American Eagle Outfitters Poised For Much Stronger Growth In 2019 Compared To Its Peers

American Eagle Outfitters (NYSE: AEO) reported a strong performance for the first quarter earlier this week. The clothing and accessories retailer handily beat consensus earnings and revenues estimate. Net sales for the company grew almost 8% y-o-y to $886 million – its highest-ever level for the first quarter of a year, largely driven by a 4% increase in comps for American Eagle and a 14% jump in comps for Aerie. Notably, comps increased across brands for the seventeenth consecutive quarter thanks to double-digit growth in digital channel sales. Per Trefis estimates, American Eagle Outfitters’ shares have a fair value of $26 which is about 45% ahead of the current market price.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Did American Eagle Outfitters Fare In Fiscal Q1 And What Can We Expect From Full-Year 2019? You can modify any of our key drivers to gauge the impact changes would have on its valuation. Additionally, you can 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 Takeaways From American Eagles’ Fiscal Q1

Aerie Brand’s Growth Trajectory Continues

• 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 Q1 2019, with comps increasing 14% – marking the brand’s 18th consecutive quarter of double-digit comp growth. The brand’s revenue surged 20% in Q1 led by strong sales volumes across product categories.
• One of the highlights of Aerie’s recent growth has been its strong retention ratio, which improved by an additional 8% in Q1 2019. Moreover, the brand continued to increase its footprint on social media – aiding the brand in increasing its retention ratio and also providing a boost to digital sales. Aerie is also expected to achieve significant retail channel growth, as the company plans to open 60 to 70 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 – helping drive the company’s top line.

Digital Channel Continues To Expand

• Digital channel has been pivotal to American Eagle Outfitters’ growth over recent quarters. AEO’s digital sales were strong in Q1 2019 and increased to 30% of total revenue for the period – an increase of 100 basis points from prior-year quarter. This growth can be primarily attributed to increase in user sessions and better conversion rates.
• Moreover, the company’s digital traffic continued to see robust growth in Q1 from its app and mobile channels, which now represent more than the half of the retailer’s digital business. AEO continues to invest in technology and its omnichannel capabilities, which should ensure sustained growth from the digital sales channel.

Impressive Jeans Performance

• AEO’s jeans business has been another consistent growth driver for the company – delivering its 23rd straight quarter of positive comps, and best-ever sales in both men’s and women’s bottoms. Across age demographics, American Eagle is the number one women’s jeans brand and number two overall, per management. The company’s jeans business has strengthened dramatically over the past few years, and we expect it to continue to thrive, as AEO remains focused on innovation and introducing new trend-setting products.

Strong Sales Trend Continues

• American Eagle Outfitters continued its strong performance in Q1, with the company achieving its 17th consecutive quarter of positive comp growth thanks to strong growth across the Aerie and American Eagle brands. Further, the company delivered comparable sales growth of 4% in the quarter as a result of growth across markets, brands and channels. This is significant, given the fact that

Performance Vs Peers

• The first quarter has been a weak period for the apparel industry as a whole. But American Eagle Outfitters bucked the industry-wide trend to deliver a 4% increase in comps for the period. Moreover, the company’s store business also delivered positive comps for the sixth consecutive quarter.
• The company outperformed its apparel retailer peers Urban Outfitters (URBN) and Abercrombie & Fitch (ANF) in Q1 2019. A&F and Urban Outfitters reported marginal year-over-year increase in revenues while American Eagle’s revenues surged by 8% led by sales growth in the Aerie brand as well as expansion in the company’s digital segment.
• Going forward, we believe that a healthy economy, improved consumer confidence and low unemployment will continue to drive demand for the company’s products.

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