American Eagle(NYSE: AEO) is a staple in malls, with its namesake brand along with the fast-growing Aerie brand. These two businesses are the main driving force at the company, but not the only divisions worth keeping an eye on. American Eagle's purchase of Quiet Logistics has pushed it into the distribution business as well. Is that working out?
What really matters
Before we answer that question, it is important to stress that American Eagle and Aerie are far more important divisions. American Eagle has 867 stores and Aerie 297. In fact, even the relatively tiny Todd Snyder business, with just 11 stores, is probably more impactful than the Quote Platform.
It shouldn't be too shocking that a retailer's top and bottom lines would be driven by its retail brands. Indeed, American Eagle had a touch over $1 billion in revenue in the first quarter. American Eagle is the larger brand, producing roughly $670 million in sales, with Aerie at about $360 million (Todd Snyder isn't broken out).
That said, the big trend to watch here is the general decline in the American Eagle brand as the company looks to "right-size" that operation while it also seeks to grow Aerie. American Eagle's sales fell roughly 2% year over year in the quarter, while Aerie's sales increased by about 10%.
On the bottom line, American Eagle posted earnings of $0.09 per share in the first quarter, down from $0.16 in the first quarter of 2022. There are a number of moving parts, but two key issues in the quarter were increasing costs and a one-time impairment charge for the company's investment in Quiet Platform. They are connected issues.
A work in progress
In 2021, American Eagle bought Quiet Logistics, which is basically the foundation for its Quiet Platform business. As you might suspect from the name, it is a logistics company. American Eagle hoped to use this platform to both handle the direct-to-consumer distribution of its own wares and open the system up to outside businesses. This way, it would get more control of its own system and create a new revenue source in the process.
The fact that American Eagle wrote down the value of this investment tells you that it hasn't performed as well as expected. The charge in the first quarter totaled around $21.3 million -- n ot huge, but enough to cut operating income in half, more or less. This was not a good thing, with cost-reduction efforts in the division hinting that demand hasn't been as strong as hoped for. That's the bad news. This may not be as material an operation as expected, or it may just need more time (and perhaps investment) to ramp up.
And yet it hasn't been a total failure. For example, American Eagle explains that it has been able to get products into customers' hands more quickly, while at the same time reducing its fulfillment costs. Both are material wins since customers are happier, and lower costs mean higher profits. So the Quiet Platform is an important business effort, and investors should keep tabs on it. It just isn't a major revenue source, and it may never be one.
While investors should pay the most attention to American Eagle and Aerie, they should also be monitoring Quiet Platform. It appears the worst-case scenario is that this business helps American Eagle improve its own performance, which is not nothing.
But the longer-term question may be whether it can actually be turned into the revenue platform that management once envisioned. Logistics is difficult, and it may be too soon to make a final call, but it is worth continuing to watch. This business could turn into a hidden gem if American Eagle can optimize it to work better, first for itself and then for other retailers.
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