Is American Eagle Flying A Little Too High Again?

When I last wrote about American Eagle (AEO), I noted the odd cyclicality of this apparel retailer - particularly the stock's "habit" of bottoming out every three years and then rallying. The shares have stuck with that pattern, rallying off summer 2017 lows and gaining more than 65% since the time of that last piece. Of course, there have been fundamental factors at play too, with American Eagle posting improved store comps and ongoing growth in its e-commerce business, as well as some signs of margin leverage.

It's harder for me now to make a bullish call on American Eagle. Core physical store-level comps are improving off a low base, but margin leverage is still challenging, and I'm not confident that the company can generate the sort of long-term revenue and margin momentum needed to make a compelling valuation argument on discounted cash flow. On the other hand, there seems to be momentum with the business now and the shares are not necessarily that pricey in the context of the company's ROIC.

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Is American Eagle Flying A Little Too High Again?

American Eagle Following A Familiar Pattern

Teen retailer American Eagle (NYSE:AEO) may not be cyclical in the classical sense of the word, but a quick look at the long-term chart shows that this company and stock have long had a pattern of ups and downs.

The shares dropped below $11 this summer on worries about mall traffic and the impact of heavier promotional activity, as well as more existential worries about the future of store-based apparel retailing, but there is a pattern here. While those present-day worries have some validity, the shares fell below $11 in the summer of 2014, the late summer/early fall of 2011, and the fall of 2008. The fall of 2005 and 2002 were also low points along the way, although 2005 bottomed out above $14 and 2002's decline went below $5.

I'm not suggesting that investors should buy AEO shares just because the stock bottoms out every three years and then recovers. What I am suggesting is that this is a strong brand and a well-run company that has been through the wringer before. The apparel retail market is changing, but change is a constant factor in retail, and I believe American Eagle is better positioned than most to withstand these changes. These shares do look a little undervalued and offer an interesting dividend, but the negative drumbeat is likely to go on a little while longer.

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American Eagle Following A Familiar Pattern

Seeking Alpha: Francesca's Floundering, But The Model Can Still Work

The list of disappointing specialty retailers is getting longer, but Francesca's (FRAN) has really gotten on the bad side of Wall Street with a series of weak quarters. Some of the more bearish analysts are claiming that Francesca's model is fundamentally broken, and that the company's differentiated store concept just doesn't work.

With seven straight quarters of weakening sequential comps, not to mention weak merchandise margins and inventories that go against the supposed virtues of the model, it's difficult to say that the bears don't have a point. Even so, I believe it is hard to fairly judge any retail concept when miserable weather is shutting stores and keeping shoppers at home. I'd also point out that even in a disappointing year, Francesca's FCF generation was better than many retailers. If management can turn this around and resume a path to mid-teens long-term FCF growth, there is enough upside here to be worth a second look but there are many beaten-down retailers to choose from today.

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Francesca's Floundering, But The Model Can Still Work

Seeking Alpha: American Eagle Offers Some Value, But Large Execution Risks

Time will tell if the current ugliness in teen-oriented retail is tied to economic issues or a more fundamental shift towards value-oriented and fast-fashion retailers. As one of the established leaders of the teen retailer space, American Eagle Outfitters (AEO) has a lot to lose if its the latter, and the company's sales are suffering amidst a highly promotional environment.

With the surprising removal of its CEO about a month ago, American Eagle has to find a new leader at a challenging time in the sector. The company's brand identity, strong store footprint, and clean balance sheet work in its favor, but there is an undeniable risk that the company will not evolve with the times. My expectations for American Eagle's future growth are quite low, and the Street is expecting very little from this company, and I believe there is some appeal here for turnaround investors.

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American Eagle Offers Some Value, But Large Execution Risks

Investopedia: Abercrombie & Fitch The Latest To Get Trampled

This is turning out to be a cruel summer for teen retailers, with Abercombie & Fitch (NYSE:ANF) the latest to report very disappointing results and weak guidance. With the A-list retailers all struggling (ANF, American Eagle (NYSE:AEO), and Aeropostale (NYSE:ARO)), it's pretty clear that traffic and promotions are having a seriously adverse impact on many retailers. While the results from companies like Urban Outfitters (Nasdaq:URBN) and Buckle (NYSE:BKE) say that it's not a wholesale wipe-out in the sector, it's pretty clear that Abercrombie & Fitch continues to face some serious challenges in turning around its comps.

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Investopedia: American Eagle Hammered As Conditions Worsen

To me, the biggest question coming out of American Eagle's (NYSE:AEO) poor second quarter and weak guidance is whether or not there's an overall traffic problem at the malls. If traffic is down across the board (and there's some evidence that that may be the case), this is just another one of those bad stretches that every apparel retailer has to deal with now and then. If the traffic patterns are more inconsistent, though, and some really outperform, it sets up a whole new round of questions about merchandising, brand value, and long-term margins.

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Investopedia: Growing Pains For Francesca's Holdings

Investors in growth stocks often like to imagine that the sheer growth potential of the company in question can overpower any adverse macro trends that may be impacting the industry. Sometimes that's true, but more often it's the case that these macro trends produce at least some noticeable headwinds. That seems to be the case for Francesca's Holdings (Nasdaq:FRAN), where the oft-cited weather issues in the spring of this year impacted even this small, growing retailer. As a somewhat expensive and heavily shorted retailer, it's not altogether surprising that pre-market trading points to a rough day for the shares.

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Investopedia: After Some Preening, American Eagle Could Fly Again

A retailer's work is never done. Even if a company has the store footprint it needs and has its brand identity/merchandising dialed in, there's often the need to refresh the stores, upgrade logistics systems, and so on. While all of that goes on, there's still the matter of weather, fashion, and competition-related volatility in comp store growth to consider.

American Eagle (NYSE:AEO) looks like it has a little more work to do before really getting going again. The company is in better shape than just a couple of years ago (when the stock traded in the low teens and “Can AEO ever be relevant again?” stories were more prevalent), but sizable cash investments and some sluggishness in sales could leave the stocky chopping around a bit before resuming a more positive trajectory.

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Seeking Alpha: Incredible Growth Makes ASOS A Must-Watch Name

Online retailing has led to massive changes in business like book publishing/retailing, consumer electronics, music, and media. Heretofore, though, its impact on apparel retailing has been less profound, in part because of the customer service issues of dealing in products where fit, feel, style, and so on complicate the delivery model. Britain's ASOS (ASOMY.PK) is looking to change this with a disruptive customer-centric model that could ring major growth in the years to come.

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Incredible Growth Makes ASOS A Must-Watch Name

Investopedia: Can Aeropostale Be More Than A Price Point?

As a value-oriented apparel retailer catering to the teen market, Aeropostale (NYSE:ARO) did pretty well during the 2009-2010 period when many other youth retailers like American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF) saw serious sales pressures. Since then, though, it hasn't been exactly clear that Aeropostale has a workable strategy outside of pricing - and shrinking price differentials have whittled away the company's momentum, cash flow and market cap. The real question for investors, then, would seem to be whether this company can develop a strong enough merchandising identity that price is no longer its primary weapon.

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Investopedia: American Eagle Needs More Preening

Investors hoping for a rapid turnaround in American Eagle Outfitters (NYSE:AEO) should be a little concerned. Although the company is reporting better results, it seems that much of that is a byproduct of easier comps, as opposed to truly improving performance. Moreover, while American Eagle has been one of the very few to consistently post attractive returns on capital and earn real economic profits in the brutally-competitive no-moat retailing world, competition makes this very nearly a zero-sum game. There is still value in these shares, but investors need to understand that the company has to sell Wall Street on its turnaround plan before the shares are likely to match that value.

An Ok Third Quarter  
American Eagle had preannounced top-line results, so there were few surprises there. Revenue rose almost 11% on a 5% comp-store increase. Keep in mind, though, that the comp-store growth was just 1% in the prior quarter, so a rebound was to be expected. Direct sales continue to be a growth opportunity (up 21% this quarter), while traditional store sales growth is more modest.

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Investopedia: Oxford Reaping The Rewards Of Transformation

Change just for the sake of change is a often a really bad idea, as is changing up a successful business plan. And yet, it looks as though a major shift in the business plan has been just the ticket for Oxford Industries (NYSE:OXM), as the company seems to be reaping better margins and a better valuation as it has shifted away from its traditional private label apparel manufacturing business. 

A Decent Beginning to the Fiscal Year 

Oxford got its fiscal year off to a solid state. Revenue rose 27% on a reported basis and was more or less in line with the average analyst expectation. Revenue growth was fueled by the inclusion of sales from the Lilly Pulitzer business that Oxford acquired roughly six months ago and was therefore not part of year-ago sales. The inclusion of this revenue was responsible for two-thirds of the company's reported revenue growth, though the Tommy Bahama business was up nearly 13%. Unfortunately, the turnaround in the Ben Sherman business line continues to falter and revenue was down a further 13%.

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Investopedia: American Eagle's Down But Not Out

Nothing lasts forever in retailing; anyone younger than 35 probably has no idea what a "blue light special" is and once-popular retailers like Montgomery Ward and Service Merchandise are long gone. Even on a less dramatic level, there is a definite cyclicality to the retail business - few companies can manage their merchandising without missteps for years at a time, and that has been especially true in teen retailing. 

That said, it seems like too many analysts and investors are counting American Eagle Outfitters (NYSE:AEO) out of the fight prematurely. True, the company's same-store sales are not good right now, but this retailer is far from a goner and new leadership could be the catalyst to a more significant turnaround. (For background reading, check out The 4 R's Of Retail Investing.)

American Eagle's Disappointing Start to the Fiscal Year 

There wasn't much good news for American Eagle to crow about this quarter. Revenue dropped 6% (and missed estimates by more than 4%) as comps fell a surprising 8%. Sales were especially weak in women's merchandise as comps here were down 10% (versus a 5% drop in men's). Online sales were not much help either, as sales rose just 3%. 

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Investopedia: Urban Warfare

When a company's management spends part of their earnings conference call talking about a company's ten-year trends and history, that is often a bad sign. Such is the case for Urban Outfitters (Nasdaq:URBN). However impressive Urban Outfitters' past may be, it is not going to spare the stock today as investors focus on worrisome developments in margins and inventory. 

A Sour Note To End 2010
Urban Outfitters did report 14% overall sales growth for the fourth quarter. That is pretty much it for the good news. That sales level was a bit below analyst expectations, and store comps were down 2% as transactions fell about 1%. On a slightly more encouraging note, sales comps were up 4% if direct-to-consumer sales are included.

To its credit, Urban Outfitters has managed to do what American Eagle (NYSE:AEO) and many other retailers have struggled to do - operate multiple successful brands. The core Urban Outfitters brand saw revenue increase 13% this quarter, with Anthropologie up 10% and Free People up 35%. URBN also has a successful direct-to-consumer business, and revenue here jumped 28%.

Turning back to bad news, the company saw gross margin shrink more than 2% as the company had to get more aggressive with markdowns to move product. SG&A growth matched sales, though, and the company saw operating income tick up 1% while operating margin fell more than 2%. Taxes also came in above analyst expectations, contributing a few pennies to the company's earnings miss.


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Lululemon Masters The Upward-Profits Pose

I am not aware of a "ring the cash register" pose in yoga, but if there is one, I have no doubt that Lululemon Athletica (Nasdaq:LULU) has mastered it. Combining a healthy living and pro-environment shtick with truly well-designed, well-crafted and well-marketed apparel, Lululemon is carving out a very successful niche in women's athletic apparel market and driving value-centered investors to distraction. 

A Limber Third Quarter
It is a real challenge to find a metric in which Lululemon did not excel in its fiscal third quarter. Revenue jumped almost 56% to $176 million, leaving the highest published estimate in the dust. Likewise, comp-store sales growth of 29% was outstanding and the company produced an eye-popping amount of productivity (nearly $2,000 in sales per gross square foot of selling space, on an annualized basis). Sure, that's less than what, say, Tiffany (NYSE:TIF) does, but they sell diamonds! Compared to other clothing retailers, even solid performers like Urban Outfitters (Nasdaq:URBN) or Limited's (NYSE:LTD) Victoria's Secret cannot come close to that level of performance. 


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Abercrombie & Fitch Back On Track

If there is a Teflon-coated retailer, there are strong arguments that Abercrombie & Fitch (NYSE:ANF) is the one. ANF routinely gets roasted for its highly sexualized advertising, its past problems with human resources (allegedly putting only the more attractive employees on the selling floor) and its somewhat questionable management stewardship.

And yet, its core teen-to-college market keeps coming back in droves. True, the company had a serious valley in same-store sales throughout much of 2009, but a quick look at the other A-type teen retailers Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) shows that ANF's experience was not entirely unique. Now that the economy is picking up a bit, it seems that the customers are more than happy to come back to ANF for its premium-priced wares. 


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