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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 $514 in 2012, which was largely driven by the company's specific item promotional strategy that began in the second half of 2011. Owing to American Eagle's strong positioning in denims, better inventory control and efforts to drive store traffic, we expect the revenue per square foot to increase and reach $608 by the end of the Trefis forecast period.
However, in the current weak macro-economic conditions the competition among teen apparel retailers is exceedingly fierce, and a single merchandise goof-up can cost the company its market share. If the revenue per square foot increases only to $550 by the end of the Trefis forecast period, there can be a downside of 10% 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 $710 by the end of the Trefis forecast period, there can be a 10% 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 23.6% due to cotton prices decline and the company's control over its inventory. We expect the figure to reach 24.6% by the end of the Trefis forecast period.
However, if the apparel market continues to be exceptionally promotional and margins come down to 22% by the end of the Trefis forecast period, there can be a downside of 10% to our Trefis price estimate. Conversely, if the macro-economic conditions improve and the promotional environment ceases to continue and margins increase to 29%, there can be 10% upside to our price estimate.
American Eagle Outfitters is a leading 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 77 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 over 902 stores across the US and Canada. Additionally,revenue per square foot for American Eagle stores has been continuously increasing since 2009. 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 $514, while that for aerie and 77kids(discontinued in 2012) stores was $279.
Internet & Catalog Orders business profit margin nearly twice that of AEO stores
EBITDA margins for the internet & catalog business is higher at 40% compared to 23% for American Eagle stores. The merchandise sold through the Internet & Catalog Orders segment is sent directly to the consumer from the distribution center. As this merchandise does not go through stores, it incurs no store operating expenses and very low SG&A expenses to the company. As a result, the margins on merchandise sold through this channel is significantly greater than that for merchandise sold through American Eagle stores.
Continuing promotional environment in teen apparel market
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 promotions. The trend is expected to continue until the U.S. economy recovers fully. Being a value focused brand loaded with fashion, American Eagle Outfitters provides a viable shopping option for the buyers.
Expansion of new 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. Although it is up against the most popular women's intimate brand in the U.S., Victoria's Secret, a difference in the target market allows Aerie to fight off the competition. while Aerie mainly targets young college women, Victoria's Secret caters to the older demographic. However, going forward the competition will intensify with Victoria's Secret's launch of PINK (lingerie line for younger demographic)
American Eagle Outfitters is scaling up its expansion in international markets where it can generate more revenue per square foot. It recently opened its first franchisee store in the Philippines and will assume control of its licensee stores in China. The retailer plans to continue expanding in these regions throughout the year. Furthermore, American Eagle Outfitters has plans of opening about six stores in Mexico in 2013 and many more in the coming years. This positions the retailer well for future growth.
Closure of 77kids.
In 2012, American Eagle Outfitters discontinued its kids brand, 77kids. The retailer launched this brand in 2008 in order to meet the increasing demand specialty retailers in children's wear market. This decision might have been inspired by abercrombie kids' success as well. The company decided to discontinue the brand last year as it accounted for a loss of $24 million on $40 million sales. With its closure, American Eagle will shift its focus and resources to its core brands.
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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