The last few years have been tough for retail stocks, which initially had to deal with the "death of retail" and "death of the mall" tropes as e-commerce became more prominent. They suffered the disruption caused by the COVID-19 pandemic, and now many fear that inflation will hurt discretionary spending.
While it has been a challenging space, this has also created buying opportunities for some strong companies that should be able to survive and thrive going forward. One strong example is American Eagle (AEO 0.09%). With a $2.4 billion market capitalization, the company is popular with younger consumers who can grow with it. The company is also expanding its Aerie line of clothes.
Meanwhile, the shares trade at an extremely cheap valuation and pay out an attractive dividend yield of over 5%. Let's take a closer look.
Image source: Getty Images.
Valuation grounded
The aforementioned macro challenges seem to have made the investment community lump American Eagle in with struggling retailers, and the shares are thus changing hands at a very inexpensive valuation. But investors need to separate the wheat from the chaff. In 2021, American Eagle eclipsed $5 billion in sales for the first time, so this is a company that is setting new revenue milestones, not fading away.
The shares trade at just seven times this year's earnings and an even cheaper 5.6 times next year's earnings. They also trade at a price-to-sales ratio of under 0.5, meaning the company is valued at less than half of what this year's revenue will be. Furthermore, a price-to-earnings-growth (PEG) ratio of 0.84 indicates that the stock is undervalued compared to its growth prospects. Popularized by legendary investor Peter Lynch, the PEG ratio levels the playing field between growth and value by dividing a stock's price-to-earnings multiple by its earnings-per-share growth. A PEG ratio of under 1.0 is widely viewed as a sign that a stock is undervalued.
American Eagle pays out a dividend that yields just over 5% at the current share price. This is a very compelling payout, especially for a company that is growing at a decent clip and is not part of a low-growth industry like telecom or utilities.
Cool kids
With this bargain-bin valuation, one could come away with the perception that American Eagle is an irrelevant brand that is losing popularity. But it's actually alive and well, especially with a very important demographic -- young consumers. According to market research firm NPD Group, American Eagle currently sits atop the competition as the No. 1 jeans company for consumers between the ages of 15 and 25.
Investment bank Piper Sandler surveyed teens in the fall of 2021 about their favorite brands across a variety of industries and found that American Eagle is the second-most-popular women's apparel brand and the third-most-popular men's apparel brand among teens.
While fashion is notoriously fickle, the upside here is that these younger consumers will grow with the brand and continue to make American Eagle a part of their wardrobe as they enter the workforce and increase their discretionary income. Furthermore, American Eagle has been around since 1977 and is still growing sales, so there is little risk that it is a flash in the pan.
The company's Aerie brand, which makes intimate apparel, loungewear, swimwear, and activewear for women, is on fire. Aerie has posted 29 straight quarters of double-digit sales growth, which is already an outstanding track record, but it is even more impressive when taking into consideration that this streak covers a time frame that includes the depths of the COVID-19 pandemic.
From the fourth quarter of 2020 to the fourth quarter of 2021, Aerie grew revenue by 27% year over year to $428 million. American Eagle estimates that Aerie has an addressable market opportunity of $65 billion. Total addressable market figures are always to be taken with a grain of salt as they are notorious for being fluffy, but this still shows that there is ample room for further growth for Aerie ahead.
Ready to fly
American Eagle looks like a buy because of its strong foothold with younger consumers and strong Aerie brand growth, all at a bargain-bin valuation and with a 5% dividend yield to pay shareholders while they wait for the stock price to climb.
