Why Did We Revise Our Price Estimate For American Eagle By Over 20%?

We recently revised our price estimate for American Eagle Outfitters (NYSE:AEO) by 24%, from $13.01 to $16.15, which is slightly lower than the current market price. After falling for the first seven months of 2017, American Eagle’s stock has soared thereafter. The recovery seen since the middle of August has been the result of strong earnings posted in the second and third quarters. Furthermore, the company anticipates comparable store sales to increase in the mid-single digits in the fourth quarter, along with continued sequential improvement in the margins. While the Q4 results aren’t due until March 2018, the positive guidance further pushed up the share price. AEO’s solid performance in the third quarter, with a comps growth of 3%, is impressive given the weak mall traffic. Furthermore, this has also placed the company in a good position to build the momentum in the important holiday quarter. In this article, we’ll highlight the main factors that have helped American Eagle to maintain a healthy performance.

We have a $16.15 price estimate for American Eagle, which is slightly below the current market price. The bar charts below have been made using our new, interactive platform.

1. Improving Retail Trends

American Eagle’s impressive performance for a majority of the past year cannot be attributed to company-specific factors alone, as it is not the only player in the retail industry that has shown strength in recent months. Companies such as Gap and Abercrombie & Fitch, which were assumed close to dead, have posted a recovery this year, spurred on by an improving economy. With unemployment rates at their lowest levels since February 2001, and consumer confidence on a high, the retail sector was bound to be a beneficiary. Moreover, apparel companies have made a considerable effort to rid themselves of excess inventory, and have undertaken store closures to better optimize their footprint with a move seen towards the online space. These factors aided in a reduced need for promotions, resulting in greater sales of full-price items and less pressure on margins.

2. Aerie Remains A Standout

American Eagle’s lingerie and activewear brand, Aerie, has gone from strength to strength, driving sales growth for the company. It posted a 14th consecutive quarter of positive comps in the recently reported third quarter earnings, at 19%, building on the 21% seen in the prior year period. This figure is all the more impressive when compared to the growth figures delivered by its competitors. While the brand is much smaller in terms of sales when contrasted with Victoria’s Secret, the latter posted a comps decline of 5% in Q3. In addition to impressive growth in core intimates, the company has seen strength in apparel, active wear, and swim wear. A lot of this growth has been a result of the efforts the company has put towards its digital channel, which has been growing at a tremendous rate, and constitutes 40% of the Aerie revenues. Meanwhile, the brand’s brick-and-mortar stores are equally valuable to the company, as they result in an increase in the digital demand. The company found that if it has a store in a location, it tends to drive digital demand at 1.5 times the store’s sales.

3. E-Commerce Business Continues Its Strong Performance

American Eagle delivered an 11th straight quarter of double-digit gains in its online sales in the third quarter, and represented 25% of the total revenue. Given the robust performance of this business, the company has focused its marketing on the digital space, which should be highly effective in drawing in new customers. Moreover, to reel in these customers, AEO has also launched a new rewards program, which should ensure growth in the future, as well. AE jeans also represent another avenue for long term success, with the company growing to be the number two retailer in America across all demographics.

See our complete analysis for American Eagle Outfitters

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

• Black Friday Trends Signal Brick-And-Mortar Not Dead Yet
• Why It Makes Sense For Retailers To Concentrate On Their Online Channels This Holiday Season
• Is India The Place To Be For Apparel Retail Companies?
• American Eagle: Winning In The Teen Apparel Space
• What Are The Two Main Factors Hampering Growth Of Apparel Retailers?

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