Clothes that look good in the store don’t always look good when you get them home. Long-term investors, however, shouldn’t have a similar regret about buying
American Eagle Outfitters
Things admittedly have been challenging for American Eagle. During its first-quarter earnings call on May 26, the retailer fessed up to high freight costs and excess inventory amid sagging consumer demand. Its stock (ticker: AEO) sank 6.6% the next day. At least five analysts have slashed their ratings on the stock since then, and shares were recently trading at $12.85, about a third of their all-time high of $37.87 in April of last year.
Still, the stock has believers who say the issues highlighted in the earnings call were temporary and that the company has solutions for the long run. The valuation—at about $2 billion, American Eagle is a small-cap stock—has fallen to a level that likely reflects the worst of the impact. There is potential upside ahead, says Jefferies analyst Corey Tarlowe, who has a Buy rating on the stock and a $27 price target.
“The buy side has already baked in” the near-term bad news, says Tarlowe, who expects the company to be in a somewhat better position by the holidays, given easing freight headwinds.
No one predicts a quick rebound. The company is expected to report operating income of $305 million for fiscal 2022, which ends next January. That’s nearly half the $603 million posted in 2021. As recently as March, the company projected operating income of up to $600 million; in May, it lowered that estimate to $314 million, but it has stopped providing longer-term guidance. That is a reflection of the economic uncertainty and heavy discounting that has resulted in BofA Securities’ Christopher Nardone and J.P. Morgan’s Matthew Boss to lower their ratings on the stock to Sell and Hold, respectively.
|Market Value (bil):||$2.2|
|2023E Sales (bil):||$5.3|
|2023E Net Income (mil):||$287|
Note: Estimates for fiscal year ending January 2024; E=estimate
Yet American Eagle looks well placed for future gains, particularly from its fast-growing Aerie division, which is known for its leggings and lingerie. It had posted 29 consecutive quarters of double-digit revenue growth until the first quarter of this fiscal year, when it rose just 8%. American Eagle says cold weather hurt Aerie swimsuit sales that quarter, but the company expects Aerie to grow to more than $2 billion in revenue by fiscal 2023, up from $800 million in 2019. Aerie now makes up about 30% of American Eagle’s total sales.
The key for Aerie is to continue to take market share. The brand was launched in mid-2006 to build on American Eagle’s intimates line, which at that time was less than 5% of total sales. The company is now the No. 3 retailer in intimate apparel behind
(HBI), according to market researcher Euromonitor International. To gain further market share, Aerie will have to continue to innovate and expand its offerings, says BofA’s Nardone, who calls Aerie “the crown jewel” of American Eagle. The Smoothez brand, the company’s take on shapewear that was launched on July 21, is an example of the forward-thinking that could help Aerie grow.
Even American Eagle’s core business, rooted in its denim for 15- to 25-year-olds, has helped Aerie expand by adding stores that are next to American Eagle, allowing Aerie to attract those customers.
American Eagle has also made a big bet on improved logistics that goes beyond just its own sales. Last year, it bought AirTerra and Quiet Logistics and combined them to form Quiet Platforms, which ships merchandise purchased both online and in stores. Quiet Platforms has more than 60 clients, including
and groups products together in warehouses in locations where customer orders are clustered.
The aim is for Quiet Platforms to become a revenue and cost-efficiency driver for American Eagle. Quiet Platforms contributed about three percentage points to American Eagle’s net revenue growth of 2% in the first quarter. “Without having a lot of volume, you pay too much,” says Lisa Anderson, CEO of supply-chain firm LMA Consulting Group. “If you fill up an entire plane, you are going to lower costs.”
American Eagle’s online business has been expanding, too. It generated 36% of overall revenue in fiscal 2021, up from 29% in the year before the pandemic. Little of the potential good news is reflected in American Eagle’s stock. It trades at just 9.7 times 12-month forward earnings of $1.33 per share, a 31% discount to its five-year average and near its lowest levels of the past 15 years.
Ryan Jacob, chief portfolio manager for the Jacob Small Cap Growth fund, expects the stock to rise roughly 50% with a price/earnings multiple in the midteens, which would put its shares around $18. He says his fund increased its stake in the company in April, and again in July after the stock began tumbling. “We took advantage of the weakness,” he says.
American Eagle itself took advantage of the weakness. In early June, the company said it would accelerate its plan to buy back $200 million worth of its stock. In the same announcement, the company said it is reducing its roughly $342 million convertible-debt obligation. The retailer now has about $70 million in debt, excluding its lease liabilities and any draw down from its $700 million asset-based loan. Its balance showed a cash position of $229 million as of the end of April. The stock currently yields 5.6%. According to Ben Reynolds, founder of research firm Sure Dividend, the dividend looks sustainable considering the projected operating income this year. “Now is a good chance to lock [it] in,” Reynolds said.
Even some analysts who downgraded the stock say it could do well in the long run. Cowen analyst Jonna Kim, who on Aug. 1 cut her rating to Neutral from Outperform, sees “lots of positive potential at Aerie.”
It’s that potential that makes American Eagle stock worth trying on.
Write to Karishma Vanjani at firstname.lastname@example.org
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