American Eagle Earnings Preview: Better Merchandise Can Help Counter Traffic Decline

Teen apparel retailer, American Eagle Outfitters (NYSE:AEO) is scheduled to report its Q2 fiscal 2015 earnings on August 19th and we expect it to maintain its performance consistency after a promising Q1 fiscal 2015. ^[1] (Fiscal years end with January.) The company will be relying on its updated product mix and the expansion of its factory stores in order to counter the impact of both falling foot traffic across the industry and the consolidation of its mainline store chain.

Casual apparel retailers including American Eagle have been losing customers to fast fashion players such Zara and Forever 21, which have taken the industry by storm with their affordable fashion-forward merchandise. In response, American Eagle has made several efforts to introduce more fashion consciousness in its logo-centric merchandise portfolio, with some success thus far. With better styles, firm inventory management, high attention to detail and certain product innovations, the retailer has been able to operate with fewer discounts over the last couple of quarters, which has pushed its average selling price and gross margin up. We expect to see a similar trend in the second quarter as well.

Our price estimate for the company at $15.30, is about 15% below the current market price.

See our complete analysis for American Eagle Outfitters

American Eagle has been expanding its factory store network for some time now, in order to attract cost conscious U.S. buyers. At present, this format does not contribute much to overall revenues and its expansion pace has been moderate (39 in 2013 and 26 in 2014). However, it is important that the retailer continues to explore lucrative opportunities for factory store expansion, so as to make up for revenues lost due to the consolidation of its mainline stores. American Eagle is in the process of shutting 150 under-performing locations by 2017, in order to improve its productivity and profitability. It aims as well to fine tune its retail infrastructure to better accommodate omni-channel retailing. While shutting stores that do not account for significant revenues but contribute proportionally to expenses can help American Eagle improve profitability, the strategy will weigh heavily on overall revenue growth. To this end, the expansion of factory stores can offset the impact of mainline store closures to a certain extent. During the second quarter, the company would have closed some mainline stores and opened a certain number of factory outlets simultaneously.

A factor that most likely impacted American Eagle’s Q2 results is the industry-wide decline in foot traffic. Due to the ongoing customer shift from store shopping to web shopping, store traffic across the market has declined significantly over the last couple of years. The rate of decline has been in mid – high single digits in most of the months. U.S. store traffic declined almost 10% year over year in May and in June it was down 6.1% in June annually and 7.6% sequentially. ^[2] In July, traffic declined a sharp 11% year over year and, despite 4.7% growth in average sales per shopper, overall retail sales fell 6.8%. ^[3] These figures aren’t promising for U.S. apparel retailers such as American Eagle, who still earn a major share of their revenues through store sales.

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1. American Eagle Outfitters Investor Relations [↩]
2. Brick-and-Mortar Traffic Decline Slowed in June, Sourcing Journal, Jul 14 2015 [↩]
3. RetailNext: Fewer shoppers but more commitment in July, Chain Store Age, Aug 6 2015 [↩]