American Eagle Outfitters (NYSE: AEO) reported strong second quarter numbers on Aug. 23. Its comparable-store sales rose for the tenth straight quarter, and its total revenue grew 3% annually to $845 million, beating estimates by over $20 million.
That's a stark contrast to its peer Abercrombie & Fitch, which posted 18 straight quarters of sliding comps. American Eagle is also faring better than Gap, which only recently broke its streak of declining comps with three straight quarters of growth. Let's examine four ways the company stays ahead of its rivals to remain a "best in breed" player in the tough apparel industry.
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1. The growth of Aerie
American Eagle's Aerie brand of lingerie and activewear for young women has become a pillar of growth. It remains small compared to the namesake brand, but its double-digit expansion offset AEO's anemic results over the past few quarters:
Aerie's marketing campaigns, which emphasize "body positive" messages with untouched photos of models, helped the company counter the sexed-up marketing strategies at L Brands' Victoria's Secret, which saw comps tumble 14% last quarter (5% after excluding the impact of its exit from swimwear and apparel). Aerie is clearly doing something right.
2. Denim sales continue to rise
American Eagle is the second largest denim retailer in the U.S. During the latest conference call, Global Brand President Chad Kessler noted that American Eagle's "strength in jeans has been a major factor in our success to date and will continue to fuel our success going forward."
In a recent note to investors, GlobalData Retail analyst Anthony Riva stated that AEO's "emphasis on features like style and fit" was boosting demand for its denim products, with early data indicating that it "did well in denim over the key back to school period".
3. Growing popularity with teens
Teen shoppers are notoriously fickle, but Piper Jaffray's semi-annual "Taking Stocks With Teens" surveys consistently highlight American Eagle as one of their favorite brands. The Spring 2017 survey ranked AEO as the second most popular clothing brand among teens, with a 10% mindshare.
The company couldn't match Nike, which had a 31% mindshare, but it easily beat Forever 21, Lululemon, Adidas, and H&M, indicating that it has little to fear from fast fashion and athleisure competitors.
Teens also ranked American Eagle as their third favorite shopping website after Amazon and Nike -- which explains why almost 40% of its sales are now generated through digital channels. Abercrombie & Fitch and Gap weren't even mentioned in Piper's survey.
4. Turning around menswear and expanding Tailgate
American Eagle struggled with soft sales of menswear in recent quarters, but it's been trying to win back male shoppers with new products. Last quarter, Kessler stated that AE had achieved "record performance" in sales of men's bottoms and saw a "good turnaround" in tops -- so the menswear business might stabilize this year.
Investors should also remember that AEO acquired Tailgate Clothing Company, which makes Tailgate collegiate apparel and high-end Todd Snyder menswear, in late 2015. It's been quietly expanding those brands, and they could eventually become pillars of "Aerie-like" growth if they gain momentum with male shoppers.
It's a tough market, but AEO is a survivor ...
AEO faces the same challenging headwinds as many other apparel retailers: sluggish mall traffic, tough price competition from fast fashion and e-commerce rivals, and ever-evolving consumer tastes. But it is handling those challenges more gracefully than many of its industry peers.
I recently told investors that it was time to "get greedy" with American Eagle, since its consistent growth, low valuation, high dividend, and clean balance sheet all made it a solid long-term investment. The areas of growth I discussed in this article support that bullish thesis and indicate that AEO doesn't belong in the same capsized boat as companies like A&F.
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