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American Eagle Outfitters Inc. (AEO - Analyst Report) posted third-quarter fiscal 2013 adjusted earnings of 19 cents per share from continuing operations, down 53.7% from 41 cents in the prior-year quarter. However, the reported figure beat the Zacks Consensus Estimate by a penny.

The year-over-year decline in earnings per share was mainly due to lower sales and weak merchandise margins, partially offset by effective cost management. Decreased earnings and a low profit outlook for the fourth quarter spread negative sentiment among investors. This was reflected in the company’s stock price, which fell nearly 9.5% on Friday, Dec 6.

Quarter in Detail

American Eagle's net sales declined 5.8% year over year to $857.3 million but came marginally ahead of the Zacks Consensus Estimate of $852.0 million. The decrease in revenues was primarily due to decline in average unit retail and average dollar sale. Stiff competition, an intense promotional retail backdrop and lower traffic were the other headwinds.

Consolidated comparable-store sales (comps) including AEO Direct, fell 5% compared with a 10% rise in the year-ago quarter. Comps decreased 3% at the company's aerie stores and 5% at AE Total Brand stores. However, American Eagle’s AEO Direct segments reported year-over-year comps growth of 17%.

Adjusted gross profit for the quarter fell 21.2% to $298.9 million. Moreover, gross margin contracted 670 basis points (bps) to 34.9% owing to increased markdowns and deleverage of rent, partially offset by improvement in non-merchandise costs.

Adjusted selling, general and administrative (SG&A) expenses decreased 6.1% to $205.7 million. Moreover, as a percentage of sales, SG&A expenses contracted 10 bps to 25.6% in the quarter. The year-over-year improvement in expenses was primarily due to fall in incentive and travel costs, partially offset by higher costs related to factory store openings and omni-channel expansion.

The company’s adjusted operating income fell 52.4% to $61.2 million, primarily due to fall in sales and gross profit. Consequently, adjusted operating margin contracted 700 bps to 7.1%.

Financial Position

American Eagle ended the quarter with cash and short-term investments of nearly $357.2 million compared with $544.7 million at the end of third-quarter fiscal 2012. During the quarter, the company had a capital expenditure of $93 million primarily due to in-store and e-Commerce enhancements as well as advancement of information technology systems.

At the quarter-end, American Eagle’s total inventory was $518.9 million versus $481.2 million at the end of third-quarter fiscal 2012. Inventory at cost per square foot increased 6% from the prior-year quarter level primarily due to shift in timing of merchandise reception.

Store Update

During the reported quarter, American Eagle opened 13 stores, including 6 factory outlets. It shut down 5 stores including 3 aerie stores. The company’s square footage increased 2% on a year-over-year basis.

At the end of the quarter, the company operated a total of 1,064 stores across the United States and 61 international franchise stores.

Fourth Quarter Fiscal 2013 Guidance

For the fourth quarter of fiscal 2013, American Eagle projects earnings per share of 26–30 cents compared with 55 cents in the fourth quarter of fiscal 2012. The guidance is based on the company’s anticipation of mid single-digit decline in comps. The current Zacks Consensus Estimate is pegged at 30 cents per share, which coincides with the company’s higher-end guidance range.

Other Stocks to Consider

Currently, American Eagle has a Zacks Rank #3 (Hold). Some better performing stocks in the apparel retail industry include Citi Trends, Inc. (CTRN - Analyst Report), Michael Kors Holdings Ltd.(KORS - Analyst Report) and Quicksilver Inc. (ZQK - Snapshot Report). All these carry a Zacks Rank #2 (Buy).

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