International Opportunities For American Eagle Outfitters’ Business – Part II

In our previous note (International Markets Opportunity For American Eagle Outfitters’ Business -Part I), we discussed the Chinese and the Philippines apparel markets from American Eagle Outfitters‘ (NYSE:AEO) perspective. In the article, we will analyze the potential of apparel markets in Mexico and Thailand. In 2013, American Eagle initiated its retail store expansion in Mexico and ended the year with 16 retail stores in the market. With changing living standards, increasing fashion consciousness and rising disposable incomes, Mexico has become an important market for U.S. apparel retailers. The retail landscape in the country is changing as specialty apparel retailers are taking market share from traditional grocery chains and direct retailers, who have been important apparel distribution channels historically. In December last year, American Eagle entered a licensing agreement with Pacifica Lifestyle Co. to open stores in Thailand, where the apparel market is expected to sustain healthy growth momentum backed by rising minimum wages, booming tourism and online retail growth. ^[1]

Our price estimate for American Eagle Outfitters stands at $14.74, implying a premium of close to 30% to the market price.

See our complete analysis for American Eagle Outfitters

Mexico

In 2013, American Eagle entered Mexico with its retail operations and opened 16 stores within the year. The retailer received encouraging customer response since it was already known in the region for the launch of its Mexico-specific e-commerce website in 2012.

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. ^{[2] [3]} 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 rate of 3.4% from 2012 to 2017, driven by improving lifestyles, economic growth and an expected increase in online retail sales. ^[4]

Historically, apparel products have been available in Mexico through a number of channels such as grocery chains and direct retailers. However lately, specialty retailers have become much more popular and emerged as the most important distribution channel in the market since 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 experience, which is better 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., Guess and Forever 21.

Thailand

The Thai apparel market might not be the biggest in the world, but it does hold good growth potential for international brands. The market registered positive growth in 2012 despite the fact that most consumers diverted a big portion of their money to flood repairs in the first quarter of 2012. Several categories such as jeans, footwear, sports wear and women’s undergarments posted double-digit growth during the year. Going forward, the apparel market growth in the country is expected to remain steady with increasing incomes and growth in online retailing.

Thailand’s labor wages are on the rise, which is likely to have a positive impact on consumers’ purchasing power. Earlier this year, Thailand adopted a nationwide minimum wage policy wherein employers had to pay their employees a minimum of Thai Baht (TBH) 300 ($10) per day. With this policy, the region’s low-income groups will start earning more, which is likely to boost sales of value-focused apparel brands. While American Eagle might not be able to match Thailand’s domestic apparel brands over price, it is one of the most affordable international brands. Therefore, we believe that American Eagle can be a viable option for Thai buyers looking for a value-for-money foreign brand. Moreover, since Thailand is the most popular tourist destination in Southeast Asia, American Eagle has a group of affluent buyers to target. Every year, foreign vacationers contribute about $30 billion to Thailand’s GDP, which should encourage retailers such as American Eagle to expand in key tourist locations – Pattaya, Phuket and Bangkok. ^[5]

Additionally, there exists a huge opportunity in the form of Thailand’s e-commerce channel, which is still at a nascent stage. Traditionally, Thai buyers have enjoyed store-based shopping where they can mix and match different styles and colors, and feel the fabric. However, lately some of the leading retailers have developed e-commerce platforms for their merchandise. Since these retailers have not expanded their online product variety, they haven’t enjoyed the boom in online retailing. We believe that American Eagle can tap this opportunity and grow its online business in the region, which will position it better to compete with international players such as Zara, AIIZ, MNG, H&M, etc. ^[6]

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1. American Eagle Outfitters Expands Global Presence With New License Agreements With Central And South America And Thailand, American Eagle Outfitters, Dec 4 2013 [↩]
2. Urban population (% of total), The World Bank [↩]
3. Mexico Age Structure, Index Mundi [↩]
4. Mexico-Apparel Retail, Market Line, Feb 5 2013 [↩]
5. Thailand Coup Could Spell Trouble For Booming Tourism Industry, NBC, May 22 2014 [↩]
6. Apparel In Thailand, Euromonitor, Jul 2013 [↩]