American Eagle Outfitters’ (NYSE: AEO) namesake label, which sells men and women apparel and accessories under the American Eagle, Tailgate, and Todd Snyder brands, has seen its revenues (excluding Aerie) grow modestly at a CAGR of 3% from $3.2 billion in 2016 to $3.5 billion in 2019, but we expect these revenues to shrink going forward to close to $3.1 billion in 2021 (down $140 million from 2016). To break it down, the teen retailer’s women business revenues (excluding Aerie) grew only at a compounded annual growth rate (CAGR) of 4% during the 2016 and 2019 period, whereas the men’s business came in largely flat. A major reason for this slowdown in revenues is low brand loyalty among buyers in the U.S. teen apparel market. Every apparel retailer is trying to outsmart the other one with a broader and deeper set of products, and as a result, people have been readily shifting to the brands that provide relevant fashion at the best affordable prices. To add to this, the coronavirus pandemic aggravated the retailer’s problems as customers stayed at home and a back-to-school season got hampered by students turning to online classes. All this further led to weaker demand for AEO’s most sought-after denim apparel. On the contrary, over the last few years, AEO saw huge potential in its relatively new brand, Aerie, which sells intimates and activewear for young women. The segment’s revenues increased from around $397 million in 2016 to almost $819 million in FY 2019 at a CAGR of a robust 24%. And, we expect these revenues to grow to $1.3 billion in FY 2021, up around $880 million from 2016.
Overall, even though the revenue share of the American Eagle label has shrunk from almost 89% in 2016 to around 81% in 2019, and will continue to shrink over coming years, thanks to strong growth in Aerie’s label – we believe that it still remains an important part of the company’s business model as we detail in our interactive dashboard, American Eagle Outfitters Revenues: How Does AEO Make Money? American Eagle label’s shifting approach toward omnichannel retailing across its 931 stores and its e-commerce – will help the company boost its top line and profit margins once the Covid threat abates.
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American Eagle Outfitters operates a network of more than 1100 retail stores in the U.S. and internationally. The company designs, markets, and sells its own brand of laid back clothing – targeting 15 to 25 year-olds at affordable prices. American Eagle has performed relatively well compared to other apparel retailers during the Covid-19 crisis, largely because of the strength of its Aerie brand, particularly online. In fact, its lingerie brand has quickly grabbed market share from ailing Victoria’s Secret with body-positive marketing campaigns and cheaper products. The Aerie segment has also been key to the growth in the company’s stock price over recent years. Going by our American Eagle Outfitters Valuation, with an adjusted EPS estimate of around $1.29 and P/E multiple of 15x in fiscal 2021, this translates into a price of $19, which is 17% below the current market price. We discuss American Eagle Outfitters’ valuation analysis in full, separately.
Approximately 60% Of AEO’s Total Revenue Growth Since 2016 Has Come Through Aerie
Aerie’s contribution to total revenues has significantly increased from 11% in 2016 to 19% in 2019. Going forward, we expect Aerie to continue its growth trajectory, with revenues likely increasing to $1.3 billion in FY 2021. That said, the women’s intimate wear market of $16 billion is a huge opportunity for Aerie to expand further. In 2020, the pandemic accelerated Aerie’s sales as the brand stood out for AEO, amid declining sales of its namesake brand. In the recent Q3, Aerie saw 34% year-over-year revenue growth, an even stronger performance than the 26% gain it notched a year ago when there was no pandemic impeding growth. In addition, AEO’s total digital revenue rose 29%, of which Aerie’s e-commerce revenue was up by 83% compared to an 11% growth at American Eagle.
Overall, AEO is learning to adapt to the new dynamics of a post-pandemic world, with its digital channel accounting for around one-third of its total revenues. While in-store sales will still be difficult for the duration of the pandemic, the company could likely be in a much more secure position than its peers when the economy fully reopens.
While AEO stock may be overvalued now, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.