American Eagle Outfitters: Why It's A Great Buy Now

Posted September 28, 2011

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Yesterday, news broke that the chairman of American Eagle Outfitters (AEO) purchased 1 million shares on September 22. On that same day, the director of the company purchased about 120 thousand shares, bringing the total purchases to 1.12 million shares. I had been on the edge about whether or not to purchase AEO shares for a few weeks, and this insider purchase convinced me that now was the time to buy. The last time Chairman Jay Schottenstein made an insider purchase was 9/8/2010. That purchase returned 14.80% in 6 months. Michael Jesselson's last large purchase was around the same time, it returned 9.80% in 6 months.

While those numbers are nice, these are the reasons I was interested in AEO in the first place:

AEO is greatly improving online sales. In the most recent quarterly report, AEO's direct-to-consumer businesses (ae.com, aerie.com and 77kids.com) had a sales increase of 16% due to higher transactions driven by "improved traffic and conversion." Companies like Amazon.com (AMZN) have proven that a large part of future consumer spending will be conducted online. For a company like AEO to post a respectable 16% growth means it is doing well at making itself a part of that future consumer spending.

Cotton prices are falling. The high cotton prices over the past year continue to impact AEO's bottom line, but appear to be stabilizing. The cost of cotton is returning to Earth, down more than 50% from its March 2011 highs, and yet cotton could still drop another 25% over the next year, further improving margins for AEO. Regardless of how far cotton does or doesn't fall, it should start to trade in a tighter range, allowing management to better price products to reflect the overall higher prices in cotton. READ FULL ARTICLE HERE

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American Eagle Outfitters