American Eagle Beats on Bottom Line

American Eagle Outfitters Inc.’s ( AEO - Analyst Report ) adjusted earnings of 22 cents per share for first-quarter 2012 handily beat the Zacks Consensus Estimate of 20 cents and climbed 37.5% from the prior-year quarter earnings of 16 cents. On a reported basis, the company earned 20 cents per share compared with 14 cents in the year-ago period.

The robust quarterly performance was primarily driven by solid top-line growth and improved operating margin.

Adjusted figures do not include income generated from 77Kids business as the company recently announced its plan to exit from children’s business.

Quarter in detail

During the quarter, American Eagle’s adjusted net sales went up 18% year over year to $708.7 million, slightly below the Zacks Consensus Estimate of $711 million. Growth in revenue was driven by a 17% increase in comparable store sales compared with a decline of 7% registered in the year-ago quarter.

During the period, the company’s AE Brand, aerie and AEO Direct segments reported a growth of 17%, 20% and 22%, respectively, in comparable store sales.

During the quarter, adjusted gross profit increased 18% to $274.9 million, primarily driven by solid top-line performance. However, gross margin remained flat year over year at 38.8%, as the benefit of 220 basis points from leveraged buying, occupancy and warehousing expenses were fully offset by higher product cost and increased cotton and incentive costs.

In the reported quarter, adjusted selling, general and administrative (SG&A) expense increased 15% to $178.5 million. However, as a percentage of sales, it improved 60 basis points to 25.2% compared with 25.8% in the prior-year quarter.

Consequently, adjusted operating income surged 46% to $64.3 million from $44.1 million in the prior-year period. Moreover, adjusted operating margin expanded 180 basis points to 9.1%, primarily due to increased sales and leveraged SG&A expenses.

Financial Position

American Eagle ended the quarter with cash and cash equivalents of $713.4 million compared with $474.7 million in the year-ago period. During the quarter, the company generated $12.7 million cash from operating activities while it deployed $24.8 million toward capital expenditure.

Guidance

Looking ahead into fiscal 2012, the company expects adjusted earnings to be between $1.16 and $1.22 per share, an increase of 19% - 26% from the previous fiscal adjusted earnings of 97 cents per share. The company anticipates a mid-single-digit growth in comparable-store sales.

For the second quarter of fiscal 2012, American Eagle expects to earn in the range of 13 cents to 15 cents per share compared with 13 cents in the prior-year period.

Moreover, the company still projects to incur a capital expenditure of $100 million in fiscal 2012.

Conclusion

We remain impressed with the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment, which will likely lead to a turnaround in its top line as well as a rebound in gross margin.

The company operates in a highly fragmented specialty retail sector and faces intense competition from other teen-focused retailers, such as Abercrombie & Fitch Co. ( ANF - Analyst Report ) and Gap Inc. ( GPS - Analyst Report ) .

Currently, the company carries a Zacks #2 Rank, which translates into a short-term Buy rating. We have a long-term Neutral recommendation on American Eagle.