Judging by the retail sector's recent carnage, there might be just one retailer worth owning these days -- teen-apparel firm American Eagle Outfitters (AEO).
I've recommended AEO on numerous occasions over the past year, although that's been a mixed call at best, as the stock has dropped nearly 6% intraday over the past two months or so.
AEO's movement has been bewildering to me because company continues to crush analyst forecasts on both the top and bottom lines, while the retailer's management team is working like a well-oiled machine. Nonetheless, the stock is trading at a mere 12x forward earnings.
I think the market just can't believe that what American Eagle is doing can be sustainable in an era of fast fashion and large-scale apparel bankruptcies, like those of Aeropostale (AROPQ) and Pacific Sunwear (PSUNQ). There's just this general distrust for all apparel stocks, especially those that cater to fickle teens. After all, one miscue on knit tops for the back-to-school season could mean a disastrous year.
Moreover, the market has been keen on the turnaround story at Abercrombie & Fitch (ANF). I don't blame investors for that, as ANF has really begun to head down the right direction operationally.
Still, American Eagle deserves more respect for its impressive performance over the past year, as well as for the momentum that it has as we head closer to the back-to-school season. I suspect some of this respect will start to surface over the next several weeks as AEO tells its story in various venues.
Here are several things that jumped off the page to me from the company's most recent earnings report:
Good Growth at AEO's Core Brand
American Eagle's namesake stores saw comps increase 4% during the first quarter despite the weak mall traffic and poor weather that tripped up just about every other retailer.
I agree with management when it says AEO continues to gain market share, and the company's latest results support that notion. Where that share is coming from is bankrupt Aeropostale and other mall retailers as American Eagle sharpens its prices and continues to strike the right mark with its fashions.
A big subset of teens don't want to dress like H&M models and the prefer preppier offerings that they can still find at American Eagle. Teens are also freakin' lazy and don't want to wander around a department store like Macy's (M). They'd rather head to American Eagle's smaller stores, where they know the sizes and product assortment and can get in and out.
Plenty of Oxygen at Aerie
Aerie is American Eagle's intimates business, which investors seem to have forgotten because the company is no longer aggressively expanding the format.
That's fine with me, because AEO is continuing to refine the product -- and consumers are eating it up hand over fist. The brand put up a 30% comp increase during the first quarter, which is completely abnormal in today's consumer environment.
Importantly, that represents diversified growth that shows consumers have loyalty to the American Eagle brand. Online sales also surged in the quarter and now represent about 30% of the brand's sales.
Bras, undies, apparel and swimwear were all strong performers for the unit. In other words, Aerie's growth isn't driven by one single style fad, which is good to know if you plan to invest in an apparel brand for more than a month.
American Eagle's CEO Is a Top Dog
In a retail sector that's chock full of subpar management -- think Gap Stores (GPS) -- I think that American Eagle CEO Jay Schottenstein is the chief that you want to bet on.
He was basically American Eagle's original architect, having served as CEO from 1992 to 2002. Schottenstein then moved over to the chairmanship, but returned as interim CEO in January 2014 and permanent CEO last December.
From what I've long seen of Schottenstein (I used to cover AEO as an analyst), he's a proven "results-getter" who's good at building teams. For example, I think the American Eagle team is working cohesively with the Aerie team, while the digital team is working cohesively with the stores team. In today's "omni-channel" retail environment, such collaboration is critical to success.