Valuation: American Eagle Outfitters (AEO)

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Company Profile: American Eagle Outfitters (AEO) (obtained via Google Finance)

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

1) Is the business simple and understandable?

American eagle is in the retail business.  Retail has its ups and downs (currently it’s in a down), but it is and always has been a simple and understandable business.  After all, people have been buying and selling various items in marketplaces for millenia.  Today, it’s not all that different than it was in ancient Rome – sure there is the whole internet thing, but really that’s more a different method of communication and a new marketplace, not necessarily a trait that makes the business itself more complicated.

2) Does the business have a consistent operating history?

The company was formed in 1977 and has consistently operated as a clothing retailer.  In terms of its operating strategy, that hasn’t changed.  As for financial operating history, the company has maintained a positive net income for over ten years despite fluctuations in the industry. 

3) Does the business have favorable long term prospects?

The retail industry faces significant issues whenever consumer discretionary spending drops – and we are currently witnessing that part of the business cycle.  However, we feel confident in American Eagle’s long-term prospects given their balance sheet strength (current ratio of 2.3, and they could pay off all of their liabilities with current assets alone).  A company with a balance sheet this strong can withstand issues in the business cycle and we expect that American Eagle will be around for a long time to come.

4) Is management rational?

We consider the management of AEO to be very rational in their business activities and decision making.  This is another fact that is evidenced by the strength of the balance sheet.  The company does not attempt to grow faster than it is able to by limiting its debt obligations. 

5) Is management candid with its shareholders?

Though we are disappointed in the amount of information provided on the company’s website, we are encouraged by the fact that the company does not seem to hide anything from its shareholders, and provides all the necessary information and ways to request further information.

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1) Size of firm

This company’s market capitalization of $2.76 billion is greater than the defensive investor’s requirement of $2 billion.  Pass.

2) Strong financial condition

The current ratio of 2.3 is greater than 2. Pass.

3) Earnings stability

This company has had positive net income for the prior 10 years. Pass.

4) Dividend record

The company has only paid a dividend since 2004 – not a long enough dividend history for the defensive investor.  Fail

5) Earnings growth

American Eagle has grown its earnings by more than 33% over the last 10 years.  Pass.

6) Price to earnings analysis

The PEmg is currently about 9, which is less than the requirement of 20.  Pass.

7) Price to assets analysis

The PB ratio is less than 2.5 (and the PBxPE ratio is less than 50).  Pass.


Having passed 6 out of the 7 required defensive investor’s tests, we believe that American Eagle Outfitters may be a suitable investment for the defensive investor following Benjamin Graham’s investment strategies.


1) Strong financial condition

This company current ratio is higher than 1.5.  Pass.

2)  Strong financial condition

The company’s debt to net current assets ratio is less than 1.1.  Pass.

3) Earnings stability

AEO has consistently maintained a positive net income for the past 5 years. Pass.

4) Dividend record

They currently pay dividends. Pass.

5) Earnings growth

The company’s earnings are currently higher than they were 5 years ago.  Pass.

OverallHaving passed all of the Enterprising tests, we feel that American Eagle may be suitable as an investment for the enterprising investor. 


Our valuation model finds a fair value to be around $34.


Since the company is currently trading at about $13.40, we feel it is currently undervalued and that it may be a suitable company for either the defensive or enterprising investor.  However, we recommend further research by the reader prior to making any investment decisions.

The author did not hold a position in AEO at the time of publication. Also, please read our disclaimer and Our Methods.

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