Key Trends Impacting American Eagle Outfitters

American Eagle Outfitters‘ (NYSE:AEO) positive revenue growth despite a lower number of stores in recent years has been aided by remodeled stores, and the company’s ability to adapt to the changing fashion trends, which has led to market share gains. The retailer has already expanded aggressively in the U.S. market and has felt the need to consolidate its stores in order to improve its position in the marketplace. Moreover, American Eagle Outfitters is focusing on the expansion of its Aerie and 77kids business as it looks to capitalize on the lack of competition in the young women’s intimates specialty format and increasing demand for specialty retail apparel in the children’s market. We expect the aforementioned trends to continue to help drive the company’s growth, assisted further by lower cotton prices and rising U.S. consumer spending.

See our complete analysis for American Eagle Outfitters

Consolidation Of Stores

American Eagle Outfitters operated around 920 at the end of 2011, down from 946 in 2009. ^[1] The company closed stores as it felt that the U.S. market was becoming too saturated. With this consolidation, the retailer looked to improve 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%. ^[1] We expect American Eagle Outfitters to further close down a modest number of stores and then we forecast a stable number thereafter. Its competitor, Abercrombie & Fitch (NYSE:ANF) is also following the same tactics by closing its under-performing stores while Aeropostale (NYSE:ARO) is continuing its expansion in the U.S. market.

The American Eagle stores constitute about 65% of the company’s value according to our estimates while internet and catalog accounts for just over 25% of our estimate. Aerie and 77kids make up the rest.

Lower Cotton Prices

Cotton prices touched a high of 229 cents per pound in March 2011 and remained elevated throughout the year. ^[2] The sudden rise in prices resulted from a heavy loss of cotton crops due to floods in Hubei, China. The prices have declined since then and stood at around 85 cents per pound in September this year. ^[2] As cotton is the primary raw material for the apparel industry, the lower prices should help the retailer to sustain competitive prices and improve gross margins.

Improving Consumer Spending

The consumer spending growth in the U.S. has been sluggish following the recession of 2008-2009. Although, the average consumer spending has not touched the pre-recession levels yet, it is getting slightly better as the economy improves. ^[3] For example, the $74 figure for the month of September this year was higher than the consumer spending levels seen for the same month in the past three years. ^[4]

Promotional Activities In Competitive Teen Apparel Market

The U.S. teen apparel market is highly competitive where retailers are trying to stay on top of the latest fashions while competing with each other on promotions to draw in shoppers. The trend is expected to continue until the U.S. economy recovers fully. American Eagle Outfitters is following a 360 degree integrated marketing plan including the TV commercials and advertisement on mobile phones. The retailer has advertised through a number of social media partners as well. These marketing strategies have helped American Eagle Outfitters register a healthy revenue growth of 11% in its last quarter earnings. ^[5]

Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. American Eagle Outfitters’ SEC filings [↩] [↩]
2. Cotton Monthly Prices, index mundi, Oct 22 2012 [↩] [↩]
3. U.S. Consumer Spending, Ycharts, Oct 23 2012 [↩]
4. U.S. Consumer Spending Slows in September, Gallup Economy, Oct 5 2012 [↩]
5. American Eagle Outfitter’s Q2 fiscal 2013 earnings transcript, Aug 22 2012 [↩]