William Ellard

American Eagle Outfitters' Wings May Be Falling Off

Steve;
My new WACC or discount rate is now at 9% for AEO. I feel teen fashion, and consumer retail, are a bit risky, and I like to build a level of caution in my DCF models. I have AEO real growth at 6-7%.....
I have no position in AEO. I have been an AEO investor for years. I have never shorted, or owned puts on AEO. I would love to be wrong and see AEO go to 30.

American Eagle Outfitters' Wings May Be Falling Off

Forest;
Thanks for the post. The cash flow/ ebida numbers you present were in line what I was forecasting several months ago. At that time my DCF value was about 24. Since then AEO's management appears to be out of touch with trends, markets, and the current economic recession the US is in. Also I should note, I believe that the US economy is in worst shape than most other economists, and analysts.

I also thought AEO would be more recession proof than other retailers. But look at BBY's 2008 estimate, and it appears they will outperform AEO as well as AEO main rival ARO.

I use 5 different metrics of cash flow, never EBIDA. Check out this blog from my CAPS page about my DCF modeling:
caps.fool.com/Blogs/Vi...

I am not sure what you mean by your above reference about prior cash flow being too high? The 525M number?? I usually strip out balance sheet changes for cash flows, but did not do that for the year ending Feb. 07 - AEO had 130M of increased liability padding their cash flow to get the 525M of free cash flow. I should have back that out, so Free clean cash flow would have been closer to 400M that prior year.

For the next 3 years, I have AEO at around 200m per annum of free cash flow. After that I have lowered my earnings, and cash flow growth rate down to 6%. At the same time I have increased my discount rate to 9% for all my models. These changes have lowered my current DCF value of AEO from 24 to 14. I may be grading AEO a bit harshly, but I have many other sectors and equities I like better.

American Eagle Ready to Fly High

You are using 1 year old data. Use feb.2008 year end cash flow data and you will see large decreases in cash flows, and NI and cash flow yields. Also net income has fallen 3 quarters(YOY) in a row, while ARO is gaining market share. AEO has major issues you are ignoring, but not using current data. That being said, AEO below 20 is a good entry point for the longer term investor.