Aerie (AEO) Beginning To Win The Bra War - Jefferies (LB)

Jefferies analyst, Randal Konik, noted the increasing competition in bras between American Eagle Outfitters' (NYSE: AEO) aerie and L Brands' (NYSE: LB) Pink. From a stock perspective, aerie's share gains are likely to have a more negative effect on LB than it will a positive effect on AEO though it is positively impacting revenue today and over time it should grow and positively impact margins and EPS.

The analyst believes aerie's growth could ultimately result in market share loss for PINK. Given the importance of PINK to LB's growth over the last several years, this could be significant. He estimates that if PINK sales declined by $500M (off the current base of ~$2.5B), this would imply a $0.27 hit to FY’18 EPS of $3.70, or downside of ~7%. Conversely, assuming aerie increases its sales base by $500M with a 20% flow through, this would add $0.35 in EPS, or upside of ~25% off of FY'18 EPS estimate of $1.37.

The strengthening of the aerie business is a catalyst for AEO. At ~$350M or ~10% of sales, aerie is still a small contributor to the total pie, but is rapidly becoming a more meaningful piece, with comps growing in the 20%-30% range over the last several quarters. Moreover, while aerie margins are currently similar to the core AE business, these should move higher as the business scales, providing a profitability lift.

The firm has a Buy rating and $24 PT on AEO and Hold rating and $55 PT on LB.

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