American Eagle Outfitters Plans To Expand Its Presence In Asia By Entering Thailand

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Quick Take

  • American Eagle Outfitters recently unveiled plans for licensed store expansion in Thailand with the aim to strengthen its position in Asia
  • The retailer has been struggling in the highly competitive and uncertain U.S. market for some time now; hence, stepping up international expansion makes sense
  • Although Thailand is not a big market, it is likely to grow in the future due to rising income levels and growth in online retailing
  • However, Thai expansion alone will not have any noticeable impact on the company; it needs to focus on other Asian markets as well

U.S. apparel retailer American Eagle Outfitters ( AEO ) is looking to expand its presence in Asia. Earlier this month, it entered a licensing agreement with Pacifica Lifestyle Co. to open stores in Thailand next year. After China and the Philippines, Thailand is the third high growth Asian market that the retailer has targeted. Given the uncertain retail environment in the U.S., expanding its international presence appears to be a viable strategy for American Eagle. Although the retailer has plans to open licensed stores in several South American countries as well, we will focus on the Thai market in this analysis.

The apparel market in Thailand is expected to sustain a healthy growth momentum in the future backed by rising minimum wages and online retail growth. It is expected that sales of economical products will increase as labor wages edge higher. This can work in American Eagle's favor. Moreover, Thailand is still somewhat untouched by the ongoing boom in online shopping, which implies that the market holds tremendous potential for apparel retailers.

Although entering Thailand appears to be a good decision, we do not see any upside opportunity for the company based on this expansion alone. American Eagle needs to expand in other lucrative Asian markets such as India and Japan and step up its expansion in China and the Philippines to grow its international business.

Our price estimate for American Eagle Outfitters stands at $18.88 , implying a premium of about 30% to the market price.

See our complete analysis for American Eagle Outfitters

What Is The Importance Of International Expansion?

The apparel market in the U.S. is highly saturated and competitive with a number of established brands. Moreover, the sluggish economic growth has been a big worry for the entire industry. This year in particular, apparel retailers have struggled to achieve positive growth as cautious consumer spending and change in spending patterns have weighed on sales. Moreover, teen buyers have been readily changing brands based on their fashion relevance, which has troubled a number of players. Along with several other retailers, American Eagle has been at the receiving end of this trend. Its comparable stores sales have declined by 5%, 7% and 4%, respectively, during the last three quarters, and the holiday season isn't looking good either.

Given the situation in the U.S., exploring opportunities in international markets isn't a bad idea. It will not only open new revenue channels for the company, but will also help diversify the business risk geographically. International markets with better macro-economic conditions and relatively lower competition provide good expansion opportunities. Currently, American Eagle is focused on expanding its geographical reach with licensing agreements. As of Q3 fiscal 2013, the company operated its licensed stores in 12 countries and had plans to open 40 such stores in 2014. However, we believe that American Eagle will have to turn to retail store expansion soon enough to realize a better impact.

Thailand Is A Good Market For American Eagle Outfitters

The Thai apparel market might not be the biggest in the world, but it does hold good growth potential for international brands. The market registered positive growth in 2012 despite the fact that most consumers diverted a big portion of their money to flood repairs in the first quarter of 2012. Several categories such as jeans, footwear, sports wear and women's undergarments posted double-digit growth during the year. Going forward, the apparel market growth is expected to remain steady with increasing incomes and growth in online retailing.

Thailand's labor wages are on the rise, which is likely to have a positive impact on consumers' purchasing power. Earlier this year, Thailand adopted a nationwide minimum wage policy wherein employers had to pay their employees a minimum of Bt300 ($10) per day. With this policy, the region's low-income groups will start earning more, which is likely to boost sales of value-focused apparel brands. This will assist American Eagle's growth since it is an affordable brand.

Additionally, there exists a huge opportunity in the form of Thailand's e-commerce channel, which is still at a nascent stage. Traditionally, Thai buyers have enjoyed store-based shopping where they can mix and match different styles and colors, and have a feel of the fabric. However, lately some of the leading retailers have developed e-commerce platforms for their merchandise. Since these retailers have not expanded their online product variety, they haven't enjoyed the boom in online retailing. We believe that American Eagle can tap this opportunity and establish its brand in the region amid fierce competition from international players such as Zara, AIIZ, MNG, H&M, etc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AEO , ANF , ARO

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