American Eagle: A Strong Buy

An healthy year-to-date return of 25.3%, robust third-quarter fiscal 2013 performance and rising estimates have helped American Eagle Outfitters Inc. ( AEO - Analyst Report ) to achieve a Zacks #1 Rank (Strong Buy) status on December 27.

This Pennsylvania-based fashion retailer has surpassed the Zacks Consensus Estimate in 2 of the trailing 4 quarters, while met in other 2. Positive earnings momentum, solid dividend prospects as well as a robust stock performance make American Eagle an attractive option for investors.

The Rank Driver

Strong top-line growth, escalating operating profit margin, better cost management, admirable financial power and solid cash flows are the rank drivers for this stock.

On November 28, 2012, American Eagle, which competes with Gap Inc. ( GPS - Analyst Report ) , posted third-quarter earnings per share of 41 cents, surpassing the Zacks Consensus Estimate by 5.1%.

Net sales rose 11% year over year to $910 million, beating the Zacks Consensus Estimate of $873 million. Growth in revenue was driven by a 10% increase in comparable-store sales compared with a rise of 7% registered in the year-ago quarter. The online sales for the company jumped 27% year over year from the 21% rise in the prior year.

Adjusted gross profit increased 21% to $379 million, while gross margin improved 350 basis points (bps) to 41.6%. The year-over-year increase in gross profit and margin was primarily driven by strong top-line performance along with lower cost of goods sold and a benefit of 60 bps, rising from leveraged buying, occupancy and warehousing expenses.

Adjusted operating income soared 39% to $129 million. Moreover, adjusted operating margin expanded 290 bps to 14.1%, primarily due to increased sales along with improved margins.

On December 4, the company declared a regular quarterly dividend of 11 cents per share and speeded up the payment of its first quarter dividend of 11 cents, which is usually paid in April. The total cash dividend of 22 cents per share will be paid on December 28 to stockholders with record as of December 19.

Earnings Estimate Revisions

The Zacks Consensus Estimate for fiscal 2012 climbed 2.2% to $1.40 per share in the past 30 days, as 19 of 22 estimates were revised upwards. This represents a year-over-year surge of 63.0%. The Zacks Consensus Estimate for fiscal 2013 grew 2.6% to $1.58 over the same time frame as 13 of 22 estimates were raised, reflecting a year-over-year increase of 12.5%.

Valuation

The current forward P/E of 14.8x implies a premium of 12.1% to the peer group average of 13.2x. On a price-to-book basis, shares are currently trading at 3.2x, a 45.5% premium to the peer group average of 2.2x. Given the company’s compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 11.8%.

About the Company

Founded in 1977 and headquartered in Pittsburgh, Pennsylvania, American Eagle is a leading retailer that operates under the American Eagle Outfitters and “aerie” brands. The offerings of the company’s core American Eagle Outfitters brand includes jeans, cargo pants, and graphic T-shirts, as well as a collection of accessories, outerwear, and footwear for people ranging between the ages of 15 – 25. The company operates more than 1,000 stores in North America, and ships to 77 countries worldwide through its websites.