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American Eagle (AEO) Tops Q4 Earnings, Dull View Hurts Stock

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American Eagle Outfitters, Inc. (AEO - Free Report) came out with fourth-quarter fiscal 2016 results, wherein earnings grew year over year and reverted to its positive surprise trend, following in-line results in the last quarter. However, soft sales and management’s dull first-quarter fiscal 2017 outlook instilled a negative sentiment among investors, leading this Zacks Rank #4 (Sell) stock to plunge 9.5% following the earnings release.

Further, American Eagle has underperformed the Zacks categorized Retail–Apparel/Shoe industry in the past six months. Evidently, the company’s shares have slumped 20.9% in the last six months, underperforming the industry’s decline of 10.8% in the same period.
 



Fourth-Quarter Highlights

Quarterly adjusted earnings of 39 cents per share increased 11.4% from 35 cents recorded in the prior-year quarter, alongside beating the Zacks Consensus Estimate by a penny. Further, earnings matched the higher end of the company’s guidance range of 37–39 cents per share, alongside marking its 10th straight quarter improvement in profits. On a GAAP basis, earnings fell 28.6% year over year to 30 cents per share.

Total revenue dipped nearly 1% year over year to $1,097.2 million, which also fell short of the Zacks Consensus Estimate of $1,106 million.

Consolidated comparable-store sales (comps) increased marginally by 0.4%, compared with a 4% jump recorded last year. Brand-wise, comps jumped 17% at the company's aerie stores, while it slipped 1% at American Eagle (AE) Total Brand outlets. Prior to this, the aerie brand posted comps growth of over 20% for six successive quarters.

As revealed earlier, fourth quarter comps (which mainly comprised holiday numbers), were backed by strong online sales at both brands, which in turn was driven by efficient use of omni-channel capabilities to enhance customer experience. However, mall traffic remained sluggish, and the holiday season was marked by intense promotional activities.

Quarter in Detail

Adjusted gross profit in the quarter inched up 0.3% to approximately $389 million, with the adjusted gross margin expanding 30 basis points (bps) to 35.4%. The upside was driven by better merchandise margins, backed by improvement in IMU, somewhat offset by greater delivery expenses.

Selling, general and administrative (SG&A) expenses, on an adjusted basis, remained flat year over year at $220 million as benefits from lower incentive compensation were nullified by increased advertising costs. As a percentage of sales, adjusted SG&A expenses escalated 20 bps to 22.1%.

The company’s adjusted operating income came in at $107 million, climbing about 1% from $106 million recorded in the prior-year quarter. Adjusted operating margin expanded 20 bps to 9.8%.

Financial Position

American Eagle ended fiscal 2016 with cash and cash equivalents of $378.6 million compared with $260.1 million in the prior-year quarter. The increase in cash balance was supported by robust free cash flow in fiscal 2016. Further, total shareholders’ equity as of Jan 28 was pegged at $1.2 billion.

The company incurred $161 million as capital expenditures in fiscal 2016. For fiscal 2017, management anticipates capital expenditures to range from $160–$170 million, out 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 paid $91 million as dividends in the fiscal.

As of Jan 28, American Eagle’s merchandise inventory was roughly $358 million, up 17% from the comparable year-ago period. This included a 13% rise in average unit cost, along with 4% unit volume growth.

Store Update

During the fiscal fourth quarter, American Eagle inaugurated two AE Brand stores, six Aerie stores, one Tailgate outlet (which was acquired at 2015 end) and one Todd Synder store. Further, the company closed 11 AE stores and one Aerie brand store. Alongside, the company opened 15 international licensed stores, while shutting two down. As of Jan 28, the company operated 943 AE stores (including 88 Aerie side-by-side locations), 102 stand-alone Aerie stores and 176 international licensed outlets.

Fiscal 2016 Synopsis

American Eagle’s adjusted earnings for fiscal 2016 grew 23.8% to $1.25 per share, which also exceeded the Zacks Consensus Estimate by a penny. Further, net revenues advanced 2.5% to $3,609.9 million. However, the top line missed our estimate of $3,619 million.

Despite a challenging and competitive retail landscape, American Eagle managed to deliver a decent fiscal 2016 performance, thanks to its continued focus on product innovation and enrichment of customer experience. Notably, the company maintained its solid position in the jeans and bottoms space, alongside witnessing superb growth in the women’s apparel category. Further, the company’s Aerie brand delivered double-digit sales increase throughout the fiscal, on the back of premium merchandise, increased awareness and enhanced customer strength.

Given the aforementioned strength and plenty of market opportunities, management expects to return solid returns to shareholders in the long-term.

Guidance

However, consistent with the trends witnessed so far this quarter, management issued a soft outlook for first-quarter fiscal 2017. 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 be in line with the year-ago period.

Considering all factors, the company envisions first quarter earnings in the band of 15–17 cents, which stands considerably lower than the current Zacks Consensus Estimate of 22 cents. Also, this guidance compares unfavorably with 22 cents recorded in first-quarter fiscal 2016.

Stocks that Warrant a Look

Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , Kate Spade & Company and Zumiez Inc. (ZUMZ - Free Report) , each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions in the last 60 days.

Kate Spade, with long-term earnings per share (EPS) growth rate of 28.3%, has seen positive estimate revisions over the past 30 days.

Zumiez’s long-term EPS growth rate of 15% and solid positive estimate revisions over the past 30 days help it stand strong in the industry. Moreover, the company flaunts a superb earnings surprise history.

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