Teen apparel retailer American Eagle Outfitters (NYSE:AEO) has announced the opening of stores in three new international markets – Morocco, Jordan and Egypt.  Additionally, the company also opened its third store in Saudi Arabia, and has plans for a second store in Lebanon in early 2012. With the new stores, the company now operates in Egypt, Jordan, Kuwait, Lebanon, Morocco, Saudi Arabia, and the UAE through its franchise partner, M.H. Alshaya. The store openings have come at a time when teen-apparel market is fiercely competitive in domestic market, and we believe the growing store count in Middle-East to provide some respite to American Eagle, particularly when the company may face a margin crunch due to the scale of its promotions in holidays. American Eagle competes with other teen specialty retailers such as Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and Gap Inc. (NYSE:GPS).
Growing Middle East business will help negate margin
In a bid to lure holiday shoppers, apparel retailers are giving huge promotions off its merchandise. The competition is even more fierce in teen apparel market, with each teen retailer trying to outsmart the other through more attractive promotions. While the growing promotions will help increase the sales comps, we expect the ongoing scale of promotions to take toll on retailers’ margins.
American Eagle is no different with the company offering 40% off its merchandise, which is quite high in comparison to its previous holiday discounts. Additionally, for this quarter the company started with an inventory of $572 million, a massive 40% growth compared to last year. High inventory level will ensure that the company’s AUC (average unit cost) remains high and that American Eagle takes more time to benefit from the cotton price decline. These factors could weigh on margins this quarter and in 2012; however international expansion to places like the Middle East could help offset these pressures by opening a new market for American Eagle.Notes: