To strengthen its position in North American market, American Eagle Outfitters (NYSE:AEO) recently announced its plans to open the first store in Mexico in February 2013.  In the coming years, the retailer will scale up its Mexican expansion depending on the reception. With its large population, Mexico provides good potential for value focused retailers.
The company may not have to struggle with the brand advertising and is is already known in the region as it launched a Mexico-specific e-commerce site last year.  Additionally, the lack of intense competition that exists in the U.S. apparel industry will work in the retailer’s favor. Although the immediate financial benefits will be minimal, it will help American Eagle Outfitters expand its international footprint, which is currently limited to only 13 countries. 
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What Is The Need Of Going International?
The apparel industry in the U.S. is highly competitive. In recent quarter, retailers look to provide heavy discounts, launch new product categories and offer exclusive products to attract customers. Additionally, as the apparel industry in the U.S. is highly sensitive to changing fashion trends, the retailers have to be on their toes to respond quickly. Apart from the intense competition, the sluggish growth in the U.S. economy has troubled the apparel industry as a whole. Therefore, the U.S. apparel retailers are looking to expand in international markets where the economic conditions are slightly better and the competition is not as fierce for western brands. For instance, Abercrombie & Fitch (NYSE:ANF) initiated its expansion in China last year, and Gap Inc. (NYSE:GPS) is also increasing its footprint in China, Brazil and Mexico.
American Eagle Outfitters, which is largely confined to the U.S., began increasing its international presence last year. The retailer signed agreements to open licensee stores in Japan, Israel and Poland in 2012, and continued to improve its presence in the Middle East.  The recent announcement to enter Mexico includes plans to open 6 company operated stores by the end of 2013. 
Mexico is the 11th most populous country in the world and provides immense potential for value focused retailers.  We note that Wal-Mart‘s (NYSE:WMT) Mexican operations have grown rapidly due to the rising consumption and higher disposable income. In each of the past two quarters, its revenues from the region have increased by more than 10%, with moderate growth observed in comparable store sales.  Although the comparison of an apparel retailer with Wal-Mart is not exactly valid, it can be regarded as a measure of confidence that the customers have in brands that offer good quality products at compelling prices.
As one of the important emerging markets due to its growth characteristics and proximity to the U.S., Mexico can provide a large base of fashion conscious customers with higher disposable income in the future. Good brand acceptance in the region and close proximity to the U.S. also make it easier for American Eagle Outfitters to open its retail stores. We believe this decision enables the retailer to improve its international footprint and reduce its dependence on the sluggishly growing U.S. economy.
Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 20% to the market price.Notes: