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Solid Online Show Leads the Way for American Eagle (AEO)

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American Eagle Outfitters, Inc. AEO has been gaining from strong digital demand, as the pandemic is forcing shoppers to shift to online shopping. In fact, digital demand remains solid and above pre-pandemic levels even after stores have reopened. Apart from this, strength in its Aerie brand bodes well. Certainly, these upsides have been aiding the company, which in its last earnings call notified that the initial holiday season trends were encouraging.

Markedly, this Zacks Rank #3 (Hold) stock has surged 57.7% in a year’s time, outperforming the industry’s growth of 48.6%. Topping it, the Zacks Consensus Estimate for fiscal 2021 earnings has risen 3.3% over the past 30 days to $1.24 per share.

That said, let’s delve deeper.

Factors Narrating American Eagle’s Growth Story

American Eagle is capitalizing on the current online trend by digital acceleration. As a result, management added a self-checkout facility in stores and the same-day delivery option for online orders. It also enhanced its website in a bid to improve the pageloads speed by 60% particularly for the holiday season.  Additionally, its four new distribution hubs are likely to help it cater to the growing online demand.

Driven by sustained online demand for its assortments, third-quarter fiscal 2020 consolidated digital sales rallied 29%, with an 83% increase for Aerie and 11% for AE. Overall, online sales contributed 37% of the company’s revenues during the third quarter. Also, digital channel customer acquisitions jumped 37%.

Moreover, the company has been witnessing a robust performance in its Aerie brand for quite some time now. Notably, sales rose 34% for Aerie, driven by its unique brand platform and significant momentum in all areas of the business. This marked the 24th successive quarter of double-digit growth for the Aerie brand. Further, Aerie’s customer acquisitions across all channels increased in double digits, reflecting growth of 15%, with a 62% increase in the online platform. Meanwhile, the AE brand also witnessed strong digital demand and gained in key categories such as jeans and bottoms. Encouragingly, it launched a new activewear collection, namely OFFLINE, which is expected to further boost Aerie’s growth. Also, management earlier revealed plans of opening 25 Aerie locations, with the first one already launched in Nashville.

Apart from these, its gross margin not only returned to the growth trajectory in the fiscal third quarter but also marked the company’s highest rate in several years. This can be attributable to elevated merchandise margins, which in turn stemmed from increased full-priced sales, reduced promotions and enhanced inventory-optimization efforts. Also, reduced product costs and improvement in rent expenses aided the gross margin.


Hurdles in the Way

American Eagle continues to grapple with soft mall traffic amid the pandemic. Notably, fiscal third-quarter store revenues declined 16% year over year due to sluggish traffic, which more than offset favorable AUR and conversion rate. Further, the company is incurring extra expenses related to performance-based incentive compensation.

Nonetheless, we believe that the abovementioned upsides are likely to help American Eagle counter these headwinds and position it robustly on its growth path.

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