Buyout of American Eagle

Outfitters
Gekko Capital
Holly Xu
Rahul Malhotra
Shahryar
Qayum
Toni Toth

Executive Summary

Recommendation
Acquire American Eagle at 49% equity
Implied target price of $18.94 per share

Investment Thesis
Emphasis on going digital, fast fashion implementation and
global expansion

Transaction
$3 billion enterprise valuation (8.5x EBITDA)
7 year time horizon - target IRR at 25%

Industry Overview
Growth and Segmentation

US Fashion Retail Overview

Characteristics

Key Stats

Highly competitive with large number of branded players

Have been under pressure in recent years due to slower
economic growth
Concentrated: 50 largest companies account for about
65% of the industry revenue

2014 Total Revenue

US $226.9 billion

2014 Total Profit

US $9.6 billion

5 Year Average Growth

2.24%

Number of Businesses

51,938

Trends

External Drivers

Increase in online shopping

Point of sale application
Competition from
international retailers and
fast fashion

Per Capita Disposable

Income
World Price of Cotton
Import penetration into the
manufacturing sector
Number of Adults aged 20
64
External Competition

Product and Service Segmentation

Children's Wear
8% Wear
Other Men's
6%
Women's Casual Wear
34%
Other Women's Wear
13%
Men's Formal Wear
9%
Men's
Women's Formal
WearCasual Wear
16%
14%

Overall industry is mature, casual wear is still the largest segment

Overview of American Eagle

Operations

Company Overview
Founded in 1977 and is headquartered in Pittsburgh,
Pennsylvania
Offers casual, outdoor-inspired fashion apparel targeted
towards 15-25 year old men and women through American
Eagle Outfitters
Offers intimate wear for women through Aerie Brand
Operates 955 American Eagle and 101 Aerie stores in US and
internationally

Market Share Relative to Direct

Competitors

UK:3 Full-Price
stores
Mexico: 17 Full-Price, 1
Factory stores

Hong Kong: 5 Full-Price

stores

US: 702 Full-Price,

132 Factory, 86 Aerie
stores
Canada: 81 Full-Price,
5 Factory, 15 Aerie
stores

American Eagle is a major player among traditional youth fashion retailers

China: 9 Full-Price
stores

Industry Players
Players to Emulate

250.0%

$
30.68
$
94.59

Stock Price
Market Cap (in
Bn)
2014 Sales
Growth
EBITDA Margin

Stock Performance

$
412.00
$
40.30

$
40.46
$
66.96

200.0%
150.0%
100.0%
50.0%
0.0%

4.9%
23.1%

21.0%
12.7%

17.8%
20.2%

-50.0%

Uniqlo

Players to learn from

Stock Price
Market Cap (in
Bn)
2014 Sales
Growth
EBITDA Margin

-8.7%
10.8%

$
19.20
$
1.64
-3.3%
12.9%

H&M

Stock Performance

$
21.83
$
1.52

H&M

350.0%

250.0%

3.50
$
0.28
-12.4%
-3.4%

150.0%
50.0%
-50.0%
-150.0%

Aeropostale

Guess

Guess

Retailers that performed well

Business Model

Fast Fashion

Fast Fashion

Traditional - ish

Supply Chain

Vertically Integrated

Outsourced

Vertically Integrated

Strategy

Constant collection
updates

Product Mix

Long-Term Appeal

Strength

Trendiness

Product Mix

Technology

Product
Development Cycle

Extremely short 15
days

Mixed based on
product type

Long cycle

We believe H&M business model is most suitable for A&E to gravitate towards

Our Mentor H&M

Strength
Strong brand presence
Strong denim products engender
customer loyalty

Weaknesses
Traditional retail business model
Anticipate consumer trends six to
nine months in advance
Make large commitments to the
products
Sources from 16 different countries

Business Model
Hybrid between timeless and trendy
Two main collections each year
The primary collections are traditional long-lead items;
the sub-collections are trendier items with short lead
times
Several sub-collections within each season to continually
refresh inventory

Implications

Declining profits
Seasonality of business
Inability to predict trend
Large markdowns of inventory (~40%)

Supply Chain
Outsources production to a network of 800 suppliers; 60%
of the production takes place in Asia, the rest in Europe.
Network of 20 30 production offices
Centralized design team 150 designers and 100 buyers

A&E needs to anchor on its strength and improve the current supply chain

Summary of Strategy
Increased consumer
engagement with
brand

Employ Fast Fashion

supply chain
strategies without
vertical integration
Emulate H&M
broaden AEs base
product line to
include fast cycle
products that
capture emerging
trends

Fast
Grow
Fashion
Online
Divest
Factory
Stores

Capture essential
data and analytics
about consumer
behavior

Stifle the
deterioration of
brand through
perpetration of
marked down
merchandise

Increased margins and consumer engagement

Decreased cycle times, lead times, inventory
costs and stock outs

Going Digital
Growing the Online Channel

According to eMarketer, online apparel

sales will increase to $90 billion in 2018 up
from $45 billion in 2013. This will help
American Eagle Outfitters direct-toconsumer sales.
rage
e
v
an a e
s
t
n
ese of onlin
r
p
e
st r rowth
a
c
e
for
oy g
s
y
i
h
T
7.8%

Investment and growth of online channel will

support the next pillar of our strategy, fast
fashion and supply chain revamp. The support
will come in the form of enhanced analytics and
increasingly timely data on consumer trends and

Omni-Channel Retailing

In Fiscal 2014, we began fulfilling online

orders at stores through our Buy Online
Ship-from-Store program and we plan to
further enhance our websites, increase
up
CRMRamp
capabilities
through personalization,
investment
segmentation
and customer lifecycle
in presence
management.
of online
channel instore!

Encourage
customers to
order the
item online
after visiting
it in store in
order to
decrease
inventory
costs, stockout rates
and required
safety

Online

Digitizin
g Instore
Experien
ce

Deeper
Consum
er
Experie
nce

Brick and
Mortar

Mobile

Fast Fashion
Players to Emulate

Benefits of Markdown Reductions

220%

Fast fashionis a contemporary term used

byfashionretailers to express that designs
move fromcatwalk quickly in order to
capture current fashion trends.

213%

% increase in Revenue
200%

% increase in Profit

192%

180%
172%
160%
151%
140%
131%

More specifically, fast fashion is a supply chain

management strategy that aims to decrease
the lead time from design to the retail shelf.
The effect of this is two pronged:
Decrease the rate at which clothing is
marked down by more closely following
fashion trends and meeting them quickly
Decrease the rate of stock outs through
reduction in the lead time from production
to retail shelf

120%
110%
100%

101%

102%

104%

105%

106%

Benefits of Stockout Reductions

190%
% increase in Revenue

180%

177%

% increase in Profit

170%

163%

160%
150%

149%

140%

135%

130%
121%

120%

Employing the rigor of the Warren Hausman

and John Thorbecks fast fashion benefit
model, we can quantify the effect of
implementing these changes to our bottom

103%

110%
100%

107%
101%

103%

105%

107%

109%

111%

Fast Fashion
Implementation

A proper execution of the fast fashion

strategy can have profound effects on AEs
bottom line which can provide gains above
and beyond even our more optimistic
estimates of future growth
There are two crucial pillars of fast fashion
implementation:
Centralize design team
Move fast fashion production closer to
retail locations
Centralize long-cycle item production in
one geographic region
Setup production offices close to suppliers
for quality control
Based on analysis, we predict theCases
Worst
revenue effects of fast fashion Base
implementation here:
Best

Revenue Increase
1.5%
9.1%
16.6%

Benefits of Combined Stockout and Markdown

Reductions
Revenue Sensitivity
to Markdown and Stockout
Improvements
Decrease in %age of Markdowns
####
1%
3%
5%
7%
9%
11%
1% $ 3,350 $
3,384 $ 3,418 $ 3,451 $ 3,485 $ 3,519
3,450 $ 3,484 $ 3,517 $ 3,551 $ 3,585
Decrease 3% $ 3,416 $
5% $ 3,482 $
3,516 $ 3,550 $ 3,583 $ 3,617 $ 3,651
in %age
of Stock
7% $ 3,548 $
3,582 $ 3,616 $ 3,649 $ 3,683 $ 3,717
outs
9% $ 3,614 $
3,648 $ 3,682 $ 3,715 $ 3,749 $ 3,783
Visualization
Revenue
Sensitivity
to Markdown
Improvements
11%
$ 3,680
$
3,714
$ 3,748and
$ Stockout
3,781 $Rate
3,815
$ 3,849

118.0%
116.0%
Revenue
114.0% Increase
112.0%
110.0%
108.0%
106.0%
104.0%
102.0%
100.0%

11%
9%
7%
5%
3%
1%

Continue to Improve In-Store

Experience
It is well publicized that certain,
Not all
American Eagle
Stores are
created equal

VS
.

particularly older, AE stores are not up to

the standard the company strives to
achieve with respect to a customers instore experience. We have a three-pronged
approach to improving the in-store
experience:
Factory
OmniRealign
Stores
Channeling

Increase
congruency
through
remodeling or
closing lower
standard
stores

Close
discount-bin
stores that
dilute the
brand

American Eagle is a lifestyle brand, so lets sell

it that way!
Maintain a clear, high standard from store-to-

Bring the
digital
experience instore and
create multitier
engagement

Continuous Global Expansion

Expansion Plan

There are large

territories untapped
territories in which the
AE brand can thrive.
Simply the fact that its
called American Eagle is
a source of brand equity
Movements into Europe
and South America,
despite economic turmoil,
can prove lucrative
Revenue growth will come
to a certain extent from
expansion into new
territories

Current and Proposed Global Footprint

Management Team Changes

Chief Executive Officer

Creative Director

Chief Operating Officer

Jeff Rudes

Anders Lyckman

John Thorbeck

Outgoing Chief Executive of J

Brand
Co-founded the popular jeans
wear label J Brand in 2005
Rudes consulted in the denim
department of retailer
Abercrombie & Fitch
Advantage: Fashion-forward
CEO, bring trendiness to AE
Risk: Strength lie in fashion

Global Creative Director at

Victorias Secret and formerly
Forever 21
Senior Art Director for global
fashion retailer H&M for 9+
years
Advantage: Experience at
H&M, synergies between his
experience at Victorias
Secret and the aerie brand

Founder for Lead Time

Optimization
Harvard MBA
Has led and managed growth
companies (Timberland,
Rockport) and turnarounds
(GH Bass)
Advantage: Expert in Fast
Fashion and Apparel Supply
Chain Management

Valuation: comparable company

analysis
Company Name

Share
price
(USD)

Market
cap
(USDm)

EV /
EBITDA

EV /
P/
GP
EBITDAR Normalized margin
EPS
(%)

EBITDA LTM Debt Consensus

margin / Capital Long Term
(%)
EPS growth
(%)

The Gap, Inc. (NYSE:GPS)

43.3

18,145.4

6.8

4.2

15.1x

38.3%

16.0%

31.2%

Urban Outfitters Inc. (NasdaqGS:URBN)

45.7

5,957.5

11.3

7.0

27.8x

42.5%

14.9%

Ascena Retail Group Inc. (NasdaqGS:ASNA)

14.5

2,343.5

5.4

5.4

18.0x

55.3%

8.7%

6.6%

19.8%

ANN INC. (NYSE:ANN)

41.0

1,875.8

7.0

3.7

23.4x

51.0%

9.5%

0.6%

Abercrombie & Fitch Co. (NYSE:ANF)

22.0

1,532.8

3.3

1.7

15.4x

61.8%

10.9%

19.8%

13.9%

Express Inc. (NYSE:EXPR)

16.5

1,393.4

5.9

3.0

18.3x

41.2%

10.3%

32.7%

The Children's Place, Inc. (NasdaqGS:PLCE)

64.2

1,338.2

7.9

3.7

24.8x

35.3%

8.0%

Zumiez, Inc. (NasdaqGS:ZUMZ)

10.1%

ROE
(%)

ROC
(%)

# of
stores

Owned
vs.
franchise
stores (%)

NM

NM

3,709

88.4%

15.5% 15.4%

15.1%

546

100.0%

6.5%

7.3%

3,959

98.4%

12.2% 13.9%

16.4%

1,033

99.7%

3.3%

6.3%

969

100.0%

19.5% 13.3%

11.8%

675

95.0%

9.4%

9.4%

1,170

93.8%

14.9% 12.4%

10.2%

40.3

1,184.0

9.6

5.7

24.2x

35.4%

13.2%

1.2%

13.9%

603

100.0%

Mean

35.9

4,221.3

7.2

4.3

20.9

45.1%

11.4%

15.4%

14.5%

10.6%

11.5%

1,583

96.9%

Top 25%

45.1

5,054.0

9.2

5.6

24.7

54.2%

14.5%

31.6%

18.5%

13.9%

15.1%

3,074

100.0%

Bottom 25%
American Eagle Outfitters, Inc. (NYSE:AEO)

17.9
17.1

1,352.0
3,331.0

5.5
8.4

3.1
4.5

16.1
24.8x

36.1%
43.9%

8.9%
10.6%

1.1%
-

10.7%
9.9%

6.5%
7.7%

7.3%
11.6%

621
1,155

94.1%
91.4%

Implied valuation
EV/EBITDA multiple of 7.2x
EV/EBITDAR multiple of 4.3x
P/E multiple of 20.9x
Mean
Control premium

USDm
2,908.2
3,213.1
2,747.2
2,956.2
25.0%

100% equity valuation

3,695.2

Implied share price of $15.2 before premium

Indicates discount of 11.2% over current price of $17.1

Valuation: discounted cash flow

DCF value ranges from $14.3 to $18.9; mid value of $15.4
2012A

2013A

2014E

2015E

2016E

2017E

2021E
Valuation

Revenue and Growth

Revenue from AE stores
Average number of stores
Net new stores opened
Sales per sq. foot
% y.o.y growth
Square feet per store
% y.o.y growth
Revenue from AE stores
Average number of stores
Net new stores opened
Sales per sq. foot
% y.o.y growth
Square feet per store
% y.o.y growth
Revenue from Aerie stores

Implied margins

902.0

918.5

(18)

51

949.5
11

940.0

922.5

917.5

(30)

(5)

-5

504.8

485.8

500.4

515.4

530.9

(10.5%)

(3.8%)

3.0%

3.0%

3.0%

6,382.4

6,509.8

6,607.4

6,706.5

6,807.1

0.9%

1.2%

2.0%

1.5%

1.5%

1.5%

3,194.9
149.5

2,959.2
136.5

3,002.8
111.5

3,107.9
93.5

3,188.7
88.5

3,315.5
93.5

(15)

504.8

485.8

500.4

515.4

530.9

5.4%

19.9%

1.5%

1.5%

1.5%

6,382.4

6,509.8

6,607.4

6,706.5

6,807.1

(6.2%)

(0.8%)

0.0%

0.0%

0.0%

0.0%

524.1

552.7

662.7

682.7

693.0

703.4

564.2
12.6%
6,278.2

564.2
16.4%
6,278.2

922.5
5

597.5
3.0%

Terminal Growth
Terminal PV
Enterprise value
Adjustments:
Equity value
Implied share value
Current Price
Discount

3.0%
3,232.4
2,623.2
389.9
3,013.0
15.4
17.1
(9.7%)

7,224.8
1.5%

3,982.2
113.5
5

597.5
1.5%

7,224.8
0.0%

735.5

Cost of Capital
Risk Free Rate
Beta
Market risk premium
+ Specific risk
Cost of Equity

1.94%
1.01
6.00%
2.00%
10.00%

Target Equity/Capital
Target Debt/Capital
Cost of Capital

100%
0%
10.00%

Transaction Structure
Rollover Equity

Equity Contribution
Total Sources

--

2,028.0
$4,088.0

-49.6%
100.0%

-4.86x
4.86x

Sources & Uses

Sources
Revolving Credit Facility

Rate
L + 75

Amount
$100.0

% of
Total
2.4%

Term Loan A
Term Loan B

L + 150
L + 150

790.0
790.0

19.3%
19.3%

1.89x
1.89x

9.50%
--

1,680.0
380.0
--

41.1%
9.3%
--

4.03x
0.91x
--

2,060.0

50.4%

4.94x

Total Senior Debt

New Senior Sub. Notes
New Mezzanine Debt
Total Debt

Multiple of
EBITDA
0.24x

Uses

Amount

% of Total

Equity Purchase Price

$3,981.7

97.4%

Refinance Debt

--

--

Excess Cash to B/S

--

--

Total Financing Fees

51.5

1.3%

Other Fees and Expenses

54.9

1.3%

$4,088.0

100.0%

Total Uses
Excess Cash

--

--

--

Rollover Equity

--

--

--

Equity Contribution
Total Sources

2,028.0
$4,088.0

49.6%
100.0%

4.86x
4.86x

Summary Financial Highlights

Summary Financial Data
Historical Period FY

Projection Period
Pro Forma

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

2012

2013

2014

2015E

2015E

2016

2017

2018

2019

2020

2021

$3,475.8

$3,305.8

$3,282.9

$3,354.7

$3,354.7

$3,435.0

$3,564.7

$3,754.8

$3,974.0

$4,245.0

$4,604.0

NA

(4.9%)

(0.7%)

2.2%

2.2%

2.4%

3.8%

5.3%

5.8%

6.8%

Gross Profit

$1,650.9

$1,409.8

$1,441.0

$1,498.9

$1,498.9

$1,534.8

$1,664.0

$1,827.8

$2,014.0

$2,193.9

$2,425.4

% margin

47.5%

42.6%

43.9%

44.7%

44.7%

44.7%

46.7%

48.7%

50.7%

51.7%

52.7%

$555.7

$353.9

$348.2

$417.1

$417.1

$427.1

$532.3

$645.2

$772.3

$871.6

$996.0

16.0%

10.7%

10.6%

12.4%

12.4%

12.4%

14.9%

17.2%

19.4%

20.5%

21.6%

120.0

144.0

144.0

144.0

192.0

192.0

3.5%

4.0%

3.8%

3.6%

4.5%

4.2%

Sales
% growth

EBITDA
% margin

Capital
Expenditures

% sales

8.5%

Credit & Capitalization Summary

Capitalization

Cash

$436.4

$50.0

$50.0

$50.0

$50.0

$150.6

Revolving Credit Facility

$100.0

Term Loan A

790.0

403.8

254.8

26.1

Term Loan B

790.0

734.7

679.4

624.1

281.6

Term Loan C

Existing Term Loan

2nd Lien

Other Debt

$1,680.0

$1,138.5

$934.2

$650.2

$281.6

$1,680.0

$1,138.5

$934.2

$650.2

$281.6

Total Senior Secured Debt

Senior Notes
Total Senior Debt

Returns Analysis

Initial Equity Investment

Equity Proceeds

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

2016
($2,028.0)

2017
($2,028.0)

2018
($2,028.0)

2019
($2,028.0)

2020
($2,028.0)

2021
($2,028.0)

2022
($2,028.0)

$2,161.6

$3,260.5

$4,503.9

$5,952.6

$7,179.5

$8,696.1

CoC - Assuming Exit in 2022E

IRR - Assuming Exit in 2022E
28.8%
6.0x
7.5x
8.0x
8.5x
9.0x
9.5x

Exit Multiple
28.8%

IRR
Entry
Multiple

7.5x

8.0x

8.5x

9.0x

9.5x

6.0x

29.8%

28.4%

28.4%

29.8%

32.5%

7.5x
8.0x
8.5x

31.0%
31.9%
32.6%

29.8%
30.9%
31.7%

29.8%
6.6%
30.9%
31.7%

31.0%
33.3%
31.9% 26.8% 33.9%
32.6%
34.4%

9.0x

33.2%

32.4%

32.4%

33.2%

34.8%

9.5x

33.7%

32.9%

32.9%

33.7%

35.1%

30.5%

7.5x
4.8x
5.1x
5.3x
5.4x
5.6x
5.7x

30.9%

8.0x
4.5x
4.8x
5.0x
5.2x
5.4x
5.5x

Exit Multiple
8.5x
4.5x
4.8x
5.0x
5.2x
5.4x
5.5x

28.8%

9.0x
4.8x
5.1x
5.3x
5.4x
5.6x
5.7x

27.5%

9.5x $10,377.1
5.4x
5.6x
5.8x
5.9x
6.0x
6.1x

26.3%

Conclusion

We recommend that Gekko Capital to invest

$1.47 billion to acquire 100% stake in
American Eagle in a leveraged buy-out
transaction at a total $3 billion valuation. We
expect to get 25% IRR.

Appendix: Comparable company

analysis

Appendix: DCF valuation

Appendix: revenue model (preacquisition) - 1/2

Appendix: revenue model (preacquisition) - 2/2

Appendix: revenue model (postacquisition) - 1/2

Appendix: revenue model (postacquisition) - 2/2