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Bottom-fishing bulls believe that American Eagle is the best positioned to bounce back after years of relentless selling. Comparing the company’s decline in same-store sales over a period of the past three years, American Eagle’s numbers declined 15% compared to Abercrobie’s plunge of 28% and Aeropostale’s gain of 23%. Aeropostale’s low price point boosted the company’s revenue considerably in 2008-2009 as spending power waned. Of these three stocks, Aeropostale trades at the steepest discount, with a trailing P/E of 8, followed by American Eagle at 16 and Abercrombie at 33. Abercrombie’s shares are technically considered overbought, due to investors betting on an economic recovery boosting discretionary spending – as the most expensive apparel retailer it is expected to outperform its discount peers. As such, Aeropostale has fallen off a cliff as consumer spending power increases, although it remains a cyclical play which could bounce back if the European debt crisis continues to worsen.
That leaves investors to wonder if American Eagle, stuck in the middle, will follow the steps of Aeropostale or Abercrombie. Fundamentally, American Eagle is strong, with $600 million in cash and no debt. The company practices conservative accounting, depreciating buildings over 25 years instead of 30-40 years and equipment over 5 years instead of 10 years. This keeps the company’s finances ahead of the curve and better equipped to make accurate long-term projections. The company’s free cash flow has been 40% higher than its earnings over the past three years. American Eagle is also focusing on escaping domestic stagnation by expanding overseas with five stores in Dubai, Kuwait City and Hong Kong. Although these are baby steps, these international locations are operated by franchisees and require no direct capital from the company. Of its three main brands, Aerie – its women’s intimate apparel retailer with 150 locations – is the most successful. If American Eagle can continue to nurture these avenues of growth, it may outgrow the teeny bop image it shares with Aeropostale and achieve a higher degree of brand recognition more in line with Abercrombie.
The company is focused on streamlining its operations, by monitoring 100 underperforming locations for possible closure. American Eagle’s SG&A (selling, general and administrative) expenses have traditionally been bloated, damaging the bottom line, which the company has addressed with cost-cutting initiatives. Insiders are confident in the company’s future, with over half a million shares in insider purchases over the past six months – $8 million of them coming from directors Jay Schottenstein (the former CEO) and Michael Jesselson. Shares currently trade at 12.18 times forward earnings with a PEG ratio of 1.04, and pay a quarterly dividend of 11 cents per share.
Other News About AEO
American Eagle Outfitters: A Prime Buying Opportunity for Value Investors
American Eagle might be a good candidate for bottom fishing bulls.
American Eagle Outfitters: Dividend Dynamo or Blowup?
Can American Eagle sustain its dividend?
Other Stocks in the News
Will Aeropostale Innovate or Die?
Can Aeropostale survive?
Africa Next in Gap’s International Expansion Plans
Gap is expanding into an unlikely market.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
AE, Abercrombie and Aeropostale all offer something different for teens although I would argue that Aeropostale is at the lower end–most often I have found their prices much higher than Abercrombie’s!
My girls shop them for the ‘design’ stuff but go to MustHaveTeenApparel.com online for their basic, everyday camis, tees, tanks and hoodies that comprise their daily uniforms for school. The shipping is free,the price points excellent and the quality better than other lower priced competitors because the products don’t shrink and can be put in the dryer–an important factor to us when buying. Would rather spend a few dollars more and have items that get worn–a lot–and last!