American Eagle Outfitters
) comes out with its Q4 fiscal 2012 earnings on March 6, we expect
good results backed by the retailer's U.S. store consolidation, a
good response to its product assortments and a balanced
pricing strategy. Looking at the trends in the online apparel
industry, we expect substantial growth in American Eagle
Outfitters' direct-to-consumer business as well. Furthermore, lower
cotton prices might help the retailer's overall margins for
2012. However, a low proportion of fashion focused products
and a weak holiday season in the U.S. could have a mitigating
See our complete analysis for American Eagle
Store Consolidation Will Help The Retailer's Store
Productivity And Margins
American Eagle Outfitters reduced its store count to 920 by the
end of 2011, from 946 in 2009, as it closed down its
underperforming stores. With this consolidation, the retailer
intends to improve its store productivity. For example, the
retailer operated 934 stores in 2010 with an average revenue per
square feet of around $440. Whereas in 2011, the store count came
down to 920 and the revenue per square feet increased to about
$470, with an overall revenue increase of 1.4%. American Eagle
Outfitters further closed down 11 stores by the end of Q3 fiscal
2012, and we expect the store count to be around 905 at the end of
the fiscal year.
With the increased store efficiency, American Eagle Outfitters'
margins might see a slight positive impact. This will be further
complemented by lower cotton prices. Cotton prices were at a peak
in 2011 ($2.29/pound in March 2011), which resulted in a sharp
decline in American Eagle Outfitters' EBITDA margins. However, the
cotton prices have been coming down since then ($0.83/pound
currently) and should help the overall margins for fiscal 2012.
Abercrombie & Fitch
) and Gap (
) are also following the same tactics by closing their
underperforming stores in the U.S.
The American Eagle stores constitute about 65% of the
company's value according to our estimates.
Direct-To-Consumer Growth Is Likely To Continue Its Pace
Driven By Industry Trends
The apparel industry on the whole is showing signs of
improvement with major players such as Gap, Urban Outfitters (
) and Abercrombie & Fitch reporting significant
growth in their direct-to-consumer business. Gap and Urban
Outfitters reported direct-to-consumer revenue growth of 23% and
36% respectively in their previous quarterly results. Aeropostale's
) growth has been slower than the overall apparel industry's
growth, it reported a substantial increase in its
direct-to-consumer revenues during its last quarter earnings
On average, revenues from American Eagle Outfitters'
direct-to-consumer segment have increased by about 10% annually
during 2009-2011. However, with the on-going shift in the apparel
industry, the growth rate picked up in 2012. The retailer's
direct-to-consumer revenues increased by 26% in the first nine
months of fiscal 2012, and we expect similar results for the entire
The direct-to-consumer segment constitutes 25% of the
company's value according to our estimates.
Fashion Newness And Marketing Should Help
American Eagle Outfitters has witnessed strong customer response
to its fashion products in both, its men's and women's businesses.
The retailer added new styles, fits, colors, washes, prints,
patterns and treatments to its apparel range. It also maintained
the strength in its core denims and bottoms by adding the
prevailing fashion trends to them. Moreover, shorts, knit tops and
dresses have performed well. Due to this, American Eagle
Outfitters's comparable store sales increased by 17%, 7% and 8% in
the first three quarters of fiscal 2012. This shows that American
Eagle Outfitters enjoys strong brand recognition among teens, and
its fashion trends are being welcomed by its customers.
In addition to staying attuned with the fashion trends, American
Eagle Outfitters is following a 360 degree integrated marketing
plan, including TV commercials and advertisement on mobile phones.
The retailer has advertised through a number of social media
partners as well. Amid the highly promotional U.S. teen apparel
industry, the retailer is looking to add more product variety in
the mid-priced and the opening priced tier.
The current teen apparel market is highly sensitive to changing
fashion trends. While American Eagle Outfitters has been quite
responsive in this aspect, its fashion products only account for
25% and 15% of women's and men's apparel respectively. The
remainder of the portion includes the core basics and core fashion.
Although these categories have performed well due to American Eagle
Outfitters' brand appeal, the retailer may have to increase its
fashion offerings over the longer run. The lack of fashion focused
apparel has severely impacted the relatively less popular brands
such as Aeropostale.
Our price estimate for American Eagle Outfitters stands at $25,
implying a premium of about 10% to the market price.
How a Company's Products Impact its Stock Price at