American Eagle Managed To Beat The Odds This Holiday Season

Building on its recovery, specialty apparel retailer American Eagle Outfitters (NYSE:AEO) delivered a good performance during the recently concluded holiday season. Amid a struggling casual apparel market, suffering from weak store traffic and unfavorable spending trends, the retailer was able to record moderate positive growth in comparable sales, which seemed unlikely a few quarters ago. American Eagle has regained much of its lost mojo by effectively revamping its merchandising strategies in line with customer preferences, which is evident from its Q3 and holiday results. In a recent press release, American Eagle provided an update on its Q4 results, stating that its comparable sales had increased 4% in the quarter so far. ^[1] With only a little over two months passed in the quarter, this metric best reflects the company’s holiday performance. While the growth is positive, it lags American Eagle’s Q3 performance by some margin, which may be attributable to the unseasonably warm weather this winter season. Nevertheless, the results make it apparent that the retailer has managed to overcome macro-economic odds and industry-specific weakness, and appears well on its way to join the league of fast-fashion companies.

Our price estimate for the company at $17, is about 20% ahead of the current market price.

See our complete analysis for American Eagle Outfitters

American Eagle had been in a fix over the past couple of years, as a number of its customers were migrating to online shopping and fast-fashion brands. The once-hot teen apparel brand was not cool anymore because buyers were getting cheaper and fashionably better clothing at Zara, Forever 21 and H&M—competitors that were launching new collections almost every week. On the other hand, American Eagle’s orthodox, back-end supply chain system had resulted in a relatively longer product development cycle, which meant that it was unable to launch new collections as quickly as its fast-fashion counterparts. Thus, buyers had little incentive to make recurring purchases at American Eagle. However, the company quickly identified the gap and proactively worked towards filling it. Its recent results somewhat showcase its progress on this front.

The holiday season of 2015 has not been the prettiest for casual apparel retailers, despite an increase in consumers’ shopping budget. Gap Inc (NYSE:GPS) registered a decline in sales while Urban Outfitters (NASDAQ:URBN) reported flat growth. This can be attributed to the way U.S. buyers are spending money. With a deep decrease in gas prices, the average U.S. household saved over $720 last year, but this did not translate into increased spending on apparel. Rather, people spent more on restaurants, automobiles and home improvement. And the relatively low spending on apparel was inclined towards fast-fashion and sportswear brands. Moreover, the unusually warm weather in December deferred the demand for winter clothing. In such an unfavorable environment, attracting buyers and increasing sales can be regarded as a big accomplishment for a casual apparel retailer like American Eagle. And it is just the start of the recovery for the company. We believe that by effectively leveraging its omni-channel platform, maintaining a firm control over design, production and product development system, and consistently customizing marketing campaigns, American Eagle can improve its performance further.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research

1. American Eagle Outfitters Provides Fourth Quarter Update, American Eagle Outfitters, Jan 8 2016 [↩]