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Summary of Operations
American Eagle is a global retailer of clothing and apparel with over 1,300 stores globally, as well as digital sales. Merchandise is manufactured in third-party factories, mostly outside of North America. These goods are then delivered to company-owned distribution centers. In 2021, AEO acquired AirTerra and Quiet Logistics, in order to create an internal supply chain network that can coordinate inventorial needs and reduce costs.
The company is usually profitable but did face losses in 2020 from COVID. The last four years, its operating margin has averaged about 5%, and operating cashflows have been positive, with much being spent in 2021 for expansion.
Strategy
The company is transitioning to digital sales and working to improve the customer experience there, introducing a customer loyalty program. In addition to American Eagle, the company owns and may acquire other brands in order to diversify its portfolio of offerings and enjoy cost efficiencies.
It prefers to fund operations with its own cash and maintains a low level of debt. Management believes cash from operations is sufficient to meat these needs going forward.
Growth and the Future
Ongoing supply chain disruptions have not helped. In its risk factors, AEO also mentions that the transition to digital sales has made their retail clothing market more competitive and introduced pricing pressures. The company will need to transition from being a mall outlet to a digital retailer.
Recent acquisitions should allow for the company grow earnings through cost elimination, if nothing else. Other than that, it remains to be seen what obvious advantage the company has in this industry to do better than that.
Valuation
Let’s assume about $102 million in FCF.
Growth Assumptions: 3%
Intrinsic Value Per Share: $5.47
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