American Eagle: Higher Store Margins Seen

The retailer is relying on an improving economy and outsourcing to improve its American Eagle store margins.
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American Eagle Outfitters

'

(AEO) - Get Report

stock is quite sensitive to the number and profitability of its stores.

American Eagle stores account for around 50% of the company's stock price, according to our estimate. They offer high quality, on-trend clothing, accessories and personal care products at affordable prices targeting customers from the age of 15 to 25.

The company competes with specialty apparel makers like

Aeropostale

(ARO)

,

Gap

(GPS) - Get Report

,

Abercrombie & Fitch

(ANF) - Get Report

, and

Urban Outfitters

(URBN) - Get Report

.

We currently have a Trefis price estimate of around $26 for American Eagle Outfitters' stock.

In the past, American Eagle stores have grown from 846 in 2004 to 938 in 2009 at a growth rate of around 2%. We don't expect the company to continue expanding aggressively in the U.S., since it's close to saturation in terms of reach.

The average of Trefis member forecasts for number of American Eagle stores indicate an increase from 931 in 2010 to 975 by 2016, compared to the baseline Trefis estimate of an increase from 929 in 2010 to 966 by the end of the Trefis forecast period.

The member estimates imply a small upside to the Trefis price estimate for AEO stock. The company sees growth in its aerie and 77kids brands, and is likely to focus on widening the presence of these two relatively new brands.

Disagree? You can drag the forecast trend-line above to express your own view, and see the sensitivity of American Eagle Outfitters Inc.'s stock to number of American Eagle stores.

American Eagle Stores EBITDA Margin (a measure of profitability) has decreased from 23.2% in 2004 to 11.7% in 2009. The company saw a major margin dip in 2007 from an increasing inventory markdown resulting from a decline in consumer spending.

The average of Trefis member forecasts for American Eagle stores EBITDA margin indicates an increase from 12.2% in 2010 to 17.3% by 2016, compared to the baseline Trefis estimate of an increase from 12.4% in 2010 to 17.8% by the end of the Trefis forecast period.

The member estimates imply a 1% downside to the Trefis price estimate for AEO stock. We expect American Eagle store margins to bounce back in the coming years driven by a recovering economy and American Eagle's on-going outsourcing initiatives to low cost markets like Cambodia and Vietnam. A potential risk however is the shrinking market size of the U.S. apparel industry that can impact its profit margin.

Our complete analysis for American Eagle Outfitters' stock is

here

.

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