I've talked about the odd cyclicality of American Eagle (AEO)
before, and even if there are some valid concerns at this leading,
youth-oriented retailer today, I believe the roughly 25%-plus correction
in the share price since my last update is overdone. This correction
seems to be largely due to management's decision to increase its
SG&A spending and sacrifice near-term margins to build future sales
growth potential. While I think there are strong arguments for
supporting growth at aerie and in the online business, the reality is
that margins have a significant influence on retail valuations, and the
Street has largely shifted toward valuing traditional retail stocks on
the assumption of moderate (at best) growth.
To that
end, I believe the Street is overlooking the long-term potential of
American Eagle's aerie brand in this shift toward a "retail is no longer
a growth sector" mentality. The company's aerie brand has the potential
to grow to a $2 billion to $3 billion business over the next decade,
adding more than 50% to today's revenue base, and the existing AE brand
still worthwhile. Although I don't expect exceptional growth, I do
believe these shares are undervalued below the $20s and could have
potential into the high $20s.
Read more here:
With Aerie Soaring, American Eagle Deserves Better
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