The market is sending American Eagle's (AEO) stock to the woodshed on Wednesday, opening up the doors to a potential buying opportunity for those who "get" investing in retail apparel names. Investing in the space is part art, part tooling around in an Excel spreadsheet.
Shares of Pittsburgh-based American Eagle fell as much as 15% in early trading in response to its latest earnings report for two main reasons. First, same-store sales growth in the third quarter decelerated vs. the prior year, feeding the debate of the well-entrenched apparel bears who say any investment in the mall right now borders on stupid. Ugh, hate those mall bears.
Second, the retailer took a cautious approach to fourth-quarter earnings guidance. No matter if the company said it was off to a "solid" start to the holidays, the market is reading the guidance as American Eagle has been swept up into the apparel price wars that have infiltrated the malls (in large part thanks to department stores such as Macy's (M) and J.C. Penney (JCP) , but specialty apparel retailers have been rather promotional).
So, the snap judgment by the market is that despite a year of sales momentum, American Eagle's cautious guidance may actually be at risk due to overly competitive industry conditions.
However, the market may have rushed to the wrong judgment on American Eagle. Here are several important considerations:
American Eagle is dominating rival Abercrombie & Fitch in the U.S.
American Eagle's third-quarter same-store sales rose 2%, a big-time outperformance relative to Abercrombie's (ANF) 5% decline. This outperformance was intriguing in that Abercrombie has undergone a major overhaul to its marketing and the look of its apparel.
In effect, young adults are voting that they enjoy American Eagle's brand messaging and clothing better than the new look of Abercrombie and to a lesser extent, its Hollister unit. The namesake Abercrombie division also continues to sport some lofty price points that tend to not be on display at American Eagle.
It's unlikely the dynamic between the two companies changes much within the next six months. When people fall in love with an apparel brand, it often takes a while for a key competitor to steal away market share.
RBC Capital Markets analyst Brian Tunick points out that "American Eagle Outfitters 2% comparable store sales increase speaks to the company's ongoing market share gains and solid execution in the mall despite a challenging backdrop."
Aerie intimates is hot.
The sales that American Eagle's intimates chain Aerie has put up this year have been mind-boggling, and the third quarter was no exception. Same-store sales skyrocketed 21% as the company continued to expand the range of its offerings. Folks, increases such as this for a mall-based apparel brand are no longer the norm.
Ultimately, Aerie has been a story of true market share gains from L Brands' (LB) Victoria's Secret brand, which has fallen victim to being unapproachable among young women. The momentum for Aerie should easily continue into the holidays, and American Eagle could detail a more aggressive store rollout plan sometime in early 2017.
The odds and ends are favorable.
Denim is back, despite what the athleisure fanboys and fangirls on Wall Street say. In large part consumers are buying denim again due to new fabrications (stretch, for example), the need to buy denim after a year of holding back, and new tops trends that make it hard not to also add a pair of new jeans in the basket.
American Eagle remains the destination for teens and young adults to buy jeans with a host of new technologies on display, all for reasonable price points. The company is also showcasing good styles in slim-fit khakis (yes, khakis are back) and athleisure -- usually at lower prices than Abercrombie & Fitch.
Meanwhile, a whole bunch of Aeropostale locations are currently holding store-closing sales. While that may hurt short-term sales for American Eagle (sales at these stores were up to 70% off on Black Friday), what it means is that Aeropostale could just flat out run out of inventory well before Christmas. That could leave American Eagle as one of the sole destinations in the mall for parents to buy trendy, well-made wares for their kids.
Moreover, it means American Eagle will likely be the gift-card destination for many, which should help boost sales in January. Aeropostale won't be around in many cases, so there is no reason to buy its gift cards for someone.