The success story of intimates giant Victoria’s Secret has set the tone for growth for other similar brands such as American Eagle Outfitters‘ (AEO) Aerie. While Victoria’s Secret has a well-established presence in the U.S., Aerie is a relatively new brand and much less well known. As of 2011, Aerie had a share of 2% of the U.S. lingerie market compared to Victoria’s Secret’s 35%+ share.  
Although Aerie does not contribute much to American Eagle’s revenues currently, we believe that the right push can significantly enhance the brand’s value. Aerie’s target demographic is big and its geographical reach is limited, which suggests good scope for expansion. The brand has performed well in recent quarters despite weakness in the overall retail market that led to large promotions. We believe that Aerie’s growth will help American Eagle diversify its product range and reduce its dependence on the casual apparel business where competition is cutthroat.
Through this brand, American Eagle offers a wide range of intimates and personal care products for young girls. Its products are beautiful, soft, sensual, feminine and comfortable. 
There Exists Significant Growth Potential For Aerie
American Eagle’s Aerie mainly caters to teenagers and young females who are fashion conscious and are likely to spend on intimate products. About 15% of the total female population in the U.S. are between ages 15 and 24.  The overall lingerie market in the U.S. stands at over $12 billion, and is currently dominated by only a few established brands. 
American Eagle launched Aerie back in 2006 and currently operates 151 stores across the country. In comparison, Victoria’s Secret has more than 1,000 stores. Moreover, Victoria’s Secret’s new brand PINK, which primarily targets college girls, has been extremely successful and Limited brands (LTD) has scaled up its expansion. Hence, we believe that there is a huge potential for Aerie’s aggressive expansion as well. Although American Eagle has expanded its lingerie brand slowly over the past few years, the comparable store sales growth has been impressive (6% in 2012). We believe that the company should ramp up Aerie’s expansion by opening new stores, and creating shop-in-shop locations within its American Eagle stores to increase the brand’s reach.
The encouraging trend is that U.S. buyers have shown great affinity towards intimate products even during the sluggish economic environment. In the recently concluded quarter, Victoria’s Secret registered robust growth for its intimate products even though the apparel industry remained weak overall. Even Aerie remained resilient as American Eagle’s Q2 fiscal 2013 results stumbled due to low store traffic and a poor response to products.
Can Aerie Imitate Victoria’s Secret’s Success?
Victoria’s Secret’s success lies in its strong brand image, which it has built over the years with attractive product offerings, responsiveness to changing fashion trends and appealing marketing campaigns. Over the past few years, the brand has also launched a number of new categories such as swimwear, beauty, sportswear, fragrances, etc. It has leveraged supermodels and fashion shows to elevate the brand image among its customers.
Similarly, Aerie has been on top of fashion changes with strong inventory management and distribution strategies.  Its focus on its famous categories as well as other categories such as swimwear based on famous bra styles has helped its results. 
With the right push we believe that Aerie can follow in the footsteps of Victoria’s Secret. The brand can fend off the fierce competition in the intimates market as its products are affordable and more about usability than glamor. We think that given the macroeconomic conditions, young U.S. shoppers are likely to find a balance between fashion and value, and that might work in Aerie’s favor. American Eagle needs to focus on Aerie along with its core business to establish itself in a niche market.
Our price estimate for Target stands at $20, implying a premium of close to 40% to the market price.
- Companies SEC filings
- Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012
- American Eagle Outfitters’ SEC filings
- United States Census Bureau
- American Eagle Outfitters’ Q2 fiscal 2013 earnings transcript, Aug 21 2013
- American Eagle Outfitters Q1 fiscal 2o13 earnings transcript, May 22 2013
Disclosure: No positions