If you look at the performance of the SPDR S&P Retail (ETF) (NYSEARCA:XRT) in recent years — it’s working on a third consecutive losing year in relation to the S&P 500 — you wouldn’t think there were any retailers having success in this discount-heavy promotional retail environment, but you’d be wrong. American Eagle Outfitters (NYSE:AEO) is slowly moving from the outhouse to the penthouse, and that’s good news for AEO stock owners.
In fact, recent moves by the company along with improving earnings suggest American Eagle will soon be a “great” retailer and not just a mediocre one like many of its teen-focused peers.
Here are three reasons why I believe this is the case for AEO stock.
Good Things Are Happening at American Eagle
At the end of September, AEO hired Bob Madore as CFO. A veteran finance guy in the retail industry, he’s been brought in to replace former CFO Mary Boland who retired April 1 of this year.
Adore, whose latest finance gig was CFO at Ralph Lauren Corp (NYSE:RL), left the top finance job at the iconic brand after only 17 months to jump on board what’s turning out to be one of the hottest turnarounds in retail.
“I’m pleased to join American Eagle Outfitters at an exciting time of transformation and growth,” Madore said in his appointment announcement Sept. 29. “I look forward to building upon its success and contributing to a strong future.”
Madore is just another piece in CEO Jay Schottenstein’s plan to turn American Eagle into a leader in retail. So far, in my estimation, he’s making all the right moves, including building an executive team that’s second to none.
Aerie Continues to Boost AEO
AEO’s second-quarter same-store sales grew 3%, slightly higher than analyst expectations. That in itself is good considering only two years earlier same-store sales declined 7% in Q2 2014 on top of a 7% decline in Q2 2013.
However, it’s the business at Aerie that’s driving AEO stock’s incredible turnaround, delivering 24% same-store sales in Q2 2016. That’s on top of 18% same-store sales growth a year earlier. It has now delivered five consecutive quarters with same-store sales growth of 20% or more.
It expects to open 10 to 15 Aerie stores in 2016; year-to-date through the first two-quarters it has opened just one location, so look for revenue contributions from those store openings in the second half of the year. American Eagle expects Aerie’s square footage to grow by 32% by the end of January 2018; a good chunk of it coming from side-by-side stores attached to AEO shops.
Using a marketing program that promotes the empowerment of women, Aerie has been able to attract a new audience to the brand; it rightfully has reasons to be excited about the future. It’s only in 11 states at the moment, so there are plenty of expansion possibilities.
Even more important is the fact that American Eagle is generating a huge amount of online business from those 11 states making its future entry into every new state a double whammy for AEO stock.
Online Continues to Grow at American Eagle
Brick-and-mortar retailers of every stripe continue to walk a fine line between opening physical stores and pouring money into their e-commerce businesses given online retail is capturing more of the consumer’s discretionary spending.
What’s the most profitable split between online and off? Williams-Sonoma, Inc. (NYSE:WSM) feels it’s right around 50/50.
Currently, American Eagle generates about 20% of its overall revenue from AEO Direct, its e-commerce business, which includes both its Aerie and American Eagle brands. Its mobile app generated 100% comps in the second quarter with its overall e-commerce comps up in high double digits. The fact that it increased its mobile conversion in Q2 by 30% certainly didn’t hurt the cause for AEO stock.
On the international front, it continues to expand its e-commerce capabilities as its moves into other countries with both corporate stores as well as licensed locations.
At the end of the day, however, American Eagle isfocused on growing profitable sales whether online or off.
Bottom Line on AEO Stock
American Eagle continues to rebuild its business both from a revenue and earnings perspective. While AEO stock is not all the way back to the good old days a decade ago — in fiscal 2006 it had operating margins of 21%, double those over the trailing 12 months — it has been making big strides.
In the second quarter alone, American Eagle increased operating margins by 160 basis points to 8.3%. Investors can expect them to be in double digits by the time it reports Q4 earnings in March.
Great things are happening at AEO. Soon, it will be considered a great retailer. Place your bets on AEO stock accordingly.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.