Why I Bought AEO

I couldn't stop thinking about AEO's new campaign. Not because of the actress or the fake(?) controversy being kicked up online. My interests are artistic, historic and pecuniary. 

I wrote about the ads last week and bought the stock for my personal portfolio a day later. 3 reasons I think AEO is worth a flyer, even after the pop last week. 

There's Something Happening in Denim

Let's keep this simple to start. AEO sells jeans. They also try to sell a ton of mediocre print tee shirts, sweat pants and underperforming Aerie product but ~40% of AEO's revenues come from blue jeans. The largely forgotten mall retailer is still the 4th largest seller of denim in America, behind Levi and Gap. I shared my $LEVI trade ahead of the company's report earlier this month.

Levi's came in better-than-expected on the top and bottom lines, leading to a nice tradable bounce. Management is doing a nice job at Levi's but the it's impossible to move the needle at Levi's without a demand tailwind. When grandmothers tell you to never throw out your clothes because they'll come back into fashion someday, they're talking about denim. Demand goes in and out of fashion. The fabric is both unkillable and impossible to grow much faster than GDP.

Demand for denim is coming in better than people think. Blue jeans are the straw that stirs the drink. The rest of the store can be, and is, lost but if denim demand is strong AEO will be fine. 

Demin is a thing before the Sydney Sweeney campaign. It's really a thing now. 

The Scandal is Fake, Super Profitable

In 1980 15 year old Brooke Shields appeared in a series of ads for Calvin Klein jeans. In one 30 second spot Brooke explains her thoughts on genetics while controrting herself into a pair of pants. Again, she was 15. In the more infamous spot the camera scrolls up Brooke's body gradually before she delivers the tag: "You know what comes between me and my Calvin Klein jeans? Nothing."

Cultural norms change over time but this was skeevy stuff in a much less concerned time. Calvin Klein sales tripled in the next 18 months. Using the same basic model of provocative ads featuring attractive people into 1,000% growth over the next 15yrs before selling to $PVH for billions.

The AEO spots are openly playing off the Shields CK campaign. They aren't propaganda. Sydney is more covered than normal. She's wearing jeans. She looks great. People can't shut up about the campaign.

That sounds like a good ad. The rest of the debate is just politics and noise. I'm not really here for either. 

AEO tapped into the public mood for the first time in ages (ever?). The company is almost half denim and is expected to do nothing but lose market share while posting negative comps for the rest of the year.  I don't care at all about the political debate. The Sydney Sweeney ads are going to move a lot of freaking blue jeans. Because they are good ads, working on a few levels. 

Don't overthink the rest. AEO is going to sell more denim than previously thought in the second half of the year. AEO isn't Google. There aren't a ton of moving parts or big expectations. "Sell more denim" solves a ton of problems at AEO.

It's a Good Chart

Here's a 20 year chart of AEO. This stock was trading above where it is now in 1998. It's cheap for a reason but not going bankrupt, either. $10 is your stop. $20 is doable, $15 seems likely. 

AEO has a tailwind, a story and a good chart. If you're looking for more than that in an aging mall stock you're shopping in the wrong place.