As you can see, American Eagle has had a great run (excluding COVID impacted 2021) the past few years. The core American Eagle brand has been doing nicely, but the real story has been Aerie’s, the company known for its legging and lingerie.
Aeries has posted 29 consecutive quarters of double digit revenue growth and could do $2B in revenue in FY ‘23, up from $800M in 2019.
American Eagle has used the strong profitable growth from both their core brand and Aeries to not only return capital to shareholders, but also create a new line of business.
So far this year, American Eagle has returned $265M in capital – $65M in dividends and $200M in share buybacks.
Additionally, the company has launched a new logistics wing that I am incredibly excited about by acquiring Quiet Logistics for $340M & the much smaller AirTerra.
Here is how $AEO described Quiet Logistics
“Quiet Logistics is a leading logistics company that operates a network of in-market fulfillment centers in Boston, Chicago, Los Angeles, Dallas, St. Louis and Jacksonville, locating products closer to need, creating inventory efficiencies, cost benefits and affordable same-day and next-day delivery options to customers and stores.”
The company serves some of the biggest names in retail like Fanatics, Steve Madden, Peloton, Khols, and more. Not only can this be a strong stand alone business projected for American Eagle, but also can provide great efficiencies for $AEO too.
With all of the strong and unique business components to $AEO and looking at the financials, you would likely be surprised to learn that the market cap is only $2B.
So what are we missing?
A really rough start to the year.
The stock had dropped from over $15 in May due to rough Q1 earnings. The company shared that the freight costs were impacting margins, there was too much inventory, and not enough demand.
The Crossover initiated its first position in American Eagle on August 15th @ around $13 a share and a ~$2.5B market cap.
At this valuation, it appeared that a lot of the struggles at the company were baked into the stock price.
What attracted to me to this opportunity was the fact that I felt the equity was undervalued. On its own, I would argue that Quiet Logistics & Aries could be worth the market cap of All of $AEO.
The real reason I was intrigued, however?
A 5.5% yield.
The yield was juiced higher due to a drop from $20 a share in May.
Even with the companies short term struggles, management shared that they were planning on making $340M in operating income in FY23, well more than the $150M required to pay the dividend.
So the thesis was simple: American Eagle is a stock trading @ 50% discount to its value and paying a 5.5% yield while you wait. Although the company will have a difficult year, the operating income should more than cover the dividend yield.
However, in the company’s Q2, things got a lot worse.
- American Eagle (brand) revenue declined 8% YoY
- Aerie revenue increased by only 11% YoY
- Gross Profit across the company declined 26% YoY
-
Massive rise in inventories
The hardest blow? Management would be putting the dividend payment on hold due to the macro and American Eagle specific struggles.
In other words, a core component to my thesis was broken. The dividend was gone.
So what did I do?
