Summary
- American Eagle stock is 24% below its May 2019 price despite 17 consecutive quarters of growth.
- The company's Aerie brand continues to move from strength to strength.
- AEO has announced it will start selling CBD-infused products.
- The company has no debt and generates a significant amount of cash flow that is returned to shareholders via dividend and its buyback program.
One of my favorite strategies is looking at unloved sectors that the market has ignored and look for solid companies at a discount (even better if the company pays a dividend so you get paid to wait!). American Eagle Outfitters (AEO) is one such company.
AEO is a multi-brand clothing and accessories retailer with over 1,200 retail stores. As a retailer in the age of online shopping/death of malls, the company has managed not only to survive but to thrive through a combination of significant digital presence to complement its brick and mortars stores as well as the proper brand messaging. I believe the market is undervaluing AEO due to trends in the overall retail sector.
Retail Apocalypse Or Retail Evolution?
The retail industry has vastly underperformed the market this past year. As the S&P 500 (led by the technology sector) quickly recovered from the December 2018 lows, retail stocks, as evidenced by the SPDR S&P Retail ETF (XRT), have barely budged off their lows. The issues facing the retail industry are largely structural and mainly caused by a confluence of factors namely the growth of online shopping, oversupply of malls and shifting consumer habits with analysts predicting more retail outlets and shop closures in the years to come.
Source: Tradingview.com (registration required)
What does a “retail apocalypse” look like? If the predictions are correct, about 145 Malls of America.
That’s how many combined stores are projected to close between now and 2026 — 75,000, according to Coresight Research. The advisory firm counts 5,994 announced shutterings just in 2019 so far, beating all of 2018.
That much retail real estate, if equated to the Mall of America’s 2.5 million square feet of 520 stores, translates to more than 700 million square feet, or 25 square miles — larger than the city of Manhattan.
Source: Forbes
Now it is easy to look at this environment and judge that the entire retail sector is doomed and will be eaten up by Amazon (AMZN) and all shopping henceforth will be done online, however, that is not really the case. What is happening is a shift in the way consumers interact with physical brick and mortar stores and the digital component. Despite the massive growth of e-commerce, retail sales are still largely being done offline. The latest data for 2019 shows that e-commerce in consumer spending as a percentage of total retail sales is at 10.2% (excluding motor vehicles, gasoline and groceries this figure jumps to around 20%).
