Profitability Ratios: Fiscal Year | 2008 | 2007 | Fiscal Year End Date | 01/31/09 | 02/02/08 | Net Profit Margin | 6.0% | 13.1% | Gross Profit Percentage | 39.3% | 46.6% | Asset Turnover | 1.56 | 1.59 | Fixed Asset Turnover | 3.17 | 3.73 | Return on Assets(ROA) | 9.3% | 20.8% | Return on Equity( ROE) | 13.0% | 29.0% | Earnings per Share (EPS) | 0.87 | 1.88 | Price/Earnings | 10.4 | 12.5 |
The ratios in this section focus on the level of profits American Eagle Outfitter generated during the years 2007 and 2008. Net Profit Margin, which relatively measures the effectiveness of management in generating revenues and controlling expenses, shows an approximately half decreasing rate. According to the Consolidated Income Statement, this decreasing rate mainly comes from the large reduction in net income caused by the general and selling expenses, depreciation and amortization, and other-than-temporary impairment charges. Specifically speaking, a failure in budgeting indispensable costs including certain buying and occupancy, warehouse expenses, employee wages directly induce these large amounts of expenses. Referred to the supplements, the AEO recognizes a loss of $ 22,889 related to the Other-than-Temporary impairment. After considering all available evidence to evaluate the realizable value of its investment, the fair value is less than its carrying value. Reviewing the operating performance and considering projections of future performance of these stores, the company then decides to shut down some stores, which obviously would not be able to generate sufficient cash flow to recover the initial investment. At the same time, the account of Other Income consisting primarily interest income as well as foreign currency transaction income also encounter a considerable fall. Therefore, the major accounts of expenses are rising while the only accounts of income are decreasing.
Furthermore, the Gross Profit Percentage is experiencing a decline because of an increased cost of sales and decreased total revenue. Technically, the AEO is earning 7% less profit on each dollar of sales. As illustrated in the notes, the merchandise costs, markdowns, shrinkage, and certain promotional costs have a higher growth rate compared to the sales revenue.
Despite a failed budgeting in merchandising cost and period cost, the financing strategy aimed at effectively making profits also performed disappointingly. According to the data presented in the accounts of Asset Turnover and Fixed Asset Turnover, the sales revenue generated for each dollar invested in assets appears to be far less than expected. According to the footnotes, analysts attribute this decline to the improper decisions made on investing tangible assets. Normally, the fixed assets for AEO are factories and machines for manufacturing clothes. The managers misdeemed the future value on building new factories and purchasing new technical machines unequivocally caused the loss. When evaluating the ROA, it is evident to find that the substantial reduction results from the considerable loss of net income which is relevant to the net profit margin on some degree. Similarly, due to mismanaging stockholder’s investment in fixed assets, the managers brought AEO significant collapse in ROE.
Overall, the stockholders experienced a severe loss since AEO reported the EPS ratio as 0.87 and 1.88 in 2008 and 2007, respectively. With no preferred stock issued and little changes in shares of common stock outstanding, the EPS ratio decreased as a result of largely diminished net income. Despite the considerable downfall of EPS, the stock price does not drop proportionally, revealing that the public still holds a relatively affirmative opinion towards AEO’s provisional decay. Consequently, the P/E ratio does not…