It has been about a month since the last earnings report for American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) . Shares have added about 2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is American Eagle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

American Eagle Misses Q2 Earnings & Revenue Estimate

American Eagle dismal second-quarter fiscal 2022 results, wherein the top and bottom lines missed the Zacks Consensus Estimate. Results were impacted by a tougher macro environment and changing consumer spending behavior.

However, the company is undertaking efforts, including non-critical expense reductions, hiring freeze and reduction in capital expenditure, to strengthen its financial position. Management paused its quarterly cash dividend for now. The company continued to gain from the execution of the “Real Power. Real Growth.” plan.

Q2 Details

American Eagle reported earnings of 4 cents per share, which significantly missed the Zacks Consensus Estimate of 13 cents. Our estimate for the bottom line was 15 cents a share. The bottom line declined 93.3% from adjusted earnings of 60 cents reported in second-quarter fiscal 2021.

Total net revenues of $1,198 million remained almost flat year over year and lagged the Zacks Consensus Estimate of $1,199 million. Our estimate for the top line was $1,223.4 million. Revenue growth was aided by a 2-percentage-point contribution from supply-chain acquisitions. The metric advanced 15% from the pre-pandemic level.

Brand-wise, revenues fell 8% to $778 million for AE and lagged our estimate of $852.9 million. Meanwhile, it advanced 11% to $372 million for Aerie and beat our estimate of $341.8 million.

The company’s digital revenues were down 6% year over year, while the same advanced 60% from the pre-pandemic levels (second-quarter fiscal 2019). Digital revenues accounted for 33% of the total revenues, driven by its mobile app, which is now the largest source of revenues in the digital channel.

Store revenues fell 2% year over year, driven by continued channel migration back to stores. Store sales were up 1% from the pre-pandemic levels.

In the quarter, the company launched a mobile point-of-sale system in its North America stores through which customers can check out or return items through a store associate. The move is likely to expedite transaction speed and minimize wait time, particularly in peak fall and holiday selling seasons.

The gross profit dropped 26% year over year to $370 million, while the gross margin contracted 1,120 basis points (bps) to 30.9%. This mainly resulted from higher markdown impacts of 750 bps, a 200-bps impact of freight costs and a 60-bps impact of the recent supply-chain business acquisition. The gross margin was also impacted by increased rent and delivery expenses, slightly offset by lower incentive compensation accruals.

Selling, general and administrative (SG&A) expenses rose 5% year over year to $308 million. As a percentage of sales, S&A expenses increased 110 bps to 25.7% due to a rise in store wages, increased corporate compensation, professional services and advertising expenses. This was partly negated by lower incentive compensation accruals.

Operating income in the fiscal second quarter was $14 million, down significantly from $168 million in the year-ago quarter. Operating income included a $25-million headwind from higher freight costs, a $30-million impact from higher end-of-season selloffs and a $9-million loss from supply-chain acquisitions. The operating margin contracted 1,290 bps year over year to 1.2%.

For the Aerie brand, operating income of $11.8 million compared unfavorably with the year-ago quarter’s $70.6 million. The AE brand’s operating income declined 45.1% year over year to $109.1 million.

Other Financial Details

American Eagle ended second-quarter fiscal 2022 with cash and cash equivalents of $98.2 million. Total shareholders’ equity as of Apr 30, 2022, was $1,372.9 million. The company had total liquidity, including available credit, of $453 million at the quarter end.

AEO bought back 17 million shares as part of its share repurchase program worth $200 million. Management paid a dividend of 18 cents per share in the quarter.

The company’s capital expenditure was $69 million in the reported quarter. It expects a capital expenditure of $250 million for fiscal 2022, down from the prior stated $275 million.

Store Update

In second-quarter fiscal 2022, the company opened 4 AE, 23 Aerie and one Todd Snyder stores, while it closed 9 AE and one Aerie stores. The store openings for the Aerie brand included stand-alone as well as Aerie OFFLINE side-by-side formats. For AE, the company is on track with its target of rightsizing the brand store footprint.

At the end of the fiscal second quarter, American Eagle operated 1,160 stores, comprising 873 AE, 276 Aerie, six Todd Synder and five unsubscribed stores. Additionally, it operated 260 international license outlets.

Guidance

Management has been witnessing sluggish demand trends. Quarter to date, brand revenues have declined in the high-single digits due to exceptional growth and a record back-to-school season last year. The gross margin is likely to be in the mid-30s and low-30s for the third and fourth quarters of fiscal 2022, respectively. This is mainly due to higher markdowns from increased promotions and seasonal clearance cadence being more weighted to the fourth quarter.

In a bid to mitigate the hurdles, American Eagle has expanded expense cuts in store payroll, corporate, professional services and advertising. The move is expected to generate cost savings of $100 million on an annual basis compared with the prior target of $60 million. As a result, SG&A expenses are anticipated to be flat year over year in the second half of fiscal 2022 compared with the earlier mentioned low to mid-single-digit growth.

The company cleared all excess spring and summer goods. It entered the fiscal third quarter with better inventory levels, and fresh back-to-school and fall merchandise.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -39.22% due to these changes.

VGM Scores

Currently, American Eagle has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Eagle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

American Eagle is part of the Zacks Retail - Apparel and Shoes industry. Over the past month, Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) , a stock from the same industry, has gained 1.6%. The company reported its results for the quarter ended July 2022 more than a month ago.

Abercrombie reported revenues of $805.09 million in the last reported quarter, representing a year-over-year change of -6.9%. EPS of -$0.30 for the same period compares with $1.70 a year ago.

Abercrombie is expected to post a loss of $0.13 per share for the current quarter, representing a year-over-year change of -115.1%. Over the last 30 days, the Zacks Consensus Estimate has changed -725%.

Abercrombie has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.