Why Are We Bullish On American Eagle?

The key reasons why we are bullish on American Eagle Outfitters (NYSE:AEO) have been listed below:

1. Comparable Sales Growth

American Eagle boasts a strong portfolio of well-established brands, focusing on the rapidly changing preferences of its target customers. The company has been consistently increasing its comparable sales growth since the beginning of FY 2015. This is impressive, amid the backdrop of a tough retail environment, with weak mall traffic as a result of a rise in e-commerce, and intense competition from fast-fashion retailers. Such an environment has been wreaking havoc on a majority of its peers. Companies such as Gap, Abercrombie & Fitch, and Ralph Lauren have been facing either negative or negligible comps growth.

2. Gaining Popularity Of Its Aerie Brand

The company’s game-changing campaign in 2014 for its Aerie brand, where the lingerie brand decided to feature only unairbrushed models in its ads, has paid off for the company. The sales increased immensely thereafter (20% growth in FY 2015), and shows no signs of slowing down. Amid an otherwise dismal retail environment, Aerie’s sales increased 32% in Q1 2016, as compared to a growth of 12% in Q1 2015, surpassing what most analysts had predicted. AEO anticipates a sales rise to $500 million in the coming years. While that is small compared to lingerie giant Victoria’s Secret’s sales of $7.7 billion, strong growth in the Aerie brand is making it a viable competitor.

3. Focus on Online Growth

As is the case with other apparel retailers, AEO is gradually shrinking its store count, and focusing more on the high margin e-commerce channel. A soft and gradual reduction in its brick-and-mortar footprint, as opposed to a large closure in one go, is a good decision as it would not result in a steep fall in its sales.

The company’s digital sales registered a 20% growth in FY 2015. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing its e-commerce capabilities, and is expected to spend more in FY 2016. The direct business continues to perform well for the company, contributing to 30% of the company’s revenues in Q1 2016, and has been a major driver in its sales growth, especially since the mall traffic has been soft.

4. Margin Improvement

Operating costs (SG&A excluding D&A, share based compensation, and operating lease) per unit square foot for American Eagle stores have declined notably over the past three years. During Q1 2016, the company’s gross margin improved 170 basis points over the same period in FY 2015, while its operating margins improved 180 basis points. This has been a result of favorable occupancy and product costs, and more controlled and targeted promotional events. Further, the company expects the margins to continue rising in the near future, despite a competitive environment. This is expected to be achieved through favorable product costs and sourcing efficiencies, and maintaining tight inventories through more strategic and targeted promotions.

Have more questions about American Eagle Outfitters? See the links below:

• What Can Move American Eagle’s Stock Down In The Next Couple Of Years?
• What Is American Eagle Outfitters’ Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
• How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
• What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?
• Where Will American Eagle Outfitters’ Revenues Come From In The Next Five Years?

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