Athleisure was a growing trend before the pandemic, and it's rate of growth is accelerating as people are staying home and working online. Activewear companies such as Nike and luluemon athletica are benefiting from growing demand, and teen apparel brand American Eagle Outfitters (NYSE:AEO) is getting in on it too with the recent launch of its new Offline label as part of the Aerie brand. Will it remain Aerie's side show, or can it shine on its own?

Building a brand

American Eagle created the Aerie brand in 2006 as a lifestyle-intimates line for its core target group of women aged 15 to 25. Aerie's groundbreaking marketing features women of all shapes and sizes and focuses on body positivity, unlike the traditional fashion model. This clearly resonates with U.S. audiences, propelling Aerie's high sales.

Woman working out with her computer at home.

Image source: Getty Images.

Aerie sales grew double digits for 21 consecutive quarters until COVID-19 and the resulting lockdowns disrupted retailers across the apparel industry. But after just a single quarter with revenue down 2% year over year, Aerie has already come soaring back with 32% growth in the most recent report. The brand has always featured a clothing collection, starting with a "dorm room" line and more recently the seed of the Offline label with a "Chill. Play. Move." collection, featuring sports bras, leggings, and other athletic apparel.

Aerie has been doing so well that it's been driving positive comps at American Eagle Outfitters for several quarters despite the company's namesake brand experiencing declines. Aerie's growth has even outperformed industry leaders like Nike and Lululemon with perhaps the smallest drop of any U.S. apparel brand in the first stages of the pandemic and a rapid recovery as stores reopened.

YOY Quarterly Revenue Growth Q2 2020* Q1 2020* Q4 2019* Q3 2019*
American Eagle Outfitters (15%) (38%) 6% 6%
Aerie 32% (2%) 26% 20%
Nike (38%) 5% 10% 7%
Lululemon 2% (17%) 20% 23%

Source: American Eagle Outfitters, Nike, and Lululemon quarterly reports. YOY = year over year. *Results for each company based on their four most recently reported quarters.

American Eagle is eyeing the tremendous opportunity within the Aerie brand and slowly kicking it up a notch with the launch of Offline.

Taking Offline online

The athleisure trend became important during lockdowns as people spent less money on clothing in general and specifically on professional office attire. The trend also led to several companies, including men's suit company Brooks Brothers and Ascena (parent to the Ann Taylor brand), to file for chapter 11 bankruptcy protection.

Aerie accounted for 28% of American Eagle's total sales in the fiscal second quarter, and it is on track to soon deliver $1 billion in annual revenue.

With its strong momentum, management is looking to Aerie to take on the $16 billion women's activewear market. Gap previously entered this market, and its Athleta brand has been the company's largest growth driver. American Eagle is looking to carve out its own corner of the space by leveraging Aerie brand for a strong start in activewear.

Offline is already available through Aerie's digital channels, and American Eagle is planning to open a few pilot Offline-only stores in the coming months, starting with a store in Nashville opening in the fall. The company is also planning to feature Offline in Aerie's 335 stores.

The new brand is already getting positive reviews with some customers praising the quality of the products at affordable prices. For example, a pair of leggings costs less then $40, while similar offerings from Lululemon cost nearly $100.

Feeding the parent brand

American Eagle stock is flat year to date as of this writing, and it has returned a mediocre 10% over the past three years, underperforming the broad market. Offline has the potential to become the next major growth driver for the company as management seeks to rejuvenate its flagship brand.

Chief Creative Director and Aerie brand manager Jen Foyle said in the September earnings call, "I think we're going to see trends emerging that we've never seen before and that we can capture in the AEO business and then continue to drive Aerie and grow that soft-dressing athleisure piece of the business."