American Eagle Outfitters (AEO) recently released its Q3 fiscal 2012 earnings with an 11% increase in its revenues. Moreover, the comparable store sales increased by 10%. This performance can be attributed to the strong growth of direct-to-consumer business and surge in store traffic due to fashion newness.  The strong brand recognition of the retailer is evident from the fact that it was able to achieve substantial growth despite fewer promotional activities. We believe that American Eagle Outfitters’ fashion apparel, improving online apparel industry and initiatives such as addition of Wi-Fi and tablets to the stores will continue to drive store traffic. Furthermore, the retailer is well poised for the holiday season as well.
Strong Customer Response To Fashion Trends Likely To Continue
American Eagle Outfitters has witnessed strong customer response to its fashion apparel. Both of its businesses (men’s and women’s) saw significant growth in comparable store sales. The retailer added new styles, fits, colors and treatments to its apparel range. It also maintained the strength in its core denims and bottoms by adding the prevailing fashion trends to them. Moreover, shorts, knit tops, fashion dresses and men’s sales continued to perform well.
This shows that American Eagle Outfitters enjoys strong brand recognition among teens, and its fashion trends are being welcomed by its customers. This is one of the most important aspects for an apparel retailer. The fact that American Eagle Outfitters was able to achieve substantial growth despite fewer promotion activities indicates its strong position in the market. The retailer will leverage this position for its long term growth as well as the on-going holiday season.
Direct-To-Consumer Business Will Continue Driving Growth
In the current scenario, the direct-to-consumer business in the apparel industry is booming. The major players such as GAP (GPS), Urban Outfitters (URBN) and Abercrombie & Fitch (ANF) have reported considerable direct-to-consumer business growth in their recent results. Moreover, American Eagle Outfitters registered a 28% growth in its direct-to-consumer revenues in the previous quarter. With the increasing popularity of online shopping, the aforementioned trend is likely to drive e-commerce focused retailers. In Q3 fiscal 2012, American Eagle Outfitters’ direct business grew by 27% on top of a 21% growth in the same quarter last year.  With the holiday sales in the U.S. being driven by online shopping, we expect strong holiday season and fourth quarter results for the retailer.
According to our estimates, the direct-to-consumer business constitutes about 30% of the company’s value.
American Eagle Outfitters is undertaking several initiatives such as integrating the inventory pool across the distribution centers and stores in order to achieve delivery responsiveness. It has also started offering Wi-Fi and tablets (for browsing through the products) in its top performing stores. The tablets will also enable the customers to use the retailer’s e-commerce inside the stores. We believe that addition of Wi-Fi and tablets will enhance the shopping experience and subsequently, drive more traffic. These initiatives are aimed at positioning the retailer favorably for the holiday season. American Eagle Outfitters saw a kick start for its holiday season and is on its way to register strong results. 
Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 20% to the market price.
- American Eagle Outfitters’ Q3 fiscal 2012 earnings, Nov 28 2012
- American Eagle Outfitters’ SEC filings
- American Eagle sees strong holidays, Aeropostale wary, Reuters, Nov 28 2012
Disclosure: No positions