Clothing retailer American Eagle Outfitters (AEO -2.20%) isn't exactly a name you'd associate with women's intimate apparel, but it also owns the Aerie brand. That's been a huge boon, even amid the tough times retail has faced from coronavirus headwinds. If you're looking for a fast-growing retailer but worry about the risks inherent in an upstart, American Eagle and Aerie could be the right mix for you.
Gaining ground
At one point, Victoria's Secret (VSCO -0.06%) was the name to beat in the women's intimates arena, including its teen-focused PINK brand. In recent years, however, Victoria's Secret has struggled. In fact, it was such a drag on Bath & Body Works that L Brands, which owned the two retailers, eventually spun Victoria's Secret off as a separate company after failing to sell it. It then renamed itself after its fast-growing Bath & Body Works nameplate.
Image source: Getty Images.
Although the separation was generally pitched as a way to let each of the companies focus more on their respective businesses, it was really about freeing Bath & Body Works to be valued based on its own strengths without the Victoria's Secret drag.
While Victoria's Secret has shown some recent signs of an early turn in performance, its struggles created a large competitive opening through which Aerie quickly jumped. This is where teen retailer American Eagle, the owner of Aerie, comes in.
At the end of 2016, Aerie had just over 100 locations. By the end of 2021, that number was around 215. Aerie is in growth mode, while Victoria's Secret has been pulling back and closing locations in an effort to get its troubled business back on track. And Aerie's growth has been impressive, with the third quarter of 2021 marking 28 consecutive quarters in which Aerie has posted double-digit year-over-year sales growth.
What's the catch?
The problem for Aerie is similar to the problem that Bath & Body Works faced: It's a legacy brand that's not growing so fast. In this case, Aerie's strong growth is obscured by the much larger American Eagle brand's slower growth. But revenue at American Eagle is around three times larger than at Aerie, so it is the driving force at the company. And the American Eagle brand is not exactly a has-been, claiming to hold the No. 1 spot in the jeans space for those aged 15 to 25, the No. 2 place in women's apparel, and No. 3 in men's apparel.
On the sales front, the American Eagle brand was able to increase revenue 21% year over year in the third quarter of 2021. To be fair, given the impact of the coronavirus pandemic, that was a fairly easy comparison (American Eagle brand's sales were down 11% year over year in the third quarter of 2020). But added in with Aerie's rapid 28% sales growth, total company sales were up 24% year over year in the third quarter of 2021 and only off by 3% in the third quarter of 2020 when Aerie posted year-over-year sales growth of 34% in the third quarter.
Essentially, the American Eagle brand looks more like a lumbering legacy brand. But given that it threw off $261 million of operating income in the third quarter of 2021, up from $155 million the prior year, it's doing something very important for Aerie.
Indeed, Aerie only produced operating income of $52 million in the third quarter of 2021, with the entire company reporting $210 million after pulling out corporate expenses. Although that's a lot of numbers, basically, the American Eagle Brand is providing a foundation on which Aerie is growing its business. Notably, American Eagle has nearly 900 locations and a plethora of industry contacts and leverage, with landlords and suppliers that Aerie alone would lack.
AEO data by YCharts
How to view this fast-growing brand
Aerie is the growth engine here, so as long as the American Eagle brand can basically hold its own while tossing off ample cash flows, this looks like a solid combination. That's especially true for more conservative investors who might be reluctant to buy into a small brand looking to rapidly expand its business, an effort that might require running at a loss while in the buildout stage.
Here's the interesting thing: American Eagle's stock got a big boost after the pandemic bear market but is now trading roughly 36% below its peak. The dividend yield, at around 3% or so, is back around normal historical levels. If you've been watching Aerie's expansion with interest -- and it is interesting -- it might be time to consider the nameplate's owner, American Eagle. The price isn't exactly cheap, but it's probably fair when you consider Aerie's growth.
