Segments of traditional brick-and-mortar retail continue to get squeezed by e-commerce, and one of the hardest-hit areas has been clothing. According to the U.S. Census Bureau, clothing and accessory store sales are down 0.6% in 2019 compared with a 3.2% rise for retail overall and a 12% rise for e-commerce.  

One chain that has been dealing with changing times effectively is American Eagle Outfitters (NYSE:AEO). With changing trends and online retail altering the way consumers shop, the company has remained relevant and is still growing. The stock, though, would indicate otherwise. Shares were down 26% in the last year compared with a 27% increase for the S&P 500. But valuation is not quite matching reality, and this is starting to look like one cheap dividend stock -- if the growth story can continue.  

A solid 2019 and some holiday-shopping cheer

Revenues at American Eagle are up 7% through the first three reported quarters of 2019, with total comparable sales (or comps, a blend of foot traffic and average purchase size) up 4%. That includes a rock-solid 5% rate during Q3. So what's up with the wanton selling of the stock?  

Metric

Nine Months Ended Nov. 2, 2019

Nine Months Ended Nov. 3, 2018

Change

Revenue

$2.994 billion

$2.792 billion

7%

Net income

$186.5 million

$185.7 million

0%

Earnings per share

$1.09

$1.04

5%

Data source: American Eagle Outfitters.  

For one, comps are slowing down. The 4% posted so far this year is far lower than the 9% rate posted through the first three quarters of 2018. Plus, comps during the holiday shopping season in 2018 were up 6%, with management recently confirming that the figure would be flat in 2019. Though that implies the chain at least held on to the big gains it made previously, investors were likely looking for a bit more.

Then there's the bottom line, which has not been rising along with growing sales. American Eagle has taken a hit due to promotional activity (read: discounting, which reduces profit margins on merchandise sold) to move a buildup of inventory, and new store openings (especially of its Aerie lingerie brand) costs money too. As a result, net income has grown far slower than the top line, although earnings per share have gotten a bump from the ongoing share repurchase program. Though comps were flat with last year, management also recently reaffirmed earnings per share would be in the $0.34 to $0.36 range, compared with $0.43 in 2018.

A woman walking through a mall holding shopping bags.

Image source: Getty Images.

Buying on the cheap

There are obvious flaws with American Eagle, but even when taking those imperfections into account, the year-long sell-off looks overdone. 

At this point, the stock trades for a meager 12.9 times trailing 12-month free cash flow, and 9.9 times one-year forward expected earnings. Add in a 3.9% yielding dividend that is easily covered by free cash, and this looks like a value stock if I've ever seen one.

Of course, that thesis assumes American Eagle doesn't fall victim to the onslaught against shopping mall-based retail. So far, the chain has been a standout star, but the flattening comps might be an early indication that store count has reached a level that no longer necessitates further expansion. It's too early to say, but stay tuned in subsequent quarters.

In the meantime, assuming American Eagle can at least maintain modest rates of growth, this looks like a retail dividend-payer worth giving some attention.