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We retain our long term ‘Outperform’ recommendation on the Pennsylvania-based fashion retailer, American Eagle Outfitters Inc. (AEO - Analyst Report) as the company continues to demonstrate solid top-line performance coupled with lower input and operating costs. We also remain impressed by the company’s excellent financial power with lower debt levels, good capital allocation and solid cash flows, which continues to drive a brilliant stock performance.

The company’s consistent earnings performance is encouraging, as it has continually met or beat forecasts in the past several quarters. American Eagle’s earnings of 21cents per share for second-quarter 2012 surged nearly 62% from the year-ago period, and came in line with the Zacks Consensus Estimate. In the quarter, the company's adjusted net sales went up 11% year over year to $739.7 million, beating the Zacks Consensus Estimate of $738 million.

On the back of robust second quarter results, management raised its fiscal 2012 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-sing digit growth in comparable store sales for the third and fourth quarter of fiscal 2012. For third quarter 2012, the company expects earnings to be in the range of 37 cents – 38 cents per share compared with 30 cents in the prior-year period.

Looking ahead, we believe the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment will likely augment its top-line performance and enhance gross margin. Additionally, we believe the company’s cost-saving initiatives and long-term growth strategy will not only provide financial flexibility, but will also help drive value proposition.

Moreover, the company’s strong portfolio of well established brands, each of which is focused on the unique characteristics and rapidly changing preferences of customers make American Eagle a leading specialty retailer of fashionable and stylish apparels and accessories in the United States and Canada.

As a strategy, the company remains committed to enhance store sales productivity by increasing focus on its merchandise assortments, adding more compelling brands, managing inventory level much diligently and augmenting e-commerce business, while simultaneously shutting down underperforming stores. In order to emphasize more on core business and generate the best possible return for shareholders, American Eagle is moving ahead with its plans to exit its children’s brand - 77Kids.

Nevertheless, operating in the highly fragmented specialty retail sector, American Eagle 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 #1 Rank, which translates into a short-term Strong Buy rating, in sync with our long-term 'Outperform' recommendation.

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