Teen apparel retailer American Eagle Outfitters (NYSE:AEO) struggled through most of fiscal 2013 due to its missed fashion calls and the weak retail environment. It is appparent these trends continued through the fourth quarter, the results of which the company will report on March 11. American Eagle provided a business update in January stating that its comparable sales during the holiday season declined by a sizable 7%. It also slashed its fourth quarter EPS guidance to $0.26 per share, which is near the lower end of its previous guidance.  We believe that apart from an overall slowdown in the U.S. apparel industry, American Eagle’s weak brand image weighed on its results. Although the company is employing several strategies to enhance the fashion content in its product portfolio, we do not expect to see any noticeable impact on the upcoming results.
In January, American Eagle’s CEO Robert Hanson left the company and Jay Schottenstein (executive chairman) was named the interim CEO.  During the earnings call, we will keep an eye on the new CEO’s strategies for the revival of the company.
Our price estimate for American Eagle Outfitters stands at $18.88, implying a premium of about 30% to the market price.
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Q4 (November – January) Wasn’t Good For The U.S. Apparel Industry
Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to December 2012.  Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline.   Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. 
In January, retail sales fell by 0.4% from a month earlier as consumer confidence slipped and the U.S. witnessed record cold and heavy snowfall, that prevented store visits.  The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month. 
Low Brand Loyalty Din’t Help American Eagle
Lately, U.S. buyers have shown low brand loyalty as they have been readily shifting to brands that provide relevant fashion at affordable prices. American Eagle has been at the receiving end of this trend due to its missed fashion calls, over-emphasis on basic products, and limited fashion variety. As a result, teenage buyers have developed a perception that American Eagle brand is no longer “cool”. On the other hand, retailers such as Gap Inc (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN) have seen tremendous success by offering a vast variety of trendy products, in line with the changing seasons. Due to this, American Eagle has been unable to grab a sizable share of low consumer spending on apparel. During its January business update, the company stated that its sales were mainly impacted by the traffic driving promotional activities.
However, Online Growth Can Have A Positive Impact
Although American Eagle’s store sales declined substantially during the first three quarters of fiscal 2013, its direct channel registered strong growth. The retailer’s online sales increased by 24% in the first quarter, 11% in the second quarter and 17% in the third. We expect this growth to pick up in the fourth quarter as U.S. buyers preferred online shopping due to the adverse climate conditions. The surge in online orders was such that, United Parcel Service (NYSE:UPS), which is one of the biggest player in e-commerce delivery, struggled to ship orders on time.  Abercrombie & Fitch (NYSE:ANF), which usually earns close to 15% of its revenues from e-commerce business, saw this figure escalate to 25%. Interestingly, Urban Outfitters’ sales during the holiday season increased 8% driven by a heavy rise in online orders.
Although online sales usually account for just 13% of American Eagle’s revenues, we expect the figure to have reached a higher value during the recently concluded quarter. Therefore, we believe that the company’s online business had a slight positive impact on its Q4 results.Notes:
- American Eagle Outfitters Provides Fourth Quarter Update, American Eagle Outfitters, Jan 9 2014 [↩]
- American Eagle Outfitters Names Jay Schottenstein Interim CEO, American Eagle Outfitters, Jan 22 2014 [↩]
- Retailing Today: December 2013, ShopperTrak, Jan 8 2014 [↩]
- Retailers See Fourth Consecutive Quarter Annual Sales Increase During 2013 Holiday Season, ShopperTrak, Jan 8 2013 [↩]
- ShopperTrak Expects Holiday Sales Will Increase In 2013, ShopperTrak, Sept 17 2013 [↩]
- U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 [↩]
- Growth Shows Signs of Slowdown, The Wall Street Journal, Feb 13 2014 [↩]
- U.S. retailers’ sales chilled by weather, and low consumer confidence, Reuters, Feb 6 2014 [↩]
- Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 [↩]