American Eagle Outfitters Debuts In The Philippines

Over the past four years, American Eagle Outfitters (NYSE:AEO) has scaled up its international expansion and currently operates about 45 franchisee stores in 11 countries. ^[1] The retailer recently opened its first franchisee store in the Philippines and plans to add more stores throughout the region in 2013. Due to increasing competition in the U.S. apparel industry and the sluggish economic growth, many apparel retailers such as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) have increased their focus on international expansion. In this analysis, we’ll take a closer look at what  the Philippines will do for American Eagle Outfitters.

See our complete analysis for American Eagle Outfitters

Going Global: How Does It Help?

The apparel industry in the U.S. is highly competitive with a number of established value and fashion focused brands. Moreover, the weak economic environment has worried the entire apparel industry. Therefore, the growth opportunities are limited, which is evident from the fact that retailers such as Gap, Abercrombie & Fitch and Jones Group (NYSE:JNY) are consolidating their underperforming stores in the U.S. ^[2] American Eagle Outfitters is also following a similar strategy. ^[3]

On the other hand, international markets with better economic conditions and relatively lower competition provide viable expansion option for these brands. For instance, Gap has been increasing its international store count since they generate about 35% higher revenue per store, compared to the U.S. stores. ^[4]

What Potential Does Philippines Hold?

The Philippines provides good potential for value based retailers due to its flourishing middle class. The disposable income of Filipino consumers has been rising as a result of booming business process outsourcing industry and rising remittances. ^[5] Additionally, increasing Internet penetration should help American Eagle Outfitters’ growth by boosting online sales. The retailer’s store will be operated by Suyen Corporation, which is one of the leading players in the Philippines’ apparel industry. ^[1]

Booming Business Process Outsourcing Industry & Increasing Remittances

In recent years, the Philippines has become an important market for business process outsourcing (BPO). ^[6] In 2011, the region’s BPO industry reported $11 billion in revenues and employed 640,000 people. ^[7] The growth in this industry has been one of the main factors driving higher disposable income, thus in parallel helping the apparel industry’s growth as well. ^[5]

Remittances refer to the money received from friends and relatives working abroad. This accounts for about 10% of the Philippines’ gross domestic product. ^[8] Towards the end of 2012, the region witnessed a steep rise in cash remittances. The year-over-year growth for October and November 2012, stood at 8.5% and 7.6% respectively. ^[8] Overall, the Philippines received more than $19 billion in cash remittances in 2012. ^[8] We expect the trend to continue and influence consumer spending growth in the country positively which would bode well for the region’s apparel industry.

Increasing Internet Penetration & Partnership With Market Leader

According to Kleiner Perkins’ 2012 State of the Internet report, the Philippines is the fourth fastest growing Internet market in the world. In 2011, with greater wireless access in urban areas, the number of Internet users increased substantially by 44%, bringing the total Internet penetration to 35%. ^[9] The growth in Internet usage will help American Eagle Outfitters in successfully promoting its direct-to-consumer business, which has been one of the key international growth strategies for western apparel retailers.

American Eagle Outfitters’ stores will be operated by Suyen Corporation, which is the leading apparel retailer in the Philippines, with a broad selection of popular brands at affordable prices. This will provide the retailer a competitive advantage, and help it in creating brand awareness relatively easily. Also, Suyen Corporation invests substantial amount on advertising and marketing. ^[5]

Potential Impact

Currently, American Eagle Outfitters is planning to open franchisee stores in the region and there seem to be no plans for its retail store expansion yet. However, we believe that it will not be long before the retailer initiates its retail store operations. Recently, American Eagle Outfitters assumed control of its six licensee stores in China. ^[10] Additionally, it plans to open six stores in Mexico by the end of 2013.

Let’s assume that the retailer carries on its expansion and opens about 60 stores (10 stores per year) in international markets by 2019 and they generate about 35% higher revenue per store as compared to the U.S. stores (similar to Gap). Adjusting these values in our pricing model, we conclude that there can be 10% upside to our price estimate.

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 Opens High Street Location In Philippines, American Eagle Outfitters, March 1 2013 [↩] [↩]
2. Companies’ SEC filings [↩]
3. American Eagle Outfitters’ SEC filings [↩]
4. Gap’s SEC filings [↩]
5. Apparel in the Philippines, euromonitor, June 2012 [↩] [↩] [↩]
6. How To Strengthen Outsourcing In Philippines, eastvantage [↩]
7. BPO firms unfazed by Obama ‘job bill’, Business Mirror, Nov 8 2012 [↩]
8. Philippine Remittances Rise Sharply, The Wall Street Journal, Jan 15 2013 [↩] [↩] [↩]
9. Internet Trends [↩]
10. American Eagle Outfitters To Assume Operations of Six Existing stores in China and HongKong, American Eagle Outfitters, Feb 4 2013 [↩]