American Eagle Outfitters Inc. (AEO Quick QuoteAEO - Free Report) has been riding on its strategic initiatives, solid earnings surprise history, strength in the Aerie brand and strong margins. All these have come against a backdrop of intense competition and fall in mall traffic due to rise of e-commerce and weak margins, which is impacting the results of the other players in the apparel industry.

American Eagle’s stock price has shown considerable resilience in this environment and is down only 0.9% year to date, while it lost nearly 12.3% over the past one-year period. Not to forget, the stock still looks promising compared to its peers – Gap Inc. (GPS Quick QuoteGPS - Free Report) , Abercrombie & Fitch CO. (ANF Quick QuoteANF - Free Report) , Ralph Lauren Corp. (RL Quick QuoteRL - Free Report) and Nordstrom Inc. (JWN Quick QuoteJWN - Free Report) , which have respectively lost about 15%, 28.4%, 12.8% and 23.2% year to date.

Coming back to the strengths in American Eagle, the company boasts a strong portfolio of well-established brands, each focused on the unique characteristics and rapidly changing preferences of target customers. The company plans to concentrate on solidifying its product assortments by adding more compelling brands, managing inventory levels diligently and improving the eCommerce business.

Among its brands, Aerie recently gained popularity among women courtesy of its stylish collections and appealing marketing strategy. So much so that it has outdone the performance of the company’s namesake brand. The growth of Aerie is very much obvious from the 32% increase in its first-quarter fiscal 2016 comps compared with a 12% rise in the year-ago quarter. Also, Aerie contributed largely to digital sales, as the brand’s total sales included 30% online sales. In contrast, comps for the American Eagle brand rose 4%.

Additionally, American Eagle has been strengthening its global presence for quite some time now after witnessing strong profitability at its overseas licensed stores, with little capital requirements. Apart from this, American Eagle is striving to develop its omni-channel platform to reach customers in every possible way. Hence, the company has been improving its website as well as mobile app.

We believe these plans for international expansion, together with its omni-channel growth, provide American Eagle with significant opportunities to expand its business and cater to the incredible global demand for its products.

Now coming to the company’s performance in first-quarter fiscal 2016, the company delivered the sixth straight quarter of positive earnings surprise benefiting from attractive assortments, strategic investments and effective execution in each department. Also, the company’s margins remained strong with gross margin expanding 170 basis points (bps) to 39.2% and operating margin growing 180 bps to 7.8%.  

Further, the company provided a favorable guidance for the second quarter of fiscal 2016. Also, it expects margins to remain strong in the future despite currency woes and rising competition. Additionally, the company announced a cash dividend of $0.125 per share, which represents a decent forward dividend yield of 3.34%.

However, the company’s attempt to grow globally also exposes it to adverse currency movements and other international risks, which pose concerns. Moreover, high dependence on external suppliers and macroeconomic headwinds may dampen results.

Despite carrying a Zacks Rank #3 (Hold), we believe that American Eagle has it all to make a good investment in a troubled apparel industry. Everything from solid comps, brand strength, right e-commerce growth and marketing strategies, to great margins and strong dividend bode well for the company’s future growth.

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