Reviewing GAP (NYSE:GAP) & American Eagle Outfitters (NYSE:AEO)

American Eagle Outfitters (NYSE:AEO) and GAP (NYSE:GAP) are both mid-cap retail/wholesale companies, but which is the better investment? We will contrast the two companies based on the strength of their risk, dividends, profitability, valuation, institutional ownership, analyst recommendations and earnings.

Analyst Recommendations

This is a breakdown of current ratings for American Eagle Outfitters and GAP, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
American Eagle Outfitters	1	4	3	0	2.25
GAP	0	3	0	0	2.00

American Eagle Outfitters currently has a consensus target price of $25.75, suggesting a potential upside of 16.20%. GAP has a consensus target price of $27.00, suggesting a potential upside of 27.00%. Given GAP’s higher probable upside, analysts clearly believe GAP is more favorable than American Eagle Outfitters.

Institutional and Insider Ownership

97.3% of American Eagle Outfitters shares are held by institutional investors. 7.3% of American Eagle Outfitters shares are held by insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a stock is poised for long-term growth.

Dividends

American Eagle Outfitters pays an annual dividend of $0.50 per share and has a dividend yield of 2.3%. GAP pays an annual dividend of $0.60 per share and has a dividend yield of 2.8%. American Eagle Outfitters pays out 45.0% of its earnings in the form of a dividend. GAP pays out -2.2% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. GAP is clearly the better dividend stock, given its higher yield and lower payout ratio.

Profitability

This table compares American Eagle Outfitters and GAP’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
American Eagle Outfitters	4.58%	20.98%	10.25%
GAP	5.05%	28.89%	6.92%

Earnings and Valuation

This table compares American Eagle Outfitters and GAP”s revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
American Eagle Outfitters	$5.41 billion	0.80	$170.04 million	$1.11	19.96
GAP	$15.17 billion	0.53	$502.00 million	($27.20)	-0.78

GAP has higher revenue and earnings than American Eagle Outfitters. GAP is trading at a lower price-to-earnings ratio than American Eagle Outfitters, indicating that it is currently the more affordable of the two stocks.

Risk & Volatility

American Eagle Outfitters has a beta of 1.51, indicating that its share price is 51% more volatile than the S&P 500. Comparatively, GAP has a beta of 2.35, indicating that its share price is 135% more volatile than the S&P 500.

About American Eagle Outfitters

American Eagle Outfitters, Inc. operates as a multi-brand specialty retailer in the United States and internationally. The company provides jeans, apparel and accessories, and personal care products for women and men under the American Eagle brand; and intimates, apparel, activewear, and swim collections under the Aerie and OFFLINE by Aerie brands. It also offers menswear products under the Todd Snyder New York brand; and fashion clothing and accessories under the Unsubscribed brand. The company sells its products through own and licensed retail stores; concession-based shops-within-shops; and digital channels, such as www.ae.com, www.aerie.com, www.toddsnyder.com, and www.unsubscribed.com. American Eagle Outfitters, Inc. was founded in 1977 and is headquartered in Pittsburgh, Pennsylvania.

About GAP

The Gap, Inc. operates as an apparel retail company. The company offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. Its products include adult apparel and accessories; and fitness and lifestyle products for use in yoga, training, sports, travel, and everyday activities for women and girls. The company offers its products through company-operated stores, franchise stores, websites, and third-party arrangements. It has franchise agreements to operate Old Navy, Gap, Banana Republic, and Athleta stores and websites in Asia, Europe, Latin America, the Middle East, and Africa. The Gap, Inc. was incorporated in 1969 and is headquartered in San Francisco, California.