Comprehensive Financial Analysis of American Eagle Outfitters, Inc.

Comprehensive Financial Analysis of American Eagle Outfitters, Inc.

Ratio Analysis

The financial ratios of American Eagle Outfitters, Inc. (AEO) highlight the firm’s ability to generate revenues and manage its cash and operations efficiently. The following analysis will, therefore, summarize major observations deduced from the ratios highlighted in relation to the years 2019 and 2020.

Return on Equity (ROE)

The return on equity for AEO in the year ended 2020 was zero. Labor was previously at 0. 780400 and was at 0. 1532 at the end of the year, and it was 2034 in 2019. ROE holds the ability to gauge the performance of the firm about the shareholders’ funds. This ratio indicates how efficiently the company utilizes shareholders’ equity to make revenues. A decrease in ROE means that for every dollar of equity, AEO made less profit in the year ending 2020 than in 2019. This reduction could be because net income has decreased and the equity base has been enhanced, possibly through retained earnings or new equity financing. A lower ROE lets the idea that AEO did not employ its equity effectively to generate profits in 2020. It may be due to low consumer demand, high operating expenses, or other market factors that the firm incurred in the year (Forbes, 2021).

Return on Assets (ROA)

The ratios of the ROA for AEO also reduced in the same year from 0. 60587 in 2014 to 137614 in 2019, and it was in the range of 0. 0575 in 2020. It is a simple business profitability indicator that indicates how well a company can operate the available assets to earn revenues. This reduction in ROA shows that the efficiency of assets in generating profit in the fiscal year 2020 has slightly reduced, owing to some operational challenges that AEO had in its operational year. Such circumstances could arise from low operating income, high operating expenses, or reduced efficiency on the assets attributable to other operating activities outside the company, such as stock market crises or fluctuating exchange rates (Herrmann et al., 2019). The overall decline in ROA makes it possible for AEO to pay particular attention to how it employs its assets. Other ways can also help enhance the efficiency of exploiting the assets, such as increasing the inventory turnover, efficiently managing the supply chain and reducing capital expenses.

Gross Profit Margin

There was also a slightly lower gross profit margin at AEO from 0. It reduced from 3686 in 2019 to 0. 3533 in 2020. Thus, the gross profit margin gives the percentage of the total revenue achieved after the cost of goods is sold. A negative change in this margin suggests that AEO’s COGS were relatively higher than its revenue in the period under consideration due to, amongst other reasons, high production costs, high material costs, or low selling prices. That reduction in gross profit margin suggests that AEO’s fundamentalism of maintaining its profits through controlling costs or setting prices declined in 2020. Hence, to manage this decline in the gross profit margin, the following strategies can be recommended for AEO: improving relations with suppliers, where AEO can win better discounts and favorable payment terms, thus bringing up the procurement cost and minimizing the funding of inventory costs; focusing on more profitable products through better product portfolio management; and improving the company’s pricing policies (Deloitte, 2021). Also, improving the company’s operations and minimizing wastage could assist in reducing the COGS, hence boosting the gross profit margin.

Current Ratio

The current ratio for AEO declined from 1. 9281 in 2019 to 1. The country’s population stood at 9,281 in 2019 to 1. 3940 in 2020. The current ratio measures a company’s solvency level regarding its current assets and liabilities. The ratio is greater than one if the figure for current assets is higher than the current liabilities in the company’s case. Current analysis indicates that AEO’s liquidity position worsened in 2020, possibly because current liabilities have increased or current assets have reduced. There may be implications relating to possible difficulties in terms of liquidity and the need for attention in terms of acting on working capital requirements in relation to short-term obligations. Based on the identified issues of AEO, the general recommendation is to enhance cash management practices to strengthen the company’s liquidity position. This could entail better managing inventories, enhancing the rate at which receivables are collected, and better handling payables (Gap Inc., 2020). Further, management of working capital is also bright since adequate cash of cash equivalents could prevent the realization of a liquidity crunch in the company.

Quick Ratio

The quick ratio for AEO has shown a similar decrease from 1. 1459 in 2019 to 0. A quick ratio of 1 or lower indicates that the company may have issues meeting immediate liabilities via the sale of inventory. The reduction in the quick ratio indicates even higher concerns about liquidity, which shows that AEO’s liquid assets other than the inventory were still inadequate to meet its current liabilities in the year 2020. One way to increase the quick ratio in the future is to pay much attention to the development of cash and receivables. The cases of credit sales to the customers can be lowered, and attempts to ensure the collection of the receivables as soon as possible could help to increase the cash flow (American Eagle Outfitters, Inc., 2020).

Significant Findings and Their Meaning

Decreased Profitability

The values for both ROE and ROA drastically fell, showing that the profitability and efficiency of assets at AEO decreased from 2019 to 2020. This may be due to a weak operating environment, especially in the retail sector, competition, higher overhead costs, and unfavorable economic factors. The downsides of these percentages indicate that AEO should examine its strategies for improving profitability by cutting down costs or increasing revenue.

Weakened Liquidity

The current and quick ratios indicate an emerging liquidity problem for AEO. Hence, it is symptomatic of the company’s problems in managing its short-term liabilities with its current or cash and near-cash assets. This could have negative impacts on cash flow, and therefore, AEO should pay more attention to the management of its liquid and fixing the source of its funds for short-term funding, for instance, accurate evaluation of the stocks, enhancing collection on its receivables, and acquisition of short-term finance.

Slight Decline in Gross Profit Margin

The minor decline in the gross profit margin indicates that the cost has risen compared to the revenue, which could be due to high production costs, low selling prices, or both (U.S. Securities and Exchange Commission, 2020). Therefore, management needs to pay attention to the welfare of the costs and possibly reconsider the current prices charged. This might be another problem, which might be solved by, for instance, better supplier negotiations, improved operational management, or new higher-margin products.

Industry Comparisons

A comparison of the presented financial ratios indicates that AEO had critical issues in 2020 compared to the industry averages. For instance, most retailers faced comparable escalating profitability losses and deterioration in their liquidity due to the effects of COVID-19. Nonetheless, some firms were able to respond to these effects more effectively through enhanced e-commerce stands, product portfolios, or more adaptable cost models (Root et al., 2023).

Strategic Recommendations

1. Enhance Profitability: For AEO, the major priorities should be increasing operational effectiveness, cutting costs, and increasing revenues.
2. Strengthen Liquidity: Liquidity ratios reveal that AEO requires enhancement of its liquidity position; accordingly, it should pay attention to cash management practices, inventory management, and receivables management.
3. Improve Asset Utilization: To increase the ROA, AEO should implement sound asset management practices.
4. Cost Management: Management at AEO should conduct a thorough analysis of pricing and negotiate with suppliers to get favorable terms while improving the COGS, which can boost the gross profit margin.

Conclusion

The analysis of the financial ratios of the company for 2019 and 2020 balances the understanding of the major income statements of the company and the business efficiency of American Eagle Outfitters Inc. By definition, these include the reduction of its return on equity, return on asset, current ratio and quick ratio which forces AEO to gear up. To overcome these challenges, implementing sound strategic plans to increase profitability, using resources efficiently, and strengthening liquidity positions is vital. Through knowledge sharing with similar industries and applying the best strategies, AEO will be better positioned to tackle the growing competitive nature of retail stores. Hence, growth can be easily achieved.

References

American Eagle Outfitters, Inc. (2020). 2020 annual report. American Eagle Outfitters Investor Relations.

Deloitte. (2021). 2021 retail industry outlook. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consumer-business/us-2021-retail-industry-outlook.pdf

Forbes. (2021). Retail industry trends and insights. https://www.forbes.com/sites/bernardmarr/2020/11/16/the-5-biggest-retail-trends-in-2021/

Gap Inc. (2020). 2020 annual report. https://www.sec.gov/Archives/edgar/data/39911/000003991121000011/q42020eprexhibit991.htm#:~:text=of%20over%2050%25.-,Gap%20Inc.,the%20end%20of%20last%20year.&text=Despite%20the%20uncertainty%20remaining%20as,fiscal%20year%202021%20financial%20outlook.

Herrmann, D., Thomas, W., & Spiceland, J. D. (2019). Financial accounting. McGraw-Hill Education.

Root, T. H., Senteza, J., Suh, I., & Yoon, J. (2023). Abercrombie & Fitch Co.: Does ESG matter? International Journal of Teaching and Case Studies, 14(1), 11-50. https://doi.org/10.1504/IJTCS.2023.131666.

U.S. Securities and Exchange Commission. (2020). Form 10-K for American Eagle Outfitters, Inc. https://www.sec.gov/Archives/edgar/data/919012/000156459020010469/aeo-10k_20200201.htm

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We’ll write everything from scratch

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This IP builds upon your work in all previous units.

In this project, you have been analyzing and interpreting the publicly traded company, American Eagle Outfitters, Inc. (located in Appendix A: American Eagle Outfitters, Inc., 2020 Annual Report of the required textbook: Financial Accounting).

• Unit 1: Industry and Business Structure
• Unit 2: Current Asset Analysis
• Unit 3: Inventory and Long-Term Asset Analysis
• Unit 4: Long-Term Liabilities and Equity
• Unit 5: Overall Company Analysis and Conclusion

All of the information has been gathered to complete a comprehensive financial analysis of the company’s financial health and internal financial measures to develop short- and long-term strategic plans to help a manager make good business decisions.

Deliverable Requirements: Your comprehensive financial analysis should have at least 5 pages and present industry findings regarding liabilities and equity. Be sure to address the questions above, and consider how to use this information in your analysis. Your analysis should include the following:

• Present the financial analysis separately.
• The trend analysis and ratios for the company should be presented in an Excel workbook.
• In 4 to 6 double-spaced paragraphs, discuss the significant findings for the company.
• Do not discuss the financial analysis line by line; instead, identify the significant findings.
• Discuss the meaning of the findings.

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