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American Eagle (AEO) Stock Down on Dismal Q1 Earnings & View


Shares of American Eagle Outfitters, Inc. AEO plunged 14.7% yesterday, as the company posted lower-than-expected first-quarter fiscal 2017 earnings, which also declined year over year. Moreover, management announced aggressive store closure plans and issued a drab comparable store sales (comps) and earnings outlook for the second quarter, raising investors’ fears.

Per sources, the soft outlook mainly stemmed from intense competition in the apparel space, where retailers are constantly battling increased shift to online shopping and a general decline in consumer spending.

In fact, these concerns have long been weighing upon investors’ sentiments for American Eagle, as evident from the fact that this Zacks Rank #4 (Sell) stock has underperformed the Zacks categorized Retail–Apparel/Shoe industry in the past one year. Evidently, the company’s shares have declined 14.8% in the last one year, underperforming the industry’s fall of 4.4%.

Q1 Highlights

Quarterly adjusted earnings of 16 cents per share tumbled 27.3% from 22 cents recorded in the prior-year quarter, alongside lagging the Zacks Consensus Estimate by a penny. However, earnings were at the higher end of the company’s guidance range of 15–17 cents per share. On a GAAP basis, earnings slumped 36.4% year over year to 14 cents per share.

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise | American Eagle Outfitters, Inc. Quote

On the positive side, total revenue climbed about 2% year over year to $762 million, also surpassing the Zacks Consensus Estimate of $744 million.

Consolidated comparable-store sales (comps) increased 2%, compared with a 6% jump recorded last year. Brand-wise, comps surged 25% at the company's aerie stores, while it slipped 1% at American Eagle (AE) Total Brand outlets. Notably, this marked aerie brand’s 13th straight quarter of double-digit comps increase, out of which many quarters witnessed growth of over 20%.

Comps were backed by strong online sales at both brands, which in turn were driven by efficient use of omni-channel capabilities to enhance customer experience. Notably, e-commerce sales represented about 26% of the company’s total sales, reflecting an improvement from 19% last year. However, mall traffic remained sluggish in the first quarter.

Quarter in Detail

Gross profit in the quarter declined 5.1% to approximately $278 million, with the adjusted gross margin contracting 270 basis points (bps) to 36.5%. The downside was accountable to greater promotional activity and higher shipping expenditure on digital operations.

SG&A expenses dipped 1% to $195 million, while as a percentage of sales it improved 60 bps to 25.6%. This was backed by reduced compensation and certain other costs, partly countered by increased advertising costs.

Excluding restructuring charges, the company’s adjusted operating income came in at $42 million, decreasing 28.8% from $59 million recorded in the prior-year quarter. Adjusted operating margin shriveled 220 bps to 5.6%.

Financial Position

American Eagle ended the quarter with cash and cash equivalents of $225.2 million compared with $239 million in the prior-year quarter. Further, total shareholders’ equity as of Apr 29 was $1,117.9 million.

The company incurred $40 million as capital expenditures in the first quarter. For fiscal 2017, management continues anticipating capital expenditures to range from $160–$170 million, of which roughly 50% will be spent on store openings and refurbishment. The balance will be invested in omni-channel and digital projects.

Additionally, the company incurred $110 million on dividends and share buybacks in the first quarter. While American Eagle paid dividends of $22 million, it repurchased 6 million shares for $88 million, leaving 19 million shares for buybacks under its existing authorization.

As of Apr 29, American Eagle’s merchandise inventory was roughly $364 million, up 9% from the comparable year-ago period. This included a 9% rise in average unit cost, with unit volumes remaining flat.

Store Update

During the fiscal first quarter, American Eagle inaugurated three AE Brand stores, two Aerie stores and one Todd Synder store. Further, the company closed two AE and Aerie brand stores, each. As of Apr 29, the company operated a total of 1,053 stores, alongside having 189 international licensed outlets.

In fiscal 2017, management intends to open 35 new outlets (including AE and Aerie stores) across U.S., Canada and Mexico. Further, the company plans to open 45 licensed stores, globally – while shutting two down.

However, given the rapid shift in consumers’ preferences toward online shopping, many retailers are switching to the store closure mode, as store traffic has been constantly declining. Following suit, American Eagle also announced plans to shutter down 25–40 stores in fiscal 2017.


These factors and mounting industry competition are likely to hurt American Eagle’s results, as it will be compelled to offer major discounts and incur high shipping expenses on online sales. Thus, management issued a soft outlook for second-quarter fiscal 2017, wherein the company anticipates comps to range from flat to low single-digits decrease. Further, the company expects weak merchandise margins owing to intense promotional activities. SG&A expenses are forecasted to increase in low-single digits.

Considering all factors, the company envisions second quarter earnings in the band of 15–17 cents, which is pegged considerably lower than the current Zacks Consensus Estimate as well as the year-ago earnings of 23 cents.

Key Picks in the Retail Space

Better-ranked stocks in the retail space include The Children’s Place, Inc. PLCE, Big 5 Sporting Goods Corp. BGFV and The Michaels Companies, Inc. MIK.

Children’s Place, with a long-term earnings growth rate of 8% and solid earnings surprise history, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting has a long-term earnings growth rate of 12%, and has a superb earnings surprise history. Further, the company flaunts a Zacks Rank #1.

Michaels Companies which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 16%.

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