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American Eagle Outfitters (AEO) Stock Is Quickly Losing Relevance

American Eagle Outfitters (NYSE:AEO) is in big trouble. Year-to-date, AEO stock has fallen nearly 27%, and the volatility shows little evidence of abating. In just the trailing 30 days alone, American Eagle investors absorbed losses totaling more than 8%.

American Eagle Outfitters (AEO) Stock Is Quickly Losing Relevance
American Eagle Outfitters (AEO) Stock Is Quickly Losing Relevance

Source: Mike Mozart via Flickr (Modified)

The apparel-maker’s problems echo that of competitors Abercrombie & Fitch Co. (NYSE:ANF), and to a lesser extent, Gap Inc (NYSE:GPS).

However, the ugliness in AEO stock isn’t strictly limited to the financial markets. The company simply has no realistic growth options. Back two years ago, management lamented its bottom-barrel position in the domestic apparel sector. At less than 1.5% market share, the American Eagle failed to resonate with fickle teenagers and millennials. Without much hope at home, the company looked overseas.

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No one can blame them. In 2015, the domestic apparel market was $315 billion strong. Three years prior, it was a $225 billion market, or a 40% increase in aggregate revenue. But for 2025, industry experts forecast only a $385 billion U.S. apparel market. That’s a tiny 22% gain over a ten year period. The European continent has an even more abysmal projected growth rate.

Contrast that with China. Two years ago, the Chinese apparel market hauled in $237 billion. In 2025, experts predict that sector will grow to an astounding $615 billion, or a 159% jump. Both in raw population size and growth magnitude, China represents a lifeline for American Eagle and other apparel makers.

But will AEO stock reflect the company’s international shift? I have serious doubts.

No Realistic Growth Opportunities for American Eagle

For its upcoming second-quarter fiscal 2018 earnings report, AEO is expected to hit a 16-cent earnings per share target. This is considerably lower than its Q2 estimate from the prior year, which was forecasted at 21 cents. The actual result was an earnings-per-share of 23 cents.

Furthermore, American Eagle is coming off a miss in the first quarter. Analysts expected earnings of 17 cents, but the apparel-maker came up a penny short. In Q1 of fiscal 2017, Wall Street forecasted an EPS of 18 cents, but the company registered 22 cents.

Investors will be looking for a strong showing for Q2, but growth is practically non-existent. Even with the international expansion, and improved online presence, American Eagle remains a secondary brand. Over the past five years, the company grew revenue at less than 10%. This is almost perfectly in line with growth trends for the domestic fashion industry.

AEO stock, American Eagle
AEO stock, American Eagle


Click to Enlarge

What’s wrong with that? For starters, striving for average is not why people start businesses. More critically, AEO stock is badly hurting.

Over the trailing five-year period, the retailer has lost roughly half of its equity value. Management needs to spark interest in the brand. As such, they need to outperform industry trends, not match it pound-for-pound.

In addition, I question the effectiveness of American Eagle’s overseas expansion. Operating over 1,000 physical stores at a time when retailers are cutting back, I expect something for that exposure. But it looks like investors are receiving more of the same.

AEO Stock Is a Bland Investment

Irrespective of the international opportunity — which again is lacking for AEO — American Eagle obviously can’t ignore domestic markets. And that’s terribly problematic as foot traffic and consumer sentiment has weakened considerably in recent years. Despite a healthy labor market, cost of living expenses are outpacing wages.

To survive in retail, and specifically in the apparel industry, you must have a distinct, irreplaceable brand. Otherwise, Amazon.com, Inc. (NASDAQ:AMZN) will destroy you. This is why adidas AG (ADR) (OTCMKTS:ADDYY) and Nike Inc (NYSE:NKE) are doing well, while everybody else is fighting for scraps.

On top of that, the international market is likely going to be even more competitive. For example, Fast Retailing Co NPV (OTCMKTS:FRCOF), Uniqlo, Theory and J Brand, have a stronghold in the Asian market. As Bloomberg writer Shelly Banjo notes, Fast Retailing “became the world’s third-largest apparel maker by delving into fast fashion before it was even in style.”

Fast isn’t doing so well, whose shares are down 18% year-to-date. But they’re experts at providing great fashion at low prices. If a company like American Eagle comes along to steal precious market share, they will come out guns blazing.

No matter how you look at it, AEO stock is mired in a declining industry with no great prospects. That is a point that I don’t think anyone will argue with. But to succeed in this sector requires something truly extraordinary. My main point is that American Eagle is good, but not nearly good enough.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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