American Eagle Outfitters AEOS
December 11, 2005 - 5:09pm EST by
robert511
2005 2006
Price: 21.10 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 3,291 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

American Eagle Outfitters (AEOS) is a youth-oriented retailer selling at a bargain basement price. P/E=11.3, EV/EBITDA = 5.1, no debt and $3.56 per share of Cash+ST Investments at end of Q3. Maintenance Free Cash Flow (Op Cash Flow – Maint. CapEx) is typically higher than Earnings so EV/FCF < 9.4. ROE over the past 5 years (average net income/average equity) has been 18%, with little or no debt during most of that time. The company has bought back more than 7 million shares (over 4% of outstanding shares) since the end of August. There were also $123 Million of long-term investments and $982 Million of off-balance sheet minimum rent commitments. The stock is down over 35% from its high.

That said, AEOS has in the past had some missteps. Same store sales and earning fell in 2002 and 2003 before they came roaring back in 2004 and 2005. However, given the company’s five year average performance and its current low valuation, I think we are well compensated for that volatility. Assuming that AEOS remains reasonably in tune with the fashions and tastes of its target market, I’d expect to see AEOS trading back in the thirties within 12-18 months, based upon an EV/FCF in the 13-15 range which seems reasonable for a moderately growing retailer with a pristine balance sheet and good, albeit erratic, returns on capital.

I encourage you to read the fine write-up of Aerospatale (ARO) that ilpadrino98 just posted. AEOS and ARO are competitors, with AEOS targeting a slightly older customer(15-25 yo) and higher price-point than ARO. David101’s followup to the ARO posting noted his observations from recent visits to the two chains. Parenthetically, I started evaluating AEOS as a possible VIC writeup before reading these postings. Other competitors are The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear and Hot Topic, and The Buckle. ARO probably will grow faster than AEOS and has historically been a more consistent performer, which partially accounts for AEOS’ lower current valuation.

In the US/Canada, with current store count of 866, the American Eagle chain is getting close to saturation. They also have the obligatory e-commerce site. Results for that are not separately broken out. Besides the annual 5-6% increase in square footage expected for AE, there are some opportunities for growth. In the flagship chain, they are expanding their offerings into women’s underwear and loungewear. A few weeks ago, the company signed a Memorandum of Understanding with an Asian partner to expand AEOS into Japan. AEOS will be the majority partner and will have operational control. Details have not yet been released and if the agreement is finalized and executed well, that could result in a nice pop. In August, AEOS will open at least 5 stores in a new concept, Martin+Osa that will focus on 25-40 year olds. Until then, the expenses associated with this launch will be a drag on the bottom line. If M+O goes well, they plan to open 10-15 new stores in 2007, and 25-30 per year after that. They see a potential 300 store opportunity. These new initiative don’t have to be a big success however for the stock to do well, considering its current price.

Capital Expenditures this year will be around $80 million, excluding the new corporate headquarters that the company just bought in trendy Pittsburgh, close to their current location of Warrendale, PA. This will cost $21 million plus an undisclosed amount for renovation and will be reflected in the next FY CapEx. I’ve found new headquarters are often a leading indicator of executive egos gone out of control, so this bears watching. I estimate Maintenance CapEx at $50 million.

The 2006 plan for the AE chain is 40-50 new stores and 45-50 store renovation renovations. For new stores, the Average Investment is $528k, first 12 months Net Sales are $2.1 million, resulting in a Four Wall Profit of $406k, Cash Flow of $471k and Pretax ROI of 89%. For remodeled stores, Profits increase from $492k to $900k with Sales increasing from $1.9 million to $2.8 million.

On November 30, AEOS announced disappointing November results. Same Store Sales (SSS) were up by only 1.7% for the month, much less than the torrid performance earlier in the year (17.4% YTD). Sales increased by 6.9%. Q4 EPS guidance was cut by 4% to 70-72 cents, essentially flat from last year. It will probably earn $1.87-$1.89 this fiscal year (up from $1.49) and will likely be pretty flat next year, but in this industry these projections should be heavily discounted.

The Schottenstein-Deshe-Diamond families own 14.2% of AEOS. Mack885’s writeup of RVI has some good background on Jay Schottenstein. During Fiscal 2004, AEOS implemented a plan to eliminate related party transactions with the families. As a result, AEOS hasn’t had any material transactions with the families since January 2005.

Insider and company buying picks up when the stock is in the low-20s. For example, Jay Schottenstein bought $20 million in September. In Q3, the company repurchased 6 million shares at an average price of $23.10. On November 15 the Board authorized the repurchase of an additional 4.5 million shares. As of December 1, AEOS had repurchased 1.0 million shares under this authorization at an average share price of $22.30. The company expects Q4 ending share count to be 152-153 million.

Management recently has tried to manage conference calls like a Presidential news conference, with limited opportunities for followup questions. They also tend to give scripted answers even if the answer is not totally responsive to the question, so that needs to be taken into account.

For a retailer, executive compensation seems reasonable. Bonuses were not given out in 2002-2003 when performance was poor. Bonuses were high in 2004, but reasonable considering how good a year 2004 was.


Risks:
Retail traffic dries up as a result of normal economic recession or one that is pandemic induced.
Fashion vagaries result in a sustained sales slide.
The company is building a new corporate headquarters, which is often a leading indicator of egos gone out of control.
The Japan or Martin + Osa rollouts crash and burn.

Catalyst

Possible sales increases (not currently incorporated into analyst estimates) from Japan, Martin + Osa rollout, and/or expansion into Women underwear and loungeware

Continued share purchases by insiders and company
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    Description

    American Eagle Outfitters (AEOS) is a youth-oriented retailer selling at a bargain basement price. P/E=11.3, EV/EBITDA = 5.1, no debt and $3.56 per share of Cash+ST Investments at end of Q3. Maintenance Free Cash Flow (Op Cash Flow – Maint. CapEx) is typically higher than Earnings so EV/FCF < 9.4. ROE over the past 5 years (average net income/average equity) has been 18%, with little or no debt during most of that time. The company has bought back more than 7 million shares (over 4% of outstanding shares) since the end of August. There were also $123 Million of long-term investments and $982 Million of off-balance sheet minimum rent commitments. The stock is down over 35% from its high.

    That said, AEOS has in the past had some missteps. Same store sales and earning fell in 2002 and 2003 before they came roaring back in 2004 and 2005. However, given the company’s five year average performance and its current low valuation, I think we are well compensated for that volatility. Assuming that AEOS remains reasonably in tune with the fashions and tastes of its target market, I’d expect to see AEOS trading back in the thirties within 12-18 months, based upon an EV/FCF in the 13-15 range which seems reasonable for a moderately growing retailer with a pristine balance sheet and good, albeit erratic, returns on capital.

    I encourage you to read the fine write-up of Aerospatale (ARO) that ilpadrino98 just posted. AEOS and ARO are competitors, with AEOS targeting a slightly older customer(15-25 yo) and higher price-point than ARO. David101’s followup to the ARO posting noted his observations from recent visits to the two chains. Parenthetically, I started evaluating AEOS as a possible VIC writeup before reading these postings. Other competitors are The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear and Hot Topic, and The Buckle. ARO probably will grow faster than AEOS and has historically been a more consistent performer, which partially accounts for AEOS’ lower current valuation.

    In the US/Canada, with current store count of 866, the American Eagle chain is getting close to saturation. They also have the obligatory e-commerce site. Results for that are not separately broken out. Besides the annual 5-6% increase in square footage expected for AE, there are some opportunities for growth. In the flagship chain, they are expanding their offerings into women’s underwear and loungewear. A few weeks ago, the company signed a Memorandum of Understanding with an Asian partner to expand AEOS into Japan. AEOS will be the majority partner and will have operational control. Details have not yet been released and if the agreement is finalized and executed well, that could result in a nice pop. In August, AEOS will open at least 5 stores in a new concept, Martin+Osa that will focus on 25-40 year olds. Until then, the expenses associated with this launch will be a drag on the bottom line. If M+O goes well, they plan to open 10-15 new stores in 2007, and 25-30 per year after that. They see a potential 300 store opportunity. These new initiative don’t have to be a big success however for the stock to do well, considering its current price.

    Capital Expenditures this year will be around $80 million, excluding the new corporate headquarters that the company just bought in trendy Pittsburgh, close to their current location of Warrendale, PA. This will cost $21 million plus an undisclosed amount for renovation and will be reflected in the next FY CapEx. I’ve found new headquarters are often a leading indicator of executive egos gone out of control, so this bears watching. I estimate Maintenance CapEx at $50 million.

    The 2006 plan for the AE chain is 40-50 new stores and 45-50 store renovation renovations. For new stores, the Average Investment is $528k, first 12 months Net Sales are $2.1 million, resulting in a Four Wall Profit of $406k, Cash Flow of $471k and Pretax ROI of 89%. For remodeled stores, Profits increase from $492k to $900k with Sales increasing from $1.9 million to $2.8 million.

    On November 30, AEOS announced disappointing November results. Same Store Sales (SSS) were up by only 1.7% for the month, much less than the torrid performance earlier in the year (17.4% YTD). Sales increased by 6.9%. Q4 EPS guidance was cut by 4% to 70-72 cents, essentially flat from last year. It will probably earn $1.87-$1.89 this fiscal year (up from $1.49) and will likely be pretty flat next year, but in this industry these projections should be heavily discounted.

    The Schottenstein-Deshe-Diamond families own 14.2% of AEOS. Mack885’s writeup of RVI has some good background on Jay Schottenstein. During Fiscal 2004, AEOS implemented a plan to eliminate related party transactions with the families. As a result, AEOS hasn’t had any material transactions with the families since January 2005.

    Insider and company buying picks up when the stock is in the low-20s. For example, Jay Schottenstein bought $20 million in September. In Q3, the company repurchased 6 million shares at an average price of $23.10. On November 15 the Board authorized the repurchase of an additional 4.5 million shares. As of December 1, AEOS had repurchased 1.0 million shares under this authorization at an average share price of $22.30. The company expects Q4 ending share count to be 152-153 million.

    Management recently has tried to manage conference calls like a Presidential news conference, with limited opportunities for followup questions. They also tend to give scripted answers even if the answer is not totally responsive to the question, so that needs to be taken into account.

    For a retailer, executive compensation seems reasonable. Bonuses were not given out in 2002-2003 when performance was poor. Bonuses were high in 2004, but reasonable considering how good a year 2004 was.


    Risks:
    Retail traffic dries up as a result of normal economic recession or one that is pandemic induced.
    Fashion vagaries result in a sustained sales slide.
    The company is building a new corporate headquarters, which is often a leading indicator of egos gone out of control.
    The Japan or Martin + Osa rollouts crash and burn.

    Catalyst

    Possible sales increases (not currently incorporated into analyst estimates) from Japan, Martin + Osa rollout, and/or expansion into Women underwear and loungeware

    Continued share purchases by insiders and company

    Messages


    Subjectreturns on capital
    Entry12/11/2005 10:09 PM
    Membermark744
    Thanks for the idea. What do you think are the returns on capital for this business once you incorporate the off-balance sheet operating leases? While the company has no debt, there is a significant off-balance sheet annual rental expense that really is very debt-like (ie. to run this business, lease payments must continue).

    Subjectreturns on capital
    Entry12/12/2005 08:06 AM
    Memberrobert511
    mark,
    These are all back of the envelope estimates. If people want I can do more exact calculations. NPV for Rent Commitments is $750M. Assets are $1,429M, of which Cash and Investments are $779M. Shareholder Equity is $1,070M. As I understand it, the accounting would go something like this:
    Property: $750M
    …Leases Payable (Debt) $750M
    Each year there would be Depreciation and Interest Expense instead of Rent Expense. Total Assets would go up by $750M and thus ROA would decline from 20% to 13%. Equity would still exceed Debt

    But when calculating adjusted ROA, I think it makes sense to also adjust for excess Cash+Investments, which I’d estimate at $500M. Let’s assume that 2/3 of the Property is paid for upfront.
    Leases Payable (Debt): $500M
    …Cash: $500M
    Then Total Assets would go up by $250M instead of $750M and ROA would be approx 17%

    Of course, either way, Enterprise Value would increase by $750M (about $6 per share)

    SubjectRe: Normalized EPS
    Entry12/12/2005 08:52 AM
    Memberdoggy835
    Nice writeup. I considered writing AEOS up recently and almost bought it below $20 the other day. What held me back was the fact that recent EBIT margins have been around 20% compared to a historic range of 7-18%. Something to do with denim, I believe.

    I applied a mid-cycle 12% operating margin to next year's expected 2.5b revenue and got "normalized" EPS of about 1.25. AEOS trades at 17x this EPS level. That's not a bad price for a high ROI business, but not a screaming bargain when you consider the volatility. If the recent stumble is the start of the fall from the mountaintop there will be plenty of buying opportunities ahead. Should margins return to high single digits (as in '03) we could see low teens.

    Of course margins may only "fall" to 15-18%, in which case EPS will hold up and the stock should do very well. Buybacks with the massive cash hoard should also provide a lot of support for the stock price. I rated the idea a 6 because I think it'll outperform the market long term. But I'm still on the sidelines hoping for the type of extreme bargain that seems to periodically appear in this space.

    SubjectRe: Normalized EPS
    Entry12/12/2005 09:12 AM
    Memberrobert511
    doggy,
    Off the top of my head, I agree with your comments. It's tough to know if AEOS' recent excellent performance is just due to being lucky with denim. I tried to account partly for it by estimating their 5 year ROE. It wouldn't shock me to see it go into the teens in the next half year, but I'm not very good at calling short term bottoms. Also the estimate of flat earnings next year tries to take into account some degradation of margins.

    Subjectre: Margins
    Entry12/13/2005 06:08 AM
    Memberrobert511
    Abra,

    I agree that AEOS can’t be expected to maintain its very high current margins (Op Margin>20%). 17% is probably more reasonable. For next year, I feel reasonably comfortable with a 10-11% revenue increase driven by 5-6% square footage increase in the AE chain, 4-5% increase in Same Store Sales, and 0-1% increase driven by the new Martin+Osa chain. Despite the sales increase, I think earnings will be pretty flat, because of the margin degradation. This is driven by the extra expenses associated with the new chain and some cooling in denim. AEOS is the market share leader in denim for their demographic. Denim fashion has been more sustainable than anybody really expected.

    Below are comps for FY2001-2005 and Trailing Twelve Months (TTM). Pardon the formatting.

    GM% , 2001 , 2002 , 2003 , 2004 , 2005 , TTM
    AEOS , 39.9 , 39.9 , 37.1 , 36.5 , 46.7 , 48.6
    ARO , NA , NA , 29.5 , 31.3 , 33.2 , 31.8
    ANF , 41.2 , 40.9 , 41.1 , 42.0 , 45.0 , 56.3
    HOTT , 40.0 , 39.0 , 38.4 , 38.5 , 35.6 , 34.8
    LTD , 34.0 , 34.7 , 36.6 , 36.4 , 35.9 , 34.9
    GPS , 37.1 , 29.9 , 34.0 , 37.6 , 39.2 , 38.5
    , , , , , ,
    , , , , , ,
    OpM% , 2001 , 2002 , 2003 , 2004 , 2004 , TTM
    AEOS , 13.4 , 12.1 , 9.6 , 6.9 , 19.3 , 21.5
    ARO , NA , NA , 9.5 , 12.0 , 14.1 , 12.7
    ANF , 20.5 , 19.9 , 19.6 , 19.4 , 17.2 , 16.8
    HOTT , 13.6 , 13.1 , 12.3 , 13.4 , 9.7 , 8.2
    LTD , 8.6 , 9.8 , 9.9 , 10.8 , 10.9 , 9.8
    GPS , 10.4 , 2.2 , 7.0 , 11.9 , 12.8 , ?


    Subjectsmall comment
    Entry12/13/2005 11:07 AM
    MemberSpocksBrainX
    <4-5% increase in Same Store Sales>

    the only problem with this is history might bring us a -8% comp too and there is no way to know beforehand. Virtually all the teen retailers have been smokin' the past couple years - in unison - and other than a freak like URBN or CHS whenever this happens they always seem to fall apart too in time. After all, when AEOS started to put up those crazy comps, you knew that ANF wasn't going to be far behind. Now, sales comparisons are deadly, margins are sky-high, and comps in the past few weeks have shown real signs of slowing.

    Still, you might be right (esp. since cash is so important this time around). You could have made the same sort of analysis with CLE last year (fat comps, peak margins, modest sqft growth) and passed and missed the resulting 40% gain.

    just 2c

    Subjectre: small comment
    Entry12/13/2005 02:22 PM
    Memberrobert511
    I agree that in this industry forecasting is a real crap shoot. Comps could be much higher than I am projecting or could be much lower. I think the current pricing and their strong balance sheet compensates us for that risk.

    Subjectfading fad
    Entry12/13/2005 09:52 PM
    Memberkitkat919
    Excellent write up

    There has been evidence of slowing growth and narrowing margins which could indicate a fashion concept that has run its course.
    As Paul118 notes the comps were amazing until this summer when there was definite signs of a crack in the foundation. SSS started taking off the summer of 2004 and were phenomenal until the summer of 2005. In Aug they declined notably along with margins and growth

    The following just shows how different this year is from last year.
    When growth slows and margins narrow, you wonder about merchandise that is being marked down and not moving. In- demand hot merchandise doesn't do that and until recently, AEOS remarked in their filings that they rarely marked anything down and the 10Ks discussion of marked down merchandise supported that.
    (margins improved slightly last quarter)
    growth is noticeably down from a year ago

    Oct 05 Jul 05 Apr 05 Jan 05 Oct 04

    Growth, revenue 13% 13.1% -26.1% 22.0% 21.7%
    Growth, gross income 18% 2.6% -31.9% 37.4% 44.5%
    Growth, EBIT 30% 0.0% -50.3% 91.4% 84.9%
    Growth, net income 26% 5.1% -45.1% 73.4% 83.5%
    Growth, Basic EPS 24% 4.4% -46.5% 70.9% 81.7%
    Gross margin 46% 44.4% 48.9% 49.3% 48.8%
    operating margin 19% 16.8% 19.3% 29.1% 19.0%
    Net margin 12% 11.3% 12.2% 16.4% 11.5%
    Growth, COGS 8% 23.1% -19.4% 8.2% 6.6%
    Growth, SGA 11% 5.9% -7.2% 0.1% 32.0%


    Even more telling is the dramatic increase in the days inventory is on the shelves and the increase in inventory levels. DIO have doubled. And while growth in inventory is better this last quarter, July was extremely bad

    10/05 7/05 4/05 1/05

    A/R Growth 41.0% -19.0% 3.8% -9.9%
    Days Inventory 80.0 88.4 40.5 50.5
    Growth in inventory 11.3% 48.2% 11.4% -32.7%
    Cash Conversion Cycle 52.6 53.3 26.9 27.6
    Days Payable Outstanding 33 40 17 28


    The reason this is worth mentioning is the consideration that AEOS may not be a teen fashion shaper but simply the fortunate recipient of a fashion trend that coincided with their merchandise. If they are no longer a "hot" concept, then sales and margins may continue to disappoint. In which case is the current price sufficiently discounted if we have to wait for the next cycle to take off? If AEOS is not a leader and just a follower, it could take awhile. I am also wondering if Christmas might be disappointing and send the price further down.

    If you look at these numbers and agree that they are having some trouble with their sales, margins and inventory, do you have any thoughts on why this is happening and if it is likely to continue? ie are they at the forefront of fashion and likely to lead the next trend or are they going to have to play catch up and adjust current inventory(get rid of it ) and invest in the next big thing? Or are they likely to coast along and sell enough distressed denim to maintain staus quo which is down from the heights of one year ago?

    All of which asks the question is $21 a price that may be with us for a while? Or is it enough of a discount even with an uncertain successful concept to take the plunge?

    I am impressed with the cash on hand, the share buybacks and the recent large insider purchase of stock. I think this is a good company--just can't decide whether they are meaningful to teen fashion at present




    SubjectWhat Gives?
    Entry12/13/2005 10:15 PM
    Memberround291
    I own shares of AEOS and: 1) don't have any idea where comparables will be next month, quarter or year,and 2) have no clue whether or not the company is missing some fashion trend or whether the company is a trend follower. Maybe I'm grossly delinquent...guilty as charged.

    Who, in honesty, knows these things with any reasonable degree of certainty?

    What creates the opportunity here, in my opinion, is exactly that (income statement) uncertainty combined with what's going on from a balance sheet and capital allocation perspective. I think the upside is decent and downside is moderate. I'm also focused on a multi-year time frame.

    That said, I am a little bit concerned with the entire landscape of teen retailers. Those things mentioned about the AEOS cash conversion cycle could also be said for the other guys...and that's a worry.

    So good luck. We'll see how things turn out in the next year.

    SubjectGreenblatt Magic Formula
    Entry12/14/2005 10:25 AM
    Memberlil305
    Excuse me for a self serving observation: AEOS has been showing up as the 3rd best pick on the Magic Formula website for stocks with a market cap of greater than $50 million. So in the universe of stocks, it’s clearly cheap without taking into account the issues discussed here about declining future margins. But as noted in the earlier comments, the formula does not take into account the capitalization of leases which would increase fixed assets and decrease the first ratio of EBIT/(Net Working Capital + Fixed Assets). And the addition of capitalized debt would negatively affect the second ratio of EBIT/EV.

    Subjectmagic formula
    Entry12/14/2005 10:30 AM
    Memberrobert511
    I too saw AEOS on the website. It's important to realize that uncapitalized leases should be added to the balance sheets of virtually all companies along with off balance sheet pension costs (which AEOS doesn't have). So, lets have these caveats for all VIC writeups

    Subjectinventory levels etc
    Entry12/14/2005 11:10 AM
    Memberrobert511
    kitkat,

    I see things a bit differently. Because this is a retailer, I think you really need to compare balance sheet items for Q3 05 to the prior year quarter, not sequentially. Remember that the inventory they have at end of October is for the Holiday Season.
    Oct 05 Oct 04
    Rev (q3) 578 480
    COGS (q3) 309 246
    Inv 253 205
    AR 31 29
    AP 104 84

    Days Inv 74.71 76.04
    Days AR 4.89 5.51
    Days AP 30.71 31.16
    Cash Cycle (Inv + AP- AR)48.89 50.40

    The days calculations really should look forward to Q4 instead of backward to Q3, but if I've done the calcs correctly, it looks to me like they are in pretty decent shape compared to last year.

    I agree that they are not going to have the kind of comps they have had the past two years. I think 2006 will be pretty flat, but it doesn't look to me like their inventory is exploding. David's store check of ARO and AEOS confirmed that as of a few weeks ago, AEOS was not doing fire sales, although of course things change rapidly this time of year.

    Does this help?

    SubjectMore on Asset Turnover
    Entry12/14/2005 11:37 AM
    Memberround291
    Robert -

    Your clarification of Kitkat's comments were right on, but how do you explain the industrywide decline in asset turnover since the late 1990's? If you don't feel like doing the calculations, check out morningstar.com. They present the components of ROE in either a "financials" or "ratios" tab.

    To the extent the players have maintained ROE's, considering the across the board reduction in financial leverage these guys have had to increase net income margins. You do this by raising prices, buying more efficiently etc.

    What do you make of this? Seems to me that having that "in", high margin product was a part of the game over the past few years. I wonder whether it will be to the same extent in the coming years? In any event, these business could bear a bit more financial leverage...that can help out when the "in" products are in short supply. That leverage can be had by simply buying in stock with cash and those players with large founding shareholder ownership that are also friendly to outsiders are more likely to head down this path. AEOS shareholder friendliness score has improved over time in my opinion.

    Best wishes...

    Subjectre: asset turnover
    Entry12/14/2005 12:42 PM
    Memberrobert511
    "Your clarification of Kitkat's comments were right on, but how do you explain the industrywide decline in asset turnover since the late 1990's? "

    round,
    I'll certainly followup on your comments, but I doubt I'm the one to have any blinding insights on this industry over the past decade. The answer could be as simple as bad management. For much of my life I made my living improving supply chains, but for me personally, it doesn't help me make good investment decisions.
    -Rob

    Subjectminor thing
    Entry12/14/2005 03:39 PM
    MemberSpocksBrainX
    balance sheet pension costs (which AEOS doesn't have).>

    minor thing, but why? Don't you need to add an asset at the same time? I can't recall a single time in my short career where operating leases were a problem until a company hit the bankruptcy stage, and that's telegraphed by every single number on file well before the problem becomes critical. Being able to reserve space at the prime malls and strips in the country has to be worth something, right?

    SubjectMight be a dead end, but...
    Entry12/14/2005 07:01 PM
    Memberround291
    I did look at ANF and GPS and the decomposition of their ROE. Their performance in comparison generated a few hypotheses and further thought about what's going on in the industry beyond AEOS. Could rightly be of no value, but it's how my knee jerks.

    Again, I own a few shares of AEOS and like its prospects.

    Sorry to hear that your training in supply chain management offers you little in terms of picking stocks. I've got a little background in the area as well and its helped me on a few things, Netflix being one. I wish I had spotted Dell, Walmart, Fedex, and Autozone (another Memphis company and beneficiary of work done in the mid 1990's at U of Memphis in cycle time reduction) early on as class acts when it comes to managing supply chain management.

    Best wishes with your investment.

    Subjectre: small thing
    Entry12/15/2005 06:46 AM
    Memberrobert511
    see my first reply posted 12/12 for the journal entries. Yes, an asset is booked, which is why Return on Assets would go down if Leases were capitalized. It would have no effect on Equity though

    Subjectre: supply chain
    Entry12/15/2005 06:50 AM
    Memberrobert511
    round,
    I haven't yet had a chance to look at the Morningstar breakdown you suggested, but I did have an idea as to why industry asset turns might be declining over the years.
    My guess is that it is due to a higher proportion of suppliers being located very far away (Asia instead of Dominican Republic for example), thus increasing the transit times which lessens responsiveness, increases the need for safety stock, and increases markdowns.
    Partially offsetting this is the improvements in information technology, but my experiences is that these improvements are far outweighed by the outsourcing trend. Just my guess.

    Subjectdead end...
    Entry12/18/2005 01:23 PM
    Memberrobert511
    round,

    I did get a chance to look at the Morningstar stats on Asset Turnover for fashion clothing chains. You’re right, there does seem to be a definite trend lower since the late 1990’s. That’s pretty interesting and unexpected. I do believe that part, but not all, of the answer relates to longer transit times from their suppliers, as I mentioned in a previous post. I’d be hard pressed to prove it however. I’m wondering if some of it may be due to a survivorship bias in the unscientific sample of companies we are looking at.

    SubjectNah...
    Entry12/18/2005 02:13 PM
    Memberround291
    I tend to doubt that longer transit times or "survivorship bias" explains what's going on. These companies have been sourcing product from far flung places for some time. And I don't know why the survivors in this industry would, necessarily, show deteriorating performance in asset management.

    I'd look for explanations in three other areas: 1) growth in the aggregate number of stores (including outlets) requiring more inventory and fixed assets 2) a policy decision to stock individual stores more aggressively, and 3) a build up of cash balances due to recent successes. The first two, combined with the vagracies of fashion, add risk and variability to the net income relative to 10 years ago. The upshot...you increasingly need exceptionally shareholder friendly management to get paid (those who will return cash/buy stock when performance wanes...to smooth variability in net income), and companies with a lot of cash on hand are quite attractive.


    SubjectUpdate?
    Entry02/15/2006 10:09 AM
    Memberskca74
    Any updates on this company? Any concerns that they are sorta stuck in the middle (eg ANF at the top and AEOS at the bottom?)

    Thanks.

    Subjectskca74
    Entry02/16/2006 05:00 AM
    Memberrobert511
    I haven't seen any signicant change in the story since I posted. Obviously it is not quite the value it was since it has advanced 25% since then, but I still think Fair Value is somewhere in the 30's.

    SubjectGreat Job...
    Entry03/01/2006 10:51 PM
    Memberround291
    Straight-forward idea...well presented...great performance.

    Subjectnear Fair Value
    Entry09/25/2006 10:11 AM
    Memberrobert511
    at $43.8, so I'm closing this out.
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