Subscribe to Entrepreneur for $5
Subscribe

American Eagle (AEO) Gains From Brand Strength Amid Cost Woes

Despite higher costs, American Eagle (AEO) is likely to continue gaining from online demand and solid growth in the Aerie brand.

By
This story originally appeared on Zacks

American Eagle Outfitters, Inc. AEO looks well-positioned on the back of brand strength, robust product portfolio and enhanced customer experience. Continued momentum in the Aerie brand, solid online show, and its Real Power, Real Growth value-creation plan also bode well. It remains focused on inventory management, real-estate optimization efforts and supply-chain investments.



This led to strong growth in key metrics on a two-year basis in second-quarter fiscal 2021. Notably, net sales increased 19%, with store sales growth of 4% from second-quarter fiscal 2019, owing to improved store traffic. Higher revenues and robust merchandise margins across brands contributed to the gross margin, which, in turn, resulted in better-than-expected earnings for the fifth straight quarter.



Driven by these factors, shares of this Zacks Rank #3 (Hold) company have gained 38.1% year to date compared with the industry’s growth of 5.3%. In the past 30 days, the company’s estimates for fiscal 2021 earnings per share have moved up 2.8%.

- Zacks

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Let’s Delve Deeper

American Eagle’s Aerie brand has been serving as a major growth driver for quite some time now. The brand’s sales rose 34% to $336 million for Aerie in second-quarter fiscal 2021, marking the 27th consecutive quarter of double-digit growth. This is mainly attributable to strong demand, higher full-price sales, and strength in core intimate, bralettes, apparel and swimwear. On a two-year basis, Aerie surged 80% in the reported quarter. Aerie's signature for legs than leggings and its OFFLINE activewear brand have also been performing well.



The company launched its first digital clothing line on Bitmoji in the said quarter. Going ahead, management remains on track to reach the next brand milestone of $2 billion in sales, out of which it has already achieved $1 billion in revenues.



The company has been witnessing persistent strong digital demand. As a result, its digital revenues surged 66% in second-quarter fiscal 2021 on a two-year basis, driven by customer acquisition of more than 2 million. This represents 35% of total revenues, up from 25% contribution in second-quarter fiscal 2019.



The company’s mobile app also delivered revenues, which more than doubled year over year in the fiscal second quarter. Management relaunched its loyalty program and has been receiving positive customer responses. Its newly acquired logistics startup AirTerra, which offers same-day services, is likely to help achieve digital sales, accounting for half of its revenues in the long term.

Hurdles on the Path

The company has been witnessing increasing SG&A trends mainly due to store reopening, higher advertising and performance-based incentive compensation. This led to SG&A expenses rising 31.4% year over year in second-quarter fiscal 2021. Dependency on third-party manufacturers and possible import disruptions also remain concerning.

Bottom Line

We believe that American Eagle is likely to keep up the momentum on the back of strength in Aerie’s brand, solid online show and value-creation plan. Also, a VGM Score of A raises optimism in the stock.

Better-Ranked Stocks in the Retail Space

Abercrombie & Fitch ANF presently sports a Zacks Rank #1 (Strong Buy). It has an expected long-term earnings growth rate of 18%. You can see the complete list of today’s Zacks #1 Rank stocks here.



The Children’s Place PLCE has a long-term expected earnings growth rate of 8% and it currently flaunts a Zacks Rank #1.



Foot Locker FL, a Zacks Rank #1 stock at present, has an expected long-term earnings growth rate of 4%.



Zacks’ Top Picks to Cash in on Artificial Intelligence

This world-changing technology is projected to generate $100s of billions by 2025. From self-driving cars to consumer data analysis, people are relying on machines more than we ever have before. Now is the time to capitalize on the 4th Industrial Revolution. Zacks’ urgent special report reveals 6 AI picks investors need to know about today.

See 6 Artificial Intelligence Stocks With Extreme Upside Potential>>



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

 

Abercrombie & Fitch Company (ANF): Get Free Report

 

American Eagle Outfitters, Inc. (AEO): Get Free Report

 

Foot Locker, Inc. (FL): Get Free Report

 

The Childrens Place, Inc. (PLCE): Get Free Report

 

To read this article on Zacks.com click here.

 

Zacks Investment Research