Description

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

Catalyst

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.