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International Expansion Will Be These Retailers' Main Source of Growth

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American Eagle Outfitters (NYSE: AEO  ) has experienced a lot of volatility in the market since August of this year. Its stock dropped from $20 per share to only $13.20 per share in two months, and then it bounced back to more than $16.20 per share. At the time of writing, it was at around $14.40 per share. Looking forward, American Eagle Outfitters is bullish about its plan to expand internationally into Central and South America and Thailand. Peers Abercrombie & Fitch (NYSE: ANF  ) and Aeropostale (NASDAQOTH: AROPQ  )  also target international markets as one of their main sources of growth.

International markets as retailers' sources of growth
While American Eagle Outfitters has experienced quite a challenging business environment for its mainline store business in North America, it is turning to the international market to fuel its future growth. In the third quarter, the retailer opened four more international locations including two stores in Israel, one in Japan, and one in the Philippines. It also announced several new store license agreements for Central America, South America, and Thailand.

Total license revenue experienced mid-single-digit revenue growth. By the end of 2014, American Eagle Outfitters expects to have at least 100 licensed stores in more than 20 countries. Japan will still remain the strongest license market, where the retailer expects a store count of five to eight at the end of next year. 

Abercrombie & Fitch has experienced negative comps in its international business for the past two years, driven by operations in Europe for the Hollister and A&F brands. The company does not think that the comp trend has bottomed out, but explained that the overall economics seem quite profitable and very cash-generative. Like other young apparel retailers, Abercrombie & Fitch is operating in a very challenging retail environment.

However, the direct-to-consumer business enjoyed good growth in all regions in the third quarter, especially in Asia. The company also felt good about the expansion progress in Asia, especially in China. Year-to-date, the company reported 40% growth in comp store sales in China, and its six Hollister stores have reached similar four-wall margins to those of its European stores. 

Aeropostale has also targeted the international market for its future expansion, along with e-commerce and P.S. stores. The company has been quite happy with its international business performance so far. With operations in 11 countries, Aeropostale has over 100 stores abroad. The company reported quite a successful launch in the third quarter in Mexico. Like American Eagle Outfitters, Aeropostale expands its international business via licensing through local partners. Thus, it can grow without any capital expenditure. The retailer will enter new territories next year and enhance the presence of P.S. in many other international markets.

American Eagle Outfitters looks attractive
Let's take a quantitative look to determine what could be exciting for investors. In terms of dividend yield, American Eagle Outfitters is the best among the three, with the highest yield at 3.50% and a reasonable payout ratio at 56%. Abercrombie & Fitch ranks second with a 2.40% dividend yield and a payout ratio a bit lower at 48%. Aeropostale offers investors no dividend at all.

My Foolish take
All three retailers see expansion in international markets as their main source of growth. Indeed, international markets will deliver improvements in operating results for these retailers over time, especially Asia because of the region's growing economy and rising middle-class population. Among the three, American Eagle Outfitters with its juicy dividend yield and reasonable valuation could fit well in income investors' portfolios. Moreover, it will enhance shareholder value by growing its international license business in the future. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2013, at 12:44 PM, segreto wrote:

    Abercrombie & Fitch is a losing retailer because teens no longer like the brand. The stock is down over 40% because it does not make attractive clothing. It looks like a bargain when it is trading at 32, but it is going to end up like Radio Shack (RSH). Radio Shack is now trading at $2.00 down from almost $80.00 because no one is in the stores. It is the same with Abercrombie. No one is in the stores! The stock will be hitting $2.00 faster than Radio Shack did, that's for sure.

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9/28/2016 11:35 AM
AEO $17.66 Down -0.46 -2.51%
American Eagle Out… CAPS Rating: ****
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AROPQ $0.04 Down +0.00 -3.61%
Aeropostale CAPS Rating: *