American Eagle’s Aerie Can Adopt Competitor Victoria’s Secret’s Ways

The success story of lingerie giant Victoria’s Secret has set the tone for growth for other similar brands such as American Eagle Outfitters‘ (NYSE:AEO) Aerie. While Victoria’s Secret has a well-established presence in the U.S., Aerie is a relatively new brand and lesser known. As of 2011, Aerie had a share of 2% of the U.S. lingerie market, compared to Victoria’s Secret’s 35%+ share. ^{[1] [2]} We expect the brands’ market share to have remained stable in the next couple of years given that none of them expanded aggressively during this time.

Although Aerie does not contribute much to American Eagle’s revenues currently, we believe that with the right push it can significantly enhance the brand’s value. Aerie’s target demographic is big but its geographical reach is limited, which suggests good scope for expansion. The brand has performed relatively better than the company’s mainline business in recent quarters, despite weakness in the overall retail market that led to large promotions. We believe that Aerie’s growth will help American Eagle diversify its product range and reduce its dependence on the casual apparel business where competition is fierce. Moreover, limited competition from specialty lingerie brands in the U.S. can make Aerie’s growth a little easier.

As per our estimates, Aerie contributes a little over 7% to American Eagle Outfitters’ value.

Our price estimate for American Eagle Outfitters stands at $17.75, implying a premium of less than 40% to the market price.

See our complete analysis for American Eagle Outfitters

Aerie Has A Big Market To Explore

American Eagle’s Aerie offers a wide range of intimates and personal care products for young teenage women, who are particular about design, style and comfort factor of their lingerie. The brand’s target demographic is big as about 15% of the total female population in the U.S. are between ages 15 and 24. ^[3] And, the competition in the $12 billion+ lingerie market isn’t as intense as the casual wear industry, since it’s currently dominated by only a few established brands.

American Eagle launched Aerie back in 2006 and currently operates 137 stores across the country. In comparison, Victoria’s Secret has more than 1,000 stores. Moreover, Victoria’s Secret’s new brand PINK, which primarily targets college girls (similar to Aerie), has been extremely successful. Moreover, its parent, and L Brands (NYSE:LB), has scaled up its expansion. Hence, we believe that there is a huge potential for Aerie’s aggressive expansion as well. Although American Eagle has expanded its lingerie brand slowly over the past few years, and has recently started consolidating its under-performing  store network, the comparable store sales growth has been impressive (6% in 2012). We believe that after reducing Aerie’s under-performing store count, the company should ramp up its expansion by targeting lucrative regions in the country. In addition, American Eagle should also create several shop-in-shop locations for Aerie in its American Eagle stores to increase the brand’s reach considerably. In its Q4 earnings call, the company stated that it is looking to position Aerie appropriately alongside its namesake brand.

An encouraging trend for the brand is that U.S. buyers have shown great affinity for intimate products, even during the sluggish economic environment. In the recently concluded quarter, Victoria’s Secret registered robust growth indicating that the niche intimates market is somewhat resilient to the unfavorable economic headwinds. Aerie also performed better than American Eagle’s mainline brand in fiscal 2013, despite a significant decline in store traffic.

Aerie Can Trace Victoria’s Secret’s Success Path

Victoria’s Secret’s success lies in its strong brand image, which it has built over years with attractive product offerings, responsiveness to changing fashion trends, and appealing marketing campaigns. Over the past few years, the brand has also launched a number of new categories such as swimwear, beauty, sportswear, fragrances, etc. Also, it has leveraged supermodels and fashion shows to elevate the brand’s image among its customers.

Similarly, Aerie has been on top of fashion changes with strong inventory management and distribution strategies. Its focus on its famous categories as well as other categories such as swimwear based on famous bra styles has helped its results. With the right push, we believe that Aerie can follow in the footsteps of Victoria’s Secret. The brand can fend off competition in the intimates market with its more affordable and higher usability product relative to more glamorous alternatives. We think that given the macroeconomic conditions, young U.S. shoppers are likely to find a balance between fashion and value, and that might work in Aerie’s favor.

The only thing limiting Aerie from becoming a valuable business for American Eagle is its small reach. We believe that the company can overcome this by aggressively expanding the brand’s shop-in-shop locations. The retailer has over 900 stores in the U.S. where it can sell Aerie products in the future. This, along with rapid e-commerce growth can boost Aerie’s market share going forward and make it strong enough to challenge Victoria’s Secret.

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1. Companies SEC filings [↩]
2. Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012 [↩]
3. United States Census Bureau [↩]