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American Eagle vs GAP: Which Retailer Has More Upside Potential?

support@smarteranalyst.com (Ben Mahaney)
·6 min read

Apparel sales took a huge hit due to the temporary closure of retail stores amid the pandemic-led lockdowns. Even after the gradual reopening of global economies, the apparel industry is struggling as consumers are cutting down on their discretionary spending amid challenging macroeconomic conditions.

One favorable outcome amid the current crisis was the rise in sales through e-commerce channels, which helped in offsetting the loss of sales from physical stores to some extent.

For US apparel makers and retailers, the back-to-school and holiday season are prime shopping seasons. However, with most of the schools still shut down due to rising COVID-19 cases, there is a lot of uncertainty for apparel demand in the back-to-school season.

Using the TipRanks’ Stock Comparison tool, we will place apparel makers American Eagle Outfitters and GAP alongside each other to see which stock fares better in these tough conditions.

This image has an empty alt attribute; its file name is AEO-vs-GAP.png
This image has an empty alt attribute; its file name is AEO-vs-GAP.png

American Eagle Outfitters (AEO)

American Eagle Outfitters offers clothing, accessories and personal care products under its American Eagle and Aerie brands. In recent years, the company’s Aerie brand, which includes intimates, apparel, activewear and swimwear, has been a key growth driver.

The Aerie brand accounted for 29% of the company’s overall revenue in the first half of fiscal 2020, up from 18% in the same period last year. Aerie’s appeal lies in product newness and the brand’s body-positive marketing, which lured a large customer base to the intimate apparel space while brands like Victoria's Secret continued to struggle.

Robust digital revenue growth of 74%, the gradual reopening of stores and strong Aerie’s sales helped American Eagle beat analysts’ revenue estimates for the fiscal second quarter (ended Aug. 1) even as the pandemic led to Y/Y declines in key metrics. 2Q revenue dropped 15% Y/Y to $884 million, reflecting the impact of store closures.

American Eagle revenue fell 26% while Aerie’s revenue grew 32%. The company posted an adjusted loss per share of $0.03 compared to adjusted EPS of $0.39 in the fiscal 2019’s second quarter.

American Eagle continues to attract customers with new launches. In the second quarter, it introduced a new activewear brand called OFFLINE by Aerie. AEO is also enhancing its digital presence and opened local shopping sites in Japan, Hong Kong, Australia, Singapore, Taiwan and Malaysia. The company intends to expand its distribution capacity to support higher digital sales.

To capture the demand for the Aerie brand, American Eagle plans to open 25 new Aerie locations, including a few freestanding OFFLINE by Aerie stores. As of the end of the second quarter, the company operated 931 American Eagle stores, 160 Aerie stand-alone stores and 175 Aerie side-by-side stores.

Following the 2Q results, Raymond James analyst Matthew McClintock raised the stock's price target to $15 from $13. He reaffirmed a Buy rating, stating, “We believe AEO will prove to be a market share consolidator in an industry that is ripe for the taking in a post COVID-19 world.”

The analyst added, “Further, AEO's e-commerce penetration is elite and the company's digital leadership should enable AEO to close underperforming stores and negotiate more favorable lease terms going forward (half of existing leases expire by 2021 with ~75% of their C Mall leases).” (See AEO stock analysis on TipRanks)

The Street has a Moderate Buy consensus for American Eagle based on 7 Buys, 4 Holds and no Sells. AEO stock has slipped over 10% year-to-date. Meanwhile, the average analyst price target of $16.17 indicates upside potential of 22.7% in the coming months.

This image has an empty alt attribute; its file name is AEO-1.png
This image has an empty alt attribute; its file name is AEO-1.png

Gap (GPS)

Gap is one of the most iconic names in the American apparel space and owns brands like Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City. However, over the years, the company’s namesake brand and Banana Republic have lost their shine due to strategic missteps.

Store closures tied to COVID-19 pulled down Gap’s fiscal second-quarter revenue by over 18% to $3.28 billion. However, the company benefited from a 95% increase in online sales and a 6% growth in the athletic apparel brand Athleta. In fact, the company added 3.5 million new customers in the quarter through its online channel.

The Old Navy brand also fared better compared to other brands like Gap and Banana Republic with its sales declining 5% as a 36% fall in-store sales was partially offset by an impressive 136% surge in online sales. Overall, weak sales led to a loss per share of $0.17 compared to EPS of $0.44 in the fiscal 2019's second quarter.

Looking ahead, Gap expects a continued recovery in its sales driven by online sales momentum, strength in Old Navy and Athleta brands, which is expected to partially offset the revenue loss from closures of unprofitable stores and continued weakness in the Banana Republic brand.

On September 1, Morgan Stanley analyst Kimberly Greenberger increased the stocks' price target to $16 from $11 but maintained a Hold rating. Following the recent earnings report, the analyst is "more constructive" on the second half of this year and the long-term forecast given management's "revitalized approach to the business."

However, the analyst continues to believe that the Gap brand and Banana Republic might not recover to 2019 sales levels due to store closures and "deteriorating consumer relevance," while she sees Old Navy and the "Other" segment (primarily Athleta) topping 2019 revenue levels by next year. (See GPS stock analysis on TipRanks)

Overall, 3 Buys, 12 Holds and 1 Sell add up to a Hold analyst consensus. The stock has declined about 4% so far in 2020 and the average analyst price target of $18.20 implies upside potential of 7.1% ahead.

This image has an empty alt attribute; its file name is GAP-1.png
This image has an empty alt attribute; its file name is GAP-1.png

American Eagle or Gap?

Aerie’s strong performance even amid the current crisis and future prospects give American Eagle an edge over Gap. Furthermore, the Street consensus and larger upside potential in the stock make American Eagle more favorable than Gap in the current scenario.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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