Why Aerie Has Become American Eagle Outfitters’ Most Important Brand

by Trefis Team
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American Eagle Outfitters
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American Eagle Outfitters (NYSE: AEO) has seen solid growth in recent years. Strong digital sales and an increasing focus on women’s apparel have been the primary reasons behind the company’s growth. While the Men’s Apparel and Accessories segment has struggled, American Eagle’s Aerie brand has gained prominence to become the most important growth driver for the company. Trefis highlights the importance of its Aerie brand for American Eagle Outfitters in an interactive dashboard. You can modify any of our key drivers to gauge the impact changes would have on American Eagle’s valuation.

 

Why Is Aerie So Important To American Eagle Outfitters?

#1 Aerie’s Contribution To Total Revenue Has Increased Steadily Over The Last 4 Years And Is Expected To Reach Almost 20% In 2019

  • Aerie has achieved robust growth in the last few years, with revenues increasing from around $310 million in 2015 to almost $650 million in FY 2018 (ending January) at an average annual rate of 27%.
  • We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 28% to more than $825 million in FY 2019.
  • Aerie is expected to achieve significant growth for both the digital channel and retail stores as the company plans to increase its exclusive Aerie stores in fiscal 2019.
  • Moreover, the brand has continued to increase its footprint on social media – aiding the brand in increasing its retention ratio and also providing a boost to digital sales.
  • The segment’s contribution to total revenues is expected to double from its 2015 levels and cross 19% in 2019.

 

#2 Aerie’s Revenue Growth Has Comfortably Outpaced American Eagle’s Total Growth In Each Of The Last Four Years

  • American Eagle has added $514 million to total revenue since 2015 at an average annual rate of 4.5%.
  • Notably, Aerie alone has added $330 million to American Eagle’s total revenue at an average annual rate of 27%.
  • Nearly two-thirds of the company’s incremental revenue growth has come through Aerie since 2015 – more than making up for the company’s Men’s Apparel and Accessories Revenue which has remained largely flat since 2015.

 

#3 Notably, the growth of the fastest-growing brands of American Eagles’ competitors is lower and ranges from -2% to 12%

 

#4 Aerie Has Achieved Strong Comparable Sales Growth Over The Last Few Years

  • Aerie has seen robust growth in the last few years, with the brand achieving comparable sales growth in excess of 20% over 2015-18.
  • On the other hand, American Eagle’s comparable sales growth has been much lower, ranging from 3% to 8% over the same time period. Aerie has comfortably outpaced the company’s growth led by positive traffic across all channels.

 

#5 Average Revenue Per Store For Aerie Is Almost 50% Higher Than The Consolidated Figure For American Eagle Outfitters

  • As of 2018, Aerie’s standalone store count stood at 115, with the brand generating average per store revenue of $5.6 million
  • On the other hand, American Eagle’s total store count stood at 1,055, making $3.8 million in average revenues per store – almost 30% lower than that of Aerie’s.

 

Conclusion

  • Aerie is one of the fastest-growing brands in the apparel industry. Product newness coupled with innovation has helped the brand develop a large customer base.
  • The brand holds strong growth potential and the company expects Aerie to exceed $1 billion in sales in the near term.
  • Moreover, the brand has a strong retention ratio and it is one of the only brands delivering growth across digital as well as retail (store) channels.
  • With growth fundamentals remaining strong for the brand, we expect Aerie to be pivotal to the company’s long-term revenue growth, profitability improvement, and enhanced shareholder returns.

 

Starting with our forecast for American Eagle’s revenues, we estimate the company’s adjusted EPS for full-year 2019 is to be around $1.46. Using this figure with our estimated forward P/E ratio of 11.3x, this works out to a price estimate of $16 for American Eagle’s stock, which is 10% ahead of the current market price.

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