New Strategy, Upgrades Suggest American Eagle Outfitters (NYSE:AEO) Has New Life in It

For those who thought the era of the mall-facing retailer was gone for good, brought low by online shopping and ultimately dispatched by COVID-19 restrictions, the news may not be so dire as previously expected. We can base that on recent reports that give American Eagle Outfitters (NYSE:AEO) a brighter future thanks to equally recent changes in the company's strategy and the analyst pool's recognition of same.

Taking On the New Market

Right now, American Eagle operates around 880 stores total. Over the next several months, the company plans to reduce that number to between 600 and 700, and also plans to focus on negotiating vastly shorter leases for its physical storefront operations. For 2020, about 85% of its lease renewal operations were annual, going for just one year.

The company is eager to make all of its branded operations look more like Aerie, which has proven to be the biggest bright spot in the company's operations so far. The Aerie brand currently has a goal of realizing $2 billion in annual revenue by itself, based on word from a recent investor's day call. That would represent a compound annual growth rate (CAGR) in the mid-20% range, giving the company a significant boost to cash flow.

The company's closure efforts, among other strategies, are part of what's known as the “Real Power. Real Growth.” market plan, a move which seeks to develop current markets over time. Reports suggest that, while the company is planning to shut down stores at a good clip, there will be some graduated steps involved. COO Mike Rempell noted that, this fiscal year, the company would close around 50 American Eagle outlets, and “learn from those results,” suggesting that the approximately 200 closures planned wouldn't be all at once.

Even as American Eagle stores close, Aerie stores are set to take their place in many regards. There are currently 342 outlets right now, reports note, and by 2023 that number will nearly double to reach between 500 and 600 outlets.

Making Headway With Analysts

The analyst pool, based on our latest research, is responding quite favorably to American Eagle's moves. Currently, the stock is rated a “buy”, and has held such rating for the last three months. The ratios making up that rating are improving as well. The ratios from six months ago came in at one “sell”, nine “hold”, and seven “buy”. That “sell” rating departed the mix three months ago and hasn't been seen since; today, we stand at seven “hold” and 11 “buy” ratings.

The price target, meanwhile, has been climbing as well. Six months ago, the company was at a consensus price target of $13.18. That went to $15.06 three months ago, and $17.28 a month ago. Today, it stands at $22 even, and for the first time in six months, represents downside potential. Given that seven separate analysts boosted their price targets back on Friday, most in the $25 - $30 range, it's a safe bet that some laggards just haven't caught the price hike momentum yet.

Beating Trouble at the Mall

The good news for companies like American Eagle Outfitters is that there are clear signs of normalcy rejoining the market. It's actually been possible to walk around a mall again in many places, possibly the result of state governments looking at the crater that was their tax budgets and realizing retailers need to be open to provide sales tax revenue. That's going to mean increased—over what it was, anyway—foot traffic at stores as normalcy-craving shoppers go back to trying on shirts and toting bags once more.

The scope of such effects, however, is uncertain. However, American Eagle has planned for this. The company is already having quite a bit of success with its AEO Direct, an online shopping operation that showed a clear prescience even in its era. For normal times, it was a convenience, but for the pandemic, it was a godsend. Even back in 2019, reports note, AEO Direct accounted for 29% of American Eagle's revenue, which made it just what American Eagle needed today. Throw in the fact that American Eagle has aced a lot of its competitors with the strong online performance over the last few years, and its only-slightly-accelerated move to a hybrid model of operations necessary for today's conditions, and American Eagle suddenly looks like a much stronger clothing retail operation than many others.

So for those who want to keep a presence in mall-facing retail that doesn't look like it might implode any time soon, American Eagle is likely to prove one of the strongest players in this post-pandemic market. Buying in right now might be one of the best moves you'll make these days.