<DAILY DOUBLE>
Thursday, December 3, 1998
American Eagle Outfitters
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Phone: 724-776-4857
Website: www.ae-outfitters.com
Price (12/2/98): $57 3/8
HOW DID IT DOUBLE?
American Eagle has taken flight, and it shows no signs of landing. Good thing the cargo pants it sells can hold a lot of rations.
This retailer of relaxed basic apparel has casually put together a string of 21 consecutive months of rising same-store sales. Most of them have been safely in double digits despite following double-digit gains in the year-ago period. For example, August comps rose 28.4% on top of a 37.1% gain last year; September was up 23.7% versus 14%; October rose 37.8% versus 16.5%.
These eagle eye-popping comps owe a lot to a merchandise mix heavier on apparel and aimed squarely at the college crowd both in style and price. Indeed, the equally successful but pricier Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> thinks American Eagle has so completely knocked off its merchandise, image, and marketing that it's suing.
However that turns out, there's no doubt that paying $24.50 for a pair of cargo pants beats paying $59.50. That's one good reason why Q2 per share earnings rose 700% to $0.40, exceeding the high-side estimate of $0.25. That's also why sales for the first nine months of the fiscal year are up 48.6% to $374.5 million on a stunning 37.2% rise in same-store sales.
With that kind of growth, the stock has tripled this year as part of an even more astonishing two-year flight plan that has this Eagle headed toward the moon.
BUSINESS DESCRIPTION
American Eagle is a mall-based specialty retailer that sells its own brand of reasonably priced casual clothes for men and women ages 16 to 34.
Its merchandise includes basics such as casual plaid shirts, athletic jerseys, cargo pants, khakis, dungarees, T-shirts, shoes, and accessories. The company operates 359 stores (up 10% from a year ago) in 39 states.
In the spring of 1995, the company moved aggressively to expand its women's apparel business, which had accounted for just 23% of FY94 sales. In FY97, women's apparel rose to 50% of sales from 47% in FY96, while menswear accounted for 41% of revenue up from 36%. Outerwear, accessories, and footwear fell to just 9% of sales.
Last January, American Eagle launched an online store featuring an "Outfit Builder" page to help customers create clothing ensembles. It has also created an advertiser-supported content area featuring links to online retailers of movies, music, and books. AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> just signed up. In March, it launched the see-through Clear Card company credit card to increase brand awareness and build customer loyalty.
Competitors include various divisions of the Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> and The Limited <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %>. Chair/CEO Jay L. Schottstein and family own 31% of the company.
FINANCIAL FACTS
Income Statement
12-month sales: $528.2 million
12-month income: $45 million
12-month EPS: $1.89
Profit Margin: 8.5%
Market Cap: $1,380.4 million
Balance Sheet
Cash: $44 million
Current Assets: $139 million
Current Liabilities: $71.5 million
Long-term Debt: None
Ratios
Price-to-earnings: 30.4
Price-to-sales: 2.6
HOW COULD YOU HAVE FOUND THIS DOUBLE?
A year ago, I looked at how American Eagle had soared 300% in the preceding six months. A string of double-digit same-store sales gains following a severe plunge in its stock price was enough for a sensational recovery.
At that point, the Eagle traded at 52 times trailing 12-month earnings and 23 times projected earnings for the January 1998 fiscal year. I said that the stock "could see some further gains" of about 33% based on a YPEG fair value of $42 1/2 for the current fiscal year. Yet, I wasn't terribly enthusiastic.
Now I'm eating crow. Adjusting for a 3-for-2 stock split in January and another in May, that target price should be $18 7/8. In other words, this Eagle has winged it for a 260% gain since last November, making it one of the year's best-performing retailers.
Where did I miss my bird? The series of stellar comp-store sales numbers alone should have been enough to suggest that American Eagle had made changes in its merchandise that were paying off. Such momentum should simply never be underestimated, though it may fade if a company misses a fashion trend or runs up against super-strong numbers from the preceding year.
In the short-term, the retailer faced weak Q4 comparisons, which it flew past with 20.1% comp-store growth for November '97 and an 18.8% jump for December. Even the weak 1.9% gain for January spoke to the company's strength since there was simply less clearance merchandise in the post-holiday period. Q4 earnings came in at $0.85 per share, blowing past the split-adjusted $0.63 high-side estimate current at the time of my earlier article.
Though the ensuing Q1 comp-store sales in the 40% plus range also came versus a weak prior-year period, American Eagle was delivering more than IOUs. The back-to-basics trend promoted more visibly by the Gap was paying off big for American Eagle.
WHERE TO FROM HERE?
Some attorneys think the dispute with Abercrombie is legit. According to The Washington Post, there is evidence that American Eagle tried to mimic Abercrombie & Fitch, even beyond the similar logo. One internal company memo sent to store managers stated, "Tell Us What Abercrombie & Fitch is Marketing!!!" There's also some precedent. The Limited's Bath and Body Works stores once copied the physical appearance of the Body Shop's stores. The parties settled out of court.
Yet others say all retailers copy each other left and right. American Eagle may have been especially adept at this, but so what. Besides, its lower prices distinguish it.
For its part, American Eagle's management has said the case is "meritless, frivolous and bordering on ridiculous. For example, we're being sued for using primary colors and 'all natural fabrics.'"
What's clear is that this business has never been stronger. Return on equity has shot up to 42.4% from 24.3% for FY97. Net margins have climbed to 7.7% from 4.8%. Inventories are being tightly managed, too. They were up just 30% year-over-year at the end of Q2 despite the 46% sales increase that quarter and the 42% gain to come in Q3.
Analysts haven't been able to raise earnings estimates fast enough. Current Zacks estimates call for $2.05 per share ($2.13 high side) for the fiscal year ending in January and $2.49 per share ($2.60 high side) for the following year. So even now, the stock trades at just 23 times the forward consensus estimate, in line with projections for long-term growth. But given preliminary reports of the spectacular third quarter numbers, these estimates might still be too low.
Tough year-over-year comparisons will force this Eagle to land at some point, but for now, it's found some mighty wings that could take it even higher.
-- Louis Corrigan
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