Aerie And Tailgate Catalysts For American Eagle; Wunderlich Reiterates Buy

“Unlike the vast majority of its brethren, we believe American Eagle Outfitters AEO has a focused plan to leverage its leadership positions in denim and its rising positions at Aerie and Tailgate to drive higher margins and returns,” Wunderlich’s Eric Beder said in a note.

Beder reiterated a Buy rating on the company, with a price target of $22.

Best Positioned

With a robust reputation for fashion and quality, the analyst believes American Eagle Outfitters is best positioned to “navigate the treacherous teen waters.”

The company reported robust comps of 5 percent for the Black Friday weekend, with the Christmas weekend also being strong. However, the lull between the periods was deep, with traffic declining 18–20 percent, leading to essentially flat holiday results.

Catalysts

Management believes there is potential for American Eagle Outfitters to raise overall average unit revenue to drive higher returns, while also being able to capture margin of 100 bps from sourcing gains for Spring/Summer 2017.

“With stores in only 13 states, management believes it has a material run rate ahead. Further, the division has been aggressively adding swim and related products to the mix, which should be a natural add-on for the (Aerie) brand,” Beder stated, while adding that the goal was to add about 50 stores in FY 2018.

In addition, the campus wear brand opened three stores in FY17, which the analyst believes would allow American Eagle Outfitters to evaluate the potential for the Tailgate brand.

“We believe the brand continues to have material potential as a longer-term growth vehicle for American Eagle,” Beder added.