American Eagle: On-Trend Fashion

Jun.10.13 | About: American Eagle (AEO)

American Eagle Outfitters, Inc. (NYSE:AEO) is one of the best clothing retailers in the country. It has consistently designed and produced trendy garments and has consequently gained huge popularity. The company has a great future for the above reason, but also has other positive attributes such as a good balance sheet, a decent dividend and low PE ratio. Long term investors should take a serious look at the company and consider adding it to their portfolio.

Important Factors For Analysis:

Business Model:

American Eagle is a premium brand that has a sustainable business model. The company benefits from its fashionable clothes that remain popular with its target market. In addition, the company recognizes the importance of opening stores abroad and has taken important steps towards that goal.

American Eagle Outfitters markets its clothes to young adults. It operates under the American Eagle Outfitters and aerie brands. The company's core offerings are jeans, t-shirts, shirts, accessories and footwear. Due to the company's success over the years, it has been ranked as one of the top specialty American retail brands. In these rankings, it is listed above brands such as Gap (NYSE:GPS), J Crew and Ralph Lauren (NYSE:RL).

The key competitive advantage of the company is its trendy clothes. The company offers well designed garments, and is a reliable place for consumers to find something relevant. The company describes its merchandise as high quality and on-trend.

American Eagle is actively pursuing the expansion of the business outside the US. For instance, it has franchise agreements to expand the brand abroad. It hopes to open stores in Eastern Europe, Northern Africa and parts of Asia over the next few years. By February 2013, the company had 49 franchised stores in 13 countries. In addition to the stores, American Eagle earns revenue by shipping clothes to 81 countries around the world.

Cash Reserves:

The current ratio of American Eagles is at 2.62. The current ratio has stayed consistently high for the last 10 years. Clearly, the company has done a good job of managing its working capital. The Acid Test Ratio is at 1.85.

The debt at the company is low too. The company has no long term debt, and the equity to assets ratio is at 0.7. The company is in a good position to use leverage, if the need arises in the future. Low leverage and high cash reserves would help it make key acquisitions around the world.

Stock Price:

The PE ratio of the company is relatively low at 17.34. The earnings of the company are down 34% from the peak in 2008, while the revenue is up 15% since then. This is due to the rise in the raw material costs. Other industry participants such as Abercrombie & Fitch (NYSE:ANF) and Aeropostale have had lower profit margins for the same reason. The company has a dividend yield of 2.2%, but also paid a special dividend of $1.61 last year. American Eagle currently trades at 19.9. Investors should not expect many more special dividends since the current ratio of the company has edging down.

Regardless, the low PE ratio and the relatively good dividend yield make this stock a 'buy'. In addition, the company's stock is even more valuable considering that high commodity prices have squeezed the margins. As raw material costs fall over the next decade, that should provide a huge boost to the stock.

Major Risks:

American Eagle depends on the public perception of its brands. Well designed clothes are a necessity due to high competition, and a neglect of the fashion trends would cost the company dearly.

In addition, the company must continue to expand at a rapid pace internationally. For instance, Abercrombie & Fitch is rapidly increasing its store count abroad and may get an early advantage.


American Eagle Outfitters is a "BUY' for the long term investors. The company benefits from its sustainable business model, excellent balance sheet, and growth opportunities abroad. The low PE ratio for this stock is icing on the cake. In addition, as raw material costs fall, with the end of the commodity boom, its profitability should rise further.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.