American Eagle Outfitters (AEO)

TMF1000 (99.07) Submitted: 9/11/07 8:34 AM : Start Price: $22.83 AEO Score: -14.81

I like retail stocks, they are easy to understand, often trade in predictable and exploitable seasonal patterns and they make up a large nice chunk of the United States’ GNP. The most difficult to predict retail companies are those that depend on apparel sales that depend so much on fashion whims.

Many things can affect the retail environment. Oil prices are high and that feeds inflation, not just because gas prices go up, but fuel bills go up and the cost of manufacturing goes up which often translates to higher end products costs, not to mention so many other products made with oil, such as plastics. The average price of a home nationally slid to $230,200, down 0.6% from a year ago. This decline was the 12th in a row which is a record for the industry. The problem with lower home values is that as house values go down, people feel poorer as their home is often their main and most valuable asset; they are less likely to spend or at least put off spending until it becomes more necessary. Many retail companies are feeling the pinch, even some of the better names.

American Eagle Outfitters has reported 14 consecutive quarters of record earnings and revenues, yet its price is down from 33% from its high. The Company has no debt and about $634 million in cash. The PE is a very low 12.7 and they are trading at a Price to sales ratio of 1.52. These are nice valuations for a growing retail company with no debt.

Perhaps investors are concerned about their flagship stores concept maturing. Generally things start slowing as a concept passes the 750 store mark, but the AE stores are still growing well producing record earnings and sales. Their overall per-square foot sales have reached $540 on a trailing 12 month basis, up from $524 in fiscal 2006.

They just reported August sales. Their revenues came in at $311.3 million up 13% from $276.6 million last year; same store sales were up 9%. The company reiterated their third quarter guidance of $0.47 to $0.48 compared to $0.44 last year.

They have had a jump in capital expenditures, as they expand two new concepts, Aerie and MARTIN + OSA, and they build their new headquarters and expand their distribution center in Kansas. In the years to come this number will shrink again. In the meantime, they have plenty of cash and cash flow to continue to buy back shares which they have been doing aggressively.

The Aerie concept is being expanded aggressively and will be accretive to earnings this year. However, they expect the smaller M+O concept will cost them about $0.15 to $0.17 for the year. They are slowing their expansion plans for them and introducing the concept in smaller markets which will cut costs and hopefully make them profitable. The holidays will be a good test for both the new concepts.

It is that time of year again, when back to school spending begins and we are not too far from the holidays. Even when discretionary spending is tight, the holidays tend to make the purse strings loosen a bit. Some companies may not respond to the holidays as much this year, but American Eagle stock price should do well for many reasons – Great balance sheet, very low PE and PS multiples, a growing concept with 14 consecutive quarters of reporting record earnings and sales, and they just reported a very good August sales report that should bode well for December. If back to school sales are doing well, it means that fashion whims have not changed and that bodes well for AE at holiday time.

Tightening consumer spending can hurt many retailers, but sales and earnings are both going up for AE and every quarter that this happens brings the TTM earnings up and their PE down even further. A 12.7 PE ratio for a company with such excellent numbers is very good and if investors don’t recognize that now, they will.

tom e

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