Every seasoned shopper knows that some of the hottest deals of the year are found on Black Friday. But this year, bargain hunters don't even have to set foot in a store to find a good buy.
It's sure been a tough year for the retail industry. Same-store sales have been set back by the bursting of the housing bubble, and rising food and gas prices have left consumers' wallets thin. Shareholders of many retail companies are facing losses on their year-to-date investments, and American Eagle (NYSE:AEO) is no different -- its price is down 31%.
Some companies that have taken a beating this year, like Pacific Sunwear (NASDAQ:PSUN), are struggling within operations and warrant the stock price drop. But American Eagle continues to carry a strong brand name and remains financially intact.
"Survey says ... "
The company ranked second, behind Nike (NYSE:NKE), this summer in a survey conducted by Teen Research that asked 12- to 19-year-olds what the "coolest brand" was.
But you don't need a survey to realize AE's management knows what it's doing. Revenue has grown at an annual compounded return of 15.9% over the past five years, and net income has grown at 33.4%. And while AE doesn't have the luxury of selling its clothes and accessories at premium prices like rival Abercrombie & Fitch (NYSE:ANF), it's nonetheless able to maintain superior margins.
|
FY2002* |
FY2003* |
FY2004* |
FY2005* |
FY2006* | |
|---|---|---|---|---|---|
|
Gross Margin |
39.1% |
38.3% |
46.6% |
46.4% |
48.0% |
|
SG&A Margin |
23.7% |
24.7% |
23.8% |
23.2% |
23.8% |
|
EBIT Margin |
11.5% |
9.4% |
19.2% |
20.0% |
21.2% |
|
Net Income Margin |
6.4% |
4.2% |
11.3% |
12.7% |
13.9% |
*American Eagle's and Abercrombie & Fitch's fiscal years end on the Saturday nearest to Jan. 31 of the following calendar year, e.g., FY2006 ended Feb. 3, 2007.
Abercrombie loses the advantage of its higher gross margin (66.6% for FY2006) by spending more on SG&A (sales, general, and administrative) expenses (47%) compared to American Eagle (23.8%). AE's tighter ship means that it has comparable, and even better, EBIT (earnings before interest expense and taxes) and net margins than Abercrombie (19.8% and 12.7%, respectively, in FY2006).
An eagle eye on stock
American Eagle has grown its inventory at close to the rate of sales over the years. It attributes that success to efficient pricing and an efficient merchandise mix through markdown optimization technology. Efficient inventory management is vital to the operations of a retail company, since it can ultimately determine profitability. AE's ability to manage inventory is what makes it stand out above its rivals.
Abercrombie, Pacific Sunwear, and Gap (NYSE:GPS) all take longer to turn over their inventory compared to AE. And this metric should only improve for the company -- it recently regained control of its distribution process, which had been outsourced to a third-party logistics provider. A new facility is now up and running to stock and replenish the company's stores.
It's multi-branded
American Eagle has been expanding its portfolio of brands. Martin + Osa, similar to the J. Crew (NYSE:JCG) style, offers a much more sophisticated and pricier selection. The concept will help retain loyal customers as they grow out of the primary brand's target age range. And aerie is competing with Limited Brands' (NYSE:LTD) Victoria's Secret in the lingerie and sleepwear segment. The new distribution center will help support this growth by leveraging receiving, shipping, and inventory storage with different material handling processes across all three concepts.
Consumers -- teens in particular -- are fickle shoppers. The merchandise mix a retailer offers can be hit or miss, but over the years American Eagle has stocked its shelves with things customers are looking for.
While it's not easy, that isn't the biggest challenge a retailer faces. Growing the top line while maintaining tight inventory and cost control to deliver increasing and profitable margins are the qualities that define a solid long-term investment.
American Eagle has managed to do all this while operating debt free. Even better, the company has shown that it can grow even when it isn't expanding its store base.
A few final thoughts
No retailer is safe in a weakening economy, but I believe AE is less vulnerable than some of its rivals. Slower sales trends plagued the retail industry last quarter, yet the company managed to sail above its peers. Investors are willing to pay a premium for this trait, but AE seems significantly undervalued.
A forward P/E of 10.07 has the company priced lower than all but one competitors mentioned (Limited Brands has a forward P/E of 10.03). Trading at a PEG of 0.7, the 14.4% expected growth is not reflected in the current price. Looks like I found my best bargain of the season before Black Friday even begins.
Now that you've read my reasoning, do you agree or disagree? Either way, head to Motley Fool CAPS and cast your vote by rating American Eagle an outperform or underperform. Results will be tallied and revealed on Monday, so vote today. It's easy. It's free. And it's Foolish.
For related Foolishness:
- Seth Jayson is loaded for more Eagle with the stock price so low.
- This Fool agrees the company is a great long-term investment selling for a value.
- American Eagle was my favorite back-to-school retailer earlier this fall.
Ready for more Fool-light specials? Dash to the rest of the series here.
