American Eagle Outfitters Inc.

The trend is your friend. American Eagle Outfitters Inc. (AEO - Analyst Report) has been hitting new 52-week highs nearly daily after posting solid second-quarter fiscal 2012 results on Aug 22 which included 62% earnings growth compared to last year.

Key strengths of this leading fashion retailer include strong top line growth, better cost management, escalating operating profit margin, admirable financial power with lower debt levels, good capital allocation and solid cash flows. Shares of this Zacks #1 Rank (Strong Buy) stock have plenty of momentum, having risen 119% over the last year.

2Q Profits Bulge, Guides Higher

On August 22, American Eagle Outfitters posted second quarter fiscal 2012 adjusted earnings of 21 cents per share, climbing 62% year over year, mainly on the back of a double-digit growth in top line, coupled with lower input and operating expenses. Moreover, earnings for the quarter were in line with the Zacks Consensus Estimate.

American Eagle's adjusted net sales went up 11% year over year to $739.7 million, beating the Zacks Consensus Estimate of $738 million. Growth in revenue was driven by a 9% increase in comparable store sales (comps) compared with a rise of 1% in the year-ago quarter. The company's three operating segments AE Brand, aerie and AEO Direct reported comps growth of 7%, 13% and 28%, respectively.

The company’s operating income surged 76% to $67 million, with operating margin expanding 340 basis points to 9.1%. This was largely driven by higher quarterly sales, lower input costs and leveraged SG&A expenses.

Looking ahead into fiscal 2012, the company raised its earnings guidance range to $1.33 - $1.36 per share from $1.16 - $1.22 forecasted earlier. The improved guidance range is based on the company’s expectation of mid-single-digit and low-single-digit growth in comparable store sales for third and fourth quarters of fiscal 2012.

Estimates Have Upside Momentum

Following American Eagle's robust fiscal second quarter results, a heartening outlook and an inspiring stock performance, analyst sentiments have remained favorable. Estimates for fiscal 2012 rose 3.8% to $1.36 per share in the last 30 days on the back of upward movement of 17 out of 22 estimates, representing a year-over-year growth of 58.0%.

Estimates for fiscal 2013 escalated 3.4% to $1.52 per share over the same time frame as 15 out of 22 estimates revised upward, reflecting a year-over-year growth of 11.8%.

Premium Valuation

The current forward P/E of 16.6x implies a premium of 16.1% to the peer group average of 14.3x. On a price-to-book basis, shares are currently trading at 3.0x, a 25.0% premium to the peer group average of 2.4x. Given the company’s compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 13.4%.

Growth Embedded Chart

There has been no looking back for American Eagle as the shares of this specialty retail chain have been rising up the charts over the last year, recently hitting new 52-week highs.

Moreover, the company’s shares have continually traded above the 200-day moving average since Jan 18. Barring occasional pullbacks, the stock has also traded above its 50-day moving average since Feb 2, 2012.

American Eagle has a market cap of $4.43 billion, while average trade volumes are a decent 2,936K. The company has also outperformed the S&P 500 Index since Apr 13, 2012.

Founded in 1977 and headquartered in Pittsburgh, Pennsylvania, American Eagle is a leading retailer that operates under the American Eagle Outfitters, "aerie" and 77Kids brands. The offerings of the company’s core American Eagle Outfitters brand includes jeans, cargo pants, and graphic T-shirts, as well as a collection of accessories, outerwear, and footwear for people ranging between the ages of 15 to 25.

Apart from this, the company offers Dormwear, intimates, and personal care products for girls under the aerie brand; and clothing and accessories for kids aged between 2 to 14 under the 77kids brand.