American Eagle Outfitters (AEO 0.18%) is not the type of investment that a conservative dividend investor should be looking at now. The dividend has been spotty of late and the company's focus on teen fashion is, well, volatile even at the best of times given the mercurial nature of its target customers. And yet, there's something interesting going on at the company that the headline numbers may be hiding.
Unloved
American Eagle Outfitters' stock is down a painful 25% or so from where it was a year ago. That compares to a roughly 6% gain for an S&P 500 index ETF. The shares have seen a notable drop over the past few months after working back from 52-week lows, which were nearly 45% below the prices from a year ago. Investors are clearly less than thrilled with the teen retailer right now.
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That's not surprising when you look at the company's 2022 performance. Notably, sales at its stores were down by 3% year over year. And earnings per share of $0.64 were well below the $2.03 earned in 2021. To be fair, the company entered the year warning that 2021 was a particularly difficult comparison. So, to some degree, the drop-off was expected. However, the earnings decline was material and it makes sense that investors were troubled.
The company's namesake brand was particularly weak, with sales off by 8%. This division makes up nearly two-thirds of the top line, so it is very important to performance and, as such, to investors. But the declines here aren't shocking at all and it isn't a fashion-related issue.
Multi-pronged approach
The first headwind for the American Eagle brand was the strong performance in 2021, which probably guaranteed some level of decline at its stores. But this is a mature brand that the company is looking to right-size, focusing on profits over growth. In 2022 it opened six stores, but closed 16, for a net decline of 10 stores. Store closures have a big impact on sales figures.
This is a long-standing effort, however, with the retailer having shuttered 85 stores since 2019. It probably isn't such a bad thing for the company to shut laggard stores even if that impacts the top line, because it strengthens the business over the long term.
This trend, however, has to be juxtaposed against the company's smaller Aerie brand (roughly 30% of revenue). This nameplate closed three stores but opened five, for a net addition of two in 2022. That's not a lot of new stores and yet the brand's sales increased 9% year over year in 2022 despite the difficult comparisons with a strong 2021. Clearly, Aerie is in growth mode while American Eagle is something of a cash cow.
The model, then, appears to be preserve the core while building a newer brand. That's highlighted by the company's capital allocation priorities, where point number one is "Investments to Fuel Aerie's Growth & Build Capabilities." So far, that plan seems to be playing out as you would expect. From this viewpoint, it is hard to get too upset about the company's performance.
What to make of the stock
Retail is a highly competitive sector and teen retail is particularly difficult given the fashion-conscious consumers it targets. So American Eagle Outfitters is not an investment for the faint of heart. However, the business plan here seems more than reasonable. That said, the company isn't expecting a huge year in 2023, with sales roughly flat to up low single digits.
But if you can see the shifting story underneath those figures (looking specifically at the strength of the Aerie brand), more aggressive investors might want to take a deep dive here while Mr. Market is in a dour mood. It probably wouldn't require much improvement at American Eagle's flagship brand to materially improve investor sentiment around the stock when you add the ongoing growth at Aerie into the mix.
