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Bull of the Day: American Eagle (AEO)

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Based in Pittsburgh, PA, American Eagle Outfitters (AEO - Free Report)  is a specialty retailer of casual apparel, accessories and footwear. Their target consumers are 15–25 years old men and women. They currently operate under the AE Brand, Aerie by American Eagle and an online retailing channel – AEO Direct.

The company operates more than 1,000 stores in the US, Canada, Mexico, China, Hong Kong and the UK. Some of their merchandise is also available at international stores operated by licensees in 22 countries.
Solid Quarterly Results and Strong Guidance

The company reported excellent results for the second quarter. Quarterly earnings of $0.23 per share surged 35.3% from the same quarter last year and surpassed the Zacks Consensus Estimate of $0.21 per share.
Revenues increased 3.2% year over year to $822.6 million, also beating the Zacks Consensus Estimate of $818.7 million. Same store sales grew 3% during the quarter—the sixth consecutive quarter of growth—but below 6% growth recorded in the previous quarter. Performance of Aerie brand was particularly strong, where sales surged 24%.
Jay Schottenstein, the CEO said: ”For the past few years, we have worked hard to lift our brands through merchandise leadership and innovation, strengthen our customer focus and invest in technology. Our efforts around these priorities are clearly paying off, as again evidenced by our strong earnings growth in the second quarter.”
The management expressed optimism about back-to-school sales, which should support Q3 results.

Rising Estimates

Analysts have been raising their estimates for the company after robust results and better-than-expected guidance. Zacks Consensus Estimates for the current and next year are now $1.31 per share and $1.43 per share, up from $1.27 and $1.36, before the results. Rising estimates sent the stock back to a Zacks Rank #1 (Strong Buy).

The company has an excellent track record of beating estimates, with not a single miss in the last twenty quarters.

Returning Cash to Shareholders

Last month, the company announced a quarterly cash dividend of $0.125 per share, marking the company’s 49th consecutive quarterly dividend. Last year, they returned about $324 million to shareholders via dividends and repurchases.

Teens Still Love Shopping at Malls

According to a William Blair survey, teen and young adults are visiting malls more in 2016 than they were in 2015. If this trend continues, it will bode well for mall-based teen retailers, which have been hurt by declining foot traffic.

The Bottom Line

Consumers’ rising preference for online shopping has created headwinds for mall based retailers. Rapidly changing trends in teen fashion and rising competition from off-price teen fashion chains isn’t helping teen retailers either.

Despite these challenges, American Eagle has been able to deliver solid performance by improving merchandise, enhancing brands and improving consumer experience. They have also been able to improve their operational performance and control inventory levels. They have also been successful in adapting to the rapidly changing tastes of their trendy teen clients.

In addition to a Zacks Rank #1 (Strong Buy), the stock has earned top Styles Score of “A” for Value and Growth, resulting in a VGM score of “A”. It is currently trading at a reasonable valuation of 14X forward earnings, making it worth a look.

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