Chit Chat Stocks - American Eagle (AEO) | Deep Dive

Episode Date: January 7, 2021

American Eagle Outfitters is an American lifestyle and clothing brand. A recommendation from a listener put American Eagle onto Chit Chat Money. This week we are joined by Ian Gray as the team dives into what the future of American Eagle Outfitters may look like. As always enjoy the episode! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Subscribe to Chit Chat Money on Youtube: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

All right, welcome in. This is the deep dive episode. And today we're going to be talking with Ian Gray. He's on the Thursday episode every time, as you probably have heard before. But if you're a new listener after December, yeah, he joins us every Thursday to do a deep dive into an episode and it will be for American Eagle Outfitters. But before we hit that, we have to talk about our friends at 7investing. Right, Ryan? Yeah, this is our sales pitch and it's going really well, actually. you guys are all signing up that's right yeah this is much appreciated and they had their new picks this month new year new picks new them and uh it's uh they look pretty interesting i'm not

gonna lie there was one that i had never come across but i was pretty uh it piqued my interest that would probably be matt's right yes yes uh but yeah if you use the code ccm you get ten dollars off feels like a no-brainer i've been doing it constantly to uh get us more kickbacks so it's uh yeah no it's uh it is a good deal and uh yeah it's code ccm so it's only seven dollars for your first month yeah they just had new they just had new picks you can see they're very timely right now if you want to do it yes all right uh i think that's it though yep all right let's hit to the show welcome to chit chat money on this show host ryan henderson and brett schaefer interview industry experts, and riff on the world of investment.

As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. All right, welcome in, everyone. Today, we're talking American Eagle. What's the O on that?

What is it? Outfitters. Outfitters, okay. I'm on the roll here. We have Ian back and we're back from the holiday season. So how was tax loss harvesting season, guys? Is that all with that? Didn't exist this year.

No, no. 2020 stocks only go up. Right, right. Yeah. I mean, yeah, you probably had zero losses, right? But Ian, in all seriousness, how was your holiday season? It was really good. Got to spend a little time with the family and open some good presents and ate some good

food. So can't complain at all. But I do want to say really enjoyed the 25 stocks of Christmas was a lot of fun coming on for one of the shows and to just hear all the great guests you had on. It was a really fun program you did. Yeah. And if you're someone that started listening during the 25 Stocks of Christmas, this is another one of our shows we do on a regular basis. We do these every week and it's going to be the three of us and we're going to do a deep dive into a single company, probably like 30 to 40 minutes. And hopefully after listening, you understand it well. So today

we're doing American Eagle Outfitters and I'll toss it over to Ryan to introduce the company. Yeah. So, American Eagle, some people might recognize this name just from wandering around malls and seeing it, but they are a multi-brand specialty retailer. So, they operate and license over 1,300 stores in the US, Canada, Mexico, and Hong Kong. And they appeal primarily to youth and teen demographics, also sort of like university age kids, I guess kids, you know. Millennials, Gen Z. Yeah. And so the two primary brands that they offer are American Eagle and Aerie. Do you know if you're saying that right? Aerie? I hope so. I was going to ask you because I hope we're not botching it the entire show. Yeah. All right. We're going to go with Aerie. But they also have something called Todd Snyder

New York, but that's just basically two stores that offer premium menswear, which so it's pretty insignificant to the business. But American Eagle is its older brand and it has men and women's apparel, but it's mostly notable for its denim jeans. That's sort of how they got, uh, started back in like the 1980s. They were really known for their outdoorsy stuff. Uh, but now Aerie is one of the bigger, more faster growing, uh, parts of the business. And this is kind of their woke brand. I'm putting woke in air quotes here. Uh, and so a big tenant for that brand is inclusivity. So it's got some men's stuff, but it's bigger with women. So they have intimates is what they call it, which is just like bras, underwear, swimsuits, that type of

thing. And then they also branch out into pretty much all apparel for women. And this is growing a lot faster than American Eagle. It has had 24 consecutive quarters of double digit revenue growth. Pretty fascinating there. I mean, it's becoming a pretty big part of the business. Yeah, it might become majority of their business sometime in the next few years here. So it is very, very important. And I mean, if you pay attention to Instagram followers, currently American Eagle has 3.8 and Aerie has 1.4 million. So, you know, I don't know what data that provides, but it is free marketing.

Yeah, what's their EV to Instagram followers? That's the real question. That's an important metric. 83% of their stores are wholly owned and operated, and the remaining 17% are third-party licensed. So basically, those ones are all over the place. They have stores in China, Europe, Middle East, South America. And basically, when they branch out in the U.S., they use third-party licensees to open those stores, maybe because they know the area better, know what kind of merchandise people are looking for, that kind of thing.

about 70 of the stores are just american eagle brand and then the other 30 are just airy brand or a blend of both um and then history american eagles an old company like almost 45 years old now they were founded in 1977 out of silverman's menswear which was a family-run menswear business jerry and mark silverman were the two sons of that family and they started it because they thought they needed to diversify the business. And over the 80s, American Eagle started to grow to become sort of the big player in their business. And in 1991, they sold their stake to, I think it's called like the Schlottensteins. I'm probably getting that wrong. I don't know if I put it down here. But they took the company public in 1994. And I think it was at

88 cents a share then, and they had 167 stores. So they've 8x or 9x their store count since then, and it's sitting at about $20 a share now. Pretty good run. Pretty good run. Yeah, that's a great overview. All of the industry and landscape and some of their competitors. So as we all know, the global apparel market is over $1 trillion. So AEO, they're not going to come up on any theoretical market saturation anytime soon. This is not someone like Walmart or anyone like that, where you're worried about how, you know, they've already dominated an entire neighborhood. You know, they only have a few billion dollars in revenue. The landscape though, they have a major DTC transition among apparel and then among

AEO themselves. So they're really trying to get American Eagle and Ari into DTC and specifically because of COVID, but also it was slowly happening pre-COVID. And then there's been a big transition away from malls for apparel retailers, which investors do need to watch out for to see if AEO is managing that transition well. Direct competitors would be, you know, someone like Abercrombie & Fitch. H&M is a kind of a competitor. Forever 21 is also kind of a competitor. If you want someone on the cheaper end that would be considered a competitor for apparel, it's someone like The Gap, maybe. And then if you go higher up, you'd probably have the stock of Capri Holdings, which owns like versace and uh michael kors so that's kind of the time louis vuitton stuff like

that that would be on the higher end but uh abercrombie and fitch is kind of in that mid luxury thing where it's not real luxury but it's not like you know some ten dollar sweatpants you get at the gap um indirect competitors these are kind of companies that could either steal their margins or growth that would be someone like you know amazon keep coming and steal some stuff with their own party stuff target is probably a competitor as well i didn't put walmart on there because I think they're too cheap with the apparel they offer. And then someone like Stitch Fix is also a competitor that's more online only. And then there is Nordstrom's, Macy's, JCPenney.

We all know what those are. And the only question I have here is, should investors be focused on competitors when looking at AEO? I was kind of saying no, but what do you guys think? I mean, you can have multiple winners in this space. So I don't know if it matters that much. And as far as like competitive landscapes goes, this is one of the most competitive landscapes in the world physical retail other than maybe like

auto or i can't even think of any other ones but uh yeah i wouldn't pay too much attention to it yeah ian what do you think i think i think you were really smart though to point out some of the indirect competitors um particularly someone like amazon or stitch fix that's more online based because that represents a threat to their business model it's not necessarily that someone's gonna like some of those direct competitors like abercrombie and fitch it doesn't matter so much if they're selling this t-shirt or that t-shirt but what matters is the business model they're approaching and so um i think that's the thing that you should be focused on when looking at american eagle is is there any threats to the business model not necessarily just direct

competitors yeah i mean they could sell on stitch fix they could sell on amazon they probably do but that could hurt their margins over time because amazon and stitch fix have the control over the consumer but next up is management so ian do you want to hit that yep so like ryan mentioned, the Schottensteins bought this company back in 1991, 92. And so the current CEO is Jay Schottenstein, who was the son of kind of that Schottenstein family. He became, he's currently a CEO. He became CEO in 2014. He was also previously CEO from 1992 until 2002. In between his two stints, he was the CEO of DSW designer shoe warehouse. And so he's had a lot of experience, um, in this, in this industry, basically for the last 30 years. So pretty experienced guy. Um,

he took over as the interim in 2014. And then in late 2015, uh, they made him the full-time CEO. He was the executive chairman of the board. So I think, I imagine he was kind of thinking he was going to be more in the retirement mode. And then, uh, they kind of hit some tough times and decided, okay, we have to, you know, I have to get back in there and fix it up a little bit since he's been back in the company. Um, the company's up about 32% since he took over. Um, so which is losing to the market, but, um, he has done some good things at the peak. The company was up about 83% after he took over. So, um, he's made some good efforts. It's been a tough landscape, but it is losing to the market over that period. I do want to highlight. Oh, go ahead, Ryan.

Do you know how old he is? I don't have that exact number, but he looked to be somewhere mid-60s to early 70s, somewhere in that range. And I did see on the 2019, or they mentioned it on the latest conference call, they did not take executive bonuses in 2019. So that, I mean, if they missed some of their numbers and they actually, you know, fell, the stock fell because of that, the shareholders won't get performance that they may have expected. They didn't, you of irrationally reward their executive team, but continuing. Right. No, and that's a good point. It's, it's good to see when brands that, that management teams are living and dying with the shareholders. Um, I think I do want to point out that they made a good decision to pivot more

strongly to Aerie. I think it was launched in 2006. Um, but that was, as Ryan mentioned, mostly, um, kind of the intimates and not as, uh, full scale as they have become, but more recently, they really made that stronger pivot to Aerie being more, you know, this body positivity brand and they got a lot of kind of tailwinds from the me too movement because there was a lot of fallout with Victoria's secret and L brands and some of the, those types of things. And so they were able to kind of take some market share during that time. And if, as you've mentioned, Ryan,

I've been growing at double digit rates and so that looking back on it, that looks to be a really good decision by management to focus more on that side of the business. Most of the executives have been around for like 10 plus years. And so it's a pretty experienced team. They know the business. They've been around this company and all work together for a long time. So a lot of stability.

Insiders own a little over 6% of the company. And almost all of that is Jay Schottenstein's position. He, most of the other insiders don't own too much, but he, he has the largest chunk and then a lot of institutional ownership. And I will point out, they also have a significant short interest, which looks to be somewhere around 15% of total shares outstanding, which I assume is largely due to the pandemic and people shorting a retail brand. Retail is dying. We hear that all the time. And so I'm not entirely surprised that there's a larger short interest here. Yeah, that's not really important if you're

like a five-year time horizon type of investor, because in the end, it's just about the earnings power. But in the short run, that could be if someone's looking for some sort of short-term trade if there's that short interest there could eventually be a short squeeze but i'll head to the valuation so the ticker is aeo ryan you got something yeah i was gonna say while we're on the topic of sort of shareholders and short sellers uh i came across this because kermit capital if you know i'm on twitter dm me and said what do you know about aeo uh it's gavin baker's largest holding so i think it's one of his largest holdings yeah i looked at the 13f for i'm forgetting a treaties management or something like that um so yeah if you needed some confirmation

bias that's who you're holding shares with that is major confirmation bias all right i'll hit the yeah the valuation ticker is aeo market cap 3.42 billion and enterprise value of about 4.62 billion they took out a large convertible note and do have a lot of operating lease liabilities which can get classified as debt so really when you're doing the enterprise value you may want to adjust for some things if you think that that convertible note is going to get you know converted to equity and not be um it's not going to be as uh whatever like it's not actual bet on the balance sheet it's kind of a hybrid uh the evita sales those about 1.2 over the past 12 months evita evita is 7.1 over the past 12 months do you guys think that is an acceptable metric to value aeo on or would

you rather do cash flow or something like that i mean you gotta uh it's i've never understood of people using EBITDA for retail I feel like depreciation matters a ton yeah and I'm just getting these down from Koyfin so those are the references there you might calculate your own numbers EBITDA operating cash flow is 20 so that's a bit higher more of a normal valuation there although they are getting a lot of that eaten by CapEx over the last few months pre-COVID they were close to double this for operating cash flow I think they were pushing above 400 million for trailing 12 months and like those winter quarters and then the fall of 2019 uh the dividend is back now they did defer it but now it is back and it got paid out on december 30th of 2020 and now it

is around 14 cents a quarter which is not much um but it's something it's there that's like less than one percent yield right yeah so it's not something where you're buying this for the dividend uh i should also note though that a decrease in inventory has accounted for over a hundred million dollars in cash flow over the last nine months that's not something that can continue forever but it does show that they're you know increasing their inventory efficiency during a turbulent time like this i think that's a good indication that management is you know managing the company well uh only question i have here what do you guys think the best value valuation metric is for someone like aeo i would probably go even a free cash

that's kind of the thing yeah i mean i feel like you say that for most businesses uh yeah gap isn't gap isn't like a terrible metric uh gap earnings for like a retail business like this but yeah free cash flow is probably the most important and then the enterprise value um you just have to take into account that a lot of that i believe is coming from the convertible debt and it's so that yeah the one number i have here is from coif and so that could also be including the operating lease liabilities, which you might, depending on how you want to classify it, you might not put that in the long-term debt. But Ian, what do you think? What's your go-to valuation metrics for this company? Yeah, I think either free cash flow or operating cash flow, you're going to want to

do EV to one of those numbers just because you do want to see how management is using leverage and how that's impacting the business. And you don't want it to be like, you don't want to use the EV at a number devoid of leverage in this case, because they are using leverage and they will probably continue to use leverage. And so that's going to have a material impact on the business. Right. And I'd also probably look at gross margins because if they can keep that new level high and they're growing their revenue on that should eventually, you know, get down to the free cashflow line, which, you know, Ryan will hit next with the earnings, right? That's right. And I'm going to give some of the last 12 month numbers and then most recent quarter

because there's a sort of a, there's been a big change obviously over the last year. So over the last 12 months, revenue has been 3.8 billion. That's a down 11% year over year. Last 12 month operating income has been negative 17 million. Last year around this time, it was about 341 million. So obviously the profitability has been affected by COVID. And then over the last five years, they typically generate between 200 and 300 million in net income. Operating cash flow was 227 million. If you're looking at the difference between operating cash flow and operating income or net income, you're probably, a lot of that's probably coming from the depreciation cost. And then Q3, so the most recent quarter, total revenue decreased about 3%

to 1 point, basically 1 billion. And most of that decline is from lower mall traffic. That's not really a surprise to anyone, but if you separate them out into brands, American Eagle revenue was down 11% and Aerie revenue was still up 34% year over year, which is pretty impressive growth. A lot of that came from online. So overall digital sales for all of American Eagle was up about 29% year over year. A lot of that came from Aerie. So the whole company has been sort of held up by Aerie being a little more digitally native compared to American Eagle. It feels like a lot more American Eagle diehard customers. I don't really know any of those, but if you are, you're probably shopping in person. Operating income was flat year over year for the quarter. So this

quarter they did generate about 103 million if you subtract out COVID protocol expenses. Gross margins, this was kind of interesting, was also higher this time versus last year at about 40%. So they actually printed higher gross profit in Q3 this year than they did last year. But they said a lot of this was because they reduced their discounts. So like they just stopped doing as many discounts in Q3. I don't know how to think about that. Does that show like, oh, they were able to create some pricing power with their brands or is like, does that upset customers and they created some profits in the short term? I think better inventory efficiency and maybe the DGC stuff online helped out a bit. But I mean, if the gross margins are going up consistently,

I mean, shareholders got to love that. Yeah. And then net income for the quarter was $58 million, about $20 million less than last year. There was just higher operating expenses all around. A lot of that was COVID related. Earnings per share, this is just something to pay attention to, might look a little worse next year because of that convertible debt that they offered in April.

And it would create about 8% dilution. So I believe they said it's unrecognized, but it could be 184 million outstanding shares. And right now they have 169 if that converts into shares. Do you know, we probably should have looked this up. Does anyone know what the strike price is? I don't. I don't either. Right.

Someone, if you're going to invest, it's probably smart to look at that. Definitely worth looking at that. What else do we have? Ian, you got the balance sheet liquidity. Yep. So I'll dive into that right now. So they've got a positive net cash position if leases aren't counted as debt. And that kind of that comes down to a little bit of your personal preference about whether you want to consider these leases for buildings and things of that nature to be debt or not.

Either way, they've got about six hundred and ninety two million dollars in cash. They have three hundred and twenty million, twenty one million dollars in long term debt. There was a revolving line of credit, not this convertible note that they were talking about that they said at the end of the quarter, they said that they've repaid. So, either way, they have somewhere, we'll see exactly how the numbers come out in the next balance sheet, but they've got, if you don't include those operating leases, they've got about $350 million in cash, net cash. So one thing I do want to point out here is that their inventory ratio was down to about four times. Inventory turnover ratio was down to about four times from six times. And we haven't talked about this number on the show before, but I think it's a good one for a retailer like this. Inventory turnover ratio basically means how many times do they sell inventory throughout the year? And so if you think about it in simplest terms, how many times do they restock the store and sell it all again? So, you know, basically take everything in the store, sell it, restock it, sell it. How many times do they do that in a year?

And the number now is saying that they do that four times versus their historical average of about six times. That's likely due to the pandemic and would have had a negative impact on earnings and cash flow just because they weren't able to go through inventory as much and earn that gross margin on every extra item they sold. And so that's a number to keep in mind as you look at their balance sheet. And as you look at American Eagle going forward, I would expect that coming out of this pandemic, they're going to get back up to around six times or higher. And with the direct-to-consumer business, it should get even higher than that if that continues to grow as a larger portion of the business. But something to keep an eye on. Yeah, balance sheet looks good overall. All right, we're going to take a break and then get back for competitive advantages on the second half of the show.

cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. All right, welcome back. Next up is competitive advantages.

I think we had Ian going first on our old schedule here. So we're going to do all three of these are whatever the second half of the show segments. We're going to start with Ian, then Ryan, then go to me, then go back to Ian. So Ian, first up, what are your competitive advantages? Did you see any with AEO here? Yeah, I think it's hard to find competitive advantages. for something that is, it's not quite a commodity, but it is, um, it's, it borders on a commodity in my mind. Um, and so one thing I will point out though, is that whether you consider this a

competitive advantage or not, is their experience management team, which I mentioned earlier, um, starting with Schottenstein, the CEO, who's been in the industry for over 30 years, um, very familiar with the industry and just a lot of continuity. And so they shouldn't have any sorts of issues with, um, hopefully you shouldn't have any sort of issues with internal strife or, you know, revolving pieces. They have their team, they know how to execute. And, um, if you trust that team, they should be around for a while longer. Okay. Yeah. That makes sense. Ryan. Yeah. My next, uh, I guess for me, they target high school and university age students. So, uh, and that customer cohort knows how to shop online. They're digitally

capable, I guess is a nice way to say it. And I have to imagine a lot of that, that is what's driving probably some omni-channel success and e-commerce success as well. Like Aerie's online sales grew 83% year over year this quarter. I have to imagine that they're going to have success in the fourth quarter and the Christmas season as well online. And I think the right customer mix is a bit of a competitive advantage because I think traditional retailers kind of lack it. And That's what we've seen, like Nordstrom's, Gap, Macy's, Sears, companies like that have really struggled because they have, not only were they not digital native, so they weren't ready to go online, but it's harder to go online when a lot of your customers aren't used to shopping there. So they've struggled with that. Yeah, and I have another note that I saw in the conference call that 20, they grew digital acquisitions, so new customers for their digital whatever websites or someone that checked out clothes on either any of these websites.

website said they're using grew 23% last quarter, which that's probably another number to keep track of to see if they're getting that transition from the in-store crossing over, because that's tough. You got to transition your customer to a whole new way of buying. If they can do that, they can build that online competitive advantage. But all in mind, it's similar to Ryan's. So they have a large store footprint, which can be a little bit of a disadvantage, especially right now. We have 1,300 stores, but it's not as bad as JCPenney, Macy's, Nordstrom, someone like that with those big box retailers. And it'll likely help them transition to online easier, which, as you guys have pointed out, the numbers we've shown, they have transitioned to online very

easily. For example, right now, online is 37% of their sales, which is a lot higher than people may have thought. Outside of that, though, it is hard, like Ian said, to find any competitive advantages. I mean, there's a lot of companies similar to Abercrombie, or sorry, yeah, I almost said I said Abercrombie. There's a lot of companies similar to American Eagle. Yeah, you got to do something that really sticks out or something super unique if you're in like one of the most competitive spaces in order to have an advantage. Future growth opportunities, Ian, you're first, right? Yeah, kind of along that line. I think one of the ways that they can grow and start to stand out a little bit is maybe do some acquisitions. There's a lot of DTC brands out there right now

and they're small brands and they're growing and they, you know, potentially some of them are looking for some exits. And so I'd love to see if American Eagle actually got aggressive with some of this cash that it has and says, you know what, we're going to buy a couple of these small DTC brands. We've figured out how to grow Aerie and we're going to take that formula and apply it to some more of these brands and really start to become more of an umbrella over many D to C brands in some of these categories, you know, maybe it's some stuff that's complimentary to Aerie. Maybe it's other things that are, um, in a new direction or some more menswear type stuff, but they have some of this industry knowledge and they seem to have done a good job with Aerie

and this D to C thing. So I'd love to see them, um, take on some, some more, like I said, I think some acquisitions would be kind of interesting in this area. Yeah. Cause D to C these, uh, a lot of these brands have struggled to reach profitability. There's a scale that you have to get to, AEO has gotten to there. So they could apply that to some smaller companies that definitely can work out. So yeah, Ryan, what do you have for future growth opportunities? Yeah, mine's increasing store count. So I think a lot of traditional mall retailers and mall businesses in general, and maybe specific locations will fail, or maybe have already failed because of covid i think right now is a time when uh if uh american eagle is aggressive in expanding their

store count they can probably get a lot of cheap leases uh a lot of cheap real estate because i have to imagine mall real estate doesn't seem that appealing right now for most most uh retailers yep yeah that just seems like a logical next step yeah that would be interesting to try to go i mean we do know commercial real estate is super cheap right now um yeah we got i mean we're in a cheap office right now we are yeah they're basically super cheap they are throwing those out yeah they could lock in some uh yes you know some deals there um that is a bit risky though you know are there any are there that many good spots left yeah right now it looks like they're sort of just sticking to the same track they have been uh but i think almost all their new store

opens this quarter or airy okay uh or aries but yeah so not american eagle um i guess that's probably a good idea is playing into the brand that's growing more yeah obviously but all right what do you have yeah i have airy for my future growth opportunity i mean there's not really any complicated ones for them you can see it right on their earnings report it's going to be the brand that's growing the quickest i mean if you believe they can build this brand up you know with pricing power they can have it to be top of mind for the younger generation i mean it's going to be worth a lot more. You know, a number to track for them might be the digital revenue for Aerie specifically. It was up 83% last quarter. If they continue that high double digit revenue

growth, it's not going to be 80% forever. They could get that up to, you know, I mean, I think they crossed the $1 billion mark for trailing 12 month revenue for Aerie, maybe. Could be wrong on that. But I mean, they could get up to $2 billion in revenue. That's a lot of profits potentially from that. It sounds, it sounds super simple, but I mean, that's it. I mean, if you believe in that brand, it's kind of tough to this. If you decide that it's something that people are going to grow into, it's going to become a dominant brand for whatever their niche is. I mean, there's plenty of opportunity for them there. All right. Go ahead, Ryan. And I would rather be an American Eagles spot than to be some up and coming DTC brand right now, because it feels like everyone

for the longest time was like if you're not starting online or if you're not online you're screwed but now it seems like if you don't have some sort of physical presence it's going to be hard to differentiate yourself it's yeah the hybrid model feels like the best position to be in yeah yeah highlights and lowlights yeah i can dive into the highlights and lowlights and i'll start with ari and kind of piggyback off that conversation we were just having but i think they Aerie's grown a lot and they're proving that they have this distribution model to go that's hybrid like you said that we can you know we can sell it online and we can sell it in our stores and that just raises awareness people see your brand around they see you in physical locations and

it kind of raises your brand status a little bit too and so you know like I mentioned the growth opportunity I think that whether it's directly through Aerie or whether it's through new brands that they launch or that they acquire. I think that model is really a great highlight for them. They've got a solid balance sheet. And I think it's also worth pointing out, they made it through the pandemic. There were some of these types of brands that didn't make it through the pandemic. And I think that shows some of the strength that American Eagle has, that they did make it through the pandemic and that Aerie is still growing and putting up some pretty big numbers. From my low light, I'm just going to stick to one, but its own brand really

isn't growing much. And it's actually declined in the last 12 months, which is understandable due to the pandemic but even before that it didn't have very impressive growth numbers and so they they've had to make a transition to to more and more revenue coming from airy and i think that transition is going to continue but okay am i up yeah yeah okay highlights for me this was kind of i'm picking i'm piggybacking off a topic that uh phil brewster and mcmurtry talked about which was like the there's going to be winners and losers coming out of covid uh and retail seems like a spot where that's going to really play out. And as a byproduct of that, I think there's going to be a lot of customer consolidation into, and hopefully American Eagle is a beneficiary of

that. If AEO, which American Eagle Outfitters can be a winner, or at least have the balance sheet to be a survivor, it's, I think they're in a really good spot and their normalized earnings moving forward are probably going to be as good, if not better than before. And that's probably what a lot of the big shareholders are looking at right now low lights for me uh while they are adapting to the new or they have adapted to the covid environment we they are still predominantly a physical retailer and we don't know how long lockdowns are going to go on for um and it feels like we're getting out the other end of covid but it right now we're still locked down where we are so it's uh it's kind of hard to tell it's a little unpredictable also i thought this valuation would

be a lot cheaper if i'm being honest i know we're not supposed to use that as a low light but it's it's it's up way more than when it started the year yeah initially it looks cheap when you look at that ebitda number but when you get down to the cash flow stuff um i mean it's not crazy uh and it has bumped up because i did have a good quarter the last quarter uh but it's it's fair it's fair if this company gets back to printing 200 to 300 million in net income or free cash flow they're going to be in there and this is going to seem really cheap yeah but uh right now i don't think they're out of the woods yet so i guess that's my low light what about you yeah you got to believe they can get their uh highlights for me i mean the fact that they generated free cash flow i i

believe they have um i'm trusting coif and on this one over the past 12 months you know with over 1 billion dollars in operating lease liabilities you have 1300 stores on their balance sheet is kind of a testament again to the management and the company as well they really managed this price as well. Low light for me, though, is stores could weigh them down. Even when COVID ends, the stores in these malls, if they're in poor locations, definitely could weigh down their profits and their stability to generate cash. I should note, though, that 60% of their leases are up in the next 12 to 24 months. So that should give them flexibility. They could either go from one location to the next, take out a store, move it to another part of the town, because a lot of

these malls are kind of dying right if you have a location in the mall with no traffic uh i mean that store is just no matter how good of a product you have it's just not going to do well um and then lastly i don't know if this is a business i can understand when things are improving versus declining like i don't know why people like you know them versus h&m versus ever probably in versus you know someone like gap um it's tough for me to gauge so that it might be it's it's a simple business but it might end up in my too hard pile but there's so many different things that end up tweaking earnings just a little bit, but it's every single quarter because there's so much inventory management that goes around it. And there's so many ad backs when

you're calculating cashflow. So it's just, uh, I don't know, depreciation also is kind of a pain in the butt, but, uh, always is. Right. Yeah. Um, all right. No, I think that's it. Right. Yeah. We have more or less interested in wrap up question. Ian, what do you think? Maybe just slightly more interested. Interesting. I think it's an interesting model and the area growth is impressive to me okay yeah ryan i'm gonna go not interested i was pretty interested when i heard it was like gavin baker's largest holding that'd be an interesting reopen play but there's just a little too much uncertainty for it uh for me to be that interesting yeah i mean i'm kind of on the fence like you know with em if i had to lean one way i'd probably be

slightly more interested but it seems like i don't know i'm pretty neutral no way i'm saying uh I mean, we never do this, but no way I would ever say like, no, this is definitely a buy recommendation. I'm immediately putting it in my portfolio. Interesting company to put on the watch list, but at a valuation like this, it's not something where I think, you know, valuation versus their growth prospects and the potential profitability in a normal environment. I mean, I don't know. It doesn't seem that appealing, right? Yeah. I just think there's hopefully better places to put your money possibly right now. I also would not have been surprised if this was at half the valuation yeah yeah just because of where it uh sort of the narrative

around being a physical retailer right now but again if you are a shareholder in something like this or you're thinking of buying shares i mean i wouldn't be surprised if they do well over the next five years you know if they execute they have a lot of potential to do well all right uh anything else before we wrap things up guys i think that's it all right that's going to do it for this episode as always make sure to use our promo code ccm at checkout at seven investing to gets $10 off your first month. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Thank you all for listening. We'll see you next week.