What To Expect From American Eagle This Holiday Season?

Just like every other retailer, American Eagle Outfitters (NYSE:AEO) is all geared up for the holiday season of 2015. In an update earlier this month, the management announced that they were very optimistic about the company’s holiday sales, given that its performance has improved significantly over the past few quarters. In fact, American Eagle’s comparable sales in the third quarter were up a promising 9%, while several of its peers such as Urban Outfitters (NASDAQ:URBN), Aeropostale (NYSE:ARO), Gap Inc (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) still continue to struggle.

The holiday season is the busiest time of the year for apparel retailers as they look to outsmart each other with various deals and discounts in order to acquire a sizable share of the increase in consumer spending around the holidays. Last year, American Eagle did not do too well during the November-December season owing to merchandise issues. This time around, while the industry-wide growth in retail sales is expected to slow down, we expect the Pittsburgh-based specialty apparel retailer to perform much better. Based on the expected rise in retail sales and American Eagle’s market share, we estimate that its holiday sales can grow over 10% this year.

Our price estimate for American Eagle Outfitters stands at $16, which is slightly ahead of the current market price.

See our complete analysis for American Eagle Outfitters

The holiday season (November-December) is the most crucial time for apparel retailers, and this year growth in retail sales is not expected to be very strong. According to the National Retail Federation (NRF), holiday sales this year are likely to  increase just 3.7% to $630 billion, and store sales growth could remain slow as online sales are expected to grow 6%-8%. ^[1] Another forecast from market research firm NPD suggests that holiday sales growth this year could be the slowest since 2009. ^[2] None of these factors bode well for a retailer like American Eagle, as it is very reliant on store sales and a bulk of the growth in apparel sales during the period is likely to come from fast-fashion companies. Also last year, when growth in industry-wide apparel sales was at 4.2%, American Eagle’s overall sales grew just 1%, which clearly reflected its weak standing in the market. ^[3] ((American Eagle Outfitters Announces Holiday Sales, Raises Fourth Quarter EPS Guidance Range, American Eagle Outfitters, Jan 8 2015))

However, American Eagle is in a much better shape now than it was last year. The company has made several efforts to introduce more fashion savvy to 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. This is why we believe that the company’s share in the U.S. apparel market this year will be higher than last year. During the 2014 holiday season, American Eagle generated $893 million in revenues and overall apparel sales were at $42.19 billion, which gives the company an implied market share of 2.1%. The year before, the retailer’s market share stood at 2.2%. For 2015, we conservatively assume a 20 basis points improvement in American Eagle’s market share to 2.3%. To calculate the market size for the season, we take the NRF’s forecast for overall retail sales growth as a proxy for growth in apparel sales as well. This puts the apparel market for November-December 2015 at $43.76 billion and American Eagle’s sales at $1 billion, which reflects year over year growth of 12%.

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1. Holiday 2015, National Retail Federation [↩]
2. Holiday shopping season forecast: consumers fight for deals, Reuters, Oct 5 2015 [↩]
3. Retail Sales, United States Census Bureau [↩]