Investing Club Stock Profile: American Eagle is making smart supply chain investments to improve profits

Published Thu, Feb 10 202212:15 PM ESTUpdated Thu, Feb 10 20221:37 PM EST

Investing Club holding American Eagle Outfitters (AEO) stands out in the retail game. It sells casual wear, a high-demand business during the Covid pandemic. The company reported the best third-quarter earnings in its peer group. With the weather warming, the pandemic subsiding, and supply chain improving — both in general and for American Eagle Outfitters specifically thanks to strategic acquisitions — we expect this strength to continue. Bottom line The retailer reduced its reliability on promotional pricing. Its sub-brand Aerie is growing rapidly, and the company is making smart supply-chain investments. All this, we believe, will continue to set American Eagle apart from its rivals. Driving strength Let's start with American Eagle. The segment is seeing strong revenue growth — an increase of 21% year-over-year for its third fiscal quarter in 2021 (AEO's most recent report). Denim is the main driver; in fact, while some might associate jeans mostly with Levi's, American Eagle is actually the number one seller of denim for women of all ages and number one for men 15 to 25. Inventory optimization and promotional discipline allowed the segments to realize a new high in operating margin during that quarter. But Aerie is the real growth engine here. Sales for the fiscal third quarter of 2021 soared 28% year-over-year, marking the 28th consecutive quarter of double-digit growth. Driving that increase was intimates and off-line activewear. More importantly, a focus on selling items at full price — which of course a company can only do when its products are in high demand — helped the company realize a high-teens percentage increase in the average selling price versus the year-ago period. This while also gaining market share and improving profitability. Meanwhile, segment operating margin reached a third-quarter high. If not for supply shortages or its high-margin leggings business, management said, the margin would have been even better. To solve its supply-chain bottlenecks, American Eagle recently purchased Quiet Logistics, an order fulfillment and returns management service for ecommerce retailers. COO Michael Rempell previously commented that the acquisition provides the company with the ability to drive substantially greater sales and margin on far less inventory. This acquisition followed the purchase of Airterra, a shipping company focused on increasing capacity and flexibility for ecommerce retailers. On the fiscal third-quarter 2021 earnings call CEO Jay Schottenstein said the team expects the combination "to create a unique platform that revolutionizes logistics" for American Eagle. The combination of sales growth, reduced promotional activity and enhanced supply-chain efficiency has also translated into improved companywide profitability, with the company achieving (in FY3Q21) its strongest operating margin in over a decade (since 2007). Catalysts While nothing has been announced, the idea of spinning off the Aerie brand has been floated in the past and were it to occur, we believe it could unlock value. Easing of supply chain woes; factory shutdowns in South Vietnam previously prevented the company from meeting the high-demand it is seeing in its legging business. Risks Competition Shifting consumer preferences Input cost inflation (Jim Cramer's Charitable Trust is long AEO. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A shopper wearing a protective mask walks past a sale sign at an American Eagle Outfitters Inc. clothing store at Westfield San Francisco Centre in San Francisco, California, U.S., on Thursday, June 18, 2020.

Michael Short | Bloomberg | Getty Images

Investing Club holding American Eagle Outfitters (AEO) stands out in the retail game. It sells casual wear, a high-demand business during the Covid pandemic.