Player Avatar TMF1000 (99.71) Submitted: 9/8/2011 2:21:59 PM : Outperform Start Price: $9.09 AEO Score: -25.03

Caps price $10.94 giving them a 4% dividend yield.


Investing in retail isn’t always easy. I always felt the restaurant part of my portfolio far more stable and much easier to predict, but if you are right with retail the rewards can be very great. Something else I like about retail is the seasonal patterns. If a company shows sales strength, but poor stock price action, every often the holidays will give it the needed rebound and make for a good trade.

AEO has a very deep customer base. They are cheaper than leader ANF, so they can’t raise prices too much to compensate for higher commodity prices. But higher cotton prices should be a temporary problem.

They are financially strong. They have $515 million in cash and no debt. They reported TTM cash flow of $184.8 million or $0.94 per share down from TTM cash flow of $227.6 million or $1.12 last year. Sales grew 3.7% in the quarter which may signal a stabilization of the business which bodes well for the holiday season.

Last year, they paid out $183 million in dividends, but $0.50 per share was a special dividend paid in 2010. This year, excluding a special dividend their dividend obligations should be about $86 million. Since they are reporting about $184 million in TTM cash flow, the dividend should be very safe and they could even raise it or pay another special dividend. Presently their annual dividend is $0.44 which gives them a yield of 4%.

I think AEO is a good risk. I think they are developing businesses that will help them compete with others in their industry. And there are those in their industry that aren’t doing well and may disappear soon giving them more market to grab. I own ARO and ANF, but at the 4% yield, I think AEO would make a good addition to my portfolio. I think they are positioning themselves well for the holidays.

Member Avatar TMF1000 (99.71) Submitted: 5/7/2012 1:21:21 PM
Recs: 1

May 7, 2012

The Company believes their new lines are meeting changing trends. With cheaper cotton prices too, this could be a really good thing. The increased guidance and 17% first quarter same store sales, makes me think this could be the beginning of a good year for AEO.

In the fourth quarter, they experienced margin erosion, due to a spike in cotton prices. This year, cotton prices are down significantly and should improve margins starting in the second half of the year. This would be in time for the holiday quarter which interests me.

The Company has always had a strong balance sheet. They have $745.044 million in cash and no debt. They are paying a $0.44 per share dividend which gives them a present dividend yield of 2.18%. The PE ratio today is 26.18. If one uses the fiscal 2012 estimate, the PE falls to 17.37.

I think there is a chance they could beat estimates for 2012. Lower cotton prices should have worked its way through the inventory for the holidays which would improve margins.

At the end of fiscal 2006, AEO made $1.70. Gross margins were 48% and operating margins were 21%. Today gross margins are 35.7% while operating margins are 7.3%. Back in 2006, cotton prices were $0.59 per pound compared to $0.88 per pound today. AEO has raised prices to compensate for the higher cotton prices of last year which was over $2.00 per pound, so the comparisons are similar. In Fiscal 2006, they only had about $2.8 billion in annual sales compared to $3.16 billion. With greater sales and because I think margins will improve in the second half of the year, I think 2012 is going to be a good year for them.

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