American Eagle Vs. Abercrombie: The Investing Battle

• Anna Andreeva of Oppenheimer pitted American Eagle Outfitters (NYSE: AEO) against Abercrombie & Fitch Co. (NYSE: ANF) in a one-on-one investment battle.
• Andreeva noted both retailers have similar sales (about $3.4 billion globally) and similar store fleets (around 1,000 units).
• Andreeva concluded that productivity at Abercrombie stores have "declined tremendously" over the past few years while America Eagle is almost 60 percent more productive on a sales/gross square feet basis in the US.

In a report published Monday, Oppenheimer analyst Anna Andreeva compared Abercrombie & Fitch to American Eagle to explore which specialty retailer can offer investors a superior return.

Andreeva noted that both firms are benefiting from favorable trends in fashion such as denim and knits. However, the question investors are asking is how long can the momentum continue, or better yet, which firm offers the better investment opportunity.

Inventories – Tie

Both retailers are expected to see average unit revenue upside in the third quarter, while both firms have appropriate exposure to denim. Despite apparel deflation, estimate ticket on denim is 25 percent higher at American Eagle and Hollister, but down 25 percent at Abercrombie & Fitch's core store.

Related Link: For Specialty Retail, The 'Real Test' Comes In The Holiday Quarter

Liability Versus Growth Vehicle – Winner: American Eagle

Abercrombie has seen "eroding" returns in international markets since 2011. Domestically, the company has been trimming its portfolio for five years "without meaningful lift."

On the other hand, American Eagle could benefit from one-third of its leases coming due in 2017, while aerie (8 percent of sales) represents an "under-appreciated" growth vehicle in a "good category."

Balance Sheet Support – Winner: American Eagle

Abercrombie hasn't bought back any of its stock in the past three quarters (nine million shares remain on its repurchase authorization), while American Eagle is "building cash" following three quarters of top-line beats and capital expenditure likely to decrease again in 2016 – making buybacks or special dividends a "strong" possibility.

Overall Sentiment – Winner: American Eagle

Investor expectations for Abercrombie is still "washed out" while the Street is expecting a -2 percent comp with "flattish" gross margins. Meanwhile, the Street is "embedding" a beat at American Eagle as the company has become less promotional.

The Winner

American Eagle is nearly 60 percent more productive than Abercrombie on a sales to gross square feet basis in the US. The company's margins are "healthy" for a specialty retailer which the analyst is modeling to be 9.1 percent in fiscal 2015, higher than a low-single-digit estimate for Abercrombie.

Shares of American Eagle remain Outperform rated with an unchanged $19 price target.

Shares of Abercrombie & Fitch remain Perform rated with no assigned price target.