American Eagle is a casual clothing retailer mostly designed to target 15 to 25 year olds. They concentrate on value offerings. They are currently in the process of expanding to target the 25 to 40 year olds with their MARTIN + OSA brand and are working on expanding their aerie line which sells dormwear and intimates for females between the ages of 15 to 25 years old. They also operate AE.com which sells their American Eagle and aerie clothing lines. AE.com has also been a major growth driver. In 2006, sales at AE.com rose 48%. They have been operating American Eagle retail stores since 1977. They have been growing at a very brisk pace, their revenue has grown from $406 million in 1998 to almost $2.8 billion in 2006.
Industry
This is a very competitive industry. Fashions can come and go without notice. Clothing is one of the three basic needs for humanity so that is a plus. Also, their clothing is mid priced so economic trends should not affect American Eagle significantly. The industry is also very sensitive to weather trends, which can affect results. American Eagle products are significantly cheaper than Abercrombie & Fitch and a bit more expensive than Aeropostale. Compared to Aeropostale, the quality of AE's clothing is significantly better.
Company
American Eagle has been growing very steadily. Their sales have been growing at a spectacular rate as I have stated earlier. They are currently testing out their aerie and MARTIN + OSA in experimental markets. Their American Eagle line is slowly saturating, so MARTIN + OSA and aerie will be their main future growth drivers. The key metrics AE measures their stores by is sales per square foot and comparable store sales, both of these metrics have been showing positive signs recently. Since they have been selling clothes over 3 decades with great success, they have showed that they have a good knowledge of trends in the clothing industry.
Valuation
They have over a $1 billion in cash, short-term investments, and long-term investments on their balance sheet. There is no long-term debt. They are trading at a trailing Price/Earnings ratio of 17.18. According to Yahoo's Apparel Stores industry, the average trailing P/E is 18.4. They pay a dividend of $.30 a year which is a yield of about 1%. American Eagle has been buying back stock, but there is nothing to be excited about. During their 4th quarter conference call (courtesy of www.seekingalpha.com), Joan Hilson, who is their Executive Vice President and Chief Financial Officer, said that
The philosophy that we have on our stock repurchase program is we offset a dilution related to stock option exercise.
Their return on equity has been very strong, averaging 27.83% over the past 10 years. According to Yahoo's Apparel Stores industry, the average return on equity is 19.7% Their EBITDA is $717.1 million and they are trading at around 7.5x Enterprise Value/EBITDA ratio.
Technicals
Their uptrend that started in late 2005 has been broken and they have been in a trading range from 28 to 34 in the past 7 months. RSI and MACD has been both trending down since October of 2006. The 20 and the 50 day moving averages have been trending down since early March and the 20DMA has crossed below the 50DMA in February for the first time since December of 2005. The three moving averages are right next to each other currently, and AEO is trading below all of them. It is also below its 200DMA for the first time since February of 2006. AEO's first major support is at $28 a share, which from the current trends does not seem like it will hold. The next major support is around the $24 area. It looks like its slowly breaking down.
Conclusion
American Eagle seems to be fairly priced or just a bit undervalued at these prices using Price/Earnings as a metric. The industry is trading at an average trailing P/E just a bit higher than AEO's. There is not much room for error if there is a slowdown in their growth. Management has shown they can perform and beat expectations, but their 15% yearly earnings growth will be harder to reach as a mid cap compared to when they were a small cap. The stock price will continue to go up as long as management can reach growth expecations set by themselves and analysts, but if there is a slowdown in their growth, the stock will tumble. Also, keep in mind the technicals are changing so that could be a hint of what is coming in the future.
Disclosure: I don't have a position in AEO.
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