American Eagle Outfitters (AEO): Demand in unexpected categories drive strong growth in Aerie

Shares of American Eagle Outfitters, Inc. (NYSE: AEO) have gained over 15% in the past three months and over 12% in the past one month. The company reported a decline in its top line along with an adjusted loss for the second quarter of 2020 on Wednesday but the results were better than what analysts had predicted.

Quarterly numbers

Total revenue dropped 15% year-over-year to $884 million in Q2 while adjusted loss per share amounted to $0.03 compared to earnings of $0.39 per share in the year-ago period. These numbers were also better compared to the first quarter of 2020 where the company saw a 38% drop in revenue and an adjusted loss of $0.84 per share.

During the second quarter, American Eagle saw particular strength in its online channel with demand rising 48%, the fastest growth rate in more than ten years. The momentum in online was driven by new customer acquisitions as well as strength in traffic and conversion. The company’s investments in its digital platform, omnichannel capabilities and supply chain are paying off in helping it meet its strong demand.

Brands

The Aerie brand witnessed strong momentum during the second quarter with revenue growing 32% year-over-year to $250 million, despite store closures as the majority of revenue came from its online channel. This was better than the first quarter when the Aerie brand saw a 2% drop in revenue.

During Q2, total customer acquisition increased 22% and more than doubled in the digital channel. Digital demand increased 113%.  The brand saw strength across categories such as leggings, sports bras, comfy tees and fleece. The company even saw exceptional results in unexpected categories such as swimwear which picked up market share during the second quarter amid the health crisis.

American Eagle launched its new activewear brand OFFLINE in the second quarter amid the growing demand for active apparel. The company sees strong growth prospects for this brand.

The AE brand saw a 26% drop in revenue in the second quarter as it was more impacted by store closures and mall traffic declines. However, online demand increased 21% with significant growth in online customers. The brand saw momentum in the jeans and bottoms categories during the quarter.

Outlook

Looking ahead, AEO will focus on expanding into important international markets with significant growth potential. The company is also working on transforming its supply chain and is focusing on ensuring sufficient delivery capacity for the upcoming holiday season. AEO expects to see strong growth in its digital channel beyond this year and therefore plans to position additional distribution capacity in 2021 and beyond in a strategic manner.

Driving growth in the Aerie brand is a major priority for AEO. In 2019, Aerie generated nearly $800 million in revenue and remains on pace to reach $1 billion pretty soon. The company sees further potential than this with categories like intimates, swim and lounge representing a combined $40 billion addressable market.

AEO expects Aerie will continue to have digital penetration above 50% and the company plans to open 25 new Aerie locations this year. AEO also sees significant growth opportunity for OFFLINE within the $16 billion women’s active apparel market.  

AEO is evaluating its store fleet and plans to close more stores over the next several years thereby reducing its fixed costs associated with these stores. The company expects to close 40-50 locations by the end of this year. The recent success in its digital channel is one of the reasons behind this move.

Click here to read the full transcript of American Eagle Outfitters Q2 2020 earnings call