American Eagle Outfitters Moat Check

The first stock on yesterday’s Magic Formula list is American Eagle Outfitters (AEOS). I am pretty familiar with American Eagle stores. My old winter coat came from their store. However, I not as familiar with their business.  

The first thing I want to find is whether American Eagle’s business can generate value by sustaining a long-term competitive advantage. In order for a business to do this, it needs to stave off competition with a wide moat. In order to determine if American Eagle Outfitters has a wide moat to protect it from competition in the future, I took a closer look at American Eagle Outfitters.

As a first step, I ran though the “Big Five” numbers Phil Town uses as a first step to check for a wide moat.  First, I checked the return on invested capital (ROIC).  Since I’m just doing an initial review of this stock, I’m going to rely on online resources to quickly check these numbers.  According to ADVFN, ROIC is currently 22.1 percent and has averaged 17.9 percent over the past five years.  That check out good since it is above the 10 percent target. 

The next factor is the growth rate of equity.  I do this by looking at the growth rate of book value per share over the past five years.  According to the financial figures on ADVFN, book value per share has gone from $2.61 in 2001 to $6.45 per share.  That is a 25 percent increase in book value per share (=(2.61/6.45)^(-1/4)).  This is well above the 10 percent target rate I’m looking for.

The next factor is sales growth.  American Eagle Outfitters sales growth has been over 13 percent over the past five years and the current rate is even higher than that.  These are some impressive growth numbers and well above the 10 percent target.

The final factor is the growth rate of free cash flow.  American Eagle Outfitters free cash flow has grown from -$23.9 million for 2001 to $272 million for 2005.  This is well above the 10 percent growth rate I want to see.

Given that all five factors are above 10 percent, there is a good possibility that American Eagle Outfitters has a wide moat.  I’ll have to dig a little further to see if I can figure out what kind of moat that American Eagle Outfitters has.  A good place to start looking is in the 10-K filing.

American Eagle Outfitters designs, creates and sells their own brand of clothing targeted at 15 to 25 year olds though their 846 stores and their website.  Their competition includes The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear, Hot Topic, Aeropostale, and The Buckle.  Seeing the Gap in that list reminds me of a time when people thought Gap had a sustainable competitive advantage.  The Gap is no longer the “hot” store to shop in and I’m concerned that American Eagle Outfitters will face the same fate in the future. 

I think the key to American Eagle’s past performance has been its ability to closely follow fashion trends in the youth market without trying to lead those trends the way Abercrombie & Fitch does.  I think this enables American Eagle to sell trendy clothes at cheaper prices using their own brand.  I think this is more of a sign of good management versus them having a wide moat.  American Eagle Outfitters definitely has a competitive advantage, but I’m not confident that it is durable competitive advantage that is needed for a company to have a wide moat.  What are your thoughts?

7 thoughts on “American Eagle Outfitters Moat Check

  • January 25, 2006 at 11:33 pm

    Thanks for the post George, it was very well thought out. I don’t know much about determining moats per se, but I do like AEOS and have written a few articles on my blog:



  • January 26, 2006 at 2:17 am

    You might want to check on the purchases of the chairman last year and also the buybacks the company has and intends to buy back. Pretty compelling maybe?

  • January 26, 2006 at 5:11 pm

    I havn’t looked at AEOS in quite a while, but you might want to consider the same store sales numbers.

    Also, consider market saturation… how many stores do they have, vs. how many potential locations (e.g. how close are they to saturating north america ala starbucks)?

    With that, and most importantly, where’s the growth coming from 6 – 12 months out?

    Looking at the 3-month chart; are they seem to be trending up… bouncing off the 10-day moving average… now might be a good time to pick some up… consider half-a-position, and then wait until it pulls back closer to 25 to fill-out your position.

  • February 3, 2006 at 12:25 pm

    AEOS was recently trading at a 12x multiple, which, for a retailer growing like it is was too low. It’s still only at 14, which is still too low in my opinion.

    But, the poster above who mentioned same-store sales and saturation of stores could be on to something…retailers are very much driven by those numbers.

    As for the products itself, if you’re in the mall, you know AE. It has appeal to most teens and young adults and it captures a nice price for its clothes. It’s pretty much a staple in malls – but much hipper than the Gap. (Who isn’t)

    Good company, good stock, could be tough to buy and hold on forever because of the nature of finicky fashion trends.

  • March 9, 2006 at 7:00 pm

    Hi there –

    I took the Formula a little further than you – investing a cool $50K based on the formula (and a few of my own thoughts on this (I started with 50 and narrowed it to 20).

    Good thing (at least so far) that AEOS was one of them – they came out with a good earnings – better than GAP for example and the stock is up 10%.

    As for my portfolio – just check my blog at

    Thanks for your thoughts –


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