Why Will American Eagle’s Aerie Brand Be A Key Growth Driver In The Future?

American Eagle Outfitters‘ (NYSE:AEO) Aerie brand, which is the company’s lingerie and activewear segment, has been performing strongly for the past several quarters. The first quarter of 2016 was another breakout one, with comparable sales increasing over 30%, amid a tough retail environment. While weak mall traffic and a soft macro environment have negatively impacted other brands, American Eagle and Aerie have been gaining market share. According to Jen Foyle, Global Brand President of Aerie, the company wants to be “a real player in the intimates sector.” There are a number of factors that we feel will make Aerie a key growth driver for the company in the future, and some of these have been listed below.

1. Growth In Comparable Sales

Amid an otherwise dismal retail environment, Aerie’s sales increased 32% in Q1 2016, as compared to a growth of 12% in Q1 2015, surpassing what most analysts had predicted. AEO anticipates a sales rise to $500 million in the coming years. While that is small compared to lingerie giant Victoria’s Secret’s sales of $7.7 billion, strong growth in the Aerie brand is making it a viable competitor.

2. Campaigns Resonate With Consumers

The company’s game-changing campaign in 2014 for its Aerie brand, where the lingerie brand decided to feature only unairbrushed models in its ads, has paid off for the company. The sales increased immensely thereafter (20% growth in FY 2015), and shows no signs of slowing down. As an extension to its #AerieReal campaign, the company in April revealed its #AerieMan campaign, as a parody, featuring a mix of quirky characters of different sizes and personalities sharing their “real life” stories in their skivvies. This marks its pledge to forego retouching even male models in their underwear and swimwear products, beginning Holiday 2016. Such campaigns also generate a lot of online chatter and debate, sparking off a ton of good publicity, increasing their brand loyalty, and thus, helping their business grow. As noted by Foyle, the #AerieReal campaign reached 4 billion media impressions in 2015.

3. Jumping On The Bralette Fashion Trend

The bralette, a feminine take on the bra, which combines the comfort of a sports bra, with the embellished elements of a fashion bra, is fast becoming a must-have item in young women’s wardrobes. The ‘athleisure’ trend has driven the growth for the bralette, which arrived on the scene five years ago, according to Jo Lynch, lingerie editor at WGSN trend forecasting firm. As noted by Sara Gaspar, associate analyst at WGSN’s Instock, the number of new bralettes in the US online market was 157% higher in the first quarter of 2016, as compared to a year prior. This item has been driving incremental business for the Aerie brand, and has been a point of focus for the past three years. Furthermore, since this item is worn as part of a layered look, it prompts additional clothing purchases. According to Foyle, the company designs “tees and tanks with open backs, low-cut arm holes, and deep V-necks specifically to show off the bralette underneath.” The brand is expected to launch new styles, colors, and silhouettes in the future. AEO’s ability to jump on this fashion trend is expected to add significant value to its shareholders going forward. Moreover, as these are cheaper to produce than traditional bras, but are priced similarly, it should give a boost to the gross margins of the company.

4. Strength Of Its Online Business

As is the case with other apparel retailers, AEO is gradually shrinking its store count, and focusing more on the high margin e-commerce channel. A soft and gradual reduction in its brick-and-mortar footprint, as opposed to a large closure in one go, is a good decision as it would not result in a steep fall in its sales. The company’s digital sales registered a 20% growth in FY 2015. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing its e-commerce capabilities, and is expected to spend more in FY 2016. The direct business continues to perform well for the company, contributing to 30% of the company’s revenues in Q1 2016, and has been a major driver in its sales growth, especially since the mall traffic has been soft. The online business for the Aerie brand has been particularly strong, with digital representing over 30% of its business in the first quarter of 2016.

Have more questions about American Eagle Outfitters? See the links below:

• Why Are We Bullish On American Eagle?
• What Can Move American Eagle’s Stock Down In The Next Couple Of Years?
• What Is American Eagle Outfitters’ Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
• How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
• What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?
• Where Will American Eagle Outfitters’ Revenues Come From In The Next Five Years?

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