American Eagle Has A Key Strategic Opportunity To Reconfigure Its Physical Store Costs

When I last wrote about American Eagle Outfitters (AEO) ("AE") and warned that “it could get worse before it gets better,” I was referring mostly to margin leverage and price competition from rivals like Abercrombie & Fitch (ANF); COVID-19 was not on my radar at that point. Even so, American Eagle has managed to outperform peers/comps like Abercrombie & Fitch, Buckle (BKE), and Urban Outfitters (URBN) since that last piece, so at least on a relative basis, I guess my overall positive stance held up.

All retailers are feeling the strain from COVID-19 and the recession, but this could be one of those crises that also creates opportunity for savvy management teams, and I believe American Eagle’s is one of those. With a large portion of the store base up for lease renewal, I think management has an opportunity to push for lower structural store costs and/or cut back the store base and counterbalance some of the deleverage pressures. I still expect American Eagle to be a low single-digit long-term grower, though, as strength at Aerie is counterbalanced by weakness in the legacy AE business. The shares do look modestly undervalued here, but improved visibility on sustainably higher margins would do a lot of good for the valuation.

 

Follow this link to the full article: 

American Eagle Has A Key Strategic Opportunity To Reconfigure Its Physical Store Costs