American Eagle Still Lagging Competitors After Holiday Season

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), Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO).

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 price estimate for American Eagle Outfitters stock. Our price estimate, at $25.70, stands well ahead of market price.

We’ve previously noted that American Eagle has been lagging behind competitors like Gap and Abercrombie & Fitch in year-over-year comps of monthly sales. We suggested that, although it was still too early to tell whether holiday shopping trends would provide a kick-start towards recovery through the new year, competitors seemed to be jumping ahead (see: American Eagle Lagging Behind Competitors, but Stock Remains Cheap).

Since then, American Eagle has reported December and January sales. In December, its net sales decreased 6% vs. Dec. ’09, with comparable store sales down 11% year-over-year (YOY). ^[1]. For the full fiscal year 2010, net sales rose 1%, with comparable store sales down 1%. ^[2] The December declines continued into January, as net sales decreased 9% YOY and comparable store sales dropped 6% YOY.

Gap

For Gap, net sales in December were flat YOY, with Gap and Old Navy comparable store sales in North America down 8% and 2% respectively. ^[3]. In January, company-wide net sales were up nearly 6% YOY, with Gap recording flat comparable store sales and Old Navy’s comparable store sales dropping 3% YOY in North America. For the full fiscal year, company-wide net sales grew 3%, with comparable store sales up 1%. ^[4]

Abercrombie & Fitch

For A&F, net sales increased 26% YOY in December, with A&F and Hollister comparable store sales rising 13% and 17% respectively. ^[5] For January, company-wide net sales rose 6% YOY, with A&F comparable store sales increasing 3% but Hollister comparable store sales dropping 8%. For the full fiscal year, company-wide net sales rose 18%, and comparable store sales grew 7%. ^[6]

Aeropostale

For Aeropostale, net sales increased 3% YOY in December, with comparable store sales dropping 5% YOY. The company largely benefitted from growth in internet & catalog order sales. ^[7] For January, company-wide net sales rose 7% YOY, with comparable store sales up 1%. For the full fiscal, net sales grew 8% and comparable store sales rose 1%. ^[8]

American Eagle Brand Revenue per Square Foot Outlook

See our full analysis and $25.70 price estimate for American Eagle Outfitters

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, an annual decline of 10% as the recessionary economic environment reduced consumer retail demand.

The decline in consumer spending particularly affected more up-market specialty brands like American Eagle and Abercrombie & Fitch, as consumers shifted to brands that sell at lower price points, like Aeropostale. 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, as discussed above, American Eagle’s growth trend has been lagging behind competitors like Gap, A&F and Aeropostale in December and January, as well as for the full fiscal 2010. This 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 $25.70 price estimate for AEO stock. As our price estimate currently implies significant upside to the stock’s current market market price, this downside scenario would still leave our number ahead of market price.

1. American Eagle Reports December Sales [↩]
2. American Eagle Reports January Sales [↩]
3. Gap Reports December Sales Results [↩]
4. Gap Reports January Sales Results [↩]
5. A&F Reports December Sales Results [↩]
6. A&F Reports January Sales Results [↩]
7. Aeroposatle Reports December Sales results [↩]
8. Aeropostale Reports January Sales Results [↩]