Rising earnings estimates on the back of strong second quarter results – including an average earnings surprise of 2.9% over the last four quarters – helped American Eagle Outfitters ( AEO - Analyst Report ) achieve a Zacks #1 Rank (Strong Buy) on September 4, 2012. Moreover, this Pennsylvania-based fashion retailer has a solid year-to-date return of 32.3%, and with several positive catalysts, the stock looks poised to keep the winning streak going.

The Rank Driver

Robust second-quarter 2012 results, improved 2012 guidance, impressive track record of paying regular dividends, and strategies to grow internationally, are the primary rank drivers for this stock.

On August 22, 2012, American Eagle reported robust second-quarter 2012 financial results, driven by strong top-line growth coupled with lower input and operating costs. Quarterly earnings of 21 cents per share for second-quarter 2012 surged nearly 62% from the comparable year-ago period, and came in line with the Zacks Consensus Estimate. In the quarter, American Eagle's adjusted net sales went up 11% year over year to $739.7 million, beating the Zacks Consensus Estimate of $738 million.

Bolstered by a strong quarterly performance, 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.

Recently, on September 12, 2012, American Eagle announced a special cash dividend of $1.50 per share along with its regular quarterly cash dividend of 11 cents per share. The company boasts of a long track record of consistently paying quarterly dividend for more than 8 years. The announcement of special cash dividend was primarily aided by the company’s strong balance sheet position and ability to generate excessive free cash flow.

Moreover, American Eagle continue to gain pace as it takes another step forward towards growing internationally. After making its presence felt in Israel, Japan and the Middle East, the company targets to capture the strong and promising Philippines market. On September 6, 2012, the company entered into a multi-year retail license agreement with the Philippines based Suyen Corporation.

All the above discussed points demonstrate the company’s strong fundamentals and its ability to keep up with the momentum. As a result, this stock offers several reasons to own it.

Earnings Estimate Revisions

For fiscal 2012, the Zacks Consensus Estimate went up by 10.6% to $1.36 per share from $1.23 over the last 60 days. For fiscal 2013, the Zacks Consensus Estimates improved 7% to $1.52 per share from $1.42 over the same time frame.

Valuation

American Eagle currently trades at a forward P/E of 15.28x, a 11.2% premium to the peer group average of 13.74x. Also, on a price-to-book basis, the shares are trading at 2.76x, a 19.0% premium to the peer group average of 2.32x. Given the company's strong fundamentals, the premium valuation is justified.

American Eagle has a trailing 12-month Return on Investment (ROI) of 14.2% compared with the peer group average of 14.1%.

About the Company

Based in Pittsburgh, Pennsylvania, American Eagle Outfitters Inc. is a specialty retailer of casual apparel, accessories, and footwear for men and women between the age group of 15 and 25. The company’s assortment includes jeans, cargo pants, and graphic T-shirts, as well as accessories, outerwear, and footwear. American Eagle has a market capitalization of about $4.09 billion.

Other Zacks #1 Rank retail stocks include Hain Celestial Group Inc. ( HAIN - Analyst Report ) and Dillards Inc. ( DDS - Analyst Report ) .