"We performed an LBO analysis on the teen players (AEO, ANF, ARO), which have seen their valuations decline over the past few months. ANF ranks the highest in terms of potential (34% IRR), followed by ARO (29% IRR), and AEO (25% IRR)."
"In our view, ANF currently has the best combination of valuation, FCF, potential for operating improvement, and ability to take on leverage of the three teen retailers, although we acknowledge that a successful LBO may require a change in management. While there is much interest in ARO, its current valuation, required leverage, large capital requirement for significant improvements in profitability, and now management backlash could make it a feat much more difficult than with ANF. We believe an LBO of AEO is prohibitive given its current valuation and less opportunity to improve since it has been the best run of the three companies."
FBR maintains an Outperform rating and $43 price target on ANF, a Market Perform and $15 price target on American Eagle Outfitters AEO, and a Market Perform rating and $10 price target on ARO.