagle Outfitters, Inc. perhaps because of its earlier establishment (Wahba). One of the leading players in the apparel industry, particularly within the United States, American Eagle Outfitters Inc. has enjoyed high liquidity ratios that include current, cash, and quick ratios. Since the company concentrates on retailing various clothing lines as opposed to selling at wholesale price, it has managed to suppress its weaknesses. The company has primarily achieved growth by capitalizing on it strengths that include the strong brand. The strong brand has lifted the company to the extent that it has enjoyed smooth operation over the years without incurring huge debts like its counterparts in the United States. Perhaps one of the worrying trends about American Eagle Outfitters Inc. is that its current, quick, and cash ratios have been on the decline over the past three years. Although its current ratio has declined significantly, the company can meet its cash obligations, making it to be debt-free. Its strong brand attracts many online shoppers who see the value in the company despite its dwindling financial position. Additionally, the profit margins, returns on equity and after-tax profits of American Eagle Outfitters Inc. have stagnated at below 50% over the years. Intense competition weighs heavily on the company and its chances of expansion in the near future are quite slim. Its weak competitive position has made it to meet its liquid obligation without nay growth whatsoever. However, the company can capitalize on the growth opportunities occasioned by the growing demand for clothing and footwear in the United States (Yahoo Finance). The Gap, Inc. has done fairly well in the last three years considering that it has a competitive edge over many apparel companies in the United States. The company has more strengths than it has weaknesses. Besides, opportunities abound for the company that has little threats in its operation especially going by the competitive nature of its brand and mode of operation. The Gap, Inc. has ensured its growth in liquidity ratios through franchising whereby it have been actively in collaboration with online stores and other stores owned by various companies. Not only has its current ratio grown at an unprecedented scale, but its profit margin has also increased gradually over the last three years. The company has also sustained a gross margin of about 100% since 2013 because it ceases opportunities that arise. The Gap, Inc. has since expanded globally to japan, China, France, and the United States (Gap, Inc.). Perhaps the reason The Gap, Inc. experienced a slight decline in its cash, current, and quick ratios in mid-2013 was because it started experiencing low productivity in 2011. The company over-relied on outside vendors, most of whom took advantage of the situation to overprice their products without any responsibility to the company. Over 1000 vendors work and in hand with The Gap, Inc. in order to ensure that all the retail outlets of the company are in full operation. The vendors, who are mainly based in china, produced about 99% of the merchandise that The Gap, Inc. sold in 2011. This major weakness by the company affected its liquidity ratios adversely. The company, however, jumped on the opportunities available, like the falling prices of cotton, to revamp its business. The company achieved its overall objective of increasing sales amid considerable decline in consumer spending apparel in both Europe and America (Reuters). Section 5 – Conclusion American Eagle Outfitters, Inc. has less income for its expansion and probable capture of new market. In this regard, the company has a financial weakness to compete with its already established rivals. On the other hand, The Gap, Inc. has an impressive After-Tax and Return on Equity (ROE), meaning that it is better positioned to attract more investors and outsourcers. It will translate into more profit margins than its competitors within the apparel industry will. The Gap, Inc. is the company to watch in the next five years because it has capitalized on its strengths and exploited most of its opportunities in order to stay competitive in the dynamic apparel industry (Yahoo Finance). If I were a common stockholder, I would prefer The Gap, Inc. to American Eagle Outfitters, Inc. because The Gap, Inc. would provide the highest financial reward over the next five years. In essence, The Gap, Inc. has a higher liquidity ratio in the sense that it has enough assets and cash to be able to meet its financial obligation whenever need arises. Besides, the profit margin of The Gap, Inc. is higher than that of American Eagle Outfitters, Inc. The implication of this statistic is that American Eagle Outfitters, Inc. will provide less financial rewards than The Gap, Inc. because the amounts of financial rewards that common stockholders receive depend on the profit margins. Although the gross margin of the two companies remains relatively the same over the three-year period, The Gap, Inc. makes a remarkable improvement in its liquidity ratios. Between 2012 and 2013, the current ratio, cash ratio, and quick ratio of American Eagle Outfitters, Inc. decline significantly implying that the company’s liabilities were increasingly outweighing its cash, assets, and inventories. It, therefore, means that American Eagle Outfitters, Inc. is unlikely to perform well over the next five years considering that since the massive decline its liquidity ratio has stagnated. The Gap, Inc. will be the best alternative in this regard. A common stockholder will reap more financial rewards in The Gap, Inc. than in American Eagle Outfitters, Inc. Works Cited "American Eagle Outfitters, Inc. SWOT Analysis." American Eagle Outfitters, Inc. SWOT Analysis (2014): 1-8. Business Source Complete. Web. 2 Dec. 2014. "Datamonitor: American Eagle Outfitters, Inc." American Eagle Outfitters, Inc. SWOT Analysis (2009): 1-9. Business Source Complete. Web. 2 Dec. 2014. "The Gap, Inc. SWOT Analysis." Gap, Inc. SWOT Analysis (2014): 1-9. Business Source Complete. Web. 2 Dec. 2014. Arrigo, Elisa. "Corporate Responsibility Management In Fast Fashion Companies: The Gap Inc. Case. “ Journal Of Fashion Marketing & Management 17.2 (2013): 175-189. Business Source Complete. Web. 2 Dec. 2014. 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