Undies for Eagles

It's amazing how investing can change your outlook on life. For instance, I'm no snappy dresser, but I'm crusty enough (or used to be) to cast the hairy eyeball on a lot of the "casual" clothing that those dang kids are wearing these days. Honestly, I don't really want to have to see all that cleavage, all those muffin-tops, and all those dirty flip-flop feet when I'm trying to get a cup of coffee at the corner cafe. (And you kids get away from them crabapples, too!)

So why am I preparing to give a thumbs-up to a new line of casual "dormwear" and undies? Because when it's American Eagle's (Nasdaq: AEOS  ) new Aerie gear, I don't mind so much. As a shareholder, I stand to make some dough if it's a hit.

Prospective shoppers can judge the goods for themselves. Geezers should familiarize themselves with newfangled clothing such as "boy briefs," "cheekys," "hoodies," and "dorm pants." The new gear will be available in American Eagle stores, as well as at a few dedicated stores and an online site.

Why so much ado about undies? Because American Eagle, as I discussed earlier this week, is quite expert in leveraging moderate revenue gains into higher profits. One method involves getting more sales out of existing storefronts, where rent is already fixed. American Eagle also keeps a lid on inventory, reducing the amount of discounting necessary to clear out the chaff.

Finally, American Eagle is paying particular attention to making itself a recognizable, if not indispensable, lifestyle brand for young twentysomethings. Loyalty programs help with this, but so does expanding its intimates and casual offerings, in order to help customers clad themselves from head to foot with American Eagle goods, and help them identify with the company.

The strong same-store sales figures suggest to me that this works. I don't cringe with embarrassment for management when it discusses the "AE girl," the way I would, for instance, if Gap (NYSE: GPS  ) or its Old Navy subsidiary tried to lay such a claim on customers.

Let's face it, competing with Abercrombie & Fitch (NYSE: ANF  ) , Aeropostale (NYSE: ARO  ) , Pacific Sunwear (Nasdaq: PSUN  ) , and Zumiez (Nasdaq: ZUMZ  ) requires some smart moves. This increasingly holistic approach looks like a good way to mitigate the risks posed by the winds of fashion. (And I'm betting the margins on cheekys are pretty good.)

For what its worth, on this week's conference call, management talked about Aerie providing some incremental growth opportunities. But as this margin breakdown shows, small gains can lead to great things.

Q2 2007

Q2 2006

Change*

Gross Margin

45.58%

44.19%

1.39

Operating Margin

18.14%

16.60%

1.54

Net Margin

11.97%

11.25%

0.72

*Expressed in percentage points.

(You'll find a full numbers-breakdown here.)

This stock chart provides a better illustration of what that kind of financial performance can do for your portfolio, especially when it follows a period of undue market pessimism. So keep your eye on the Aerie. It may not seem like a big deal, but if it works out well, it might become a great deal for shareholders.

Through the end of August, goback to schoolwith The Motley Fool. You'll find more educational book reviews, stock analysis, and financial advicehere.

American Eagle Outfitters, Gap, and Pacific Sunwear areMotley Fool Stock Advisorrecommendations, while Zumiez is aHidden Gemspick. Gap is also anInside Valuepick. You can try any of our premium newsletter services free for 30 days.

Seth Jayson gets his undies in a bundle. At the time of publication, he had shares of American Eagle Outfitters, but no positions in any other company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.


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