Investors Overlooking American Eagle’s Growth Potential

by Trefis Team
-10.30%
Downside
18.00
Market
16.15
Trefis
AEO
American Eagle Outfitters
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American Eagle Outfitters‘ (NYSE:AEO) stock price has been on a steady downtrend since the release of its second and third quarter results (ended July and October 2016). From a closing high of $19.37 on August 15, the share price has spiraled down to $15.28 on December 28. The company’s 50-day simple moving average is a difference of -10.39% from the current levels, and further back, its 200-day simple moving average is -7.50% difference from December 28’s price. The company’s share price is at a similar level as when the year started, which is surprising given the positive performance of the company, amid a tough retail environment. This may indicate that the company’s growth and its potential are being overlooked by investors. Below we’ll underline some positives of the company, which should help to revert the share price closer to $19.97, which is the Trefis price estimate for the company.

AEO Stock Price

See our complete analysis for American Eagle Outfitters

The Aerie Potential

American Eagle’s Aerie brand, which is the company’s lingerie and activewear segment, has been performing strongly for the past several quarters. The third quarter of 2016 was another breakout one, with comparable sales increasing 21%, a sixth consecutive quarter with comps over 20%. While weak mall traffic and a soft macro environment have negatively impacted other brands, American Eagle and Aerie have been gaining market share. According to Jen Foyle, Global Brand President of Aerie, the company wants to be “a real player in the intimates sector.”

The company’s game-changing campaign in 2014 for its Aerie brand, where the lingerie brand decided to feature only unairbrushed models in its ads, has paid off for the company. The sales increased immensely thereafter (20% growth in FY 2015), and shows no signs of slowing down. As an extension to its #AerieReal campaign, the company in April revealed its #AerieMan campaign. This marks its pledge to forego retouching even male models in their underwear and swimwear products, beginning Holiday 2016. Such campaigns also generate a lot of online chatter and debate, sparking off a ton of good publicity, increasing their brand loyalty, and thus, helping their business grow. As noted by Foyle, the #AerieReal campaign reached 4 billion media impressions in 2015. The brand’s innovation around the bralettes have continued to see great momentum throughout the year. Additionally, a new yoga-inspired line – Chill. Play. Move. – was also launched to an incredible response in the third quarter. The newly designed stores are also generating productivity at 50% above the older formats, and the company is on track with its expansion plans, and will end the year with 10 to 15 such stores, and another 25 by the end of next year.

AEO Aerie

The brand holds a low-singe digit share in the lingerie market, compared to Victoria’s Secret’s 62% share, according to IBIS World. However, it is growing at a much faster pace to Victoria’s Secret’s anemic growth this year. This makes the brand a viable competitor in this space.

Strong Growth In The Direct-To-Consumer Channel

With growing Internet penetration, a consistent customer shift from store to web shopping and the proliferation of smartphones and tablets, American Eagle Outfitters‘ direct-to-consumer business has grown rapidly. From $307 million in 2008, the retailer’s direct revenues increased to an estimated $630 million in 2015, according to Trefis estimates. The U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel. This is becoming an inevitable move for U.S. apparel retailers, including American Eagle, which is working hard to develop its omni-channel 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. The company’s digital sales registered a 20% growth in FY 2015. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing it e-commerce capabilities, and is expected to spend more in FY 2016. The direct business continues to perform well for the company, contributing to 30% of the company’s revenues in Q1 2016 and has been a major driver in its sales growth, specially since the mall traffic has been soft.

AEO Direct Sales

A Not So Weak Fourth Quarter Guidance

A weak holiday guidance provided by the company has been a major factor which pulled down its stock price; AEO is anticipating an earnings per share of $0.37 to $0.39 for the fourth quarter. The company stated this guidance includes potential impairment and restructuring charges. However, the EPS of $0.42 in the corresponding quarter of last year included $0.07 of non-recurring items, including a gain on the sale of a distribution center of $9.4 million, and a lower tax rate of 27.9%, against an anticipated rate of 35% in the quarter this year. This means that the retailer’s fourth quarter earnings would actually represent a 6%-11% growth from the adjusted EPS of $0.35 last year.

Have more questions about American Eagle Outfitters? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Eagle Outfitters
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