AEO Upgrades 2Q Outlook

American Eagle Outfitters Inc. (AEO - Analyst Report), a leading specialty retailer, recently raised its earnings outlook for the second-quarter of fiscal 2012 on the back of better-than-expected sales experienced by it during the period. Management believes that the increased revenues were the results of improvements across product assortments and company-owned brands, together with better sales in its areas of operations.

Driven by strong sales, American Eagle’s second-quarter comparable sales climbed 9%, resulting in total sales increase of 11% to $740 million compared with $669 million in the year-ago quarter. Moreover, quarterly sales also exceeded the Zacks Consensus estimated sales of $735 million.

Further, better-than-expected top-line performance and lower promotional expenses, encouraged management to raise its second-quarter earnings guidance range. The company now expects earnings for the quarter to be in the range of 19-21 cents per share, reflecting an increase of 46%-62% compared with the prior-year quarter earnings of 13 cents. Earlier, the company has forecasted earnings to lie between 13-15 cents.

The Zacks Consensus Estimate for second quarter profit, which currently stands at 21 cents per share, was 15 cents per share prior to the announcement of the preliminary results.

Management revealed that the company managed to bring down its promotional expenses while sustaining the improvement in average traffic and transaction. Going forward, management aims to provide better returns to the shareholders through delivering consistent performance in the long term.

American Eagle is expected to release its financial results for second-quarter of fiscal 2012 on Wednesday, August 22, 2012. The company will announce the third-quarter 2012 outlook along with the second-quarter financial results.

Our Recommendation

American Eagle now plans to focus more on merchandise assortments, adding more compelling brands, managing inventory level much diligently and augmenting e-commerce business. Further, in order to emphasize more on the core business while generating the best possible return for shareholders, the company has decided to exit its children’s brand, 77Kids.

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 augment its top-line performance as well as enhance the gross margin.

Moreover, we believe that American Eagle’s cost-saving initiatives and long-term growth strategy will not only provide financial flexibility, but will also help to drive value proposition. In a drive to boost its bottom line, the company is relentlessly focusing on initiatives to cut down costs through supply chain efficiencies and updated product allocation system.

American Eagle, which competes with Abercrombie & Fitch Co. (ANF - Analyst Report) and Gap Inc. (GPS - Analyst Report), carries a Zacks #2 Rank, translating into short-term Buy rating for the next 1-3 months. Moreover, we maintain our long-term Outperform recommendation on the stock.