With The U.S. Market Saturating, American Eagle Outfitters Is Aggressively Inking International Licensing Deals

American Eagle Outfitters (NYSE:AEO) is aggressively signing licensing agreements in lucrative markets outside North America in order to compensate for its lack of growth in the U.S. The U.S. apparel market is highly saturated and fragmented with a number of specialty brands, general merchandise stores, fast-fashion players and multi-brand chains competing against one another on design and prices. American Eagle holds less than 1.5% share in the market, which has not been growing too well lately. In fact, whatever growth it has seen has come from fast-fashion retailers, who are nibbling the share of their casual apparel counterparts. And retailers such as American Eagle are consolidating their domestic store networks in the wake of an industry-wide online shift.

Consequently, American Eagle has minimal potential for growth in the U.S. and is therefore exploring opportunities in international markets. The company has presence in 28 countries worldwide with a combination of international licensed and company-owned stores. In 2015 alone, it entered five new countries in Latin America, Asia and Europe. Most recently, American Eagle announced that it has signed new licensing agreements in South Korea, Singapore and Greece to strengthen its position in the EMEA and APAC regions. ^[1]

Our price estimate for the company at $15.28 is about 15% below the current market price.

See our complete analysis for American Eagle Outfitters

The Need For International Expansion

The U.S. apparel market has matured and physical store retailing has lost some of its appeal. With the exception of a few fast-fashion retailers such as Zara and Forever 21, store-based apparel players are finding it extremely hard to attract customers, who in numbers are moving to the online space. American Eagle neither has fashion-forward products to compete with fast-fashion companies, nor online strength to take advantage of the ongoing shift. Hence, the retailer isn’t the part of the industry growth, which has averaged at just around 4% during the last six years. ^[2] The illustration below indicates the slow progress of the market.

The market is highly fragmented and American Eagle holds just 1.16% share. Despite being at such a low level, the retailer’s market share has dropped over the years due to strong growth of fast-fashion players and online retailers. Looking at American Eagle’s standing in the market and its market share trend, it is almost certain that the company cannot hope for much growth in domestic markets. Therefore, it is looking to grow its overseas revenues by aggressively striking licensing deals with local companies.

American Eagle Is Looking To Bolster Its International Business

At present, revenues from outside the U.S. account for 12% of American Eagle’s total revenues, and the figure has increased gradually over the past six years. Back in 2009, international revenues accounted for 9% of the company’s net sales, and they have increased at an average annual rate of 7.2% since then. The illustrations below (revs in $ million) clearly indicate that while American Eagle’s domestic revenues have followed an inverted V curve, international revenues have gone up consistently.

American Eagle has been steadily expanding its reach in lucrative international markets mainly with licensing deals. This year alone, the retailer has announced its expansion in Chile, Peru, Singapore, South Korea and Greece. In April, American Eagle entered 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, to open licensed stores in Chile and Peru. In the subsequent month, the company inked licensing deals with SK Networks in South Korea, Trendz 360 in Singapore, and Notos Com Holdings in Greece. ^[1]

American Eagle currently has 111 licensed stores in 17 countries, and it has plans to open a total of 40 such stores this year through different deals. This makes it clear that the retailer is indeed on a licensed store opening frenzy, which has been triggered by its weakness in the domestic market. Not only will licensed store expansion bolster American Eagle’s revenues, it will even help in diversifying risks geographically. Good acceptance internationally can even set the precedent for subsequent retail store expansion.

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1. American Eagle Outfitters Continues Global Expansion in South Korea, Singapore and Greece with New License Agreements, American Eagle Outfitters, May 19 2015 [↩] [↩]
2. Clothing and clothing accessories stores, U.S. Census Bureau [↩]