American Eagle Outfitters, Inc. – Currently Listed as ‘AEO’ on the New York Stock Exchange

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Company Overview

American Eagle Outfitters, Inc. (“AEO”) is a global specialty retailer with an offering of clothing, accessories and personal care products. The Company operates stores in Canada, Hong Kong, Japan, Mexico, and the U.S., whilst maintaining licensing agreements throughout Asia, Europe, Latin America, and the Middle East. The Company has two operating and reportable segments (American Eagle brand and Aerie brand), whilst identifying their Todd Snyder brand, Unsubscribed brand, and Quiet Platforms as separate operating segments which do not meet the quantitative thresholds for separate disclosure. Brief descriptions of these segments are as follows:

  • American Eagle: This Segment is an American jeans and apparel brand.
  • Aerie: This Segment is an apparel, activewear, intimates, and swim collections brand.
  • Todd Snyder: This non-Segment is a menswear brand offering accessories, custom suiting, signature essentials, and statement pieces.
  • Unsubscribed: This non-Segment offers one-of-a-kind vintage pieces, clothing and accessories.
  • Quiet Platforms: This non-Segment is a supply chain platform.

This Security Issue came to our attention at the price of approximately 11.60 at around early-June 2023, with drafting of this Piece beginning relatively soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and stability
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from AEO’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 1.40 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 1.14, 1.04 and 0.87 respectively, all of which are below the minimum recommended figure of 1.5. The Issue also fails the test in all four scenarios.

The long-term debt value does not exceed 110% of the net current asset value in the stated, best and average case, but in the worst-case scenario, the net current asset value is negative, invalidating the metric.

The Company has demonstrated one loss over the last financial decade, but it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 2004.

The Company’s most recent annual earnings were smaller than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have decreased by approximately 37%.

The discernible tangible equity per share is 0.04 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -2.10, -3.40 and -4.25, respectively. The current price of 11.74 is greater than 120% of the stated value, with the other values all being negative and thus rendering the 120%-price-paid-to-DTE metric invalid in this instance.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were two main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following two points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Restructuring (and Other) Charges

We do not have much commentary to offer in this subsection, but are instead taking the chance to emphasise the presence of constant ‘impairment and restructuring’ charges, which can be found by searching for that exact phrase in the latest 10-K Filings. The details are outlined in the Filings but they largely relate to the impairment of retail stores very probably on account of the shift in consumer shopping i.e., the rise in e-commerce and online shopping. These charges even led to fiscal year 2020’s net loss as ‘impairment, restructuring and COVID-19 related charges’ eroded the Company’s operating profits for this same fiscal year. The reoccurrence is likely to persist, but it is clearly unfortunately eating into the Company’s profits in a rather distinguishable way, hence us brining it into the spotlight, and it is worth noting that impairments related to retail stores have been critical audit matters in four out of the last three 10-K filings. There are other charges, and an explementary list is provided directly below:

  • “$8.0 million ($3.5 million cash and $4.5 million non-cash) of net charges for Fiscal 2017 related to the planned exit of a joint business venture were recorded within Other (Expense) Income, Net on the Consolidated Statements of Operations” [13].
  • “Other expense was $(15.6) million in Fiscal 2017, compared to other income of $3.8 million in Fiscal 2016. Included in other expense in Fiscal 2017 was $8.0 million of costs related to the planned exit of a joint business venture, along with a $15.2 million net charge associated with a reserve against a receivable, partially offset by foreign currency fluctuations” [13].
  • “Fiscal 2017 joint business venture exit charges were recorded within other (expense) income, net on the Consolidated Statements of Operations” [11].
  • “Fiscal 2017 inventory charges were recorded within cost of sales, including certain buying, occupancy, and warehousing expenses on the Consolidated Statements of Operations” [11].
  • “In connection with these transactions, the Company recognized a pre-tax inducement charge of approximately $4.7 million during the 13 weeks ending January 28, 2023, which was recorded within debt-related charges on the Consolidated Statements of Operations” [5].
  • “$64.7 million of pre-tax debt related charges related primarily to induced conversion expense on the exchanges of our 2025 Notes, along with certain other costs related to actions taken to strengthen our capital structure” [5].

Just to re-iterate, this list is not definitive but a quick illustratory example that the restructuring and impairment charges are not the only charges taking away from Shareholder’s potential earnings.

Shares Authorized, Issued and Outstanding

There are a large number of shares authorized, making possible future equity dilution and as always we’d like to know why such a large number have been authorized. Additionally, the differences between the number of shares issued and outstanding is rather notable, although the differential appears to have been on the decline for the last few 10-K Filings. The difference seems tied in with the Company’s repurchase of their common shares which occurs somewhat frequently resulting in repurchased shares being recorded as treasury stock. There was recently a large volume of such repurchased shares:

Accelerated Share Repurchase Agreement

On June 3, 2022, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with JPMorgan Chase Bank (“JPM”). Pursuant to the terms of the ASR Agreement, on June 3, 2022 the Company paid $200.0 million in cash and received an initial delivery of 13.4 million shares of its common stock on June 3, 2022.  At final settlement, on July 28, 2022, an additional 3.7 million shares were received. The cumulative repurchase under the ASR Agreement was 17.0 million shares repurchased at an average price per share of $11.75. The aforementioned shares have been recorded as treasury stock. [5]

We highlight the differential between the number of shares issued and outstanding because we use the number of shares issued for our diluted EPS calculation and in this instance a marked pronounced difference would occur here off of this fact alone, and although there is nothing to do about it the matter seemed worth highlighting.

As a bit of additional and relevant information, the consolidated statements of stockholders’ equity has a ‘reissuance of treasury stock’ in every 10-K Filing and has a note saying shares “were reissued from treasury stock for the issuance of share-based payments” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27], making it clear what the intentions are with the treasury stock.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Company may have recently completed a business cycle expansion.
  2. The Company is relatively conservatively capitalized so may not make much of an interesting speculative purchase in this regard.
  3. We do not suspect any corporate pyramiding.
  4. Concerning the principles of consolidation, the Company has recently said the following – “The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries and consolidated entities where the Company’s ownership percentage is less than 100%” [3, 5]. Thus there is no need for concerns about partial ownership of entities from the Shareholder perspective, although the following has recently been stated – “Non-controlling interests are included as a component of contributed capital within the Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity and was not material for any period presented” [3, 5].
  5. Depreciation and amortization have been delineated on the income statement, and as far as the depreciation methodology is concerned, the Company’s fixed assets are depreciated using the straight-line method over the assets’ estimated useful lives which are as follows: ‘buildings’ is 25 years; ‘leasehold improvements’ is the lesser of 10 years or the term of the lease; ‘fixtures and equipment’ is five years; and ‘information technology’ is 3-5 years.
  6. Net income and comprehensive income typically approximate to the same value with minor differences occurring on account of currency fluctuations.
  7. Regarding the valuation of inventories, “merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method” [5, 7, 9, 11], prior to which it was “valued at the lower of average cost or market, utilizing the retail method” [13, 15, 17, 19, 21, 23, 25, 27].
  8. The Company had both ‘prepaid expenses and other’ and ‘other assets’ listed on the latest balance sheet, but a full comprehensive breakdown was not provided so we have not included these in our valuation(s).
  9. The Company’s long-term debt is secured by their assets.
  10. There are no concerning payments due in a year or so.
  11. There has been a recent decline in the value of the current assets but this seems owed to the previously issued notes and the cash received (just to be clear we are referring to the spike and subsequent decline in the Company’s cash on the balance sheet). We do not believe this to be portent, although we do suggest an eye be kept on this going forward.
  12. The Company paid cash dividends throughout the loss of fiscal 2020.
  13. The Company is a ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act and has been for all of our sampled 10-K Filings.
  14. It seems the Company may have been perceived as being at risk of a revenue drop due to it being a retail entity, but the earnings and other metrics have not reflected such an opinion.

Points we feel may be considered negative

  1. The equity compensation plan information is missing for fiscal years 2020 and 2021, so we used the equity compensation plan information for fiscal year 2022 instead.
  2. There is no history of stock splits [29] but there was some stock dilution when “in June 2022, the Company exchanged $342.4 million in aggregate principal amount of the 2025 Notes. The Company paid cash of $136.1 million to redeem a principal amount of the 2025 Notes with a carrying value of $339.2 million and issued approximately 34.7 million shares of the Company’s common stock” [5], and then “in December 2022, the Company exchanged $60.8 million in aggregate principal amount of the 2025 Notes for shares of the Company’s common stock, plus payment of accrued and unpaid interest. The Company issued approximately 7.6 million shares of the Company’s common stock with a carrying value of $60.4 million” [5].
  3. There is considerable institutional ownership of the common shares outstanding (66.91% at the time of writing [30]).
  4. More often than not, the Company’s expectations for the following year do not materialize as predicted. We reached this conclusion from looking at the anticipated capital expenditures, store openings, and store closings.
  5. There have been more year-over-year decreases in cash and cash equivalents than there have been increases over the latest financial decade.
  6. The effective tax rates appear a little wayward and there does not seem to be any consistency or predictability concerning their values. As of the latest 10-K Filing’s date, there were foreign net operating loss carryovers, foreign tax credit carryovers, state income tax credit carryforwards and United States federal and state capital loss carryforwards.
  7. Every year the Company says they are involved in actions associated with or incidental to their business.
  8. Every year there is a list of related party transactions. This has included matters involving leases, in-store music program services, one-time transactions for handbags, many inventory purchases, ecommerce and technological platform(s), and the “name, image, likeness” ambassador services for two National Collegiate Athletic Association athletes. Related party transactions seem perpetually present.
  9. We noted a few unfavourable Management observations:
    1. The Directors serve staggered three-year terms.
    2. The Company uses non-GAAP measures to determine EO compensation, including TSR.
    3. Fees are paid to some Directors for meeting attendance.
    4. The CEO pay ratio seems very excessive.
    5. The Company’s NEOs have received some questionable benefits (relative to the Shareholder’s perspective) such as the Executive Chairman of the Board and Chief Executive Officer receiving security arrangements and some other NEO usage of the corporate airplane which also involved the accompaniment of family members.
    6. There does not seem to be an upper age limit for which Directors can serve the Board.
    7. Some of the amounts due in fees in the event of termination etc are rather high.
    8. Most DEF 14As detail delinquency as it pertains to Section 16(a) beneficial ownership reporting compliance.

Points we feel may be considered positive

  1. The Business was founded in 1977 thus has stood the test of time.
  2. Concerning previous economic downturns, the Company profited during the years of 2009 and 2008 [28].
  3. We would say the operations of the Company are easy for the layman to understand.
  4. The Company has no dependency on neither a small number of suppliers nor customers.
  5. The Company is a large enterprise in terms of consolidated financials.
  6. There is not history of hostile take-overs or acquisitions of unrelated companies.
  7. The Company has previously returned extra value to Shareholders in the form of extra cash dividend payments.

Possible Questions for AEO’s Approximate 448 Stockholders to Consider, Investigate and/or Raise with Management

  1. Why have such a large number of shares been authorized? Can any reassurance be provided that these will not eventually dilute Shareholder equity in the near-term future?
  2. Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
  3. Why did the Company remove the portion of the 10-K Filings addressing the off-balance sheet arrangements?
  4. The latest 10-Q Filing said the following – “Non-controlling interests are included as a component of contributed capital within the Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity and was not material for any period presented” [3]. Can more information on these interests be provided?
  5. Why did the Company recently remove the table beneath the ‘Disclosure about Contractual Obligations’ header which outlined their upcoming payment obligations?
  6. Can AEO not pay more in cash dividends to Shareholders on a more consistent basis?
  7. Is there an upper age limit for which Directors can serve the Board?
  8. Was any Director or EO a founder or co-founder of the Company?
  9. The Company has said that both themselves and their third-party vendors regularly experience cyber-attacks aimed at disrupting services. How effective are these attacks, and to what notable extent have services been disrupted?
  10. Why did the compensation committee have 17 meetings in fiscal 2021?
  11. Why was the equity compensation plan information missing for fiscal years 2020 and 2021 from both the relevant 10-K and DEF 14A Forms?
  12. Why are the DEF 14A Forms so long, in some instances longer than the accompanying 10-K Forms?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 11.74. Using our most recent three-year average of the diluted EPS (0.42) as opposed to the most recent EPS figure (0.47) increased the P/E ratio from 27.73 to 28.24; and using our discernible tangible equity value per share (0.04) as opposed to the stated book value per share (6.13, in accordance with Table 2 – 2) has increased the P/BV ratio from 1.92 to 332.89. With that in mind and considering current federal interest rates (5.25% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 0.42 for diluted EPS and our stated discernible tangible equity value per share of 0.04, and multiplying the corresponding P/E and P/BV ratios of 28.24 and 332.89 respectively, we get a figure of 9,401.44, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 0.57).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – no longer valid
  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – no longer valid
  • The Company’s previous earnings consistency and stability – still somewhat valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This Issue did not do well concerning our ‘Initial Discussions Regarding the Company’s Financials’ section. Qualitatively speaking our main issue is the charges eating into the income, but the quantitative matters quite frankly are not fantastic; and the share price is current astronomical according to our P/E * P/BV figure. At this point in time, there is currently no pricing point at which we would have assigned this Issue a valuation of ‘Gold’ or higher.

At this point in time and all matters here considered, this is not stock pick we would likely follow nor likely add to a stock portfolio even at a seemingly reasonable price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. AEO’s 1st 2023 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/919012/000095017023024242/aeo-20230429.htm
  4. AEO’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312523118748/d391725ddef14a.htm
  5. AEO’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000095017023007604/aeo-20230128.htm
  6. AEO’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312522120421/d309895ddef14a.htm
  7. AEO’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000095017022003587/aeo-20220129.htm
  8. AEO’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312521124945/d95737ddef14a.htm
  9. AEO’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459021012543/aeo-10k_20210130.htm
  10. AEO’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312520114253/d888944ddef14a.htm
  11. AEO’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459020010469/aeo-10k_20200201.htm
  12. AEO’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312519117177/d689334ddef14a.htm
  13. AEO’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459019007828/aeo-10k_20190202.htm
  14. AEO’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312518131579/d513563ddef14a.htm
  15. AEO’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459018006045/aeo-10k_20180203.htm
  16. AEO’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312517121352/d298282ddef14a.htm
  17. AEO’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459017003969/aeo-10k_20170128.htm
  18. AEO’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312516545050/d106602ddef14a.htm
  19. AEO’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000156459016014422/aeo-10k_20160130.htm
  20. AEO’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000120677415001357/americaneagle_def14a.htm
  21. AEO’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000119312515087519/d848537d10k.htm
  22. AEO’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000119312514142779/d703653ddef14a.htm
  23. AEO’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000119312514098050/d657823d10k.htm
  24. AEO’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000118811213001107/t76133_def14a.htm
  25. AEO’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000119312513102293/d468081d10k.htm
  26. AEO’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/919012/000118811212001148/t73126_def14a.htm
  27. AEO’s 2011 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000119312512117468/d277416d10k.htm
  28. AEO’s 2010 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/919012/000095012311024788/l41576e10vk.htm
  29. https://www.stocksplithistory.com/?symbol=aeo
  30. https://www.gurufocus.com/stock/AEO/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended the following year, typically in the calendar month of January, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended January 2020. The Filings are usually published a couple of months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2020 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the following calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V