• Brett Schafer

Deep Dive: American Eagle Outfitters

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We are back and rolling with a new Deep Dive episode, and are kicking off 2021 discussing American Eagle Outfitters (NYSE: AEO). This is the holding company that owns American Eagle, but they also own a few different brands, the largest of which is called Aerie. Listen to the episode to get the full overview.

  1. What do they do? AEO is a multi-brand specialty retailer. They operate over 1,300 stores, mainly in the United States, and target a younger demographic. American Eagle is the most notable brand, famous for its denim jeans. Then, there’s Aerie, an “inclusive” women’s brand that sells bras, underwear, and swimsuits. It has had 24 consecutive quarters of double-digit revenue growth.

  2. History? Founded in 1977, AEO is a fairly old company and was spun out of Silverman’s Menswear. Jerry and Mark Silverman sold the company to another family in 1991, and that family took the company public in 1994 at $0.88 per share (assuming split-adjusted).

  3. Industry? AEO operates in the apparel industry, which is over $1 trillion globally (and many hundreds of billions of dollars in the U.S. alone), so investors do not need to worry about any market saturation. What they may need to worry about is the trend towards omnichannel solutions, and whether AEO can build a powerful online DTC offering through social media and its own site.

  4. Management? Jay Schottenstein is the Chairman of the Board and CEO. It is a bit of a yellow flag when those positions are held by one person. Jay was originally the CEO back in 1992 – 2002, so he is a veteran of the company. He came back to the CEO position in 2014. Insider ownership is around 6%, with most of it being with the CEO. One thing to note is that there is significant short-interest with AEO, at about 15% of shares outstanding.

  5. Valuation? AEO has a market cap of $3.42 billion (as of recording), and an enterprise value (EV) of $4.62 billion. EV/sales is 1.2, EV/EBITDA is 7.1, and EV/OCF is 20. Pre-COVID, its OCF was around double where it is today. The company pays a modest dividend, which it just reinstated at $0.14 a share.

  6. Earnings? LTM sales are down around 11% to $3.8 billion, however, last quarter digital sales grew 29% and operating income was actually flat year-over-year.

  7. Balance Sheet? If you don’t count leases as debt (which I’m not sure you do?) the company has a net cash position. Overall, it has around $692 million in cash. One thing to not is their inventory ratio has gone down from 6x to 4x, meaning they are being less efficient with their merchandise. Also, inventory as a whole was down 13% this quarter, which helped inflate OCF.

  8. Potential Competitive Advantages? We couldn’t find much with AEO, except that its demo will likely transition to online a lot easier and that it already has the structure for a solid omnichannel strategy.

  9. Potential Future Growth Opportunities? We discussed getting some mall locations for cheap right now, the continued growth of Aerie, and bolt-on DTC acquisitions.

  10. Highlights? They have stayed cash flow positive over the past 12 months, the balance sheet looks fine, and they can scoop up market share from anyone that has gone out of business during the pandemic.

  11. Lowlights? The operating leases could end up hurting them, and the fact that the American Eagle brand isn’t growing much.

Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.

#AEO #AmericanEagleOutfitters #DeepDive

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