Hats off to American Eagle Outfitters (AEO) (“American Eagle”) management – in my last article, I identified ways the company could unlock more long-term value through structural cost/margin improvement, and even in that short time period since, the execution has been excellent. That, in turn, has driven the shares up more than 100% since that article, though the returns flatten out quite a bit relative to the sector and S&P on three-year and five-year comparisons.
I really like what management has said about managing in-store assortments, supply chain costs, and store/occupancy costs. I’m also bullish on the long-term prospects for the aerie concept, with mid-teens long-term revenue growth potential.
What makes me nervous now is that American Eagle has benefited from a benign promotional environment; something I expect will change significantly as vaccinations progress and the pandemic fades. So, I do like American Eagle as a good house in a sketchy neighborhood, but I can’t and won’t dismiss the risk that the neighbors decide to set everything on fire again later this year with irresponsible promotional activity.
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American Eagle Executing Extremely Well, But Industry Behavior Is Key
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