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Is American Eagle Outfitters a Buy Ahead of Earnings?

By Pearl Wang – Sep 6, 2020 at 9:11AM

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The apparel brand will want to reassure investors with a strong recovery from pandemic-induced troughs.

American Eagle Outfitters (AEO -3.58%) will report fiscal second-quarter earnings on Sept. 9. The specialty retailer is likely to report strength in digital and at its Aerie brand, which has been a fast-growing segment despite store closures and an economic slowdown. Revenue will likely be supported by strong demand for casual wear and athleisure, which have been performing well for other retailers in the space.

Here's what to focus on in the consumer discretionary company's next report.

American Eagle models

Image source: American Eagle.

The company is strong in digital

In the first quarter, digital demand rose 33% year over year with Aerie up an impressive 75%. There was backlog associated with distribution, so some of this demand will be pushed into the second quarter. Online orders accelerated in the quarter and continued in the markets with reopened stores.

To improve the service for online customers, American Eagle is accelerating efforts "to set the company up like a digitally native brand would, to be able to put inventory close to customers, manage delivery costs, and improve service levels." This increased investment and effort will likely improve the company's digital revenue growth.

For example, the company has opened third-party logistics hubs in Boston and Atlanta. COO Michael Rempell elaborated on this effort during the previous earnings call: "The opening of regional fulfillment hubs is part of our supply chain transformation strategy. This is designed to add needed capacity to support future growth, optimize how we manage inventory, reduce delivery costs, and speed up delivery times." The retailer also rolled out buy online, pick-up in store and ship-from-store capabilities to improve digital fulfillment and service for shoppers.

Aerie is a growth driver for the company

Aerie has delivered impressive growth over the last few quarters. Even with social distancing and retail shutdowns, demand for Aerie products has been strong thanks to its focus on casual wear, athleisure, and loungewear. Consumers continue to favor these categories this year, largely due to more people working from home and other changes to customers' social lives driven by COVID-19.

In the fiscal first quarter, Aerie stores were closed for seven weeks, but despite the disruption, CEO Jay Schottenstein highlighted the brand's outperformance: "Aerie's experienced a double-digit demand increase for their total business. More consumers are looking for exactly what Aerie is -- a unique brand platform of positivity and acceptance." Aerie's revenue declined 2% year over year as a result of the previously mentioned backlogs that pushed some sales into the second quarter.

American Eagle and Aerie's reputation for positivity and body acceptance has won over younger consumers. In Piper Sandler's Taking Stock with Teens survey, American Eagle was named the number two favorite clothing brand.

Competitor Urban Outfitters similarly cited its Free People segment as a standout in its recent earnings report, helped by the brand's products that skew toward casual leisurewear. Gap also cited a revenue boost in the second quarter from its Athleta brand, which is known for athleisure apparel. The recent strength in these categories for the company's peers bodes well for American Eagle's upcoming report.

The balance sheet is strong

American Eagle had $886 million in cash and equivalents on its balance sheet, up from $350 million in the prior-year quarter. Its debt ratio is 0.73, indicating a stable balance sheet with more assets than debt. Management was quick to shore up liquidity in the fiscal first quarter with $406 million raised through a convertible notes offering, plus another $330 million drawn down from the company's revolving credit facility.

In addition to raising cash, American Eagle cut its capital spending plans to $100 million to $125 million for fiscal 2020. The remaining expenditures are focused on customer-centric and supply chain investments that help American Eagle maintain its competitive edge.

CFO Mike Mathias is confident in the company's post-shutdown recovery, noting in the first-quarter call: "Stores are reopening strong, while momentum in our digital business also continues. As a result, we expect significant top and bottom line improvement compared to the first quarter. Our business is well positioned to win both during the crisis and as conditions normalize."

Overall, American Eagle is well positioned for revenue growth with strong momentum from Aerie and its flagship brand, and investments in its quickly expanding digital business. As consumers continue pick up their spending heading into the holiday season, the company is also recovering from lows experienced earlier this year. Investors who want exposure to resilient retailers may want to look at shares in American Eagle.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
AEO
$10.24 (-3.58%) $0.38
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.47 (-4.40%) $0.39
Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
URBN
$21.00 (-1.46%) $0.31
Piper Sandler Companies Stock Quote
Piper Sandler Companies
PIPR
$108.32 (-1.81%) $-2.00

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