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Why American Eagle (AEO) is Marching Ahead of the Industry
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American Eagle Outfitters (AEO - Free Report) has been benefiting from brand strength and solid demand, driven by compelling products and exciting new marketing campaigns. The company remains well placed on the back of its cost-reduction efforts, strength in Aerie and a solid online show. Also, the Real Power Real Growth value creation plan bodes well.
This led to sales growth of 0.3% year over year in second-quarter fiscal 2023. Management expects the positive momentum to continue in the fiscal third quarter as well, across brands and channels. For the second half, the company anticipates a positive response to its early fall goods. Consequently, management expects fiscal 2023 revenues to be up low-single digits, which compares favorably with its prior view of flat-to-down low-single digits and is in line with our estimate of 1.2% growth.
Driven by these factors, shares of this Zacks Rank #1 (Strong Buy) company have gained 35.6% in the past three months against the industry’s decline of 5.6%.
Image Source: Zacks Investment Research
Analysts also seem optimistic about the stock. The Zacks Consensus Estimate for American Eagle’s fiscal 2023 sales and EPS is pegged at $5.1 billion and $1.29, suggesting respective growth of 2.2% and 33% from the year-ago reported figures. The Zacks Consensus Estimate for AEO’s fiscal 2023 earnings for the current financial year has inched up 23% in the past 30 days.
The PEG ratio for American Eagle is just 0.82, a level that is lower than the industry average of 1.22. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, AEO is a solid choice on the value front from multiple angles. Topping it, a VGM Score of A speaks volumes.
Other Factors to Consider
American Eagle’s profit improvement initiatives have been paying off. This, along with lower delivery, distribution and warehousing costs, aided second-quarter fiscal 2023 margins. Also, higher merchandising margins due to lower markdowns stemming from inventory control, and lower transportation and product costs acted as tailwinds. Driven by these factors, the gross margin expanded 680 basis points (bps) year over year.
Operating margin of 5.4% expanded 360 bps year over year. Adjusted operating margin for the Aerie and AE brands increased 12 bps to 15.1% and 3 bps to 16.8%, respectively. Consequently, adjusted earnings of 25 cents per share climbed significantly from 4 cents reported in the second quarter of fiscal 2022.
Going ahead into fiscal 2023, operating income is estimated in the range of $325-$350 million, up from the earlier guidance of $250-$270 million. The estimation includes $25 million in gains from the company’s profit improvement initiatives. AEO also envisions gross margin expansion, driven by lower freight and product costs, as well as reduced markdowns. Product cost and freight are also predicted to act as tailwinds in the second half of 2023.
The company’s Aerie brand is a key growth engine for American Eagle. Sturdy demand in its core apparel, strength in the OFFLINE brand and renewed momentum in intimates led to sales growth of 2% to $380 million, which also outpaced our estimate of $359.3 million. Its newly launched SMOOTHEZ styles and extended body suit collection have been received well by customers.
The brand witnessed double-digit comps growth across categories except for swimwear and intimates. The metric grew further following the introduction of new merchandise in July and thus accelerated into the third quarter. Strength in its core apparel collection, particularly in fleece, bottoms and tops, acted as major growth drivers.
Also, its activewear extension, OFFLINE by Aerie, performed well on the back of tops, sports bras, active shorts and fashion items. The Aerie brand remains on track to reach the next brand milestone of $2 billion in sales, out of which, it has already achieved $1.5 billion in revenues.
Moving on, management is on track with its Real Power Real Growth value creation plan, which has been aiding performance. The plan is driving profitability through real estate and inventory optimization efforts, omnichannel and customer focus, and investments to improve the supply chain.
As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company’s efforts under the plan have aided the recovery of the American Eagle brand. Going forward, it expects to undertake initiatives to deliver growth and sustained profitability for the American Eagle brand.
Driven by the trends and progress on its growth plan, American Eagle raised its 2023 financial targets. The company now expects to achieve an operating income of $800 million in fiscal 2023. It also expects revenues of $5.8 billion in fiscal 2023, up from the earlier mentioned $5.5 billion. Operating income is estimated to be $800 million, with the operating margin expanding to 13.5% by 2023.
Previously, the operating income and the operating margin were anticipated to be $550 million and 10%, respectively. Earlier, the company expected revenues for the Aerie brand to reach $2.2 billion by 2023, seeing more than a 20% compound annual growth rate compared with fiscal 2019. The American Eagle brand is also envisioned to grow slightly from fiscal 2019, with $3.6 billion in revenues.
The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.
Urban Outfitters, which engages in retail and wholesale of general consumer products, currently flaunts a Zacks Rank #1. The expected EPS growth rate for three-to-five years is 18%.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.
Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three-to-five years is 5.5%.
The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.
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Why American Eagle (AEO) is Marching Ahead of the Industry
American Eagle Outfitters (AEO - Free Report) has been benefiting from brand strength and solid demand, driven by compelling products and exciting new marketing campaigns. The company remains well placed on the back of its cost-reduction efforts, strength in Aerie and a solid online show. Also, the Real Power Real Growth value creation plan bodes well.
This led to sales growth of 0.3% year over year in second-quarter fiscal 2023. Management expects the positive momentum to continue in the fiscal third quarter as well, across brands and channels. For the second half, the company anticipates a positive response to its early fall goods. Consequently, management expects fiscal 2023 revenues to be up low-single digits, which compares favorably with its prior view of flat-to-down low-single digits and is in line with our estimate of 1.2% growth.
Driven by these factors, shares of this Zacks Rank #1 (Strong Buy) company have gained 35.6% in the past three months against the industry’s decline of 5.6%.
Image Source: Zacks Investment Research
Analysts also seem optimistic about the stock. The Zacks Consensus Estimate for American Eagle’s fiscal 2023 sales and EPS is pegged at $5.1 billion and $1.29, suggesting respective growth of 2.2% and 33% from the year-ago reported figures. The Zacks Consensus Estimate for AEO’s fiscal 2023 earnings for the current financial year has inched up 23% in the past 30 days.
The PEG ratio for American Eagle is just 0.82, a level that is lower than the industry average of 1.22. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, AEO is a solid choice on the value front from multiple angles. Topping it, a VGM Score of A speaks volumes.
Other Factors to Consider
American Eagle’s profit improvement initiatives have been paying off. This, along with lower delivery, distribution and warehousing costs, aided second-quarter fiscal 2023 margins. Also, higher merchandising margins due to lower markdowns stemming from inventory control, and lower transportation and product costs acted as tailwinds. Driven by these factors, the gross margin expanded 680 basis points (bps) year over year.
Operating margin of 5.4% expanded 360 bps year over year. Adjusted operating margin for the Aerie and AE brands increased 12 bps to 15.1% and 3 bps to 16.8%, respectively. Consequently, adjusted earnings of 25 cents per share climbed significantly from 4 cents reported in the second quarter of fiscal 2022.
Going ahead into fiscal 2023, operating income is estimated in the range of $325-$350 million, up from the earlier guidance of $250-$270 million. The estimation includes $25 million in gains from the company’s profit improvement initiatives. AEO also envisions gross margin expansion, driven by lower freight and product costs, as well as reduced markdowns. Product cost and freight are also predicted to act as tailwinds in the second half of 2023.
The company’s Aerie brand is a key growth engine for American Eagle. Sturdy demand in its core apparel, strength in the OFFLINE brand and renewed momentum in intimates led to sales growth of 2% to $380 million, which also outpaced our estimate of $359.3 million. Its newly launched SMOOTHEZ styles and extended body suit collection have been received well by customers.
The brand witnessed double-digit comps growth across categories except for swimwear and intimates. The metric grew further following the introduction of new merchandise in July and thus accelerated into the third quarter. Strength in its core apparel collection, particularly in fleece, bottoms and tops, acted as major growth drivers.
Also, its activewear extension, OFFLINE by Aerie, performed well on the back of tops, sports bras, active shorts and fashion items. The Aerie brand remains on track to reach the next brand milestone of $2 billion in sales, out of which, it has already achieved $1.5 billion in revenues.
Moving on, management is on track with its Real Power Real Growth value creation plan, which has been aiding performance. The plan is driving profitability through real estate and inventory optimization efforts, omnichannel and customer focus, and investments to improve the supply chain.
As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company’s efforts under the plan have aided the recovery of the American Eagle brand. Going forward, it expects to undertake initiatives to deliver growth and sustained profitability for the American Eagle brand.
Driven by the trends and progress on its growth plan, American Eagle raised its 2023 financial targets. The company now expects to achieve an operating income of $800 million in fiscal 2023. It also expects revenues of $5.8 billion in fiscal 2023, up from the earlier mentioned $5.5 billion. Operating income is estimated to be $800 million, with the operating margin expanding to 13.5% by 2023.
Previously, the operating income and the operating margin were anticipated to be $550 million and 10%, respectively. Earlier, the company expected revenues for the Aerie brand to reach $2.2 billion by 2023, seeing more than a 20% compound annual growth rate compared with fiscal 2019. The American Eagle brand is also envisioned to grow slightly from fiscal 2019, with $3.6 billion in revenues.
Other Key Picks
Some other top-ranked stocks are BJ's Restaurants (BJRI - Free Report) , Urban Outfitters (URBN - Free Report) and Walmart (WMT - Free Report) .
BJ's Restaurants, which operates a chain of high-end casual dining restaurants in the United States, currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.
Urban Outfitters, which engages in retail and wholesale of general consumer products, currently flaunts a Zacks Rank #1. The expected EPS growth rate for three-to-five years is 18%.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.
Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three-to-five years is 5.5%.
The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.