American Eagle Outfitters (NYSE: AEO) has gained close to 7% since early February after the WHO declared the Coronavirus a global health emergency, while Gap Stock (NYSE: GPS) stock has remained flat over the same time period. The lockdown in various parts of the world has hurt the apparel industry worldwide. Moreover, fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders resulting in stores remaining closed adversely impacting the apparel market. However, we believe American Eagle has the edge over Gap and is likely to fare better over the coming months because of its stronger brand appeal (Aerie and American Eagle) and a robust digital network as compared to Gap, despite Gap having a more diversified business than American Eagle Outfitters. Notably, American Eagle has gained more than 12% over the last week while Gap stock has remained flat and, we believe that AEO stock will continue to outperform due to the factors highlighted above.
Our conclusion is based on our detailed dashboard analysis, ‘American Eagle Outfitters Looks Cheap vs. Gap’ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances.
- Gap derives roughly 82% of its revenues from North America, while American Eagle makes more than 85% of its sales from the region.
- Gap has a larger retail footprint with the company operating more than 3,900 stores as of 2019 while American Eagle’s store count stood at less than 1,100.
- Despite Gap having a larger geographical reach and retail footprint, American Eagle looks better poised for future gains as it has two of the fastest-growing brands (Aerie and American Eagle) in the apparel market.
- Aerie’s revenues surged nearly 66% between FY2017-2019 and it is expected to be a major growth driver for American Eagle over the coming months. On the other hand, Gap’s brands have been struggling, with the company’s iconic Gap brand losing 6% over FY2017-2019.
- Finally, American Eagle has a robust digital network. The company’s digital channel continued to flourish as digital demand surged by 48% in Q2 2020 (ending July) despite the pandemic, with demand for Aerie’s products swelling by more than 113%, resulting in Aerie’s revenues growing by 32%. Moreover, the digital channel accounts for around one-third of American Eagle’s revenues while Gap’s direct to consumer accounts for nearly 25% of its total revenues. With the digital channel gaining significance due to Covid-19, AEO is in a better position to reap the benefits as compared to Gap.
There Is Little To Separate The Stock Performance Of Both Companies Over Recent Weeks
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American Eagle’s P/E based on 2019 earnings has improved from 13x in 2019 to 14x currently, while Gap’s multiple has remained around 19x. There is little to separate the two, as the multiple of both the companies has remained stable. However, we believe American Eagle’s multiple is appropriate at its current level. On the flip-side, Gap’s multiple appears high, keeping in mind the fact that the company’s revenues and margins are at a higher risk compared to American Eagle’s. Notably, American Eagle’s P/E is trading toward the lower end of the spectrum seen over the last six years, while Gap’s multiple seems to be elevated, trading towards the higher end of the spectrum. This leads us to believe that Gap stock could be vulnerable. Overall, it’s likely that American Eagle stock will outperform Gap, if not near-term, at least in the medium- to long-run.
But How Long Can American Eagle Stock Continue To Outperform?
- The expected timeline for recovery in global economic conditions, and in Gap’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
- Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Gap’s multinational peers, including L Brands and Lululemon. The complete set of coronavirus impact and timing analyses is available here.
- We believe there will be a recovery in demand for most sectors by late September/early October, with the gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
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