Feb Retail Data Positive for American Eagle, E-Commerce Supports $25 Value

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). There were concerns regarding how retail sales would trend in February as consumers were expected to cut back on spending after a better than expected holiday season (see American Eagle Still Lagging Competitors After Holiday Season). However, for the month of February, U.S. retail sales increased by 4.2% as compared to the same month last year, ahead of the expected 3.6% increase.

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.

Spending and Outlook for Retailers Cautiously Positive

The major sub segments from department stores to teen apparel retailers contributed to the increase in February sales. Improving employment and better macroeconomic conditions as well as a reduction in the payroll tax helped to drive this increase, more than offsetting the increase in fuel and food prices.

According to a Thomson Reuters report, around two-thirds of the 25 retail chains tracked by it beat sales expectations for the month of February this year. However, missing from the list were leading teen retailers Abercrombie & Fitch, Aeropostale and American Eagle, who had earlier decided to discontinue reporting monthly sales data, and only report quarterly data. ^[1]

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.

E-commerce Growth to Continue

However, net revenues at American Eagle may increase at a faster rate, largely due to the growing popularity of the e-commerce channel for shopping especially among teens and young adults. The monthly unique visitors at the company’s ‘ae.com’ website has been increasing on a year-on-year basis. This January, it increased by around 37%, as compared to January 2010. ^[2]

The internet & catalog order sales at American Eagle grew rapidly from around $120 million in 2005 to $350 million in 2009. Going forward, we expect it to increase to around $1 billion by the end of our forecast period, an average annual growth rate of around 16%. However, if it increases at an average annual growth rate of around 20%, reaching $1.2 billion by the end of our forecast period, it would mean an upside of around 5% to our current price estimate for American Eagle’s stock.

See our full estimates for American Eagle.

1. US retail sales climb 4.2% in February [↩]
2. ae.com site statistics-from compete.com [↩]