Apparel retailer American Eagle Outfitters (NYSE:AEO) is scheduled to release its Q3 fiscal 2012 earnings on November 28.  We expect good results from the retailer driven by good response to its product assortments and balanced pricing strategy. Moreover, a lack of direct competition in women intimates will help Aerie’s growth. Looking at the trends in the online apparel industry, we expect a substantial growth in American Eagle Outfitters’ direct-to-consumer business as well. However, the low proportion of fashion focused products can have a mitigating effect on the retailer’s growth.
Strong Response To Fashion Changes
The launch of new fashion in American Eagle Outfitters’ main categories such as denims, knit-tops, shorts and colors has been successful.  The success was driven by an increase in the variety of products, alteration and addition of designs such as new heritage fits, new washes, color palette, prints and patterns. The retailer offers distinct apparel in accordance with the prevailing trends. Moreover, American Eagle stores’ comparable store sales increased by 17% and 7% in the previous two quarters. 
American Eagle stores contribute about 65% to the company’s value according to our estimates.
Moreover, the lack of competition in women’s intimates will drive Aerie’s growth, which registered comparable store sales increase of 20% and 13% in the last two quarters. 
Direct-To-Consumer Segment In Apparel Industry Is Improving
The apparel industry on the whole is showing signs of improvement with major players such as Gap (NYSE:GPS), Urban Outfitters (NASDAQ:URBN) and Abercrombie & Fitch (NYSE:ANF) reporting significant growth in their direct-to-consumer business.  Gap and Urban Outfitters reported direct-to-consumer revenue growth of 23% and 36% respectively in their recent results.  Although Aeropostale’s (NYSE:ARO) growth has been slower than the apparel industry’s growth, it reported a substantial growth in its direct-to-consumer revenues in its last quarter results. 
The revenues for American Eagle Outfitters from this segment increased by 28% in the last quarter and will be driven by the on-going trends in this quarter as well.  The direct-to-consumer segment constitutes 27% of the company’s value according to our estimates and 12% of the revenues.
Strong Marketing And Balanced Pricing Strategy Will Help
American Eagle Outfitters is following a 360 degree integrated marketing plan including the TV commercials and advertisement on mobile phones. The retailer has advertised through a number of social media partners as well. 
Amid the highly promotional teen apparel industry, the retailer is looking to add more product variety in the mid-priced and the opening priced tier.  It is also increasing the same in the high-priced tier. Maintaining a balance between the prices and the products in the three categories will help American Eagle Outfitters to drive comparable store sales growth.
Low Proportion Of Fashion Focused Products Might Weigh On The Retailer
The current teen apparel market is highly sensitive to the change in fashion trends. In this environment, an apparel retailer’s success largely depends upon its ability to adapt to the prevailing fashions. While American Eagle Outfitters has been quite responsive in this aspect, its fashion products only account for 25% and 15% of women’s and men’s apparel respectively.  The remainder of the portion is with the core basics and core fashion. Although these categories have performed well due to American Eagle Outfitters’ brand appeal, the retailer will have to increase its fashion offering over the longer run. The lack of fashion apparel has severely impacted relatively less popular brands such as Aeropostale.
Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 25% to the market price.Notes: