Three Things You Can Watch Forever: Fire Burning, Water Falling, and Retail Stocks Reporting Earnings

May 19, 2022

After yesterday’s declines in many retail stocks and ongoing inflation concerns, ones appetite to look at retail might disappear for quite a long time. We think this is exactly the time to start looking again at the sector.

We recently wrote about Kontoor Brands: “Kontoor Brands: Buy American Jeans. I am”. Kontoor Brands a global lifestyle apparel company with a portfolio led by two of the world’s most iconic consumer brands, Wrangler, and Lee. Company stated that it has confidence in raising fiscal year revenue and EPS guidance. Kontoor Brands was a 2019 spin-off from VF Corporation.

Some of you may remember the article Warren Buffett published in October of 2008 in the midst of credit market crisis “Buy American. I am”.

Such long-term and balanced perspective is always a healthy ingredient worth adding to the toxic cocktail of stock market story of volatility, emotions, sentiment, and short-term perspective.

Today we want to continue with this idea of buying American, and especially American jeans.

So, we take a look at American Eagle Outfitters.

Company is a leading global specialty retailer and operates under two brands: American Eagle and Aerie and total $5 bil in sales (last FY).

American Eagle Outfitters aims to grow Aerie segment significantly and achieve FY 2023 sales of $2,200 million (FY 2021 sales were $1,376 million).

Company has a market capitalization of $2,784 million (assuming full conversion of convertible debt), an Enterprise Value of $2,349 million is currently valued at an EV/EBITDA multiple of x4.02 (average EBITDA for FY 2019 and FY 2021, without FY 2020).

Based on company’s objectives for FY 2023, it aims for $5.8 bil in sales and 800 mil in operating income. This can bring EBITDA to about $967 mil.

Using our valuation assumptions and applying an EV/EBITDA valuation of multiple of x7.5 we believe that shares of American Eagle Outfitters could be valued at $38.5 per share in two years.

This would provide an upside of about 186% or approximately 93% percent annual return.

We also believe that give current story structure of company and its shares, it can become a buyout target or activist investors target.