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American Eagle Rises on Q1 Earnings Beat; Gives Q2 View

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Shares of American Eagle Outfitters Inc. (AEO - Free Report) surged nearly 5.5% after the company reported robust first-quarter 2015 results and provided an encouraging outlook for the second quarter.

The company’s quarterly earnings of 15 cents per share increased substantially from 2 cents per share in the prior-year quarter and also beat the Zacks Consensus Estimate of 11 cents. The improvement in earnings reflects strong sales and lower promotions during the quarter. Earnings were also above the company’s own guidance range of 9 cents to 12 cents.

American Eagle's net sales in the quarter rose nearly 8.3% to $699.5 million compared with $646.1 million in the prior-year quarter and surpassed the Zacks Consensus Estimate of $689 million. The rise came on the back of enhanced merchandise collection along with a superior customer satisfaction. Comparable-store sales (comps) increased 7% as against a 10% decrease last year.

Brand-wise, comps rose 12% at the company's aerie stores and 7% at AE Total Brand stores.

Quarter in Detail

Gross profit for the quarter rose 16% to $262 million and gross margin expanded 260 basis points (bps) to 37.5% owing to lower markdowns, partially offset by higher buying, occupancy and warehousing expenses.

Selling, general and administrative (SG&A) expenses were $185 million, flat year over year. As a percentage of sales, SG&A expenses contracted 210 bps to 26.5%, reflecting higher incentive compensation and selling expenses due to strong sales, offset by expense reduction initiatives.

The company’s operating income of $42 million rose significantly from $8.4 million in the prior-year quarter. Operating margin expanded 470 bps to 6%.

Financial Position

American Eagle ended the quarter with cash and short-term investments of nearly $327 million compared with $328 million in the prior-year period.

During the quarter, the company incurred $42 million as capital expenditure. For fiscal 2015, the company maintained its capital expenditure guidance of $150 million, mainly to be allocated toward new and renovated outlets, roll-out of the point of sale system across all stores, supporting technologies and the completion of its new fulfillment center.

As of May 2, 2015, American Eagle’s total inventory was $333 million, up 1% from the same period last year. Inventory at cost per foot remained flat with last year. American Eagle expects inventory per foot in the second quarter to increase in the mid single-digits range because of merchandise investments and better sales trends.

Store Update

During the first quarter, American Eagle opened 4 factory stores, including 1 store in Mexico. The company shut down 6 stores, including 3 AE and 3 aerie stores. Alongside, on the global platform, the company opened 10 international licensed stores. At quarter end, the company operated 109 international licensed stores across 17 countries.

By the end of fiscal 2015, the company expects to operate 141 international licensed stores across 22 countries.

Outlook

For second-quarter fiscal 2015, American Eagle projects earnings per share in the band of 11–14 cents compared with 3 cents earned in the prior-year quarter. The guidance is based on the company’s anticipation of high-single-digit rise in comps.

Other Stocks to Consider

American Eagle currently has a Zacks Rank #1 (Strong Buy). Other favorably-placed stocks in the same industry include Boot Barn Holdings Inc. (BOOT - Free Report) , ANN INC. and Bebe Stores Inc. . All three stocks carry a Zacks Rank #2 (Buy).

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