American Eagle Outfitters (NYSE: AEO) is looking to jumpstart growth, judging by its decision to start a new brand for little kids. However, I'm wondering if American Eagle's overextending itself, and possibly venturing into an area where there's already ample competition.
American Eagle is planning a new brand, 77kids by american eagle, which will launch first online, then open brick-and-mortar stores in 2009. It will provide apparel for children aged two to 10 (the regular American Eagle stores target young people between the ages of 15 and 25). The company says the line will appeal to kids with "kid-cool" styles and to moms with "function, durability, and value."
That's all well and good, but maybe American Eagle's biting off more than it can chew. First of all, there are a lot of players in this market. Off the top of my head, I think of Children's Place (Nasdaq: PLCE) (a stinker lately), Gymboree (Nasdaq: GYMB), Gap's (NYSE: GPS) GapKids and babyGap (not to mention Old Navy), and J. Crew's (NYSE: JCG) crewcuts. And of course, you can't disregard discount players like Target (NYSE: TGT).
Meanwhile, what about American Eagle's other concepts? Martin + Osa has been a drag to the retailer's profitability, and Reuters reported that the retailer doesn't plan to close it. It's also got a dormwear concept called aerie.
American Eagle's stock has fallen more than 40% in 12 months' time (even decent quarters displeased), and recently cut its fourth-quarter estimates when reporting less-than-spectacular holiday comps (along with a few other retailers, of course). I'm not sure such extreme pessimism has been well founded, even though expected growth does appear to be slowing from its historically high rates. It's trading at just 10 times forward earnings. While that's in line with its expected growth rate for that timeframe, it's also got a PEG ratio of just 0.76. It sounds reasonably priced, especially if growth picks up again, but its aggressive new plans might at least give potential investors pause.
If the new kid-centric line takes off, that will be good news, indeed. But here's an outrageous thought: Perhaps American Eagle Outfitters could have left well enough alone, skipped the new concept, and focused on improving its existing ancillary brands, at least one of which appears to need some help. It should be interesting to see which way this one goes.
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