American Eagle Outfitters Scores a Home Run with Teens

August 29, 2012 /

American Eagle Outfitters ( AEO ) heads into the homestretch of the back-to-school shopping season with prospects of scoring high grades with shoppers.

The teen and young-adult clothing retailer cited a very good start to the back-to-school period on its Aug. 22 second-quarter conference call. And if analysts are on target, American Eagle should end up with a good report card for the entire season, which runs from late July to mid-September.

“Among the three major specialty retailers of preppy-style apparel — American Eagle,Aeropostale ( ARO ) andAbercrombie & Fitch ( ANF ) — American Eagle looks outstanding for back-to-school in terms of merchandise content and positioning, including its value proposition and marketing,” said B. Riley & Co. analyst Jeff Van Sinderen. My sense is that among these three, American Eagle will have the most improved margins for back-to-school this year.”

Continued Momentum

After a good start to the back-to-school season, American Eagle should see continued momentum through August and September, adds Brian Sozzi, chief equities analyst at NBG Productions.

“I wouldn’t be surprised if third-quarter sales and earnings came in stronger than expected because they’re taking so much market share from their key competitors,” he said.

The upbeat prospects come at a time when American Eagle’s business is sizzling with two straight quarters of double-digit earnings growth.

In the most recent second quarter, earnings surged 62% to 21 cents a share. That excluded charges from the sale of its 77kids business and other one-time items. Sales grew 11% to $740 million, ahead of views. Same-store sales, including its online division, rose 9%, vs. a 1% gain last year.

American Eagle has come back impressively after tough going on and off the past few years. Earnings slipped 16% in 2011. Now, thanks to the efforts of Chief Executive Robert Hanson, who took the helm Jan. 30, American Eagle is on the comeback trail.

Hanson came to the company from Levi Strauss, where he was global president of the Levi’s Brand. He replaced Jim O’Donnell, who retired.

Hanson has done a good job getting American Eagle back on track through changes in areas such as more frequent flows of fresh fashion merchandise into the stores and leaner inventory for better margins, says Van Sinderen.

On the merchandising front, Hanson has emphasized American Eagle’s core areas of strength — such as denim for back-to-school — through sharper product content, better visual merchandising and better marketing positioning of the value proposition, Van Sinderen says.

“This back-to-school season is an example of them really leading in the denim category,” he adds.

Sozzi says Hanson has streamlined the supply chain so that American Eagle is able to flow fashionable products to the stores quicker.

At the same time, the merchandising team has increased the fashion content of American Eagle’s merchandise with added touches like bright colors in categories such as denim and girls’ tops.

Last Monday the American Eagle store in Times Square had a huge assortment of fashion items, including girls’ knit tops in hot pink, green and other bright colors. In addition to basic blue jeans, girls’ jeans came in prints and bold colors such as peach and green.

“They’ve hit their stride with the right fashions,” said Sozzi.

Followers expect American Eagle to keep up the momentum. Analyst polled by Thomson Reuters see full-year earnings up 58% to $1.36 a share. They forecast a 12% increase in 2013 and a 13% rise in 2014.

Van Sinderen says the turnaround, which is only in the early innings, is sustainable.

Operating Margins

“To the extent they continue to execute well I think it’s sustainable,” he said. “The company has the capability and potential to get back to a mid-teen operating margin over the next year to 18 months. They’re headed in that direction.”

American Eagle, he adds, is doing well for back-to-school, especially vs. last year, and is resonating much better with customers. He expects American Eagle to have a strong Christmas holiday this year.

Sozzi says he thinks the momentum it gathered the past two quarters is sustainable at least until the end of the year.

“They captured the minds of teens in two key periods — the spring, and they’re off to a very good start for back-to-school,” he said.

He expects it will also be a place where parents and teens go to buy gifts during the holiday season.


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