American Eagle Outfitters: Can CEO’s Share Purchases Revive Investor Confidence?

American Eagle Outfitters‘ (NYSE:AEO) stock has been down almost 10% since it released its Q2 earnings last month. Despite beating expectations on revenues and earnings, and guiding Q3 EPS ahead of consensus estimates, the company saw negative investor reaction to its CMO’s exit. The CMO, Michael Leedy, who played a pivotal role in the company’s e-commerce efforts and marketing campaigns, resigned immediately after the earnings were reported.

Recently, American Eagle’s CEO, Jay Schottenstein, bought 500,000 shares of the company’s stock. ^[1] This served as an indication that top level management was very much confident in the company’s growth potential. Subsequently, its stock price rose by 4%, indicating improved sentiment.

American Eagle has given investors ample reasons lately to be optimistic about its stock. Its revenue growth has rebounded and significantly outpaced the industry, and its bottom line has improved considerably, also outpacing the apparel industry and broader market. Even the cash flow growth in the previous quarter was ahead of the industry average. ^[2]

Our price estimate for American Eagle Outfitters is $16, is roughly in line with the current market price.

See our complete analysis for American Eagle Outfitters

CEO’s Share Purchases Soothe Shareholder Concerns

American Eagle’s CEO bought 500,000 shares of the company worth $7.87 million through the holding company SEI Inc, which now has a total of 3.5 million shares. ^[2] Following the transaction, there was a notable increase in demand for the company’s shares in the market, which resulted in a a rally in its stock price. With the CEO showing confidence in American Eagle’s long term potential, investor confidence is beginning to rebound. On Thursday, around 10.51 million of the company’s shares were traded, which was significantly more than the trailing 30 day average of 6.78 million and overall average of 5.2 million shares a day. ^[2]

Encouraging Performance Offers Reasons For Confidence

After struggling for several quarters due to a comparatively weak merchandise portfolio, American Eagle witnessed a strong turnaround in growth in the second quarter of fiscal 2015. The company’s revenues increased by 12.2%, while the growth in the U.S. apparel industry for May-July quarter was just 3.6%. ^[3] With a 500 basis point expansion in operating margins, the retailer’s net income increased 470% year over year, and comprehensively outpaced the growth of S&P 500 and the specialty retail industry. ^[4] Free cash flow for American Eagle increased more than 70% year over year, much faster than the industry average of 0.33%. ^[2]

While such performance is more than sufficient to create confidence among investors, it remains to be seen if this growth is sustainable. The competition in the U.S. apparel market is relentless, and fast-fashion brands such as Zara, Forever 21 and H&M continue to have success. Even Abercrombie & Fitch (NYSE:ANF) has recreated itself as a fast-fashion brand to an extent, and can certainly give American Eagle a run for its money.

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1. American Eagle Outfitters (AEO) Stock Rises on CEO Stock Buy, InvestorPlace, Sep 17 2015 [↩]
2. American Eagle Outfitters (AEO) Stock Gains After CEO Buys Shares, The Street, Sep 17 2015 [↩] [↩] [↩] [↩]
3. United States Census Bureau [↩]
4. American Eagle Outfitters Reports Record Second Quarter Sales and Strong EPS Growth, American Eagle Outfitters, Aug 19 2015 [↩]