American Eagle Outfitters (AEOS) is a mall-based specialty retailer targeting the teen and college-age consumer. The company operates 492 stores & sells all private label merchandise. It is often compared to Abercrombie & Fitch (ANF) in terms of the look of its merchandise & its core customer base. However, AEOS competes more effectively on a number of fronts. AEOS offers lower opening price points and lower average price points than ANF which will help them in a more difficult retail environment. Additionally, the store offers less product with the company logo and the women's side of the business offers more feminine styling and a greater assortment of product.
This spring has been a difficult one for retailers and retail stocks. The cool and damp weather in the Northeast and Midwest led to ugly same-store sales comparisons in the April/May timeframe. I expect this trend to continue in June. In addition, interest rate worries have added to the negative impact on the stocks of these companies. AEOS is down 68% year-to-date and trades at its 52-week low. At these levels, the numbers are compelling: $2/share in cash and no long term debt, trailing p/e of 8x and forward P/E of 7x, TEV/EBITDA at 3x & a Price/Sales ratio (minus cash) of .6. The company also has a share buyback plan in place and has been purchasing stock since the beginning of the year.
Q2 will likely remain a challenging one for retailers and in particular those catering to the teen segment of the market. AEOS and many others have been very promotional to clear inventory for the important back-to-school season. Why should things turn around for the second half? On a macro level, inventories should be much cleaner going into back-to-school making for a less promotional environment. Weather clearly had an impact in the first half demonstrated by better performance of stores in the West & in warmer regions of the country. On the merchandising side, the company continues to refine styling toward a more fashionable less unisex look like that of Abercrombie. Finally, a new ad campaign and the launch of TV ads should help drive comps in the second half.
Drive comps in the second half
Moderating comps in the back to school season could drive stock higher. AEOS has traded at a multiple of 40x forward earnings when popular, so multiple expansion is possible. Also, a return of growth/momentum investors to retail stocks.
|Subject||Another retail stock|
|Entry||06/15/2000 03:04 AM|
|Everyone is posting retail stocks. Yes, the whole retail sector is down now. Why not just buy the whole sector instead of buying individual stocks?
"At these levels, the numbers are compelling: $2/share in cash and no long term debt, trailing p/e of 8x and forward P/E of 7x" -- check out BEBE with $3 cash per share and trailing PE of around 6 and trading today between $7 and $8
I give this idea a 6 because all beaten down retail stocks with good "value" numbers (like p/e, p/sales, p/book etc) will bounce back up. But it's not exceptional|
|Entry||06/17/2000 04:33 PM|
|It may be a little early for this one. Earnings at all of the teen specialty retailers, such as ANF and AEOS are looking weak for the second quarter. There may be a chance buy this one cheaper after these companies start pre-announcing earnings shortfalls.|
|Entry||06/18/2000 07:42 PM|
|AEOS has had three incredible years of increasing productivity of its stores. Sales per Sq Ft have are up over 50% in the last 3 years and they are coming off of 3 yrs of nearly 20% annual comps. Sales per sq ft is now near $450. The question I have is, have they reached a permanently higher plateau or a mountain peak.
Over the same period, they have also revitalized (maybe create) the brand, and narrowed their focus on the 20 yr old customer with lower price points than ANF, but similar clothing. I would argue that the last few years may have been an anomoly on the positive side for both AEOS - they had a lot of new fashion that drove people to the stores to buy above trend levels of merchandise. But they have still built a strong business that can be extraordinarily profitable at $400 sales per square foot, with lower gross margins. If the company can prove that it can operate on this basis permanently, earnings should be around $2 and the stock over $20, but it may take them a while to convince people of this.
In the meantime, look for earnings estimates to come down.|