American Eagle Outfitters (NYSE: AEO), a company that designs, markets, and sells its own brand of laid back clothing – targeting 15 to 25 year-olds at affordable prices, has gained roughly 79% in the last year – increasing from about $14 to around $25 currently, outperforming the S&P500, which grew 31%. Why? AEO has made a conscious effort to focus on its integrated retail strategy under the American Eagle, Aerie, Tailgate, and Todd Snyder brands, which seamlessly connects online and offline channels. The retailer is learning to adapt to the new dynamics of retail, with its digital channel accounting for around one-third of its total revenues. The company performed relatively well compared to other apparel retailers in 2020, largely because of the strength of its Aerie brand (particularly online). The Aerie brand, which sells intimates and activewear for young women, was able to quickly grab 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. That said, the company is showing plenty of opportunities to keep expanding going forward. We discuss more in the sections below.
But is this all there is to the story?
No, not quite. Despite the company’s stock rally, Trefis estimates American Eagle Outfitters’ Valuation at about $30 per share, around 18% above the current market price based on two key opportunities.
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The first opportunity we see is American Eagle Outfitters’ Revenue growth. In the recent Q2, the company’s revenues grew a strong 35% year-over-year (y-o-y) to $1.2 billion, driven by increased traffic as economies re-opened. While the retailer’s revenue was the highest it has been in the second quarter, it still missed the analyst consensus slightly by $30 million. To break down the revenue growth, AEO’s store revenue grew by 73% y-o-y but digital revenue fell 5% during the same period. It looks like some investors might have liked to see the company perform a little better on the digital front, but it should also be noted that the company was up against a tough comparison when digital demand surged 48% y-o-y in fiscal Q2 last year. Compared to the pre-Covid quarter, the company’s store revenue increased 4% and digital revenue grew 66%.
In 2020, the pandemic accelerated Aerie’s sales as the brand stood out for AEO, amid declining sales of its namesake brand. However, the American Eagle brand has also been performing quite well so far with Q2 2021 revenues growing 35% y-o-y to $846 million. In Q2, Aerie’s revenue grew by 34% y-o-y to $336 million after lapping extremely difficult comps of 32% growth in Q2 2020, assisted by strength in core intimates, swimwear, and apparel. That said, Aerie’s contribution to total revenues has significantly increased from 16% in 2018 to 27% in 2020. Going forward, we expect Aerie to continue its growth trajectory, with revenues likely increasing to $1.5 billion in FY 2021. As such, the women’s intimate wear market of $16 billion is a huge opportunity for Aerie to expand further. AEO also posted second-quarter earnings per share of $0.60, up more than 50% from $0.39 in Q2 2019. One of the major contributors to profitability was again Aerie, which saw its Q2 operating profit increase 7 times from the pre-pandemic quarter. This is despite the ongoing higher labor shortages and supply chain disruptions.
The second key opportunity stems from AEO’s valuation multiple compared to its peers. The stock now trades at a premium of 14x its projected 2021 earnings per share of about $2.17, per Trefis estimates. This is higher when compared to its peer, Abercrombie & Fitch, trading at 9x forward earnings. And, we believe that AEO deserves this premium in its multiple. While AEO saw a flat revenue growth between 2017 and 2020, ANF’s revenues declined 4% during the same period. Having said that, we expect AEO’s revenues to grow at a strong rate of 20% over the next two years, compared to an 11% growth expected for ANF’s revenues.
Our price estimate of $30 for American Eagle Outfitters stems from a 13.8x P/E multiple and $2.17 in earnings per share in 2021. This implies around an 18% premium to the current market price near $25.
E-commerce is eating into retail sales and should present a big opportunity for the logistics industry. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift. Also, American Eagle Outfitters vs. E-Commerce stocks provides a comparison.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.