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American Eagle (AEO) Surges Despite Q3 Earnings & Sales Miss


Despite posting lower-than-expected earnings and sales for third-quarter fiscal 2017, shares of American Eagle Outfitters, Inc. AEO rose nearly 2.4% yesterday. The upsurge can mainly be attributed to the company’s record sales, sequential improvement in margins and continued comparable store sales (comps) growth.

Moreover, American Eagle’s shares ascended 34.9% in the last three months, outperforming the industry’s 23.4% growth.

Q3 Highlights

Quarterly adjusted earnings of 37 cents per share declined 9.8% from 41 cents recorded in the prior-year quarter and also lagged the Zacks Consensus Estimate of 39 cents. On a GAAP basis, earnings declined 12.2% year over year to 36 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

Total net revenues increased about 2.1% year over year to $960.4 million but missed the Zacks Consensus Estimate of $965.2 million. However, this marked record sales for the company.

Consolidated comps increased 3% compared with a 2% rise recorded last year. In fact, the reported quarter marked 11th straight quarter of positive comps. The company’s e-commerce business exhibited growth in high teens partly negated by slight decline in in-store comps. Notably, e-commerce sales represented about 25% of the company’s total sales.

Further, trends improved in the brick and mortar stores. Evidently, traffic and transactions improved and store traffic surpassed mall traffic for both brands. Average unit retail price increased low-single digit on account of favorable mix, while average dollar sale dipped marginally driven by lower units per transaction.

Brand wise, comps rose 19% at the company's aerie stores, while it inched up 1% at American Eagle (AE) brand outlets. Notably, this marked aerie brand’s 14th straight quarter of positive comps.

Comps were backed by strong online sales at both the brands, which in turn were driven by efficient use of omni-channel capabilities to enhance customer experience.

Further, the company notes that the positive momentum continued in the fourth quarter with Black Friday and Cyber Monday delivering better-than-expected results. The company expects this to poise it well for the holiday season.

Quarter in Detail

Adjusted gross profit declined 0.5% to $374.9 million in the reported quarter, with the gross margin contraction of 120 basis points (bps) to 39%. The decline can primarily be attributed to greater promotions and increased shipping costs due to strength in digital business. However, the company witnessed sequential improvements from the 270 bps and 240 bps gross margin declines in the first and second quarters of fiscal 2017, respectively.

SG&A expenses fell 1.3% to $217.1 million, while as a percentage of sales it leveraged 80 bps to 22.6%. The improvement was backed by higher sales and lower incentives and expenses. However, this was offset by higher wages.

Furthermore, the company’s adjusted operating income came in at $115 million, down 3.3% from $118.9 million recorded in the prior-year quarter. Adjusted operating margin also shriveled 70 bps to 11.9%.

Financial Position

American Eagle ended the fiscal third quarter with cash and cash equivalents of $257.5 million compared with $291.7 million in the prior-year quarter. Further, total shareholders’ equity as of Oct 28 was $1,163.2 million.

In the past one year, American Eagle paid $88-$90 million as dividends, spent $88 million for share repurchases and incurred $189 million of capital expenditures.

Moreover, the company spent $48 million as capital expenditures in the reported quarter. For fiscal 2017, management continues to anticipate capital expenditures in the range of $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.

As of Oct 28, American Eagle’s merchandise inventory was roughly $534 million, up 8% from the comparable year-ago period. The improvement relates to investments in bottoms, women’s tops and Aerie apparel to support strong sales trends.

Store Update

During the fiscal third quarter, American Eagle inaugurated four new AE Brand stores and one Aerie location. The AE stores included one store each in Mexico and Canada, and two stores in the United States. The new Aerie store was opened in Canada. Moreover, the company closed three AE brand stores and one Todd Synder store. Further, the company opened 11 international licensed outlets and closed one. As of Oct 28, the company operated a total of 1,058 stores alongside having 205 international licensed outlets.

Management intends to open 15-20 new AE outlets, one Todd Synder store and 15 Aerie stores across the United States, Canada and Mexico in fiscal 2017. However, this Zacks Rank #2 (Buy) company expects to shut down 25-40 stores in fiscal 2017.

Looking Ahead

Management remains impressed with its quarterly performance, particularly sequential improvements in sales and profit margins. The company expects these trends to continue in the fourth quarter. Consequently, the company anticipates a successful holiday season ahead and expects to close the year strong.

American Eagle anticipates comps for the fiscal fourth quarter to increase mid single-digits. This is likely to result in earnings per share of 42-44 cents compared with 39 cents earned in the prior-year quarter.

Looking for Some Trending Picks? Look at These

Some other top-ranked stocks in the same industry are Zumiez Inc. ZUMZ, Urban Outfitters Inc. URBN, both sporting a Zacks Rank #1 (Strong Buy), and The Buckle Inc. BKE, carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez has gained 29.1% in the last three months. Moreover, it has a long-term earnings growth rate of 18%.

Urban Outfitters has a long-term EPS growth rate of 11.5%. Further, the stock has returned 51% in three months.

Buckle has grown nearly 58.2% in the last three months. Moreover, the company has delivered an average positive earnings surprise of 3.8% in the trailing four quarters.

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