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Here's Why American Eagle (AEO) is Well-Poised Amid Cost Woes
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American Eagle Outfitters, Inc. (AEO - Free Report) has been benefitting from robust online demand and strength in the Aerie brand. It is on track with Real Power, Real Growth value-creation plan. The company also witnessed robust holiday demand in 2021.
Let’s delve deeper into factors that make AEO a promising bet.
Impressive Sales
American Eagle has been witnessing sustained momentum across its brands and channels. This led to year-over-year revenue growth of 17% and 15% on a two-year basis in fourth-quarter fiscal 2021. Robust demand, higher full-priced sales and reduced promotions boosted the average unit retail and led to double-digit growth in average transaction value. This marked its seventh successive quarter of AUR growth. Management also highlighted that it reached $5 billion in revenues for fiscal 2021.
Store revenues improved 32% year over year, owing to increased store traffic. Store sales were up 4% from fourth-quarter fiscal 2019. With customers returning to stores, mainline and factory outlets witnessed improvements, driven by a demand recovery.
Solid Online Show
Continued digital demand bodes well for American Eagle. The company’s digital revenues advanced 31% from fourth-quarter fiscal 2019. Digital revenues accounted for 36% of total revenues compared with 29% in fourth-quarter fiscal 2019. AEO remains on track with expanding its omni-channel capabilities, including a new mobile point-of-sale solution, which led to a significant increase in curbside pickup orders, along with an instant credit feature for returns and the expansion of its Afterpay capabilities in its mobile app. The company’s mobile app accounted for approximately one-third of its e-commerce sales and traffic in the fourth quarter. The relaunch of its loyalty program also received positive feedback.
Other notable retailers that witnessed continued online strength compared with the pre-pandemic levels, include Gap , Nordstrom (JWN - Free Report) and Abercrombie & Fitch (ANF - Free Report) .
Gap’s digital sales rose 44% from fourth-quarter fiscal 2019, accounting for 43% of total sales for the fourth quarter of fiscal 2021. Going forward, GPS targets the e-commerce business to contribute 50% of sales by the end of 2023.
Continued growth in the e-commerce business contributed significantly to the company’s consolidated sales as well as gains in its Gap, Old Navy and Athleta brands. The online business is benefiting from the company’s dominant omni-channel strength and scaled operations. Gap remains keen on optimizing its mobile experience as a key priority. As a result, it launched its native Android app, which is gaining traction.
Nordstrom’s fourth-quarter fiscal 2021 digital sales rose 23% on a two-year basis. For the fiscal fourth quarter, digital sales represented 44% of net sales compared with 54% in the year-ago period.
JWN’s digital business witnessed gains from improved digital traffic across both Nordstrom and Nordstrom Rack, as well as increased utilization of Buy Online, Pick Up In-Store service. Its mobile app also witnessed a solid performance, with mobile users accounting for nearly 70% of the total digital traffic.
Abercrombie & Fitch’s fourth-quarter 2021 digital sales rose 17% to $556 million on a two-year basis. The metric represented 48% of total sales, up from 40% in the fourth quarter of 2019.
ANF’s digital business mainly benefited from the addition of customers in the channel, backed by robust digital marketing efforts. Also, high customer retention and spend per customer aided sales growth. The company plans to continue investing in bolstering omni-channel capabilities, including curbside and ship-from-store services.
Brand Strength
AEO’s Aerie brand has been performing well for quite some time now. Sales rose 27% to $428.4 million for Aerie in fourth-quarter fiscal 2021 and surged more than 60% on a two-year basis. This marked the 29th consecutive quarter of double-digit growth for Aerie, driven by solid demand across apparel, intimates and offline activewear categories. The brand witnessed strong demand for core Aerie apparel and intimates, as well as OFFLINE activewear. Robust demand in the legging business, which is one of its best margin categories, bodes well. Going ahead, it remains on track to reach the next brand milestone of $2 billion in sales.
Growth Plans
American Eagle is progressing well with its Real Power Real Growth value creation plan, which aims at driving profitability through real estate and inventory optimization efforts, omni-channel and customer focus, and investments to improve the supply chain. As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company’s efforts under the plan have also aided the recovery of the American Eagle brand.
Driven by the trends and progress on its growth plan, management raised its 2023 financial targets. The company now expects to achieve an operating income of $800 million in fiscal 2023. Previously, the operating income and the operating margin were anticipated to be $550 million and 10%, respectively. It also expects revenues of $5.8 billion for fiscal 2023, up from the earlier mentioned $5.5 billion.
Hurdles On the Way
Despite such upsides, elevated freight costs, along with a rise in store wages and variable selling expenses, dented margins in the fiscal fourth quarter. The gross margin contracted 160 basis points (bps) to 32.4%, while the operating margin contracted 210 bps year over year to 6.1%. Also, SG&A expenses rose 19.7% year over year, while as a percentage of sales, S&A expenses expanded 60 bps to 23.2%. This led to a year-over-year adjusted earnings decline of 10.3%.
Also, industry-wide supply-chain disruptions resulted in almost $80 million in freight costs in the fourth quarter of fiscal 2021. Out of this, $60 million was air freight costs related to the Vietnam factory closings. Higher freight of approximately $31 million in the fourth quarter impacted the Aerie brand. Also, the shortage of labor and raw materials resulted in delayed store openings. Earnings are expected to decline in the first half of fiscal 2022 due to continued freight pressures.
Bottom Line
Although the aforementioned cost headwinds are likely to persist in the near term, we hope that AEO will remain well-placed for growth on strength in the Aerie brand, solid online show and robust demand.
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Here's Why American Eagle (AEO) is Well-Poised Amid Cost Woes
American Eagle Outfitters, Inc. (AEO - Free Report) has been benefitting from robust online demand and strength in the Aerie brand. It is on track with Real Power, Real Growth value-creation plan. The company also witnessed robust holiday demand in 2021.
Let’s delve deeper into factors that make AEO a promising bet.
Impressive Sales
American Eagle has been witnessing sustained momentum across its brands and channels. This led to year-over-year revenue growth of 17% and 15% on a two-year basis in fourth-quarter fiscal 2021. Robust demand, higher full-priced sales and reduced promotions boosted the average unit retail and led to double-digit growth in average transaction value. This marked its seventh successive quarter of AUR growth. Management also highlighted that it reached $5 billion in revenues for fiscal 2021.
Store revenues improved 32% year over year, owing to increased store traffic. Store sales were up 4% from fourth-quarter fiscal 2019. With customers returning to stores, mainline and factory outlets witnessed improvements, driven by a demand recovery.
Solid Online Show
Continued digital demand bodes well for American Eagle. The company’s digital revenues advanced 31% from fourth-quarter fiscal 2019. Digital revenues accounted for 36% of total revenues compared with 29% in fourth-quarter fiscal 2019. AEO remains on track with expanding its omni-channel capabilities, including a new mobile point-of-sale solution, which led to a significant increase in curbside pickup orders, along with an instant credit feature for returns and the expansion of its Afterpay capabilities in its mobile app. The company’s mobile app accounted for approximately one-third of its e-commerce sales and traffic in the fourth quarter. The relaunch of its loyalty program also received positive feedback.
Other notable retailers that witnessed continued online strength compared with the pre-pandemic levels, include Gap , Nordstrom (JWN - Free Report) and Abercrombie & Fitch (ANF - Free Report) .
Gap’s digital sales rose 44% from fourth-quarter fiscal 2019, accounting for 43% of total sales for the fourth quarter of fiscal 2021. Going forward, GPS targets the e-commerce business to contribute 50% of sales by the end of 2023.
Continued growth in the e-commerce business contributed significantly to the company’s consolidated sales as well as gains in its Gap, Old Navy and Athleta brands. The online business is benefiting from the company’s dominant omni-channel strength and scaled operations. Gap remains keen on optimizing its mobile experience as a key priority. As a result, it launched its native Android app, which is gaining traction.
Nordstrom’s fourth-quarter fiscal 2021 digital sales rose 23% on a two-year basis. For the fiscal fourth quarter, digital sales represented 44% of net sales compared with 54% in the year-ago period.
JWN’s digital business witnessed gains from improved digital traffic across both Nordstrom and Nordstrom Rack, as well as increased utilization of Buy Online, Pick Up In-Store service. Its mobile app also witnessed a solid performance, with mobile users accounting for nearly 70% of the total digital traffic.
Abercrombie & Fitch’s fourth-quarter 2021 digital sales rose 17% to $556 million on a two-year basis. The metric represented 48% of total sales, up from 40% in the fourth quarter of 2019.
ANF’s digital business mainly benefited from the addition of customers in the channel, backed by robust digital marketing efforts. Also, high customer retention and spend per customer aided sales growth. The company plans to continue investing in bolstering omni-channel capabilities, including curbside and ship-from-store services.
Brand Strength
AEO’s Aerie brand has been performing well for quite some time now. Sales rose 27% to $428.4 million for Aerie in fourth-quarter fiscal 2021 and surged more than 60% on a two-year basis. This marked the 29th consecutive quarter of double-digit growth for Aerie, driven by solid demand across apparel, intimates and offline activewear categories. The brand witnessed strong demand for core Aerie apparel and intimates, as well as OFFLINE activewear. Robust demand in the legging business, which is one of its best margin categories, bodes well. Going ahead, it remains on track to reach the next brand milestone of $2 billion in sales.
Growth Plans
American Eagle is progressing well with its Real Power Real Growth value creation plan, which aims at driving profitability through real estate and inventory optimization efforts, omni-channel and customer focus, and investments to improve the supply chain. As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company’s efforts under the plan have also aided the recovery of the American Eagle brand.
Driven by the trends and progress on its growth plan, management raised its 2023 financial targets. The company now expects to achieve an operating income of $800 million in fiscal 2023. Previously, the operating income and the operating margin were anticipated to be $550 million and 10%, respectively. It also expects revenues of $5.8 billion for fiscal 2023, up from the earlier mentioned $5.5 billion.
Hurdles On the Way
Despite such upsides, elevated freight costs, along with a rise in store wages and variable selling expenses, dented margins in the fiscal fourth quarter. The gross margin contracted 160 basis points (bps) to 32.4%, while the operating margin contracted 210 bps year over year to 6.1%. Also, SG&A expenses rose 19.7% year over year, while as a percentage of sales, S&A expenses expanded 60 bps to 23.2%. This led to a year-over-year adjusted earnings decline of 10.3%.
Also, industry-wide supply-chain disruptions resulted in almost $80 million in freight costs in the fourth quarter of fiscal 2021. Out of this, $60 million was air freight costs related to the Vietnam factory closings. Higher freight of approximately $31 million in the fourth quarter impacted the Aerie brand. Also, the shortage of labor and raw materials resulted in delayed store openings. Earnings are expected to decline in the first half of fiscal 2022 due to continued freight pressures.
Bottom Line
Although the aforementioned cost headwinds are likely to persist in the near term, we hope that AEO will remain well-placed for growth on strength in the Aerie brand, solid online show and robust demand.