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American Eagle Outfitters, Inc. Message Board

  • bellard bellard Apr 17, 2008 11:27 AM Flag

    Life cycles of specialty retailers....

    Log onto morningstar and look at the 10 year history of Talbots(TLB), another specialty apparel retailer. You will see TLB EPS sharply increase from .09 in the late 1990's to around 2.00 for years ending 2002-2003.

    Talbots stock price obviously rose from 6-7 a share in the late 1990's to over 50 a share in 2001-2002. Thats a 700% increase in just a few years. During that time AEO also had huge increases in EPS, and AEO stock price rose from 2-3 a share to over 30, a hefty 1000+% increase.

    Talbots has been around longer than AEO, and until recently very highly respected. From 2001 to 2006 TLB averaged 1.8 earnings per share during this US credit bubble economic environment.

    In 2005-2006 Talbots saw its own expansion in the US had come to a halt(just like AEO now). TLB had saturated the US market - and without new store growth, sales and EPS growth had stopped.

    Instead of just being a solid cash cow company, TLB made acquisitions(J Jill) and entered new areas for apparel - mens and kids concepts - to keep its growth rates up. This is what aeo is currently doing with M&O, expensive NYC leases, and the new kids concept. Read the below news from TLB from just a few months ago(Jan.-2008):

    TLB will discontinue its Talbots Kids and Talbots Mens concepts by September after a business review revealed the concepts didn't demonstrate potential to deliver acceptable long-term returns on investment. As part of the move, Talbots will close about 78 stores, which will affect about 800 full-time and part-time positions, or about 5% of the total Talbots workforce.

    This shows my current thesis for AEO. I have been very upset when I was a shareholder, and AEO did not kill the M&O concept. Now AEO is paying record leases for new stores, opening new kids concept that TLB just decided does not make much sense - all to try and fight nature!

    The natural life cycle for AEO is the cash cow business stage - Just accept sales flat to up 5-6%, reduce capex, use the huge free cash flow to increase the divy, and buy back shares....

    Those who ignore history will relive it. This TLB and AEO story reminds me of the US homebuilders in 2006. The HB's were making great $$, and cash flow - but kept expanding to keep their growth rates up - instead of accepting the business cycle and prepare for the future.

    I really feel many investors ignore how risky buying AEO stock is in light of current market conditions, and managements lack of foresight....

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    • Reaching saturation with AE is fine as long as it doesn't lose its high profit margins. Think See's Candies. It was saturated 36 years ago when Buffett bought it but has been providing Buffett with cash to invest at high rates of return ever since. AEO management has places to invest the cash from AE and that it is why AEO can still grow. Investments are aerie, internet sales (all brands), M+O, 77kids. AE is a cash machine and this cash will be invested in building other cash machines. If their ultimate problem is too much cash and no where to invest it, that isn't such a bad problem to have. They can pay it out to their shareholders.

    • al_la_ca Apr 25, 2008 6:29 PM Flag

      It maybe true that AEO is reaching saturation in the US. Money does go where is growth is. Guess I think would be a better comparison than Talbots. Guess was down for a while and made a comback.

    • Talbot

      n. A large white or light-colored hound of an English variety, having long hanging ears and heavy jaws, formerly used for tracking and hunting.

    • Correlation should not be confused with causation, Post hoc ergo propter hoc describes a logical falacy, and considering the past as predictor combines the two flaws. In other words, George Santayana's assertion that "Those who cannot remember the past are condemned to repeat it" may be wrong because history does not reliably repeat.

      Sodom and Gomorrah, Caligula, and the Emperor Nero have been referenced repeatedly to predict the downfall of the United States at various points in our history, as we have entered times of perceived excess and pleasure. "Reefer Madness" possessed such a prediction during the Jazz era of the late 1950s. The gyrations of "Elvis The Pelvis" was, for some, a predictor of our downfall as a nation. Indeed, that sweet, conservative paradigm of social correctness that was my grandmother when I knew her, was a party-girl flapper at the speakeasies in the 1920s -- a time in history that surely portended the demise of the country due to its low morals and egregious excesses of hedonism. She was even (oh, the shame of it) a divorce by the late 1930's -- before becoming the wife of salesman (even worse), who rose to the senior ranks at Rockwell and retired well.

      On the other hand, the argument that "the world is different today than at any time in the past" is equally fallacious. Speculative bubbles arrive with alarming predictability -- the proof of which earned Kanneman and Smith the Nobel Prize in economics.

      So how do we square these two opposing conventions?

      We don't... simply, because we can't.

      Crystal balls do exist, but the magic that supposedly resides within them does not.

      What I do know is that it is a mistake to compare Talbots with American Eagle. The clientele is different, the management is different, the structure is different, and the debt posture is different.




      "Almost every wise saying has an opposite one, no less wise, to balance it."

      "Fashion is something barbarous, for it produces innovation without reason and imitation without benefit."

      "Fanaticism consists in redoubling your efforts when you have forgotten your aim."

      George Santayana

      • 1 Reply to rtcrawfordiii
      • "What I do know is that it is a mistake to compare Talbots with American Eagle."

        Not a mistake at all. The two firms are quite similar. TLB collapse has no causal relationship to AEO future. The main point I was trying to make, and maybe you did not see, was when does a firm just become a cash cow, and stop trying to be a growth company?

        I have posted about AEO's not being a growth firm before - IMHO they are fighting this natural trend just like TLB did 2 years ago with terrible consequences for its shareholders.

    • You sure care a lot about this stock for having no position in it one way or the other.

      But I sure appreciate all the time you're taking to save us all money without any compensation coming to yourself.

      Just wish I'd read all this brilliant analysis last year when the stock was over $30. THAT would have been an excellent time to save us all the money we're sure to lose. But I guess 50% off the 52-week high and trading at 3-year lows is better than nothing.

      It's just too bad that the stock coincidentally collapsed before all of this information came to light. Now on top of the random 50% haircut we have to face brand new and independent bad news going forward completely ignored by the previous 50% drop. Darn.

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