Thursday, February 21, 2019

A Current AIM Small Cap Equity Holding: American Eagle Outfitters, Inc. (AEO, $21.86): “Fly High” By: Manuela Chaves, AIM Student at Marquette University

American Eagle Outfitters, Inc. (AEO, $21.86): “Fly High”
By: Manuela Chaves, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

· American Eagle Outfitters, Inc. (NYSE: AEO) is a multi-brand specialty retailer who sells under two brands. Apparel and accessories for both men and women are sold under the American Eagle Outfitters brand, while strictly women’s apparel and personal care products are sold under the Aerie Brand.

· American Eagle continues to compete among the top retail competitors and looks to advance even further with their Aerie brand.

· Strong momentum and growth led to a guidance update on January 14 of the new year, including an increase in Q4 EPS guidance of $0.40 to $0.42.

· Updated share buyback activity disclosed the buyback of 4 million additional shares in December of 2018, totaling 7.3 million for the year.

· Sales volume is hitting record numbers as well as increased sales and gross margins in both the American Eagle and Aerie brands.

· Digital sales continue to be a large contributor to the bottom line. American Eagle has had 14 consecutive quarters of double-digit e-commerce growth.

Key Points:

American Eagle Outfitters, Inc. (AEO) will be held in the AIM portfolio in great confidence of future upside. The stock is trading at $21.86/share, only $0.86 higher than when it was pitched, but have given investors and analysts a bullish attitude toward the company. Same store sales have seen a steady increase in revenue growth, as well as a significant new store growth and expansion within the United States market.  The United States currently makes up 86.8% of American Eagle’s total LTM Revenue, which is $4.0B. The company has done an excellent job of retaining their number one position and gaining market share in the previous quarter. They make up 28.41% of their respective market, where the top 5 players make up 85.53%. Their biggest competitor Abercrombie & Fitch Co. (ANF) holds a market share position of 26.14%, with reported revenue of $300K less than American Eagle.

This quarter’s results are highly anticipated as American Eagle has recently increased their guidance on Q4 EPS. The company has seen significant growth under their brand name Aerie. The brand is currently attributable to 15% of total net revenue, a 3% increase YOY. The earnings estimate increase is due to the additional 4 million share buybacks in December of Q4. A lot of strong margin growth has created momentum for AEO and is expected to continue. As of November 3, 2018, gross profit increased 12% compared to the same time in the previous year. Gross margin improved 110 basis points as a result of lower rent and markdowns.

E-commerce and in store sales have increased significantly in Q4 due to an above average holiday shopping season.  AEO’s CEO, Jay Schottenstein, disclosed that the company was pleased to report another record holiday season. These sales have been a catalyst for companies continued growth, with no end in the foreseeable sight. Their Aerie line has seen double-digit growth ever since their push into swimwear in 2017. AEO plans to continue their expansion of new stores under both their American Eagle and Aerie brands.

What has the stock done lately?

Since its addition to the Domestic AIM Small Cap portfolio in late October 2018, shares have only seen an increase of 33 basis points, which is decent compared to the benchmark. During the November and December correction, AEO outperformed and withstood the noise much better than competitors, with a rally during the holiday shopping season. With the latest guidance update, American Eagle continues to shine in the retail industry.

What has the stock done in the past year?

American Eagle has seen an excellent return in the past twelve months. Shares have gained 14.20%, which equates to $2.62/share. With a 52wk high/low interval of 16.14-29.88, the company is trading at a forward P/E of 14.40. AEO thrived through their first and second quarters of 2018, with strong consumer and investor confidence in Q4 results.

Source: Factset

My Takeaway:

American Eagle Outfitters continues to look like an attractive longterm hold. The company has yielded favoriable turns in the past year and appears to have forward moving momentum, especially with their strong growth within their Aerie brand. The company has a very strong presence within the states and has continued to invest in new stores across the nation. I believe the company is also trading at a discount given it’s current P/E, relative to the industry average. Fourth quarter and fiscal year 2018 results are to be released on March 6, 2019.

Source: Factset