American Eagle Outfitters' (NYSE:AEO) shares have underperformed the S&P 500 index for several years. That includes over the last year, when the stock fell by 23% compared to the index's 13% gain.

One part of its business has been performing well -- the Aerie brand. With this fast-growing unit and the share price at this level, does American Eagle Outfitters present a buying opportunity?

A woman wearing sunglasses and a matching jacket and pants.

Image source: Getty Images.

Going in different directions

The company's recently reported fiscal second-quarter results, which encompassed the period that ended on Aug. 1, showed a revenue decline of 15% versus the prior year to $883.5 million. American Eagle Outfitters reported a loss under U.S. generally accepted accounting principles (GAAP) of $13.8 million compared to a $65 million profit.

American Eagle Outfitters has two main brands. One is its namesake, the venerable American Eagle, which offers trendy apparel to men and women. Tailgate, offering vintage, sports-themed apparel, also falls under this umbrella.

Even before the pandemic, the American Eagle portion of the business went through a rough patch last year. Its same-store sales (comps) were flat after a history of positive annual comps, including 2% and 5% in 2017 and 2018, respectively.

The company didn't report comps the last couple of quarters due to COVID-19 affecting comparability. However, revenue fell by 45% in the first quarter and 26% in the second quarter.

Its other brand, Aerie, is a different story. This unit offers intimates, apparel, and active wear. The business regularly reported strong increases in comps -- from 2017 to 2019, they rose 27%, 29%, and 20%.

Clearly, Aerie is a fast-growing brand, and there is room for more growth. After opening 14 stand-alone stores this quarter, there are now 160 Aerie stores, plus another 175 attached to American Eagle stores. This compares to 931 stores under the American Eagle banner.

Right now, with quarterly revenue of $250 million, Aerie was less than 30% of American Eagle Outfitters' second-quarter revenue. However, one Wall Street analyst predicts Aerie could become a $3 billion annual business within five years. If this comes to fruition, it would be a major revenue generator for American Eagle Outfitters, which had $4.3 billion of revenue last year.

Staying on trend

The Aerie brand has clearly resonated with customers, gaining market share by appealing to women with different shapes by emphasizing a positive body image. With this approach, Aerie has done a good job reaching its targeted 15 to 25-year-old customer.

On the other hand, American Eagle tries to sell fashionable merchandise primarily to teenagers. This is a notoriously fickle group, and if management misses the mark too many times, it ceases to become a shopping destination.

Granted, Aerie is hitting its mark, but until American Eagle shows it can draw its customers back in, I'd put this one aside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.