American Eagle Outfitters: Why Buy Now? (AEO)

AEO - American Eagle

International license stores, 4% dividend yield and solid management.

American Eagle Outfitters (AEO) fell like a dead bird from the sky last Friday. It was down as much as 15% then closed the session down 13%. Wall Street hates the stock. A reason why I'm starting to like it.


International License Stores. AEO is doing this to make up for less foot traffic and the decline of spending by their once frequent customers. They have to look other places to make money, and licensing is a brilliant way of raking in cash at a fraction of the cost of opening a new store.  

What is giving me faith and why I bought AEO when it tanked last week is this nugget from their latest 10-Q:

..the planned opening of approximately 25 AEO stores in the Factory store format in North America and continued international expansion in Mexico, Asia and the United Kingdom during Fiscal 2014; 

• the success of our efforts to expand internationally, engage in future franchise/license agreements, and/or growth through acquisitions or joint ventures;
• the selection of approximately 45 American Eagle Outfitters stores in the United States and Canada for remodeling and refurbishing during Fiscal 2014; 
• the potential closure of approximately 150 stores in North America through Fiscal 2016; 
• the planned opening of approximately 40 new international third party operated American Eagle Outfitters stores during Fiscal 2014;

They plan to close stores that are not working. Update existing stores to make them more attractive and sell more merchandise. However my favorite of all the action items - bring on 40 international stores using a 3rd party. As of today AEO has 99 International licensed/franchise stores in 17 countries.

The 10-Q doesn't say how much the international licensing initiative is bringing in, the figures are lumped into their bottom line. That's the problem, how much is this new gamble making for them

What to hate is that total net revenue decreased 2% to $2.211 billion compared to $2.264 billion last year. The change in total net revenue resulted primarily from a comparable sales decrease of 7% for the period. By brand, including the respective AEO Direct sales, American Eagle Outfitters brand comparable sales decreased 8%, or $154.0 million, and aerie brand comparable sales increased 3%, or $3.5 million. AE women’s and men’s comparable sales decreased 6% and 10%, respectively. For the 39 week period, traffic, transactions and average transaction value decreased.


Now that the share price is in the $12 range the dividend yield is at 4%. I suspect that is some of the reason the stock has bounced 5% since tanking last week. What else is to like is the company's solid management.  They clearly are doing what is best for shareholders. Closing stores that suck, international licensing, and focus more on what is working. They can't do much about the lack of customers coming in the door. However the company isn't willing to die. They are thinking licensing and new ideas to help offset declining foot traffic. They have 99 intl. stores today, with 40 more to come. AEO is taking steps to keep their revenue growing.


Mastery Bottom Line - Ninjas

Mastery Bottom line:

If AEO can do more eCommerce, cash in on intl. licensing, and shut down store fronts that aren't working -- then the share price will go higher.

 Disclaimer: The author has a long position in AEO.