How Is American Eagle Expected To Perform In 2016?

In Q2 2016, American Eagle Outfitters (NYSE:AEO) reported its eighth consecutive quarter of profit improvement, primarily due to a large demand for its Aerie line of lingerie, and personal care products. Comparable sales in the brand soared 24% in the quarter, a fifth consecutive quarter of 20% plus growth, much higher than the 3% overall comparable sales growth, with 1% increase in its namesake brand. The company managed to attain higher selling prices and transaction size across all of its brands, and this coupled with lower product costs helped to achieve an improvement in the merchandise margin and profitability.

See our complete analysis for American Eagle Outfitters

While the sales momentum at the company has slowed down, from the comps growth of 11% achieved in the second quarter of the previous year, due to increased competition for teen apparel and broader pressures for mall-based retailers, CEO Jay Schottenstein remains confident of continued growth at the company. This will be achieved through innovative styles, particularly in women’s jeans, and a higher focus on its omni-channel tools. The latter in particular has been exceptionally strong recently, with online business delivering high growth, and the new Mobile-First website driving a 35% increase in mobile conversion. The company also remains on track to shut down 35 to 40 of its least profitable stores this year, and is tightly controlling inventory to avoid markdowns. This will help the company attain further margin improvement going forward.

American Eagle’s 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.

American Eagle, like other apparel retailers, has gradually shrunk its store count, and focused more on its 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.

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

• How Has the Digital Age Affected Apparel Retailers?
• How Did American Eagle Manage To Improve Its Gross Margins In The Second Quarter?
• Growth In Aerie Helps American Eagle Beat Estimates
• How Will American Eagle Perform In The Second Quarter Of Its FY 2016?
• How Has The Merchandise Mix Of American Eagle Changed Over The Last Three Years?
• Why Will American Eagle’s Aerie Brand Be A Key Growth Driver In The Future?
• 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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