Aerie Boosts American Eagle, Threatens Victoria's Secret

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Includes: AEO, LB
by: Trefis

American Eagle Outfitters (NYSE:AEO) designs, markets and sells its own brand of high quality, on-trend clothing, accessories and personal care products at affordable prices targeting 15-25 year old customers. The company also has two smaller brands, "77kids," a collection of casual apparel for children aged 2 to 10, and "aerie," which offers intimate apparel for young women, primarily in the age group 15-25 years.

Aerie and 77kids stores together constitute 12% of the $26 Trefis price estimate for American Eagle’s stock. We expect the total number of aerie stores to increase during the Trefis forecast period, crossing 300 stores by 2016. We expect revenue per square foot to grow rapidly as well, reaching $450 a square foot by the end of our forecast period. Our analysis follows below.

Aerie vs. Victoria’s Secret

American Eagle markets aerie primarily to young women aged 15 to 25. This strategy fits American Eagle’s broad customer base of high school and college-aged consumers. In the lingerie market, American Eagle’s growth is likely to come at the expense of Victoria’s Secret (LTD), which has traditionally catered to an older demographic but is now also targeting younger customers through its PINK line of lingerie for college-age women.

The aerie collection has grown strongly since its launch in 2006. This positive trend seems likely to continue, driven by American Eagle’s aggressive marketing. We expect the revenue per square foot for aerie stores to increase going forward and touch the $450 mark by the end of the Trefis forecast period.

American Eagle is also increasing the number of aerie store. American Eagle started with three aerie stores in 2006 and grew the brand to 137 stores in 2009. We expect the number of aerie stores to cross 300 by 2016. You can modify our forecasts for aerie below to see their impact on our price estimate for American Eagle’s stock.

Lingerie Market Set to Grow at 2% Annually Through 2016

The US lingerie market, estimated at around $9 billion in 2009, is expected to grow by $190 million each year from 2010 to 2016. This represents an annual average growth rate of about 2%. A significant portion of this incremental growth is attributable to growth of spending on intimates among younger women (college and high school demographic).

The intimates market fragmented with the entry of retailers like American Eagle and Abercrombie & Fitch (NYSE:ANF). The rising competition marks a sharp shift from the 1980s and 90s, when Limited Brands’ Victoria’s Secret had most of the market to itself.

Disclosure: No positions