One of the leading brands in women’s intimate apparel industry, Victoria’s Secret, has been immensely successful in the U.S. Its success has created a path for other brands to follow, one of them being American Eagle Outfitters‘ (NYSE:AEO) Aerie. Aerie is a relatively new brand in the U.S. market and lags Victoria’s Secret in terms of revenues and geographical presence. As of 2011, Aerie had a share of 2% in women’s intimates and socks/hosiery market compared to Victoria’s Secret’s 30%+ share.  
However, taking Victoria’s Secret’s market presence as a reference, we believe that Aerie has a good scope of expansion. Although, stiff competition from Victoria’s Secret will exist, the slightly different target markets of the two brands can help Aerie’s growth. Besides this, we also believe that Aerie should expand its target market slowly, and not just limit itself to young demographic. Having a wide range of apparel will not only help in growth, but also reduce the competitive risk.
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Victoria’s Secret Shows Market Potential For Aerie
For a business that generates over $4 billion in revenues, Victoria’s Secret growth has been substantial. Revenues from its store business have increased by almost 12% annually for the past three years.  Victoria’s Secret generates average revenue per square feet of over $800, which we believe can touch $1,000 by the end of our forecast period. On the other hand, Aerie’s revenue growth has been slower. Aerie earns around $250 million in annual revenues, and its revenue per square feet is significantly lower than that of Victoria’s Secret. 
Victoria’s Secret’s success can be attributed to its strong brand recognition, successful marketing and wide product range. The U.S. intimate apparel market provides still a huge potential for players such as American Eagle Outfitters, if they pull the right levers. Aggressive and unique marketing, associating the products with beauty and glamor and wide product variety helped Victoria’s Secret tremendously and are some of the strategies that Aerie can target. Moreover, increasing the target market by launching new product lines will help the retailer in strengthening its position in the market. One such example is Victoria’s Secret’s launch of PINK brand, targeting young college women. Since Victoria’s Secret has successfully entered the young women’s market, Aerie can experiment with a product line for the older demographic.
Aerie Should Open A Lot More Stores
Launched in 1977,Victoria’s Secret currently operates 1,017 stores in the U.S. Whereas Aerie, launched in 2006, only operates 154 stores and has a long way to go to.  In terms of expansion strategy, while American Eagle Outfitters is looking to slowly expand its Aerie stores, Limited Brands (NYSE:LTD) is consolidating its Victoria’s Secret stores in order to improve the store economics. We estimate that Victoria’s Secret’s store count will come down to about 950 in the coming five years.
If we consider Victoria’s Secret’s geographic presence as the saturation point in the U.S. intimate apparel industry, we conclude that a large portion of the U.S. market is still not being leveraged by Aerie. However, mere store numbers cannot alone formulate an expansion strategy for American Eagle Outfitters. The strategy will also depend on the success of existing Aerie stores whose annual revenue growth has averaged at 6% for the past three years.
Competition Will Remain A Concern
An increasing number of brands have ventured into the women’s intimate apparel business in the U.S. Retailers such as Kohl’s and JC Penney have added new lingerie lines and have started offering services such as bra fitters. Established retailers such as Abercrombie & Fitch (NYSE:ANF) have introduced new lingerie lines as well. Therefore, the road to success is not going to be an easy one for Aerie.
American Eagle Outfitters markets Aerie primarily to teenagers. This strategy fits American Eagle’s broad customer base of high school and college-aged customers. On the other hand, Victoria’s Secret has traditionally catered to an older demographic, but is now also targeting younger customers through its PINK line. Hence, Aerie faces direct competition from Victoria’s Secret’s PINK brand.
On the pricing front, Aerie’s products are relatively cheaper than its competitors such as Limited Brands and Ann Taylor (NYSE:ANN). However, Aerie’s Products are more functional than glamorous, something that Victoria’s Secret emphasizes on.
Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 20% to the market price.Notes: