American Eagle Outfitters (NYSE:AEO) is one of the popular apparel retailers in the U.S. offering high quality and trendy fashion clothing at affordable prices for men and women. The company’s stock price has almost doubled since mid-2011 due to its strong financial performance.
Our price estimate for American Eagle Outfitters stands at $27, implying a premium of about 45% to the market price. We expect the retailer to continue to do well due to its disciplined inventory control, its ability to stay on top changing fashion and strong customer engagement. Additionally, international expansion and growth in the direct-to-consumer channel will lend strong support.
- What Can Move American Eagle Outfitters’ Stock In The Next Year?
- By How Much Did American Eagle Outfitters’ Revenue & EBITDA Grow In The Last Five Years?
- How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
- What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?
- What’s American Eagle’s Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
- How American Eagle Outfitters’ EBITDA Growth Outpaced Revenue Growth In 2015
Growing Revenue Per Square Feet
American Eagle’s revenue per square feet has been increasing since 2009, and we expect the trend to continue in the foreseeable future. To grow sales volume, the company is looking to attract customers through remodeled stores, attractive rewards program and marketing as well as a balanced pricing strategy. In addition, its strong supply chain allows it to maintain a firm control over its inventory to avoid unnecessary markdowns and launch new apparel in accordance to the ongoing trends in a timely manner.
Growth In Sales Volume: American Eagle Outfitters employs a number of strategies to attract customers with the best deals. The retailer uses a 360-degree marketing approach encompassing the social media channel, TV commercials and mobile advertisements. It also maintains a balance between apparel offered at opening-price, mid-price & high-price tiers to cater to different customer demographics. American Eagle’s rewards program, where customers earn points based on spending, has also helped drive store traffic. Last year, the retailer witnessed a 36% increase in new customer signups for the program.  The company is also remodeling its stores to offer more products with better presentation, accommodate additional customers and enhance their shopping experience. In 2011, American Eagle remodeled and refurbished a total 106 stores and plans to remodel another 50 stores in 2013. 
Fewer Discounts: Strong inventory controls allow a retailer avoid surplus inventory situations, launch the latest products in a timely manner and operate with fewer discounts and markdowns. Players such as Aeropostale (NYSE:ARO), Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) have had troubles with their product launches in the past. On the other hand, American Eagle has managed to stay on top of changing fashion trends with its strong supply chain and disciplined inventory control.
Although the retailer faced inventory issues in 2011, it was able to finish the year with much lower inventory levels.  This is why it went through most of 2012 with fewer promotions and performed well even during the weak holiday season. American Eagle is working aggressively on identifying prevailing trends, styles, fits, colors, fabrics and patterns. To enhance its fashion responsiveness, it increased its product development cycle from four to six times a year, lowered the cycle period by about four-six weeks and increased its open-to-buy stock levels by 20%.   The retailer is now introducing new collections on a monthly basis. For instance, the women’s merchandise team has already tracked 40 different fashion choices for the second quarter based on the spring results. 
While most of American Eagle’s operations are confined to the U.S., it recently unveiled plans to speed up its international expansion. The company is looking to tap some of the most lucrative apparel markets in the world, which will open up new growth avenues and diversify its risks geographically. American Eagle recently assumed control over its six franchise stores in China and opened its first store in Mexico. It also entered the Philippines earlier this year through a franchise partnership. The retailer is now planning to spread its operations across these regions over the long term.
A few months back, American Eagle terminated its licensing agreement in China and Hong Kong to assume control over its existing stores.  It also hired Kitty Yung as president of Asia-Pacific operations, who had previously completed a successful tenure with Guess (NYSE:GES). China has become the focal point of global apparel industry with its booming middle class and growing urbanization. The substantial rise in the region’s labor costs has positively impacted the consumer lifestyle, which is expected to drive the proportion of urban population from 53% in 2012 to 65% in 2025.   China’s annual apparel sales have increased at an annual rate of 16% prior to 2011. In 2009, the market stood at $110 billion, and consulting firm McKinsey expects this figure to cross $200 billion by 2014. 
Last year, the retailer launched a Mexico-specific e-commerce website and came out with plans for retail store expansion in early 2013.  Mexico has become an attractive market for affordable brands with its rising disposable income, growing urbanization and fashion consciousness. About 78% of the region’s population resides in urban areas and about 46% Mexicans are below 25 years of age.   This implies that a major portion of Mexico’s population is young, has a good lifestyle and is aware of fashion. However, the region’s apparel market is small at $5.7 billion and is expected to grow at a GAGR (compounded annual growth rate) of 3.4% from 2012-2017.  Specialty retailers are gaining popularity in Mexico and emerged as the most important distribution channel in 2012. 
American Eagle recently entered the Philippines in partnership with Suyen Corporation. The region’s booming business processing outsourcing industry and rising remittances have positively impacted disposable income. This is good news for the region’s apparel industry and American Eagle will benefit from this.  Moreover, Suyen Corporation is the leading apparel retailer in the country and invests heavily in brand building. 
Growth In E-Commerce Business
American Eagle’s direct-to-consumer revenues have increased at an average annual rate of 18% over the last couple of years. We expect this growth to continue in the future driven by industry growth and the adoption of omni-channel retailing. With the surge in global Internet usage, online shopping has been gaining tremendous popularity. The proportion of the world’s population using Internet has increased rapidly from o.5% in 1995 to 39% in 2013.  The U.S. alone accounts for about 34% of global e-commerce sales and online shopping constitutes just 11% of total retail sales in the region.  Interestingly, apparel and accessories account for 20% of total U.S. online sales, and is the second largest category sold on the internet. The outlook is good and eMarketer forecasts annual online apparel sales to increase from $45 billion in 2012 to almost $90 billion in 2016.  Apart from the U.S., demand from emerging economies where American Eagle ships directly will also assists the channel’s growth.
A number of companies including American Eagle are adopting omni-channel retailing to enhance efficiency of their direct-to-consumer channel. American Eagle is making substantial investments in improving and upgrading its technology. Its Oracle-based global enterprise system will integrate point-of-sale and merchandise systems, providing customers with a consistent shopping experience across channels.  The flexible system will also allow the retailer to respond much faster to changing business needs. The company will start its 1 million sq. ft. distribution center project in Pennsylvania this quarter, which will enable it to directly ship products to U.S. customers within two days. This distribution channel is expected to be operational by mid-2014 and will play a crucial role in American Eagle’s omni-channel expansion plans.Notes:
- American Eagle Outfitters Q4 fiscal 2012 earnings transcript, March 6 2013 [↩] [↩]
- American Eagle Outfitters Q4 fiscal 2011 earnings transcript, May 7 2012 [↩]
- American Eagle Outfitters’ Q1 fiscal 2013 earnings transcript, May 22 2013 [↩] [↩] [↩]
- An open-to-buy system uses stock turn requirements and sales forecast to determine optimum inventory levels [↩]
- American Eagle Outfitters To Assume Operations Of Six Existing Stores In China and Hong Kong, American Eagle Outfitters, Feb 4 2013 [↩]
- China’s population – Peak toil, The Economist, Jan 26 2013 [↩]
- United Nations, Department of Economic and Social Affairs [↩]
- From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
- American Eagle Outfitters To Launch First Store In Mexico, American Eagle Outfitters, Jan 28 2013 [↩]
- Urban population (% of total), The World Bank [↩]
- Mexico Age Structure, Index Mundi [↩]
- Mexico-Apparel Retail, Market Line, Feb 5 2013 [↩]
- Apparel in Mexico, Euromonitor International, Apr 2013 [↩]
- Apparel in the Philippines, euromonitor, June 2012 [↩]
- American Eagle Outfitters Opens High Street Location In Philippines, American Eagle Outfitters, March 1 2013 [↩]
- Internet Growth Statistics, Internet World Stats [↩]
- Ecommerce Sales Topped $1 Trillion for First Time in 2012, eMarketer, Feb 5 2013 [↩]
- Retail Ecommerce Set to Keep a Pace Through 2017, eMarketer, Apr 24 2013 [↩]