Will Aerie And Digital Channel Drive American Eagle Outfitters’ Growth In Q1?

American Eagle Outfitters (NYSE: AEO) is slated to announce its fiscal first quarter results on June 5, followed by a conference call with analysts. The teen clothing retailer is expected to post quarterly earnings of $0.21 per share while revenues are expected to come in around $855 million (up 4% from a year ago). Higher revenues are expected to be driven by sales growth in the Aerie brand as well as expansion in the company’s digital segment.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Is American Eagle Outfitters Likely To Have Fared In Fiscal Q1?  You can modify any of our key drivers to gauge the impact changes would have on its valuation and see more Trefis Textiles, Apparel and Luxury Good Industry Data here.

A Quick Look at American Eagle Outfitters’ Revenue Sources

AEO reported $4 billion in Total Revenues in Fiscal 2018. This included 3 revenue streams:

• Men’s Apparel and Accessories: $1.3 billion in FY 2018 (32% of Total Revenues). This segment contains the American Eagle, Tailgate and Todd Snyder brands and includes sales related to only men’s apparel and accessories.
• Women’s Apparel and Accessories (excluding Aerie): $2.1 billion in FY 2018 (52% of Total Revenues). This segment contains the American Eagle and Tailgate brands and includes sales related to only women’s apparel and accessories.
• Aerie: $646 million in FY 2018 (16% of Total Revenues). Aerie is a women’s lifestyle brand and its assortment include intimates, apparel, activewear and swim collections.

Key Factors To Watch for In Q1

Digital Channel Will Continue To Expand

• The growth of online and mobile shopping highlights the shift away from physical stores, and AEO has ensured that its presence is felt in this space. AEO’s digital sales were strong in Q4 2018 and increased to 31% of total revenue for the quarter. For the full year, digital sales crossed $1.1 billion and were 28% of total sales.
• Moreover, the company’s digital traffic has seen robust growth in the recent years from its app and mobile channels, which together represent roughly half of the retailer’s digital business. Going forward, we expect the company’s digital channel to continue to drive a bulk of its growth.

Aerie Brand’s Growth Trajectory Likely To Continue

• American Eagle’s lingerie and activewear brand, Aerie, has been the major growth vehicle for company, going from strength to strength in driving its overall profitability. Aerie has been the standout performer for AEO the last few years – growing approximately 27% annually between 2015-18. The brand continued its impressive performance in Q4 2018, with comps increasing at 23% – marking the brand’s 17th consecutive quarter of double-digit comp growth. We expect this growth trajectory to continue in the first quarter.
• Aerie is also expected to achieve significant growth from both the digital channel and retail stores, as the company plans to increase its exclusive Aerie stores in fiscal 2019. Going forward, we expect the Aerie brand to continue to post double-digit comparable sales growth for the foreseeable future – in turn helping drive the company’s top line.

Strong Sales Trend Likely To Persist

• American Eagle Outfitters has been a consistent performer in the apparel industry. In Q4 2018, the company was able to achieve its 16th consecutive quarter of positive comp growth thanks to growth in jeans and bottoms, as well as in complementary businesses such as graphics, shoes and accessories. Further, the company delivered comparable sales growth of 8% in 2018 as a result of growth across markets, brands and channels. We expect the strong sales momentum to carry over in Q1 and remain throughout 2019.
• Going forward, we believe that a healthy economy, improved consumer confidence and low unemployment will continue to drive demand for the company’s products.

Trefis Price Estimate

Based on our forecast, American Eagle’s EPS for full-year 2019 is likely to be around $1.42. Using this figure with our estimated forward P/E ratio of 18.7x, this works out to a price estimate of $27 for the company’s shares, which is about 50% ahead of the current market price.

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