Aerie Continues Its Strong Performance For American Eagle

by Trefis Team
-25.37%
Downside
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13.01
Trefis
AEO
American Eagle Outfitters
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American Eagle Outfitters (NYSE:AEO) anticipates a strong holiday quarter, following such expectations reported by other apparel companies such as Gap and Abercrombie & Fitch. The company reported an 11th consecutive quarter of positive sales growth. However, it missed analysts’ estimates on earnings per share, and its revenues of $960.43 million were just shy of the average expectation of $960.95 million. AEO’s comparable sales growth of 3%, on the other hand, came in higher than estimated (2%). Another positive news that came out of the earnings was that its lagging men’s segment reversed to positive in the quarter, and this may prove to be crucial in the upcoming holiday period.

We have a $13 price estimate for American Eagle’s stock, which is below the current market price. The charts below have been made using our new, interactive platform.

Aerie Again Is The Revenue Driver

American Eagle’s lingerie and activewear brand Aerie has gone from strength to strength, driving sales growth for the company. It posted a 14th consecutive quarter of positive comps, at 19%, building on the 21% seen in the prior year period. This figure is all the more impressive when compared to the growth figures delivered by its competitors. While the brand is much smaller in terms of sales when contrasted with Victoria’s Secret, the latter posted a comps decline of 5% this quarter. In addition to impressive growth in core intimates, the company saw strength in apparel, active wear, and swim wear. A lot of this growth has been a result of the efforts the company has put towards its digital channel, which has been growing at a tremendous rate and constitutes 40% of the Aerie revenues. Meanwhile, the brand’s brick-and-mortar stores are equally valuable to the company, as they result in an increase in the digital demand. The company found that if it has a store in a location, it tends to drive digital demand at 1.5 times the store’s sales.

Margin Pressure To Remain

While the top-line growth delivered has been impressive given the soft state of the apparel retail market in the country, it may have been driven by the promotions put in place by AEO. This factor has strained the margins, with a 120 basis points decline witnessed in the gross margins, of which 60 points were caused by the higher promotions. A greater focus on the online space resulted in higher shipping costs, which was another factor pressuring the margins, driving the remainder 60 points of gross margin decline. The margin decline has improved sequentially though, as compared to the first and second quarters. Looking ahead, the company can be expected to continue to remain promotional in the fourth quarter, which will cause the margins to fall as compared to the corresponding quarter last year, with continued sequential improvement.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions in 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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