It's been a challenging year for retail, with store closures pressuring revenue for even the most dominant players like Nike (NKE). However, traditional mall stores like American Eagle Outfitters (AEO -1.26%) also have an opportunity to gain market share and come out of the coronavirus pandemic stronger than before as the weakest retailers are forced to shutter stores.
Nike has been the better growth stock over the last decade, but American Eagle may offer a compelling value at these price levels. Here's a comparison of where both companies currently stand. Perhaps this data can help to determine which stock is the better buy right now.
Nike doubling down on digital
Nike stock has climbed more than 500% over the last 10 years. Those gains have been fueled by the tailwind of a growing demand for sportswear, especially footwear, which accounts for two-thirds of Nike's business.
Despite revenue falling slightly in the most recent quarter, investors have bid the shares to new highs this year, currently up 24% year to date. It's encouraging that Nike's 1% decline in revenue in the most recent quarter was a significant improvement over the previous quarter's 38% year-over-year decrease. Management expects revenue to be roughly flat in the first half of fiscal 2021, while growth in the second half of the year is expected to be up significantly year over year.
Nike is experiencing tremendous momentum in e-commerce, where sales generate a higher gross margin than sales through wholesale channels. Customers are increasingly engaging with Nike through apps, including workout programs on Nike Training Club and the SNKRS app. Digital sales made up 30% of the business last quarter and grew 83% on a currency-neutral basis. While e-commerce sales may not remain at those robust levels as the economy reopens, management expects digital to eventually reach half of the business over time.
Nike is transitioning to its new Consumer Direct Acceleration strategy to capitalize on the digital momentum. By investing more in data sensing to better predict demand, and other areas to improve the efficiency of managing inventory, Nike believes it can accelerate growth.
The stock is not cheap, trading at a forward price-to-earnings multiple of 44. Nike will have to show strong growth in profits going forward to justify that high valuation, but American Eagle stock could be a layup for investors at current price levels.
American Eagle positioned for a comeback
American Eagle operates over 1,300 retail stores, including the Aerie women's lifestyle brand. Despite exposure to declining mall traffic in recent years, the company has been one of the best-performing retailers, delivering 20 straight quarters of comparable-sales growth before the pandemic struck.
While total revenue was down 15% in the fiscal second quarter (ending on Aug. 3), the Aerie brand reported revenue growth of 32%, as its REAL marketing campaign continues to resonate with women. Aerie is on track to reach $1 billion in yearly revenue, representing nearly a quarter of American Eagle's total revenue, and management believes there is much more room for it to grow.
Like Nike, American Eagle sees strong growth in the digital channel continuing beyond 2020, so management is investing accordingly, including adding more distribution capacity. However, spending on distribution and delivery pressured the company's gross margin last year.
Still, American Eagle stock is cheap, trading at a trailing P/E of 7.5 and a forward P/E of 10. Earnings are expected to be down this year, which is why its forward P/E is higher, but there are a few reasons why the company's performance will improve.
American Eagle stands to gain market share, as other retailers close stores to compensate for the problem of operating too many.
Moreover, the company is placing a tighter rein on supply, which could lead to improving margins and better revenue growth once the pandemic passes. As a result of these potential catalysts, this retail stock could be a bargain at these levels.
Growth or value?
Nike is the better growth stock. Over the last three years, Nike has grown revenue and operating profits faster than American Eagle, and that has translated to a better-performing stock price.
Outside of the Aerie brand, American Eagle doesn't offer much growth. But at these valuation levels, a return to growth in revenue and earnings would likely be enough to send the share price higher.
I own shares of Nike, but the value in American Eagle can't be ignored. I believe the latter could outperform over the next few years, given the growth in Aerie and potential to win new customers as other retailers shrink their store footprint. American Eagle gets my vote as the better buy at current price levels.