Unscrambling Monday's Egg

Unscrambling American Eagle Outfitters (Nasdaq: AEOS)

Since this is the first "Unscrambled Egg" of the new year, I want to make sure anyone reading this article walks away learning not only something about a company, but also how the research was done. Its not rocket science. Demystifying the mystique of Wall Street is really what this Chicks' Website is all about. You can do this! Before we take American Eagle Outfitters through the paces that we Chicks have designed to measure our perspective stock purchases, I'd like to mention two sites that will be of enormous help. The first is www.marketguide.com. Love their financials; love their supplementary information. The second place you'll find a wealth of information is the website of the company you're researching, in this case, www.ae.com. Now let's proceed with the dozen and see if we can find the answers to all our questions.

1. Buy What You Know

I've never been to this store or even know where one is for that matter. My interest stems from the fact that they are a growing competitor of Chick holding, The Gap, and, especially Abercrombie and Fitch  (look for Chick Karin to chirp about that one later in the week!). It's always wise to keep an eye on the competition, not to mention the fact, sometimes, you may end up "buying what you get to know"!

Maybe the reason I'm not familiar with this company, is the fact that their target customer is a man or woman between the ages of 16 and 34. What can I say? At 36, I'm just too mature for their clothing. HA! Are you kidding? I'll be shopping there tomorrow on my perennial quest for the fountain of youth! The company currently operates 556 stores in 47 states and the District of Columbia with expansion headed toward Canada. (Good news Karin! Cuz you're no spring chick either.hehehe)

AEOS provided the clothing for the 1999-2000 season of television's teen hit, "Dawson's Creek" (ousting J. Crew!). Sheez, I am out of the loop! In another Hollywood coup, the company and Dimension Films (the subdivision of Miramax that produced "Scary Movie"), announced an agreement where AEOS will provide merchandise for at least four upcoming Dimension productions, in exchange for showing off their threads on film.

2. Keep it Simple Sister

Ah, simplicity! I think that's the beauty of this kind of retail store. Like competitors, Gap and Abercrombie, they specialize in all-American casual apparel, accessories and footwear. They design and sell their own brand of timeless, relaxed clothing classics like jeans, khakis, and T-shirts. My wardrobe exactly! They boast that the AE brand is "hip, youthful and vivacious." I think I really would like this store.

3. Industry

Their industry is listed as Retail (Apparel). Obviously, that's a huge market, but as mentioned, they are quite specialized, catering to a youthful customer.

4. Leader in the Field

Gee, I just can't imagine how AEOS can possibly be a leader when I've never even heard of them. I'm not that far out of their target age category! Given the fact that just about everybody knows the Gap and even though I don't shop at Abercrombie & Fitch, I'm certainly familiar with them. Of course, AEOS calls themselves a "leading specialty retailer", but you have to be wary of that like a new TV show calling itself America's newest hit, only to get cancelled a week later! Proof, however, that they may be gaining on the competition, can be found in the courtroom. Apparently, Abercrombie & Fitch felt a little heat from American Eagle and has twice filed suit against the company for "trade dress infringement and unfair competition." Each time, the case has been thrown out of court, citing that Abercrombie & Fitch "has no rights, and cannot acquire rights, in the type of generic marketing devices that are described in the complaint." Hmmm, interesting.

5. Repeat  Profitablility

Youth and clothing. can one ever get enough of either???

(NOTE: Figures for the following equations were found at www.marketguide.com, using the financials for the quarter ending 10/28/00.)

6. Gross Margins

At 42%, I would say they're darn close to our 50% criterion.

(Sales - cost of Goods Sold) / Sales

(282.8 - 162.7) / 282.8 =

120.1 / 282.8 = .424

.424 x100 = 42%

7. Net Margins

They actually beat our 8% criterion and have a net margin of 10%.

Net Income / Sales

29.2 / 282.8 = .103

.103 x 100 = 10%

8. Cash vs. Long Term Debt

Well, well, well, no problems here! American Eagle Outfitters should be mighty proud that they have absolutely zero debt.long term or short term! Pretty extraordinary for a retailer!

9. Flow Ratio

We prefer our companies to keep it below 1.5, again AEOS shines with a ratio of 1.34.

(Current Assets - cash*) / Current Liabilities - Short Term Debt

(265.7 - 99.2) / (124.3 - 0) =

166.5 / 124.3 = 1.34

*cash equiv. and marketable securities

10. Increasing Growth

In the last quarter, sales have increased 35%!

(most recent quarter sales - last quarter sales) / last quarter sales = X

X x 100 = %

Sales from Q10/00 = 282.8

Sales from Q7/00 = 209.0

(282.8 - 209.0) / 209.0 =

73.8 / 209 = .35

.35 x 100 = 35% sales increas e

In fact, since 1996, sales have risen at an average annual rate of 37%! Populartiy is definitely on the rise. The company credits its success to "fashion-right merchandise, exciting brand imaging" (hot models in the ads), "affordable prices and friendly service."  Personally, I find Abercrombie a little pricey for what you get, maybe this is a nice alternative! When I went to their handy dandy little website at www.ae.com (e-commerce established in 1998 and growing rapidly), I checked out their store locator map. No wonder, I've never stumbled onto one of their retail outlets. they haven't come to southern California yet! Can you say room for growth? If there's one thing I know people love in my part of the state, its clothes!

11. Strong Management and History

American Eagle Outfitters first opened their doors in 1977 (quite new if you compare it to the competition). Originally, it was merely a sporting goods store until 1992 when they repositioned and refocused themselves to sell its own brand of casual apparel.  At this time, Forty-five year old, Jay Schottenstein began leading the company as Chairman and CEO. In early December, he named James O'Donnell Chief Operating Officer of AEOS. He was very pleased with this appointment as O'Donnell has a ton of experience from his prior years at the Gap, serving in various executive positions from 1980-1992, a time when Gap's growth went from $500 million in sales to over $4 billion! Can lightening strike twice?

12. Buy on Sale

52 week high:  50.50

52 week low:  11.62

52 week average:  31.06

Current Stock Price (as of 12/29/00): 42.25