American Eagle Outfitters (NYSE:AEO) is a leading apparel retailer in the U.S. and operates under its namesake and Aerie brands. As of 2012, the company has more than 1,000 stores in North America, operates 49 international franchise stores and ships directly to 81 countries.
In this analysis, we’ll discuss some important business drivers for American Eagle Outfitters’ stock including its revenue per square feet (RPSF) and the number of stores. We’ll follow up this analysis with another one which will focus on profit margins (measured by EBITDA) and its direct-to-consumer revenues. Let’s take a look at the long-term outlook for these drivers and our price estimate’s sensitivity to them.
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Rising Revenue Per Square Feet
This refers to the average annual revenue per square feet of retail store space for American Eagle stores. This metric is indicative of the retailer’s comparable store sales. Since the recession, the brand’s RPSF has increased steadily and we expect this trend to continue in the future. The following factors will assist its growth.
Disciplined Inventory Control & Responsive Supply Chain
Maintaining optimal inventory levels is essential for the success of any retailer and American Eagle Outfitters is no different. With control over its inventory, American Eagle can launch new products in a timely manner and operate with fewer discounts and markdowns. Ultimately, this will have a positive impact on its revenue per square feet. The level of control that the company can maintain over its inventory will be decided by the strength of its supply chain.
Although American Eagle Outfitters was facing inventory issues in 2011, it was able to finish the year with much lower inventory levels.  This is why the retailer went through most of 2012 with fewer promotions and fresh assortments, which pushed its RPSF to $514 for the year. Even during the weak holiday season, American Eagle Outfitters was able to post good results backed by its inventory control. 
The retailer is working aggressively on identifying prevailing trends, styles, fits, colors, fabrics and patterns. To enhance its fashion responsiveness, it increased its product development cycle from four to six times a year, lowered the cycle period by about four-six weeks and increased its open-to-buy stock levels by 20%.  An open-to-buy system uses stock turn requirements and sales forecast to determine optimum inventory levels. The retailer is now introducing new collections on a monthly basis. For instance, the women’s merchandise team has already tracked 40 different fashion choices for the second quarter based on the spring results. 
Better Customer Engagement
American Eagle Outfitters employs a number of strategies to attract customers and provide them with the best deals. The retailer uses a 360-degree marketing approach encompassing the social media channel, TV commercials and mobile advertisements.  It also maintains a balance between the products offered at opening-price, mid-price & high-price tiers to cater to different customer demographics. American Eagle Outfitters’ rewards program, where customers earn points based on their spending, also helps in driving store traffic.  Last year, the retailer witnessed a 36% increase in new customer signups for the program.  The company is also remodeling its stores to offer more products, accommodate additional customers and enhance their shopping experience.
Stock Sensitivity – We currently estimate American Eagle Outfitters’ RPSF to reach $606 by the end of our forecast period. For every +/- $50 deviation in the figure, there can be about 5% upside/downside to our price estimate. Any further inventory issues can force the retailer to usher large promotions, which can weigh on its revenue per square feet. On the flip side, maintaining supply chain efficiency and inventory control will complement RPSF’s long-term growth.
Number Of American Eagle Stores
This refers to the average number of American Eagle stores operational in a year. Historically, the figure has been coming down due to the closure of underperforming brand stores. Going forward, the store count is likely to stabilize due to the mixed impact of the continuation of consolidation strategy, international expansion and growth of factory stores.
American Eagle operated around 902 stores at the end of 2012, down from 946 in 2009. The company closed some of its stores to improve productivity and negate the risk of self-cannibalization. For instance, the retailer operated 934 stores in 2010 with an average revenue per square feet of around $440. In 2012, while the store count came down to 902, the revenue per square feet increased to about $514 . Store consolidation is becoming an industry trend with players such as Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) following similar strategy. American eagle is likely to continue closing its underperforming stores in the near future.
Until a few years back, American Eagle Outfitters’ operations were confined to the U.S. which made the retailer more susceptible to the economic downturn. In 2009, revenue per square foot for American Eagle stores reduced by more than 3% and in 2010, its direct channel witnessed a similar decline. However, during the last four years, the company has energized its international expansion and currently operates about 49 franchisee stores in 11 countries.  It recently opened its first franchisee store in the Philippines and will assume control of its licensee stores in China.  The retailer plans to continue expanding in these regions throughout 2013.  Furthermore, American Eagle Outfitters has plans of opening about six stores in Mexico in 2013 and many more in the coming years.  We believe that it’s only a matter of time before the retailer fuels its retail store expansion in international markets.
Factory Store Expansion
Major apparel retailers such as Ann (NYSE:ANN) and Ralph Lauren (NYSE:RL) operate a big network of factory stores to attract value-conscious customers. American Eagle Outfitters is looking to follow their footsteps as it plans to aggressively expand its factory store network in the U.S. As the name suggests, factory stores offer products at lower prices than other American Eagle stores. The retailer opened about 10 factory outlets in 2012 and plans to add about 40 in the current fiscal year. 
Stock Sensitivity – We currently estimate American Eagle’s average store count to remain around current levels. For every +/- 100 deviation in the figure, there can be about 10% upside/downside to our price estimate. If the retailer expands its international footprint and factory outlet network faster than its store closures, the figure can go up.
We’ll discuss the remaining drivers in another analysis that will follow soon.
Our price estimate for American Eagle Outfitters stands at $27, implying a premium of about 35% to the market price.Notes:
- American Eagle Outfitters Q4 fiscal 2011 earnings transcript, May 7 2012 [↩]
- American Eagle Outfitters Q4 fiscal 2012 earnings transcript, Mar 6 2013 [↩] [↩]
- American Eagle Outfitters’ Q1 fiscal 2013 earnings transcript, May 22 2013 [↩] [↩]
- American Eagle Outfitters’ Q2 fiscal 2012 earnings transcript, Aug 22 2012 [↩]
- American Eagle Outfitters’ Reward [↩]
- American Eagle Outfitters’ SEC filings [↩]
- American Eagle Outfitters Opens High Street Location in Philippines, American Eagle Outfitters, Mar 1 2013 [↩]
- American Eagle Outfitters To Assume Operations of Six Existing Stores In China, American Eagle Outfitters, Feb 4 2013 [↩]
- American Eagle Outfitters To Launch First Store in Mexico, American Eagle Outfitters, Jan 28 2013 [↩]
- American Eagle Outfitters Q4 fiscal 2012 earnings transcript, March 6 2013 [↩]