American Eagle Earnings Preview: Improving Market Conditions And Recovering Brand Image Can Subdue Harsh Weather

After flourishing for several years, American Eagle Outfitters‘ (NYSE:AEO) growth stalled in 2013 as it was unable to drive sufficient store traffic due to missed fashion calls, weak consumer confidence and fierce competition from fast fashion brands. While U.S. buyers had already scaled back their spending on apparel, they shied away from American Eagle due to its less popular merchandise. As a result, the retailer’s 2013 comparable sales declined by 6% and its EBITDA (earnings before interest tax depreciation and amortization) margins shrunk by 6.5 percentage points.

However, when the company comes out with its Q1 fiscal 2014 earnings on May 21, we expect a marginal improvement in its results driven by better market conditions, partially offset by extreme weather at the beginning of the quarter. The U.S. economy has started showing some signs of recovery lately with improvement in consumer confidence and promising growth in retail sales. This can help American Eagle post better results in Q1 backed by its vigorous efforts to improve its brand image, which had stumbled over the last one year. We believe that American Eagle’s growth might have gained some momentum after the impact of adverse weather subsided.

Our price estimate for American Eagle Outfitters stands at $16.77, implying a premium of more than 40% to the market price.

See our complete analysis for American Eagle Outfitters

Improved Consumer Confidence In The U.S. Will Complement Sales Growth

After being weighed down by harsh weather and sluggish consumer spending, retail sales in the U.S. rebounded in the first quarter (February-April) of 2014 with renewed consumer confidence and better employment data. Consumer confidence index in the U.S. reached 100 in the first quarter, propelled by better employment data, and rising equity and home prices. ^[1] Applications for unemployment benefits dropped to their lowest level in more than three months in early March. Labor Department reported a decrease of 9,000 in initial claims for unemployment benefits in the first week of March. Average job growth in February and March (195,000) was much better than what it was in the prior two months. In fact, the first time jobless benefits applications in early April were at their pre-rescession levels. ^[2]

Retail sales in February improved marginally by 0.7%, followed by 1.1% jump in March, which was their biggest gain in over 18 months. Once the weather became suitable for store shopping, U.S. buyers weren’t too reluctant to spend on furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods, etc., which is good news for several retailers, including American Eagle. Although the market growth slowed down in April to 0.1%, overall growth in the first quarter still looks pleasing. ^[3]

Efforts To Get Better Customer Acceptance Might Help

Over the past year, American Eagle has seen its brand falter in the U.S., burdened by its overemphasis on basic products, missed fashion calls and a limited fashion variety. As a result, there is a perception among teenage buyers that American Eagle brand is no longer “cool”. However, the company is working very hard to rejuvenate its brand image by specifically focusing on product design and marketing. Despite its weak connection with customers, some of American Eagle’s products such as denim still remain very popular. Recently, music icon Shakira wore American Eagle jeans in Women’s Health magazine, which somewhat defines its popularity. The company has an opportunity to leverage such instances to promote its products aggressively.

American Eagle is looking to strengthen its product assortments with more innovation in distinct finishes, fabrics and washes. The inclusion of Chad Kessler (chief merchandising and design officer hired last year) in the designing system is expected to bring some fresh and relevant changes to the brand’s merchandise. The retailer is also looking to enhance its focus on accessories and outerwear, which were de-emphasized last year. Additionally, American Eagle is organizing certain marketing events such as AE Real People and Aerie’s Real campaign to engage its customers in an appealing manner. While these efforts are likely to have some positive impact on American Eagle’s brand image going forward, we are eager to see their impact on the retailer’s first quarter results.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

1. U.S. consumer confidence rebounds to pre-crises levels in first quarter: Nielsen, Reuters, Apr 29 2014 [↩]
2. Bullish U.S. retail sales brighten growth outlook, Reuters, Apr 14 2014 [↩]
3. Retail sales slow, but growth outlook still upbeat, Reuters, May 13 2014 [↩]