American Eagle Outfitters Inc - Fundamental Investment Case

Qualitative Concerns:

• American Eagle growth engine,  Aerie, has benefitted from a one time viral marketing campaign. The #AERIEREAL campaign will make growth on top of the elevated results difficult over the next 12 months.
• Competition is increasing in jeans, lingerie and swimsuits from Amazon private label and DTC competitors. PrimeDay showed Amazon plans to be aggressive in both men’s and women's apparel in these categories.
• Insiders appear to see problems going forward and are selling large amounts of stock. The CEO specifically is selling for the first time in 5+years.

Fundamental Concerns:

• Inventories are growing with units growing even faster. Increased promotion on deal sites year-over-year show the build could be impacting results already.
• Gross margins have been in a long-term downtrend with inventory and discounting pointing to further weakness.
• Gross and EBITDA margins have further to fall based on the history of volatile results for teen fashion retailers and strong cotton prices.
• Estimates appear aggressive on both gross margins and revenue going forward.
• Valuation looks expensive based on peers and historical averages for NTMEV/EBITDA and Free Cash Flow.