Analysis: American Eagle Outfitters navigates challenges well
At headline level, American Eagle Outfitters’ net revenue continues to grow at pace. However, the 7.9% uplift includes around $40 million of license royalties from a third-party operator in Japan. Once this is removed, growth falls to a still respectable, but much more muted, 3.9%. The same dynamic applies to the bottom line, where royalty income was helpful in offsetting margin declines from higher markdown and delivery expenses to produce a 7.2% uplift in operating profit.
Without the royalty income, there is no denying that AEO’s underlying performance has deteriorated. Overall comparable sales growth dipped to a modest 2%, while American Eagle’s comparable sales fell by 1% – ending a long run of respectable increases. Aerie held up better, posting a 16% uplift in comparables – its 19th consecutive quarter of double-digit sales uplifts.
American Eagle’s soft numbers were not aided by some unfavorable weather and relatively soft demand for apparel over the start of the quarter. Like other retailers, it saw less interest from consumers, which translated into weak numbers – especially off the back of a relatively strong performance of a 7% comparable uplift last year.
However, we also believe that, outside of denim, collections in American Eagle were a little bland and ‘samey’ this season; in a market where demand was already soft, that did little to stimulate consumers into spending money. This was exacerbated by weak traffic in some of the locations where American Eagle trades. All of this resulted in more markdown activity to clear inventory, something that impacted on margins.
Fortunately, we believe that sales strengthened as the quarter progressed and this bodes well for third-quarter performance. So to does the continued focus on denim where American Eagle has added more shapes and styles. We believe this area will be a winner over the important third and fourth quarters, including in menswear collections where American Eagle is attempting to replicate the success it has seen in women’s denim.
Aerie’s comparable sales remain robust, although as the division is now lapping prior year growth of 27%, it is understandable that growth is beginning to flatten out. Even so, an uplift of 16% underlines that Aerie is still taking market share across all the categories in which it trades. This includes from Victoria’s Secret, thanks to Aerie’s inclusive marketing and proposition which continue to resonate and pull in new customers. Over recent quarters, we have noticed the brand being much more active on social media which we see as helpful in widening Aerie’s potential audience.
Some of the increase at Aerie is also down to much greater traction in categories outside of lingerie, like leggings and yoga pants. Here, Aerie has had little difficulty in getting its core customers to buy products, which are both well designed and reasonably priced. We believe that this is a winning strategy going into the holiday quarter and that Aerie will trade well with collections where the emphasis is on cozy and comfortable.
Overall, we remain encouraged by the progress at AEO. The company operates in a difficult and fickle part of the market and is subject to the vagaries of fashion demand as well as to softening mall traffic. However, it generally navigates these challenges well and at both Aerie and AEO it has carved out a distinct proposition that connects with consumers. Over the next couple of quarters, prior year numbers become less challenging which should help boost results.
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