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Investment Overview for American Eagle Outfitters (NYSE:AEO)
- American Eagle Revenue per Square Foot: American Eagle revenue per square foot increased to $521 in 2012 largely driven by the company's specific item promotional strategy that began in the second half of 2011. However, we expect this figure to decline sharply in 2013 due to an overall weakness in the U.S. apparel market arising from cautious consumer spending. In 2013, buyers were reluctant on spending on apparel due to increased taxes, slow job growth, higher healthcare costs and gasoline prices. Also, they diverted some their spending to long lasting products such as cars and houses to take advantage of low mortgage rates while holding back on general merchandise. In addition to the macro economic factors, American Eagle had a few missed fashion calls that resulted in a terrible 2013 for the company.
After 2013, we expect the company to recover owing to its enhanced focus on fashion offerings, strong positioning in denims, better inventory control and improved economic environment. We expect the revenue per square foot to gradually increase and reach $515 by the end of the Trefis forecast period.
However, competition among teen apparel retailers is exceedingly fierce, and a single merchandise goof-up can cost the company its market share. Moreover, it can take some time for the U.S. consumer sentiment to bounce back. If the revenue per square foot remains somewhere around the current levels by the end of the Trefis forecast period, there can be about 5% downside to our price estimate. However, consider a scenario where American Eagle maintains its merchandise well with inventory control and attracts significant store traffic with its rewards program and fashion products. If this lifts the revenue per square foot to $540 by the end of the Trefis forecast period, there can be about 5% upside to our price estimate.
- American Eagle Stores EBITDA Margin: Though American Eagle Stores EBITDA Margin declined in 2011 due to an increase in cotton costs, It rebounded to the 2010 level of 26.1% in 2012 due to cotton prices decline and the company's control over its inventory.
However, the year 2013 was market by heavy promotions throughout the U.S. apparel industry which is expected to drag its margins down to 25.1% We expect the figure to decline slightly in the near term and increase in the future to reach 25.1% mainly driven by more fashion offerings and operating leverage.
However, if the apparel market continues to be exceptionally promotional and margins come down to 23% by the end of the Trefis forecast period, there can be a downside of 5% to our Trefis price estimate. Conversely, if the macro-economic conditions improve, company operates with more full price sales on account of its fashion offerings and margins increase to 27%, there can be 5% upside to our price estimate.
American Eagle Outfitters is a leading specialty apparel retailer that operates under the American Eagle Outfitters (AEO) and Aerie brands. Last year, the retailer discontinued its 77kids brand.
American Eagle Outfitters designs, markets and sells its own brand of high quality, on-trend clothing, accessories and personal care products at affordable prices while targeting 15-25 year old customers. It operates retail stores in the US and Canada. In addition to this, it operates web-based stores for its different brands, through which it ships its merchandise to around 100 countries across the world.
The American Eagle stores provide most value to the company, followed by the Internet & Catalog Business.
Revenue per square foot & number of AEO stores higher than Aerie
As compared to the recently launched Aerie stores, American Eagle stores have a much broader geographical presence, with close to 950 stores across the U.S. and Canada. Additionally,revenue per square foot for American Eagle stores has been continuously increasing since 2009 (before the expected fall in 2013). This is largely due to the successful marketing of the brand as being fashionable and trendy as well as being priced affordable in comparison to more upscale chain stores like Abercrombie & Fitch. As of 2012, the revenue per square foot for American Eagle stores was $521, while that for aerie and 77kids(discontinued in 2012) stores was $300.
Internet & Catalog Orders' revenue growth is faster than American Eagle's mainline stores
Although Internet & catalog revenues account for just 13% of the company's overall revenues, they have grown at a rapid pace over the past few years. During 2009-2012, AEO direct revenues have grown by more than 10% annually driven by the increasing popularity of online shopping. In 2013, even as AEO's stores sales have been disappointing, the direct channel has sustained its growth momentum. Going forward, this is likely to continue.
Weak macro-economic environment for apparel retailers
The past year has been particularly weak for the apparel industry in the U.S. as buyers have scaled back their spending on apparel. This situation has arisen due to increased taxes, slow job growth, higher healthcare costs, rise in gasoline prices and several other political issues.
Moreover in 2013, consumers spent more on long lasting products such as cars and houses to take advantage of the low interest rates. As a results, several apparel retailers have struggled to achieve positive. This trend is likely to continue in the near future as consumer sentiment is not improving.
Low brand loyalty
The U.S. teen apparel market is currently highly promotional, where each retailer is trying to outsmart the other one with a broader and deeper set of products. As a result, U.S. buyers have shown low brand loyalty as they have been readily shifting to the brands that provide relevant fashion at affordable prices. This trend has helped the growth of fast-fashion companies such as Gap Inc, Urban Outfitters, Zara, Forever 21 and H&M. On the other hand, companies such as American Eagle Outfitters, Abercrombie & Fitch, and Aeropostale have been at the receiving end of this trend.
Greater focus on fashion offerings
While American Eagle’s core products have struggled this year, its fashion assortments have found good acceptance among customers. This trend continued in the Q3 fiscal 2013 even when the entire apparel industry was struggling and it only makes sense for the company to expand this category. American Eagle’s management has stated that its merchandise team is focused on ensuring that 50% of its business comes from core products, 30% from core fashion and the remaining from fashion. This clearly indicates that currently fashion does not contribute much to the retailer’s revenues. However, the company is making several efforts to strengthen this category.
American Eagle recently hired Chad Kessler, who has previously worked with Urban Outfitters, as the new chief merchandising and design officer. URBN is well known for its trendy products and has a history of successfully adapting to customer tastes. Therefore, we believe that Mr. Kessler can leverage that experience and expertise to boost American Eagle’s merchandising capabilities as well. Additionally, the retailer is working on improving its speed-to-market, to enhance its ability to quickly respond to changing fashion trends. Given that U.S. buyers have shown a great affinity towards the brands that provide the latest fashion, this appears to be a valuable step. Increasingly, fashion inventory should bring in more customers which will have a positive impact on American Eagle’s results.
Growth of young brand Aerie
American Eagle Outfitters sees huge potential in its relatively new brand, Aerie. The company is looking to capitalize on the lack of competition in the young women's intimates specialty format. About 15% of the total female population in the U.S. are between ages 15 and 24. The overall lingerie market in the U.S. stands at over $12 billion, and is currently dominated by only a few established brands. The encouraging trend is that U.S. buyers have continued to spend on intimate products even during the sluggish economic environment.In 2013, Victoria’s Secret registered robust growth for its intimate products, even though the apparel industry remained weak overall. Even Aerie’s performed better than American Eagle’s namesake brand during Q2 and Q3 fiscal 2013. With the right push, we believe that Aerie can follow in the footsteps of Victoria’s Secret. The brand can fend off the fierce competition in the intimates market as its products are affordable and more about usability than glamor.
The apparel market in the U.S. is highly saturated and competitive with a large number of established brands. Moreover, the sluggish economic growth has been a big worry for the entire industry. Last year in particular, apparel retailers have struggled to achieve positive growth as cautious consumer spending and change in spending patterns have weighed on sales. Given the situation in the U.S., exploring opportunities in international markets is warranted. It will not only open new revenue channels for the company, but will also help diversify the business risk geographically. With slightly better macroeconomic conditions and lesser competition, international markets might provide American Eagle with the opportunity to operate more full priced sales.
Early last year, the company assumed control over its six franchise stores in China and appointed Kitty Yung as the president of its Asia-Pacific operations. Given China’s growing urbanization and rising disposable income, its apparel market is expected to touch $220 billion in 2016, up from $140 billion in 2012. Also, hiring Kitty Yung should complement American Eagle’s growth as she had previously helped Guess operations in the region to grow over 200 stores, resulting in an average annual revenue growth of 25% during 2010-2012.
American Eagle also announced the opening of its first store in Mexico last year, where a young customer base, rising disposable income and increasing fashion consciousness can help it succeed. Additionally, American Eagle entered the Philippines last year and recently announced its plans to enter Thailand. Though small in size, both these markets are in the growth phase with consumers who spend to improve their lifestyle.
Factory channel is promising
American Eagle’s factory channel, which was launched not too long ago, has been generating better sales than the company’s mainline stores. During Q3 fiscal 2013, factory stores delivered mid-single digit, positive comparable store sales, despite the tough retail environment. Although currently this channel is not big enough to have a material impact on American Eagle’s results, the U.S. market does provide huge room for its growth. The retailer has opened 29 factory stores so far in the year, and plans another 10 for the fourth quarter and 26 for the next year. This will bring its store count to 140 by the end of 2014, which will still be significantly less that its mainline store count (900+). American Eagle’s made-for-factory products have resonated very well with its customers over the past, and it now represents almost 50% of the assortments offered in factory stores. Therefore, we believe that this channel is well positioned to be a bigger business for the company in the future.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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