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See all Bulls Reasons
Bulls: Reasons To Buy

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Upside Potential

 100% agree

Upside Potential

Outstanding track record with positive net income & free cash flow generated in each of the last 10 years. Best-in-class retailer led by solid management. Barring liquidity issues, the company’s balance sheet is unencumbered and large enough to support... read more
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Today's Society

 0% agree

Today's Society

Albeit startling, today's youth is captivated and motivated with being cool. With that said, a part of being cool and accepted is to wear preppy cloth from companies such as American Eagle and Abercrombie & Fitch. The other day I was visiting a middle school... read more
0 votes
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Today's Society Continued

After reading the bears for AE stocks, I have an addition to my previous bull statement. Although consumer spending is decreasing, I have discerned a noticeable drop in the prices of American Eagle products. Cheaper products are thus more appealing to the more frugal-minded consumers, and should result in a decent performance in AE stocks.
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Bears: Reasons To Sell

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Issues with the Balance Sheet

Over half of their short-term liquidity ($372M) is locked up in auction-rate securities. While management stated that cash on hand is more than enough to fund operations through the spring, the seasonal pick-up toward the back end of the year could strain... read more
1 votes
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As exposed as you can get to the US economy.

Sales should weakness due to declines in consumer spending. Also I don't see their new business initiatives leading to higher sales..
3 votes
66%
agree

Mature profile for the company

The company’s mature profile may limit growth going forward. Management is responding with the roll-out of the aerie, 77kids and Martin+Osa brands in an effort to expand their potential market. Only aerie has gained traction so far. In general, fashion trends change and “cool” brands naturally go stale despite revamp efforts.
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American Eagle (NYSE: AEO) is a mall-based apparel and accessories retailer that sells its own brands of products throughout the U.S. and Canada. AEO operates three different chains (American Eagle Outfitters, aerie, and Martin + OSA), each of which targets a different segment of customers within the broad 15-40 age group. While the company maintains three separate brands, the overwhelming majority of AEO's sales come from its namesake American Eagle operations.[1]

In fiscal 2007, AEO generated over $3 billion of sales with a 19.6% operating margin[2], placing it second in the youth apparel retail sub-market in terms of operating profit and revenue behind high-end competitor Abercrombie & Fitch Company (ANF); other competitors include Aeropostale (ARO), Pacific Sunwear of California (PSUN), Urban Outfitters (URBN) and Gap (GPS). AEO had been efficiently and successfully growing from 2004 through 2006, with same store growth of 21%, 16% and 12% during the 2004-2006 operating period, while increasing its store count from 846 to 911 from 2004 to 2006.[3] The company's performance strayed from this track in 2007 as the retailer's same store sales grew only 1% for the year; however overall sales grew 9.3% for the year, fueled largely by a net addition of 76 stores.[4] American Eagle's struggles with same store sales growth continued through the first quarter of 2008 as comparable store sales decreased 6% in the quarter, while net sales rose 5% mostly because of the addition of 34 new stores in the quarter.[5] This trend continued in the summer of FY08 as AEO's same store sales declined 9%[6] in the second quarter of FY08.

AEO has grown successfully over the past few years through several key strategies:

  • The company has spent heavily on marketing and partnerships. From 2004-2006, AEO spent $159 million on advertising, more than its two closest competitors combined: Abercrombie & Fitch spent $110 million[7]) and Aeropostale spent $23 million[8] during the same time period.
  • AEO has branched out from its 15 to 25 year old customer segment in order to diversify and enhance the company's scope and scale. During 2006, AEO launched its sub-brands aerie (lingerie) and Martin + OSA (sportswear) to target a broader customer base.[9] The company is currently preparing a fourth concept, 77kids, to be launched online in 2008 and then expanded with physical stores in 2009. 77kids will feature apparel and accessories for 2-10 year olds styled after the traditional American Eagle fashion.

Contents

[edit] Business Overview

An American Eagle Outfitters storefront in a mall
An American Eagle Outfitters storefront in a mall

American Eagle sells its own brands of clothing and accessories in mall-based retail stores in the U.S. and Canada.

AEO has grown its business rapidly, with sales more than doubling from $1.4 billion in 2003 to $3.0 billion in 2007 (111% increase), while only increasing its total store count from 753 to 987 stores (23% increase) during the same time period. AEO has opened increasingly larger stores, as the company's gross square footage expanded from 4.2 million square feet in 2003 to 5.7 million square feet in 2007 (35% increase); yet the company has also managed to increase sales per square foot from $340 in 2002 to $535 in 2006.[10][11]

The company launched two new concepts in 2006, aerie and Martin + OSA, to branch out of their historical merchandise and customer segments. aerie sells intimate apparel and "dorm-wear" designed for 15 to 25 year old women, while Martin + OSA offers denim and sportswear for men and women aged 25 to 40.[12] At the end of fiscal 2006, neither sub-brand had accounted for a significant amount of company revenue, but AEO significantly expanded upon these two operations during 2007, opening 36 new aerie locations and 14 new Martin + OSA locations during the year.[13] In addition to expanding the aerie and Martin + OSA brands, the company is currently preparing a 2009 launch of a fourth concept, 77kids, which will launch online in the second half of 2008 and brick-and-mortar stores in 2009.

American Eagle 5-Year Financial Figures[14]
Figure 2002 2003 2004 2005 2006
Revenue (millions) $1,389 $1,442 $1,889 $2,322 $2,794
Operating Margin 11.4% 9.1% 19.1% 19.8% 21.0%
Same store sales growth (decrease) (4%) (7%) 21% 16% 12%
Store Total 753 805 846 869 911

[edit] Trends and Forces

[edit] Expanding aerie and Martin + OSA

One of the lynch-pins to AEO's growth plans is to grow its aerie and Martin + OSA store brands. aerie offers intimate apparel (underwear, bras, pajamas, robes, etc.) to 15 to 25 year old women, whereas Martin + OSA sells denim and sportswear designed for 25 to 40 year old men and women.[15] At the end of fiscal 2006, AEO operated only 3 stand-alone aerie stores and 5 Martin + OSA stores and neither segment had generated a significant amount of revenue (the company did not break sales out).[16] At the end of the first quarter of 2008 the company operated 62 aerie stores and 22 Martin + OSA stores, and plans on adding 64 more aerie stores and 8 new Martin + OSA stores during fiscal 2008.[17] While the company has not broken out sales figures for the two newest sub-brands of AEO, the greater-than-expected store growth is likely a signal that the stores have been performing well.

[edit] Introducing 77kids

In January 2008 AEO announced that they would be launching a fourth in-house concept titled 77kids an AE-fashion styled apparel retailer for children ages 2-10.[18] 77kids will be introduced in 2008 as an online store followed by physical store locations in 2009. In the press release AEO stated that the store will offer merchandise that has the styles that kids want as well as the "durability and value that moms want"[19], implying that the 77kids store will target a blend of style and value, possibly with lower price points than Abercrombie & Fitch's kids store "abercrombie". ANF has seen considerable success with their abercrombie kids stores, as same store sales at the children's brand grew 10% over 2006 and 2% and 3% in the second and third fiscal quarters of 2007 respectively.

[edit] Big Spending on Innovative Marketing Techniques

AEO has spent more on advertising over the past three years ($159 million[20]) than its two most direct competitors, Abercrombie & Fitch ($110 million[21]) and Aeropostale ($23 million[22]), have combined. In addition to traditional forms of advertising (print, television, etc.), AEO has sponsored various events and presented advertisements in different channels. Past examples of these alternative marketing techniques include:

  • In March of 2007, AEO was a primary sponsor of Spring Break 2007, a week long festival for teenagers and young adults hosted by MTV in Mexico.[23] AEO not only had its brand names attached to various concerts and events during the week long festivities, but also handed out free American Eagle tote bags and apparel.
  • During the 2007 NCAA Division I College Football season, AEO sponsored a series of online video segments that covered various football traditions at different colleges and universities throughout the US.[24] AEO sponsored crews set up tents and stands at various college football games during the season where fans could tell stories about their experiences with college football for the video segments as well as check out AEO merchandise and even design American Eagle apparel with custom colors to match their school's football uniforms.

[edit] Second Half Strength: Back-to-School and Holiday Shopping

  • Back-to-School: Because the overwhelming majority of the customers of AEO's brands age from 15 to 25 years old and are students at some level of education, AEO traditionally experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for AEO's competitors such as Abercrombie & Fitch, Aeropostale (ARO) and Pacific Sunwear of California (PSUN). Most of the back-to-school sales are included the third fiscal quarter, for which this year AEO experienced same store sales growth of 2%[25] while its competitors (Abercrombie & Fitch, Aeropostale (ARO) and Pacific Sunwear of California (PSUN)) saw same store sales growth of 1%,[26] 1.9%[27] and 5% respectively.[28] This indicates that AEO performed comparably with its competitors.
  • Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. AEO's fourth quarter sales have been nearly twice as large as their first quarter sales in 2005 and 2006.[29]

[edit] Competition

AEO competes with several other retailers in the 14-30 year old apparel market. AEO has consistently been at the top of its sector in terms of profitability and is one of the largest companies in the market in terms of net sales. AEO's 21.0% operating margin is the highest out of all of its competitors, even considering that its 48.0% gross margin rate is considerably lower than the 66.6% gross margin rate of AEO's main competitor, Abercrombie & Fitch Company (ANF).

American Eagle's competitors include:

  • Abercrombie & Fitch Company (ANF): Abercrombie & Fitch is one of AEO's main rivals. ANF is a larger company than AEO, with a greater store base and higher net sales than AEO. Abercrombie & Fitch Company (ANF) also operates four brands: Abercrombie & Fitch, Hollister, abercrombie, and RUEHL; all of which target different subsets of the 8-30 age range. While AEO's namesake stores compete directly with A&F and Hollister stores, and AEO's new Martin + OSA concept competes with ANF's RUEHL, AEO has no match for A&F's kids apparel concept: abercrombie. Although ANF is one of AEO's most direct competitors, the two company's operate with different strategies: Abercrombie maintains a premium brand with high price points while American Eagle attempts to reach a larger range of customers with relatively lower price points on trendy products.
  • Aeropostale (ARO): Aeropostale is a smaller company than AEO, with the overwhelming majority of revenue coming from only its namesake brand of stores that targets 14 to 17 year olds. Aeropostale's business model also relies heavily on sales and promotions, something that AEO is trying to move away from in order to keep margins high. Aeropostale (ARO) and AEO compete for the same set of customers, but AEO has been growing more quickly and more successfully than Aeropostale (ARO) in the past few years.[30]
  • Pacific Sunwear of California (PSUN): Pacific Sunwear primarily serves several different customer segments through its three retail chains: PacSun, demo, and One Thousand Steps. PacSun stores are based mostly around trends in the alternative sports (surfing, snowboarding, skateboarding, etc.) lifestyle and offer third-party branded as well as private-label apparel, footwear and accessories to teenagers and young adults.[31] Finally, demo stores target 16 to 24 year olds with fashion and accessories influenced by hip-hop lifestyle and One Thousand Steps offer a wide range of casual footwear to the 18 to 24 year old customer segment.[32] Because Pacific Sunwear's operations depend largely upon third-party brands, footwear and different lifestyle-focused customer segments it is less comparable to AEO than Abercrombie & Fitch or Aeropostale (ARO).
  • Urban Outfitters (URBN): Urban Outfitters is a relatively young retailer that operates three different branded store chains, Urban Outfitters (18 to 30 year olds), Anthropologie (30 to 45 year old women), and Free People (16 to 35 year old women).[33] Urban Outfitters is not as directly comparable to AEO due to its slight differentiation in targeted customer segments.
  • Gap (GPS): Gap is a much larger company than ANF in terms of sales, stores and customer segments targeted. Through variations on Gap (Gap Kids, babyGap, Gap Maternity) the retailer serves a wide range of customers; also, Banana Republic and Old Navy stores serve different socio-economic segments.[34] Because of the wider range of customers, Gap doesn't match up with AEO as closely as some other competitors, however there is considerable overlap.
Company Net Sales (mm) Gross Margin Operating Margin Sales Growth (Decline) from 2005 Same Store Sales Growth (Decline) Total Stores Sales per Store (thousands)
American Eagle Outfitters $3,055 46.6% 19.6% 9.3% 1.0% 987 $3,095
Abercrombie & Fitch $3,749 67.0% 19.7% 13.0% 2.0% 1,035 $3,623
Aeropostale $1,590 34.8% 12.7% 12.6% 3.3% 828 $1,921
Pacific Sunwear of California $1,454 28.0% (-2.5%) 0.8% 0.7% 1,097 $1,325
Urban Outfitters (URBN) $1,507 38.3% 14.9% 23.1% 11.0% 245 $6,153*
Gap (GPS) $15,763 36.1% 8.3% (1.0%) (4.0%) 3,167 $4,977
[35] [36] [37] [38] [39] [40]

Note: *:Much of Urban Outfitters' revenue is generated through wholesale and internet orders so sales per store is not reflective of store-only sales.



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      [edit] References

      1. ↑ American Eagle Outfitters (AEO) 10-K 2006, "Principles of Consolidation", p. 36
      2. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      3. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Financial Highlights", p. 11
      4. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      5. ↑ American Eagle Outfitters (AEO) Press Release, First Quarter Earnings Release 2008
      6. ↑ American Eagle Outfitters (AEO) Press Release, Second Quarter Earnings Release 2008
      7. ↑ Abercrombie & Fitch (ANF) Annual Report 2006
      8. ↑ Aeropostale (ARO) Annual Report 2006
      9. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Chairman's Letter", p.5-6
      10. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Financial Highlights", p. 11
      11. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      12. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Chairman's Letter", p. 5-6
      13. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      14. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Financial Highlights", p. 11
      15. ↑ American Eagle Outfitters (AEO) Annual Report 2006, "Chairman's Letter", p. 5-6
      16. ↑ American Eagle Outfitters (AEO) 10-K 2006, "Growth Strategy", p. 5
      17. ↑ American Eagle Outfitters (AEO) Press Release, First Quarter Earnings Release 2008
      18. ↑ American Eagle Outfitters (AEO) Press Release, "American Eagle Outfitters to Launch New Children's Apparel Brand"
      19. ↑ American Eagle Outfitters (AEO) Press Release, "American Eagle Outfitters to Launch New Children's Apparel Brand"
      20. ↑ American Eagle Outfitters (AEO) Annual Report 2006
      21. ↑ Abercrombie & Fitch (ANF) Annual Report 2006
      22. ↑ Aeropostale (ARO) Annual Report 2006
      23. ↑ American Eagle Outfitters (AEO) Press Release, "Fergie, Ludacris to Headline American Eagle Outfitters Spring Break 2007"
      24. ↑ American Eagle Outfitters (AEO) Press Release, "American Eagle Outfitters Amps Up College Football With AE Big Game Live"
      25. ↑ American Eagle Outfitters (AEO) Third Quarter Earnings Release
      26. ↑ Abercrombie & Fitch (ANF) Third Quarter Earnings Release
      27. ↑ Aeropostale (ARO) Third Quarter Earnings Release
      28. ↑ Pacific Sunwear of California (PSUN) Third Quarter Earnings Release
      29. ↑ American Eagle Outfitters (AEO) 10-K 2006, "Quarterly Financial Data", p. 59
      30. ↑ Aeropostale (ARO) Annual Report 2006
      31. ↑ Pacific Sunwear of California (PSUN) Corporate Website
      32. ↑ Pacific Sunwear of California (PSUN) Corporate Website
      33. ↑ Urban Outfitters (URBN) Corporate Website
      34. ↑ Gap (GPS) Annual Report 2006
      35. ↑ Pacific Sunwear of California (PSUN) Press Release, Fourth Quarter Earnings Release
      36. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter Earnings Release
      37. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      38. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      39. ↑ Urban Outfitters (URBN) Press Release, Fourth Quarter Earnings Release
      40. ↑ Gap (GPS) Press Release, Fourth Quarter Earnings Release
      41. ↑ 41.0 41.1 41.2 Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 25, Item 6: Selected Financial Data
      42. ↑ Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 28, Item 7, Financial Summary
      43. ↑ Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 4
      44. ↑ 44.0 44.1 44.2 Aeropostale, FY2007 10-K, 04/01/08, Item 6: Selected Financial Data, pg. 17
      45. ↑ Aeropostale, FY2007 10-K, 04/01/08, Item 7: Key indicators, pg. 19
      46. ↑ 46.0 46.1 46.2 46.3 AEO FY2007 10-K, 04/02/08, Item 6: Selected Consolidated Financial Data, pg. 16
      47. ↑ 47.0 47.1 PSUN, 2006 10-K, Item 15, Pg F-4
      48. ↑ PSUN, 2006 10-K, Item 7, Pg 16
      49. ↑ PSUN, 2006 10-K, Item 15, Pg F-20
      50. ↑ 50.0 50.1 URBN, 2006 10-K, Item 15, Pg F-5
      51. ↑ URBN, 2006 10-K, Item 15, Pg F-8
      52. ↑ URBN, 2006 10-K, Item 7, Pg 25
      53. ↑ URBN, 2006 10-K, Item 7, Pg 20
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