American Eagle Outfitters’ International Business Holds Good Promise For Long Term Growth

One of the leading apparel retailers in the U.S., American Eagle Outfitters (NYSE:AEO), has had it tough in the recent past. Its growth plummeted in the last quarter due to poor response to product changes and an overall weakness in the U.S. apparel industry. The company slashed its outlook for the third quarter, and the fourth quarter is not likely to be any different as an early forecast suggests a weak holiday season for the retail industry this year. As the near term outlook for the U.S. apparel industry is weak, American Eagle’s growth will remain slow as most of its business is confined to North America. However, its international business is quite important from long term perspective as it helps in geographical risk diversification. Although the retailer’s international presence is limited to just 50 franchise stores in 13 countries, it is looking to speed up its expansion and appears to be targeting the right markets for the purpose.

Earlier this year, American Eagle assumed control over its six franchise stores in China and announced the launch of its first store in Mexico. It plans to continue expanding in these regions throughout the fiscal 2013. American Eagle also entered Philippines earlier this year through a franchise partnership, and is planning to spread its operations throughout the region over the long term. These regions are some of the most important developing markets and provide good potential for value-for-money brands.

Our price estimate for American Eagle Outfitters stands at $20, implying a premium of about 50% to the market price.

See our complete analysis for American Eagle Outfitters

China – Growing Urbanization & Booming Online Retail

In February this year, American Eagle terminated its licensing agreement in China and Hong Kong to assume control over its existing stores. ^[1] It also appointed Kitty Yung as the president of Asia-Pacific operations, to devise relevant strategies for the region. ^[2] Earlier, Yung has helped Guess‘ (NYSE:GES) Chinese operations to grow to over 200 stores, resulting in average annual revenue growth of more than 25% over the last three years. Apart from American Eagle’s strong growth fundamentals, the market’s potential and new leadership are likely assist the company’s growth in the region.

As the global economy was reeling under the impact of the recession of 2008-2009, China was able to sustain its economic growth with rising income levels and growing urbanization. ^[3] The substantial rise in the region’s labor costs has been one of the primary reasons behind the increase in disposable income. At the end of 2012, about 53% of Chinese resided in urban areas, which was significantly lower than the proportion of the urban population in the U.S. and Japan. ^[4] This indicates that there is a huge scope of urbanization and this figure could reach 65% by 2025. ^[5] These factors have resulted in rapid growth in China’s apparel industry. Prior to 2011, the region’s apparel sales were growing at an average annual rate of about 16%. ^[6] The apparel market stood at $110 billion in 2009, grew to $140 billion in 2012 and is expected to touch $220 billion by 2016. ^[7] Moreover, the booming e-commerce channel in China also provides tremendous growth potential for American Eagle. eMarketer forecasts online retail sales in China to increase from $110 billion in 2012 to $440 billion in 2016. ^[8]

The Philippines – Booming BPO Industry & Rising Cash Remittances

American Eagle opened its first franchise store in the Philippines in March 2013 and plans to add more stores throughout the region in fiscal 2013. ^[9] The retailer’s 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 as Suyen Corporation invests heavily on advertising and marketing. ^[10]

Although the market is small, it does offer good potential for value focused retailers due to its flourishing middle class and rising disposable income on the account of booming BPO (Business process outsourcing) industry and increasing remittances. Lately, the Philippines has become an important market for BPOs. ^[11] In 2011, the region’s BPO industry reported $11 billion in revenues and employed 640,000 people. ^[12] The growth in this industry has been one of the main factors driving higher disposable income, parallely helping the apparel industry’s growth as well. Remittances refer to the money received from friends and relatives working abroad. This accounts for about 10% of the Philippines’ gross domestic product. ^[13] Towards the end of 2012, the region saw a steep rise in cash remittances. The year-over-year growth for October and November 2012, stood at 8.5% and 7.6% respectively. ^[13] Overall, the Philippines received more than $19 billion in cash remittances in 2012. We expect the trend to continue and influence consumer spending growth in the country positively, which will bode well for the region’s apparel industry.

Mexico – Increasing Fashion Consciousness & Popularity Of Specialty Retailers

In early 2013, American Eagle announced plans to open its first store in Mexico and scale up the expansion depending upon the reception. ^[14] The retailer is already known in the region for the launch of its Mexico-specific e-commerce website last year, and therefore it may not have to struggle much as far as brand advertising is concerned.

With rising disposable income and fashion consciousness, Mexico has become an attractive market for affordable brands. About 78% of the region’s population resides in urban areas and about 46% of Mexicans are below 25 years of age. ^{[15] [16]} This bodes well for the apparel industry’s long term growth outlook. Currently the region’s apparel market size stands at around $5.7 billion and is expected to grow at an annual growth rate of 3.4% from 2012-2017, driven by improving lifestyles, economic growth and expected increase in online retail sales. ^[17]

Historically, apparel products have been available in Mexico through a number of channels such as grocery chains and direct retailers. ^[18] However lately, specialty retailers have become much more popular and emerged as the most important distribution channel in the market in 2012. These retailers are increasing their market share by expanding to major shopping centers across the country. This is a result of Mexican buyers laying greater emphasis on shopping experiences in a specialty store as compared to a department store. Although these factors are encouraging for American Eagle, it will face tough competition in the region from brands such as H&M, Gap Inc. (NYSE:GPS), Guess and Forever 21. ^[18]

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

1. American Eagle Outfitters To Assume Operations Of Six Existing Stores In China and Hong Kong, American Eagle Outfitters, Feb 4 2013 [↩]
2. American Eagle Outfitters Appoints Kitty Yung To EVP/President Of Asia Pacific, American Eagle Outfitters, Apr 10 2013 [↩]
3. Apparel In China, Euromonitor, Apr 2012 [↩]
4. China’s population – Peak toil, The Economist, Jan 26 2013 [↩]
5. United Nations, Department of Economic and Social Affairs [↩]
6. From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
7. China’s apparel retail market: $218 industry by 2016, Trans World News, Aug 3 2013 [↩]
8. B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 [↩]
9. American Eagle Outfitters Opens High Street Location In Philippines, American Eagle Outfitters, March 1 2013 [↩]
10. Apparel in the Philippines, euromonitor, June 2012 [↩]
11. How To Strengthen Outsourcing In Philippines, eastvantage [↩]
12. BPO firms unfazed by Obama ‘job bill’, Business Mirror, Nov 8 2012 [↩]
13. Philippine Remittances Rise Sharply, The Wall Street Journal, Jan 15 2013 [↩] [↩]
14. American Eagle Outfitters To Launch First Store In Mexico, American Eagle Outfitters, Jan 28 2013 [↩]
15. Urban population (% of total), The World Bank [↩]
16. Mexico Age Structure, Index Mundi [↩]
17. Mexico-Apparel Retail, Market Line, Feb 5 2013 [↩]
18. Apparel in Mexico, Euromonitor International, Apr 2013 [↩] [↩]