American Eagle Outfitters Stumbles With Weak Results And Outlook

American Eagle Outfitters‘ (NYSE:AEO) stock fell by 10% after the company reported disappointing Q2 fiscal 2013 results. The retailer’s revenues and comparable store sales (CSS) declined by 2% and 7% respectively. The drop in store traffic, a high promotional environment and a poor response to women’s product offerings were the key reasons behind the dismal performance. Additionally, the company slashed its outlook for the third quarter as its Q3 sales have been disappointing so far due to higher promotions. The National Retail Federation has forecast an 8% decline in spending during the back-to-school season indicating that the industry won’t bounce back this quarter.

However, there were a few underlying positives from the earnings such as good performance of certain products, e-commerce growth, and promising results from the Aerie brand and factory stores. We believe that these factors will play a crucial role in the company’s long-term growth.

See our complete analysis for American Eagle Outfitters

Low Store Traffic, High Promotions & Disappointing Women’s Business Weighed On The Business

The second quarter was marked by low store traffic due to weak demand and cautious consumer spending. The spring season (March-May) this year was colder and wetter than usual, which resulted in low demand for spring and summer clothing. Moreover, consumer spending remained sluggish throughout the quarter due to the payroll tax hike and high unemployment rate. As U.S. employers slowed hiring outside the farming sector, the unemployment rate rose in 28 states in July. ^[1] The teenage segment was the worst hit as the unemployment figure reached 23.7% during the month. ^{[2] [3]} As a result, apparel retailers witnessed a sharp decline in store traffic. For American Eagle, transaction per store (a measure of store traffic) decreased by 3%. ^[4]

Additionally, the average price per unit declined slightly due to large promotions that American Eagle had to undertake to clear its inventory and attract customers. ^[4] The retailer’s apparel products failed to appeal customers. The worst hit was its women’s business, which constitutes more than 50% of its revenues, and this segment’s core fashion apparel struggled. As a result, units per transaction went down by 3% leading to a 9% decline in comparable store sales. ^[4]

Some Factors That Can Help American Eagle’s Future Growth

Product Offerings

While the retailer’s women’s business remained weak for the most part, fashion offerings (about 30% of overall apparel) continued to do well. Fashion styles in pants and tops were among the best performers during the quarter. ^[4] Going forward, American Eagle will continue to promote these apparel products and plans to re-assort its offerings for Q3 and Q4 with new styles and compelling fashion at good value. ^[4] The company has a history of being responsive to fashion changes and it is just a matter of time before its business gets back on track.

Although the retailer’s men’s business was also down, its apparel products found better acceptance as compared to women’s merchandise. With the addition of relevant new styles, men’s pants, tops, polos and graphics performed reasonably well. ^[4]

Growth Of Aerie

American Eagle’s intimates brand Aerie continued its solid performance in the second quarter. Although its comparable store sales declined by 2%, it aided the retailer’s bottom line growth with improved inventory principles and better distribution strategies. ^[4] Aerie is still at a nascent stage in the U.S. and the market provides immense expansion potential. However, it will face strong competition from Victoria’s Secret which has a loyal customer base.

Factory Channel

American Eagle’s factory stores have performed well as U.S. buyers are increasingly becoming cost-conscious. This channel registered a staggering 29% revenue growth during the second quarter driven by aggressive store expansion. ^[4] The company’s focus on its factory network is evident from the fact that 18 out of 20 stores opened during the quarter were factory outlets. ^[4] The success of Ann‘s (NYSE:ANN) and Ralph Lauren‘s (NYSE:RL) factory channel indicates that this can become a big business for American Eagle as well.

Online Business

This channel has been one of the key drivers for American Eagle’s business registering over 40% growth in the last two years. ^[5] Although the growth slowed down to 11% in Q2 fiscal 2013 due to industry weakness and cautious consumer spending, it is likely to pick up in the future as the outlook for online apparel retail remains optimistic. ^[4] eMarketer forecasts annual online apparel sales to increase from $45 billion in 2012 to almost $90 billion in 2016. ^[6] To take advantage of this opportunity, American Eagle is progressing with its omni-channel initiative which will help it serve its customers better.

Our price estimate for Target stands at $23, implying a significant premium to the market price. However, we are in the process of updating our model in light of the recent earnings.

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

1. Unemployment rates rise in most US states in July, CNBC, Aug 20 2013 [↩]
2. Unemployment rates 7% for adult men, 6.5% for adult women, 23.7% for teens, July 2013, Bureau Of Labor Statistics, Aug 6 2013 [↩]
3. American Eagle Outfitters Revises Second Quarter Outlook, American Eagle Outfitters, Aug 5 2013 [↩]
4. American Eagle Outfitters’ Q2 fiscal 2013 earnings transcript, Aug 21 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
5. American Eagle Outfitters’ SEC filings [↩]
6. Retail Ecommerce Set to Keep a Pace Through 2017, eMarketer, Apr 24 2013 [↩]