What happened

Shares of American Eagle Outfitters (NYSE:AEO) jumped 17.4% in September, according to data from S&P Global Market Intelligence, after the casual clothing retailer beat Wall Street's second-quarter estimates on the top and bottom lines.

So what

Net sales actually fell in the quarter, due to a sharp drop at American Eagle-branded stores. But its up-and-coming Aerie lingerie and loungewear chain saw a substantial increase in sales.

Four young women model aerie clothing.

Image source: American Eagle Outfitters.

Sales were up 32% for the period, an even stronger performance than the 22% gain it notched a year ago when there was no pandemic impeding growth. One analyst sees Aerie turning into a $3 billion brand in the next few years.

Now what

American Eagle's second-quarter performance shows the retailer is learning to adapt to the new realities of a post-pandemic world.

Digital sales rose 48% in the quarter, the fastest rate of growth the company has ever achieved. While that was borne of necessity, it's clear the Aerie brand is its future, as its digital sales surged 113% for the period.

Only a quarter of American Eagle stores include the Aerie brand, whether as a stand-alone storefront or as part of an American Eagle store. That gives it a chance to further expand the chain's footprint, though it must remain mindful that the shopping mall is a venue of dwindling value.

Because American Eagle Outfitters can continue pushing the digital retail envelope with the lingerie company, it can steal even more market share from rival Victoria's Secret. If it can get its namesake stores back on track, too, there could be significant upside still in this stock, but that latter effort could prove to be the most challenging for this retailer.

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