Buying American Eagle Outfitters

Friday I bought American Eagle Outfitters (AEO/NYSE) at $22.58 per share. The stock closed the day at $22.15. American Eagle designs, markets and sells its own brand of clothing, primarily to 15 to 25 year olds. It has stores in all 50 states, Puerto Rico and Canada.

The company has a market cap of approximately $4.76 billion with nearly 215 million shares outstanding. The dividend yield is less than 2%. The balance sheet is strong, and there’s nearly $3 a share of cash.

American Eagle has been hurt by unseasonably warm weather and fears of slower consumer spending (the most recent quarter saw sales decline 3% when analysts had expected a gain of just under 1%). The stock is down, and trades for 12 times earnings. But the short terms hiccups make the company a bargain. It expects to boost earnings by about 14% next year.

Anyone who’s a keen reader of the Barron’s Roundtables will be familiar with this name. Scott Black recommended American Eagle in January 2006. The stock had a good run and he sold it. Then it fell back and he pounded the table for it in the midyear Roundtable in July 2007.

SEC filings show the company has become a holding of fellow Roundtable participant Meryl Witmer’s firm in the last quarter. Regular readers know I admire Witmer and Eagle Capital Partners immensely. She turned me on to 3i Group and Imagistics International, among others. She’s named several other winners I didn’t take advantage of, mostly because the stocks had significant run-ups in price by the time I found out about them (most went on to rise even more, meaning I missed out on some good gains).

That’s not the case here and, after investigating the company myself, have decided to jump in.

What are the risks with this pick? Primarily continued sales weakness due to larger than expected declines in consumer spending. There’s also the possibility that new business initiatives the company’s rolling out could be failures. I don’t anticipate that, yet there are no guarantees.

I believe American Eagle’s current share price is a good entry point into a strong retailer. But I could always be wrong and do your own due diligence before jumping in.

Comments

[Amit Chokshi]

I think AEO could fall quite a bit more. It looks cheap on a trailing basis but i think the risk when potentially entering a consumer slowdown is that the forward estimates drop off considerably. So in reality, you could be paying closer to 7x EV/EBITDA or 18+ EPS off of 2008. This reminds me of GPS a few years ago, looked like a bargain but the issue was its fashion fell out of style and the only way to pump sales was through eating away at the gross margins which results in lower return metrics as well. These are just cursory thoughts, virtually impossible to go against the # of smart people in this stock right now.

[John]

Yeah, it could go lower (already has since I bought it but that's pretty meaningless). I'm thinking that even if the holiday season is terrible and/or we have a deep recession it is strong enough to endure and come out fine.

And, with all the smart people in it, AEO doing well may become the "conventional wisdom" and we know what happens then. ;-)

[slick]

3 teenage daughters.
We used to shop at AE on a regular basis. It's no longer on the shopping list.
The jury has spoken. lol.

[ted]

Started buying at $25 in August 07. Have bought all the way down to $12 (July 08). Fundamentals are incredibly sound. My biggest worry is a weakening of the brand, though anecdotal evidence seems to suggest it is still strong.

[楊文值]

The issue was its fashion fell out of style and the only way to pump sales was through eating away at the gross margins which results in lower return metrics as well. These are just cursory thoughts, virtually impossible to go against the # of smart people in this stock right now.