Little Respite For American Eagle In The Holiday Season

American Eagle Outfitters (NYSE:AEO) released its holiday sales results earlier this month, reporting 1% increase in its revenues for the two month period of November and December. However, the company’s consolidated comparable store sales including e-commerce were down 2% from the year ago period. ^[1] Although American Eagle’s holiday performance was significantly better than its peer Aeropostale (NYSE:ARO), the Pittsburgh based specialty apparel retailer is headed into its eight consecutive quarter of comparable sales decline. Fierce competition in the market, weakness in the online space, and a slow response to changing consumer tastes are some of the factors that have troubled the company.

Our price estimate for American Eagle Outfitters stands at $13.45, implying a discount of more than 5% to the current market price.

See our complete analysis for American Eagle Outfitters

Competition Making It Tough For The Company

Amid the highly saturated and competitive retail landscape, it has become extremely difficult for players such as American Eagle to distinguish their products from other players. The market scenario is such that there are a number of players in every segment striving to outsmart one another over prices and designs. American Eagle is among those retailers, who have persistently focused on basic logo merchandise, and have subsequently driven their customers to affordable fashion forward brands.

Fast-Fashion retailers such as Zara and Forever 21 have been highly proactive with their merchandise launches, offering better products than casual clothing brands at prices cheaper than upscale brands. Buyers have invariably responded well to this balance between the two segments, which has impacted sales of retailers such as American Eagle, Aeropostale, Abercrombie & Fitch (NYSE:ANF) and Guess (NYSE:GES).

American Eagle Lost Customers Due To Online Shift

While the overall apparel industry grew 4.5% during the holiday season, foot traffic across the market was down 8.3%, which makes it evident that U.S. buyers preferred online shopping during the season. ^{[2] [3]} In fact, overall online retail sales during the two month period of November and December increased 15%. ^[4] Growth in online apparel sales may have been better, given that it is one of the prominent categories sold online.

While overall industry growth was solid, American Eagle clearly lost more due a decline in foot traffic than it gained from incremental online sales. The retailer’s e-commerce channel contributes close to just 10% to its overall revenues and even significant growth in this segment would be easily overshadowed by a decline in foot traffic that impacts the remaining 90% revenues. This was the case in the recently concluded holiday season.

However, Margins Showed Some Promise

Despite its topline growth struggle, American Eagle has not been all bad lately. The company reported an impressive 200 basis points improvement in its gross margins in Q3, driven by fewer-than-expected markdowns. American Eagle’s Interim CEO, Jay Schottenstein, had stated before the holiday season that the design team has made significant progress on merchandise improvement, but they were not planning too aggressively for the holiday season. In the most recent update, he said that the retailer has seen meaningful margin recovery during the holiday season, which will likely lead to an year-over-year improvement in Q4 earnings per share. American Eagle operated with fewer promotions in December, due to good customer response to holiday and early spring assortments. ^[1]

With its holiday sales release, the company updated its full year EPS guidance. It now expects earnings per share to be around $0.32-$0.34, slightly above its previous guidance of $0.30-$0.33. American Eagle’s new outllook will reflect an improvement of 19%-26% from its last year’s level of $0.27.

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1. American Eagle Announces Holiday Sales, Raises Fourth Quarter EPS Guidance Range, American Eagle Outfitters, Jan 8 2015 [↩] [↩]
2. Clothing and Clothing Accessories Stores, The United States Census Bureau [↩]
3. Holiday season U.S. store sales down 8% in 2014: RetailNext, Reuters, Jan 7 2015 [↩]
4. Holiday season retail e-commerce sales figures in the United States from 2005-2014, Statista [↩]