American Eagle Expands Into Chile And Peru

Furthering its international expansion strategy, teen apparel retailer American Eagle Outfitters (NYSE:AEO) recently unveiled plans to expand into Chile and Peru. The company announced that it will open a chain of licensed stores throughout these markets over the years to come. The retailer has entered a multi-year licensing deal with Eurofashion Limitada, a leading Chilean company and a division of Cencosud S.A. Group, which specializes in building international fashion brands. Eurofashion Limitada will open the first Chilean American Eagle store in the second half of 2015, and will launch the company’s first outlet in Peru in early 2016. ^[1]

American Eagle’s foray into Chile and Peru strengthens its footing in the Latin American market. It already operates licensee stores in Columbia and Panama and has retail presence in Mexico. Its partnership will Eurofashion Limitada will allow American Eagle to gain valuable knowledge about the local consumer taste, which will help in effectively catering the market need. However, competition will be a big concern for the retailer, especially in Chile, where fast fashion brands have established a strong footing. In Peru, apparel market growth has been good lately, which should benefit American Eagle.

Our price estimate for the company at $14.07, is over 15% below the current market price.

See our complete analysis for American Eagle Outfitters

Chile – Good Prospects But Tough Competition

Favorable Macro-Economic Scenario: Over the past few years, Chile has witnessed a surge in apparel sales as the macro-economic environment has improved steadily. Disposable income of Chileans has gone up, driven by a consistent decline in unemployment rate. The jobless rate in Chile has dropped steadily since 2009 and stood at just 6% in 2013. As a result of increased consumer buying power, Chile’s GDP increased by an average of 6% between 2010 and 2012. Although the growth rate came down to 4% in 2013 and slowed further down towards mid-2014, prospects for value-for-money apparel retailers still look good. ^[2] In this context, American Eagle can become a popular brand in the region given that it offers value-for-money products. It must be noted that in 2013, growth in apparel and footwear sales in Chile (+8%) comprehensively outpaced its GDP growth rate. ^[3] With the apparel industry performing much better than the overall economy, foreign retailers such as American Eagle should be encouraged to enter the market.

Football & Running Gaining Traction: Since football and running are two of the most popular sports in Chile, American Eagle should look beyond its basic casual products and introduce a line of apparel and accessories relevant to these sports. With Chilean footballers including Alexis Sanchez and Arturo Vidal doing well in European leagues, people are imitating their outfits out of respect and pride. As a result, sales of performance apparel, tops, shorts, socks and footwear have gone up. Although American Eagle doesn’t have performance apparel in its portfolio, it can tweak its basic t-shirts and hoodies with prints and designs closely associated with football. Even running is gaining significant popularity in the region. Each year, a number of brands organize marathons. Santiago alone hosts over 500 running events per year. ^[3] Such events provide a great opportunity for brands such as American Eagle to increase their visibility.

Competition is a Big Concern: Apart for its overreliance on basic logo products, American Eagle’s struggle in the U.S. can be attributed to fierce competition from fast fashion brands such as Zara, Forever 21 and H&M. While the retailer might have hoped for lesser competition with these international ventures, its counterparts are not going to let that happen. Zara has been in Chile for almost a decade and Gap Inc (NYSE:GPS) entered the market in 2011. More recent arrivals are Forever 21 and H&M, who set up their operations in the country in 2013. Even Aeropostale (NYSE:ARO) entered the market last year, and is set to present a direct competition to American Eagle. Although American Eagle might not struggle for growth in the initial expansion phase, it may end up repeating its U.S. story if it doesn’t infuse fashion in its product portfolio. Specialty retailing is a relatively new concept in Chile, and most buyers are still accustomed to shopping for clothes at department stores and hypermarkets. Major retailers such as Falabella, Cencosud Retail, Ripley Corp and Wal-Mart (NYSE:WMT) Chile continue to gain share in the Chilean apparel market. It can be difficult for American Eagle to compete with them given their deep understanding of Chilean consumer taste. Also, there are a couple of low-price focused retailers – Comercial Fashions Park and Tricot – who can give American Eagle a run for its money. ^[3] Going forward, the apparel industry is likely to get more competitive with the expansion of domestic retailers in shopping malls and entry of foreign players. Hence, we believe that while the Chilean apparel market looks good for American Eagle form the outside, the likelihood of intense competition somewhat steals its thunder.

Peru – Promising Growth Scenario For Apparel Retailers

Peru’s economic growth in 2014 was relatively slower as compared to 2013, but apparel and footwear retailers in the region managed 8% growth in value sales during the period. Consumption patterns remained positive throughout the year, boosted by easily availability of credit  and heavy discounting throughout the apparel industry. Offers such as 2-for-1 and promotions linked to store cards were particularly popular in the market, which encouraged buyers to open up their wallets. ^[4] Moreover, apparel retailers focused aggressively on marketing through magazines, newspapers and street billboards, which helped them generate significant visibility. Going forward, we believe that the apparel market will continue to perform well, given that credit card issuance is growing, which is facilitating spending on non-essential products. In fact, sturdiness in the Peruvian economy, proliferation of new retailing channels and growing consumption, all sum up to an optimistic future for the apparel market. Moreover, rapid growth in web sales also presents a substantial growth opportunity for domestic and foreign retailers. ^[5] This bodes well for value focused retailers such as American Eagle.

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1. American Eagle Outfitters Expands Global Presence with New License Agreements in Chile and Peru, American Eagle Outfitters, Mar 25 2015 [↩]
2. Chile’s Unemployment Rate Climbs 6.5% As Growth Slows, Bloomberg, Jul 31 2014 [↩]
3. Apparel and Footwear in Chile, Euromonitor, Jun 2014 [↩] [↩] [↩]
4. Apparel and Footwear Specialist Retailers in Peru, Euromonitor, Dec 2014 [↩]
5. Retailing in Peru, Euromonitor, Dec 2014 [↩]