American Eagle – Outperforming the Industry
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American Eagle Outfitters (NYSE: AEO), the specialty retailer, is about to release its fourth quarter earnings on Mar. 6. Here we take a look at the performance of the company and its stock before the release of its financial performance.
Operating segments
The company has divided its operational segments based on its various brands. Its original American Eagle brand sells products for 15 to 25-year-old men and women. The target customer for its aerie brand, launched in 2006, is teenage girls and young women, and the product range consists of intimates and personal care products. American Eagle has a separate brand for kids called 77kids. The last operating segment of the company is AEO Direct, comprising of sales from online operations.
Growing domestically and internationally
The company has not only been expanding the brands to capture more customer segments, but also has been opening more stores, especially internationally. Apart from franchisee operations, the company has 911 AE outlets, 158 aerie stores and 21 – 77kids stores within the US. However, there is a lot of room for growth internationally for the company. Only 10% of its $3 billion in revenues is generated from international sales. The company has started operations in 14 countries internationally, most recently in the Philippines. Other major countries include China, Egypt, Hong Kong, Israel, Japan, Jordan, Kuwait, Lebanon, Mexico, Morocco, Poland, Russia, Saudi Arabia and UAE. The company has announced that it is also planning to open stores in Mexico. There are strong indications from the company that it is looking to increase its revenue streams from markets other than the US. For example, the company’s recent 8-K filing states that it has terminated its license agreement with Dickson Concepts for Hong Kong, Macau, China and other designated territories in Asia. American Eagle stated that this was done to “further support its long-term global expansion strategy.”
New CEO ushers in a new era
The company has seen a sort of turnaround in its performance since the CEO Robert Hanson took over the company in Jan. 2012. Bringing his experience from Levi’s, he has been very impressive delivering results for American Eagle. The EPS reported in Apr. 2012 for American Eagle's first quarter since Robert Hanson took over was $0.22. In October 2012, the EPS reported was $0.41, beating market expectations. And analyst reports say that the estimated EPS for the Jan. 2013 results is $0.56. In particular, he has been praised by analysts for his efficient inventory management techniques. The company’s inventory has been reduced by 13% year-over-year as reported in its last quarter. Between its Q1 and Q3 last year, the sales grew 26%, however, the COGS only increased by 17%. The share price when Robert Hanson’s appointment was announced was approximately $13. Today it’s around $20.
Dividend policy
Most importantly, American Eagle has a very healthy dividend. American Eagle has announced dividends consistently the last few years. Since 2010, the company has announced a dividend of $0.11 every quarter and a special dividend in Dec 2010 (of $0.50) and in September 2012 (of $1.50). Apart from special dividends, it also increased its dividend amount to $0.22 in December 2012 and is expected to continue with it in coming quarters. The company has cash and equivalents worth $550 million and most importantly zero debt on its books! That is total cash per share of $2.75 with no outstanding debt. The company has also repurchased shares worth $105 million in December 2012.
Retail industry and competitors
However, concerns remain for the retail industry in general in the US. Because of proposed cuts in the budget to control the fiscal deficit, the government may have to take steps that may hurt the economy in short term. The unemployment rate in the US coupled with job cuts and/or salary freeze may affect the spending pattern of the consumers. The industry may also face pressure from the increasing price of raw material due to an increase in fuel prices amongst other things. Additionally, because of volatile macroeconomic factors, the industry in general may not be able to charge high prices and thus narrowing their margins.
Let us have a look if it’s just American Eagle that has been having great quarters, or is the industry in general doing well? Abercrombie & Fitch (NYSE: ANF), the closest competitor to American Eagle, and the only retailer as big as American Eagle with a market capitalization of nearly $3.77 billion versus American Eagle’s $4 billion, has had a turbulent last year. The company’s stock had fallen from a high of $53 to a low of $28, before better than expected earnings in November again helped the stock price go up. Abercrombie & Fitch, like American Eagle has a cash rich balance sheet; it has approximately 15% of its market capitalization as cash, while American Eagle has approximately 10% as cash. Both companies target the same customer base, and are well placed to compete with each other. However, this should also mean higher revenue numbers for both the companies, as other competitors are still to get their strategies in place. Retailers like GAP target a niche market and have their own stand alone stores, while American Eagle and Abercrombie & Fitch both mainly target mall-going customers. These companies' pricing is very similar.
Similarly, in January 2013, Aeropostale (NYSE: ARO) had reported weak sales for its holiday season and its shares had fallen almost 10% back then. In fact, Aeropostale has its stock downgraded by most of the analysts. The company’s same store sales had declined by 8% in the year 2011. For the first three quarters in 2012, the company has had flat same store sales. Aeropostale’s road to recovery seems to be very slow. Aeropostale’s gross and operating margins are below American Eagle and Abercrombie & Fitch. The company is set to release its Q4 2012 earnings on March 14, and analyst expectations are lower than what it was for Q3 2012. Aeropostale has tried to enhance the customer experience by introducing iPads in its stores where customer can personalize products before ordering them. However, the effects of such initiatives has yet to be seen in the company’s earnings.
Conclusion
Clearly, American Eagle has found the right strategy with targeting the right customers and aligning its products to their tastes. This, along with a CEO bringing in operational efficiency to cut down costs, is like icing on the cake for any company. Not to forget that, American Eagle, foreseeing the US retail market nearing saturation, is expanding its operations globally and trying to diversify its revenue streams. The company has also been able to keep its fundamentals strong, something reflected in less volatility in its stock (beta is below 1). Thus, I suggest that one look out for the company’s financial results in the next week. American Eagle should be a long term buy.
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