American Eagle Outfitters (AEO) Last Update 6/29/22
Related: ANF TPR GPS NKE
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
American Eagle Outfitters
STOCK PRICE
DIVISION
% of STOCK PRICE
American Eagle
70.9%
$8.86
Aerie
24.6%
$3.07
TOTAL
100%
$12.49
$12.49
Yours
Trefis Price
N/A
$12.85
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

American Eagle Outfitters Company

VALUATION HIGHLIGHTS

  1. American Eagle constitutes 71% of the Trefis price estimate for American Eagle Outfitters's stock.
  2. Aerie constitutes 25% of the Trefis price estimate for American Eagle Outfitters's stock.

WHAT HAS CHANGED?

  1. Lower Demand Impacts Q1 Results
AEO disappointed investors when it reported just $0.16 in earnings per share on sales of $1.06 billion- missing on both the top and bottom lines in Q1. The company noted that demand was below expectations which pressured operating profits as it faced a tough comparison to a year ago when stimulus payments to consumers helped boost sales. Total sales increased only 2% year over year (although as expected, its Aerie label outperformed with 8% sales growth). Gross profit margins were pressured by higher freight costs while operating margins took a hit from higher selling, general, and administrative expenses, primarily high labor costs. All this resulted in a 65% y-o-y fall in profits to 16 cents.

Note: AEO's FY'21 ended on January 29, 2022. Q1 FY'22 refers to the quarter that ended on April 30, 2022.

  1. Q2 Guidance
For the second quarter, management expects top-line growth to trend similarly to the first quarter with a gross margin rate of approximately 33%. This reflects higher markdowns to clear through spring inventory, higher freight costs, and the impact of the supply chain acquisitions. In Q1, the company's inventories surged 46% in size in comparison to last year's first quarter, a monstrous increase given that sales only inched up 2%. And that foreshadows perhaps extreme discounting as the company works to unload stale inventory.

BUSINESS SUMMARY

American Eagle Outfitters is a leading specialty apparel retailer that operates under the American Eagle Outfitters (AEO) and Aerie brands. The retailer designs, markets, and sells its own brand of high quality, on-trend clothing, accessories, and personal care products at affordable prices, while targeting 15-25-year-old customers. Through its Aerie brand, the company offers a collection of intimates and personal care products for girls. Aerie emphasizes comfort rather than glamor when it comes to women's lingerie.

Most of American Eagle's retail presence is confined to the U.S., Canada, Mexico, and Hong Kong. In addition to this, it operates web-based stores for its different brands, through which it ships its merchandise to 81 countries across the world.

SOURCES OF VALUE

Aerie revenue continues to grow at a strong pace

American Eagle's lingerie and activewear brand, Aerie, has gone from strength to strength, driving sales growth for the company. It's opening more stores, which gives it a chance to gain on Victoria's Secret. While Victoria's Secret remains the industry leader with $6.8 billion in annual sales, at its current rate of decline and Aerie's accelerating growth, the two retailers could cross trajectories sooner rather than later. In addition, the demand for Aerie’s products has also contributed to AEO's sales, margins, and profitability in recent quarters. Also, smooth progress on Real Power, and Real Growth value-creation plan aided results.

Internet & Catalog Orders' revenue growth is faster than American Eagle's mainline stores

With the rise of internet shopping, the Internet & catalog revenues as a share of the total revenues for American Eagle has been on the rise, accounting for 48% of the company's overall revenues in FY 2021. The US apparel industry is gradually shifting towards omnichannel retailing, which refers to providing a seamless shopping experience across stores and the online channel. This is becoming an inevitable move for US apparel retailers, including American Eagle, which is working hard to develop its omnichannel platform and has shown significant progress so far. As is the case with other apparel retailers, AEO is gradually shrinking its store count, and focusing more on the high margin e-commerce channel. This lends credence to its decision to develop its omnichannel presence by investing in digital marketing, and improve its website and mobile app.

KEY TRENDS

Weak brand loyalty for American Eagle

The U.S. teen apparel market is currently highly promotional, where each retailer is trying to outsmart the other one with a broader and deeper set of products. As a result, U.S. buyers have shown low brand loyalty as they have been readily shifting to the brands that provide relevant fashion at affordable prices. This trend has helped the growth of fast-fashion companies such as Gap Inc, Urban Outfitters, Zara,and H&M. On the other hand, companies such as American Eagle Outfitters, Abercrombie & Fitch, and Aeropostale have been at the receiving end of this trend.

Greater focus on fashion offerings

While American Eagle’s core products have struggled, its limited fashion range has found good acceptance among customers. As a result, the company is looking to strengthen this product category with more innovation in distinct finishes, fabrics, and washes. The company is looking to shift its product portfolio from basic to fashion gradually and has already seen some success. American Eagle is planning to simplify its designing system to respond to changing customer tastes quickly and effectively. It is removing layers within its designing teams, reorganizing the structure to implement direct accountability, and enhancing its speed sourcing capabilities. One such development on this front is the retailer’s fast-track fashion capsules, whose designing to in-store receiving process takes just 60 days. By effectively leveraging these factors, the company will be able to increase the proportion of fashion products in its portfolio.

Growth of young brand Aerie

American Eagle Outfitters sees huge potential in its relatively new brand, Aerie. The company is looking to capitalize on the lack of competition in the young women's intimates specialty format. About 15% of the total female population in the U.S. is between ages 15 and 24. The overall lingerie market in the U.S. stands well over $12 billion and is currently dominated by only a few established brands. The encouraging trend is that U.S. buyers have continued to spend on intimate products even during the sluggish economic environment. With the right push, we believe that Aerie can follow in the footsteps of Victoria’s Secret. The brand can fend off the fierce competition in the intimates market as its products are affordable and more about usability than glamour.

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. Last year, in particular, apparel retailers struggled to achieve positive growth as cautious consumer spending and changes in spending patterns have weighed on sales. 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.

Development on omnichannel platform

With e-commerce not turning into a big business for many retailers despite continued robust growth, the need for omnichannel 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 omnichannel platform, and all of them have shown good promise so far. Its "buy online and ship from the store" pilot program has helped it attract those customers, who could have shied away from the retailer if the inventory pool wasn’t integrated across all the channels. The initial rollout was slow, but the company soon went aggressive on its deployment.

The retailer reported that its BOSS program exceeded all expectations, and this might help it operate with fewer markdowns and better inventory utilization in the future. Also, American Eagle has improved its delivery time significantly, and it now delivers products in two days or less to more than 90% of its customers. It opened a new "state of the art" fulfillment center in Pennsylvania in July 2014, which has played an important role in improving capacity and delivery efficiency. In addition, American Eagle has several other projects planned that are intended to optimize shopping experience across the online and mobile channels. It is in the process of adding new features to its website, including a 360-degree product view and an on-body product display. The company is relaunching an updated version of its mobile app that will now run faster and have a better interface.

All these efforts, along with the anticipated growth in online apparel sales, are likely to help American Eagle improve its store productivity.