American Eagle Outfitters' positive Q3 2010 results provide some
cheer heading into the holiday shopping season. The company
generated a 1% year-over-year (YOY) improvement in same-store sales
with SG&A down slightly YOY (excluding $2.5 million in
severance charges) and end-of-quarter inventory per square foot
down 2% YOY.
In the days between AEO's Q3 2010 earnings release and the
Thanksgiving holiday, AEO's stock rose roughly 5% to $16.81, still
35% below the
Trefis price estimate of $25.70
. Encouraging retail data for early holiday shopping could help to
close the gap should investors gain confidence in a resurgence of
retail spending. However, we note that aggressive holiday
promotions could hinder EBITDA margins and provide a slight
headwind to profitability.
American Eagle Outfitters (
AEO
)
competes with Aeropostale (
ARO
),
Gap (
GPS
)
, Abercrombie & Fitch (
ANF
), and Urban Outfitters (
URBN
) in the specialty retail apparel market.
We estimate that the company's American Eagle brand stores
constitute almost 50% of AEO's stock value. Our forecasts reveal
that a 5% change in 2011 American Eagle revenue per square foot
translates to a 2% move in the price estimate. A 50 basis point
change in 2011 American Eagle store EBITDA margin translates to a
1-2% change in price estimate.
Holiday Sales Trends Could Push AEO…
A National Retail Federation survey quoted by The Wall Street
Journal cited an 8.7% YOY jump in online and store traffic to 212
million shoppers during the period between Thanksgiving and Sunday.
Furthermore, average spend estimates showed a 6.4% YOY increase to
$365.34.
American Eagle Stores revenue per square foot saw a sharp
decline between 2007 and 2009 due to falling demand in the apparel
industry alongside the economic downturn. We currently project a
more gradual improvement between 2010 and 2013 with a 4.6% CAGR.
Our estimates could see further upside as positive trends continue
through the holiday season and into 2011.
… But Be Mindful of Promotional Initiatives
Revenue upside from encouraging holiday shopping trends should
be taken with caution as increased revenue often comes at the hands
of promotional initiatives. Despite this effect, AEO profits should
continue to be buoyed by improving EBITDA margins. We estimate a 70
basis point improvement in 2010 EBITDA margins to 12.4%, following
a string of annual declines between 2006 and 2009.
Our forecast show a 1-2% AEO price sensitivity to a 50 basis
point change in 2011 American Eagle store EBITDA margins. As
we advance deeper into the holiday shopping season, investors
should watch the development of trends in December sales to dissect
the impact of bargain-hunting shoppers on early retail strength
before deciding if this points to a more widespread improvement in
consumer confidence.
See our full estimates for American Eagle
Outfitters here.