American Eagle Outfitters Is Getting Back On Track

While major names in the U.S. casual apparel industry still continue to struggle, American Eagle Outfitters (NYSE:AEO) appears to have regained much of its lost mojo. In an environment where buyers have been shunning basic apparel retailers for fast-fashion brands such as Zara and Forever 21, American Eagle has done well to re-align its merchandise in line with shopper preferences. While the retailer needs to sustain this control over its merchandise design and prices, there are some other areas it can leverage to ensure steady long-term growth. These include, international expansion, development of an omni-channel platform and growth of the young brand Aerie. American Eagle has covered significant ground on these fronts so far, but it still has much ground to recover.

During the recently concluded quarter, the retailer reported an 8% increase in its Q3 revenues driven by 9% growth in comparable sales, partially offset by fewer operating stores. American Eagle’s gross margins expand 310 basis points to 40%, owing to reduced promotional activities. While SG&A rate remained flat at 24%, operating margins expanded 320 basis points and adjusted EPS soared 59% to $0.35. ^[1]

Our price estimate for the company at $16.14, is just below the current market price. However, we are in the process of updating our model inline with the recent earnings release.

See our complete analysis for American Eagle Outfitters

International Expansion

The apparel market in the U.S. is highly saturated and competitive with a large number of established brands. Moreover, the sluggish economic growth has been a big worry for the entire industry. Given the situation in the U.S., exploring opportunities in international markets is warranted. It will not only open new revenue channels for the company, but will also help diversify the business risk geographically. With slightly better macroeconomic conditions and lesser competition, international markets might provide American Eagle with the opportunity to operate more full priced sales. In its recent earnings call, American Eagle stated that the brand has several growth opportunities in international markets and that building stronger brand awareness in these markets was one of its top priorities. Currently, the retailer has 126 licensee stores across 20 countries with the latest expansion into Chile and Greece. And the company operates its own outlets in Mexico, where its 23 stores have delivered promising results so far. ^[2] The progress has been good, but American Eagle still has a lot explore in international markets.

Omni-Channel Development

With e-commerce not turning into a big business for many retailers despite continued robust growth, the need for omni-channel retailing has emerged. The entire apparel industry is gradually shifting towards this concept, which appears to be the future of retailing. Over the past couple of years, American Eagle has taken several steps towards the development of its omni-channel platform and all of them have shown good promise so far. Its “buy online and ship from the store” program has seen tremendous success in driving incremental store traffic. Delivery times have improved to two days or less for more than 90% of its customers. New “state of the art” fulfillment center in Pennsylvania has played an important role in improving capacity and delivery efficiency. These factors along with several other planned initiatives make it apparent that omni-channel still remains one of the top priorities for the company.

Growth of Aerie

American Eagle Outfitters sees huge potential in its smaller brand, Aerie. The company is looking to capitalize on the lack of significant competition in the young women’s intimates specialty format. About 14% of the total female population in the U.S. are between ages 15 and 24. ^[3] The overall lingerie market in the U.S. stands well over $13 billion, and is currently dominated by only a few established brands. ^[4] The encouraging trend is that U.S. buyers have continued to spend on intimate products even as overall apparel spending has been sluggish. Victoria’s Secret has registered robust growth for its intimate products over the past few years and even Aerie has performed slightly better than American Eagle’s namesake brand. During the third quarter, Aerie’s sales increased in double digits, and the brand has gained significant momentum since Jen Foyle took over the leadership role. The company mentioned that their new format stores for the brand have done very well so far and they are planning to accelerate the format’s roll-out in 2016. American Eagle plans to double Aerie’s business over the next few years and it seems to be progressing well on this quest.

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1. American Eagle Outfitters Reports Strong Third Quarter Sales and EPS Growth, American Eagle Outfitters, Dec 2 2015 [↩]
2. American Eagle Outfitters 2015 Earnings Transcript, Dec 2015 [↩]
3. United States Age Structure, Index Mundi [↩]
4. USA Intimate Apparel Market Research Report 2015, We Connect Fashion [↩]