American Eagle Outfitters (NYSE:AEO) announced plans to expand in Israel by opening 11 stores starting in February.  With the new stores, the company now operates in Egypt, Jordan, Kuwait, Lebanon, Morocco, Saudi Arabia, the UAE and Israel, thus making the Middle East one of the key strategic regions for American Eagle’s international operations.
We believe the move is in sync with long term strategy of American Eagle to expand its international presence and will provide some respite to the company, particularly when it is facing a margin crunch due to the scale of its promotions in holidays 2011. American Eagle competes with other teen specialty retailers such as Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and Gap Inc. (NYSE:GPS).
Expansion in Middle-East will help Negate Holiday 2011 Margin Blues
The holiday season proved to be a tough one for American Eagle Outfitters. In a bid to lure holiday shoppers, American Eagle had to increase its scale of promotions to drive its sales. The result was that despite registering a 15% growth in its holidays sales, American Eagle had to trim its Q4 earnings outlook from $0.40 – $0.44 per diluted share previously to $0.33 – $0.35 per diluted share. ((American Eagle Reports Holiday Sales Results, Source: American Eagle Outfitters’ Investors Relations)) The effect was felt immediately, with American Eagle’s stock getting smacked by 20% on the very same day.
See our article: American Eagle Cuts Q4 Earnings Outlook, Sends Shares Crashing
Compared to the U.S. and Europe where the majority of American Eagle’s operations are situated, macro-economic conditions are relatively better in Middle-East.  As evident from the graph above, the GDP growth trend is expected to continue in 2012 and 2013 as well. This implies that American Eagle can realize a higher full-priced merchandise sale in Middle-East markets contrary to U.S. and Europe. Additionally, the company can also pass cost pressures to customers more easily in the Middle-East markets than U.S. or Europe, thus negating the margin pressures in domestic market.
Trefis price estimate for American Eagle Outfitters stands at $17.75, implying an upside of nearly 25% to the current market price.Notes: