Why American Eagle Outfitters Seems A Little Overpriced

American Eagle Outfitters (NYSE:AEO) is one of the many casual apparel retailers in the U.S., who have struggled to drive store traffic over the last couple of years. The company’s comparable store sales declined 6% in 2013 as it made a few off-pitch fashion calls that drove customers to other relatively fashion-forward brands. This even highlighted the retailer’s weakness in the fashion segment, which continues to trouble it to date. For the first three quarters of 2014, the company’s comparable store sales declined 10%, 7% and 5%, respectively.

A major part of American Eagle’s product portfolio comprises of basic logo products that no longer entice fashion conscious teenagers and young adults. Due to this, the retailer has seen a number of its customers switch to fast-fashion brands such as Zara, Forever 21 and H&M, which are currently among the best performers in the U.S. apparel market. The market itself is highly saturated and its growth has slowed down considerably over the past few years, indicating that consumers are no longer focusing as much on apparel. In fact, they have diverted their limited apparel spending to online channel, where American Eagle’s presence remains terribly weak. Keeping these factors in mind, we believe that American Eagle Outfitters is a little overpriced and our price estimate for the company at $13.45, is over 10% below the current market price.

See our complete analysis for American Eagle Outfitters

Apparel Market Growth Is Decelerating

The U.S. apparel market stands big, at close to $250 billion, but its growth has decelerated in recent years, as buyers have scaled back their discretionary spending in the aftermath of the economic downturn. The market grew by 5.2% in 2012, 3.4% in 2013 and just 1.7% in the first 11 months of 2014. While the market growth is already slow, most of it is attributable to rapid growth of fast-fashion players and online retailers. Casual apparel retailers, who rely on basic logo products and physical stores for a bulk of their revenues, have lagged far behind the industry. The biggest strugglers of the past year have been Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and also American Eagle, who have comparable presence in the U.S. and a product portfolio that mostly comprises of logo products. American Eagle has lost considerable market share over the past year, on account of a decline in foot traffic, resulting from fickle consumer behavior and the gradual shift online.

Competition Is Getting Intense

Amid the highly saturated and competitive retail landscape, it has become extremely difficult for players such as American Eagle to distinguish their products from other players. The market scenario is such that there are a number of players in every segment striving to outsmart one another over prices and designs. American Eagle is among those retailers that have persistently focused on basic logo merchandise, and have subsequently driven their customers to affordable fashion forward brands. Fast-Fashion retailers such as Zara and Forever 21 have been highly proactive with their merchandise launches, offering better products than casual clothing brands at prices cheaper than upscale brands. Buyers have invariably responded well to this balance between the two segments, which has impacted sales of retailers such as American Eagle, Aeropostale, Abercrombie & Fitch and Guess (NYSE:GES).

Number Of Customers Falling Due To Online Weakness

With growing Internet penetration and proliferation of smartphones and tablets, a bulk of U.S. buyers have changed their shopping behavior. They are making more purchases online and subsequently, visiting fewer stores. Due to this, American Eagle has lost a number of its customers, as it relies on store sales for close to 85% of its revenues. While the retailer has seen robust growth in online sales, it has not been strong enough to drive overall results. In fact, the company has lost more revenues due to a decline in foot traffic, than it has gained from incremental online sales. In 2013, while American Eagle’s e-commerce revenues increased by $61 million, its store revenues fell by a much larger $228 million. Though the company is trying its best to leverage growing online sales to drive overall growth, it needs to address its merchandise issues first. American Eagle is among the many retailers who are aggressively deploying omni-channel strategies, but are yet to see a material impact of the same.

American Eagle’s Market Share Is Falling

American Eagle has been unable to sustain its share in the decelerating U.S. apparel market, let alone grow it. From $3.48 billion in 2012, the retailer’s revenues declined 5% to $3.31 billion in 2013, as buyers moved to fast-fashion retailers and online players. The company’s brand image took a beating as teenagers developed a perception that American Eagle is no longer “cool”. Unable to entice customers with its product designs, the company relied heavily on discounting to drive store traffic, which pushed its revenues down.

American Eagle’s revenues fell 4.5% year over year in the first quarter of fiscal 2014, 2.3% in the second quarter and 0.4% in the third. Its market share fell 6 basis points from 1.10% in Q1 fiscal 2013 to 1.04% in the same quarter this year. In subsequent quarters, the retailers margins shrunk by 5 basis points and 3 basis points (year over year), respectively. These metrics clearly indicate that while American Eagle’s performance has improved marginally, it remains far from a complete turnaround. Also, reviving the company’s revenue growth is going to get arduous going forward, given that it is consolidating its store network.

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