American Eagle Lagging Competitors’ Growth, but Stock Remains Cheap

American Eagle Outfitters (NYSE: AEO) designs, markets and sells its own brand of high quality clothing, accessories and personal care products. The company targets the 15-25 year-old demographic, and competes with other specialty apparel retailers like Gap (NYSE: GPS) and Abercrombie & Fitch (NYSE: ANF).

American Eagle Outfitters operates stores under the brands American Eagle, aerie and 77kids, in addition to marketing these brands through web based channels. We estimate that American Eagle brand stores are the largest value driver for the company, contributing around 49% to our $25.70 price estimate for American Eagle Outfitters’ stock price.

We’ve previously discussed the potential upside to the revenue per square feet for American Eagle stores should consumer spending pick up and continue through the holiday season (See Strong Q4 Retail Trends Could Lift AEO). While it’s still too early to tell if holiday shopping trends will provide a kick-start towards recovery through the new year, it seems that competitors are getting a head start on American Eagle Outfitters, with the company’s revenue trends left lagging behind.

Abercrombie & Fitch

Comparable store sales were notably higher for both A&F and Hollister brand stores vs. November 2009. The two brands saw comparable stores up 23% year-over-year (YOY) and up 22% YOY, respectively. Year-to-date, company-wide comparable store sales are up 7% YOY (up 22% YOY in November). ^[1]

Gap

Comparable store sales for Gap in North America were up 5% YOY in November 2010, while company-wide comparable store sales increased 4%. This growth continued a trend from October, which saw comparable store sales for Gap in North America up 5% YOY. ((Gap Inc. Reports November Sales Results)) ^[2]

American Eagle Outfitters Lagging Behind

Comparatively, comparable store sales for American Eagle Outfitters declined by 2% YOY in October and remained flat in November. Year-to-Date, company-wide comparable store sales are roughly flat (with a 1% YOY increase), vs. an increase of 7% for Abercrombie & Fitch and 4% for Gap. ^{[3] [4]}

American Eagle Brand Revenue per Square Foot Outlook

Revenue per square foot for American Eagle brand stores increased from $470 in 2005 to $520 in 2007, an annual growth rate of around 5%. However, this number subsequently dropped to $420 by 2009, at an annual decline of 10% as the recessionary economic period reduced consumer retail demand .

The decline in consumer spending particularly affected more upmarket specialty brands like American Eagle and Abercrombie & Fitch, as consumers shifted to brands that sell at lower price points, like Aeropostale (NYSE: ARO). On average, Aeropostale’s price points are about 30% lower than American Eagle’s and 50% lower than Abercrombie & Fitch’s.

Going forward we anticipate that revenue per square foot at American Eagle brand stores will increase at an annual rate of 3-4% from 2009 levels as the economy recovers and consumer spending increases.

However, with American Eagle’s growth trends lagging behind competitors like Gap and A&F in October and November, it could hinder the American Eagle brand’s ability to achieve our projected pickup in revenue per square foot. Annual growth of 2% in this metric for the years ahead (vs. our 3-4% base projection) would generate 5% downside to our price estimate for AEO stock. As our current $25.70 price estimate implies significant upside to the stock’s current market market price, this downside scenario would still leave our number ahead of market price.

See our full company breakdown and estimates for key drivers to American Eagle Outfitter’s stock value in the display below.

See our full analysis of American Eagle here

1. Abercrombie & Fitch Reports November Sales Results [↩]
2. Gap Inc. Reports October Sales Results [↩]
3. American Eagle Reports November Sales Results [↩]
4. American Eagle Reports October Sales Results [↩]