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American Eagle's (AEO) Q2 Earnings Beat Estimates, Stock Up

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Shares of American Eagle Outfitters, Inc. (AEO - Free Report) rose nearly 7.8% yesterday, as the company posted better-than-expected second-quarter fiscal 2017 results. While the quarter marked second straight quarter of sales beat, earnings topped estimates after a miss in the last quarter.

Further, American Eagle’s shares ascended 5.8% in the last three months, outperforming the industry’s fall of 14.3%. Currently, the industry is placed at the bottom 33% of the Zacks classified industries (172 out of 256). Meanwhile, the broader Retail-Wholesale sector gained 1.6% and is placed at the bottom-end of the Zacks classified sectors (16 out of 16).

Q2 Highlights

Quarterly adjusted earnings of 19 cents per share declined 17.4% from 23 cents recorded in the prior-year quarter but outpaced the Zacks Consensus Estimate of 16 cents. Also, the bottom line came ahead of the company’s guidance range of 15–17 cents per share. On a GAAP basis, earnings tumbled 47.8% year over year to 12 cents per share.

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise


American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise | American Eagle Outfitters, Inc. Quote

Total net revenues increased about 3% year over year to $844.6 million and surpassed the Zacks Consensus Estimate of $826 million.

Consolidated comparable-store sales (comps) increased 2% compared with a 3% rise recorded last year. In fact, the reported quarter marked 10th straight quarter of positive comps.

Brand wise, comps rose 26% at the company's aerie stores, while it remained flat at American Eagle (AE) brand outlets. Notably, this marked aerie brand’s 14th straight quarter of double-digit comps increase, out of which it witnessed growth of over 20% in many quarters.

Comps were backed by strong online sales at both the brands, which in turn were driven by efficient use of omni-channel capabilities to enhance customer experience. Notably, eCommerce sales represented about 23% of the company’s total sales. However, mall traffic remained sluggish in the fiscal second quarter.

Quarter in Detail

Adjusted gross profit declined 4% to $294.3 million in the reported quarter, with the gross margin contraction of 240 basis points (bps) to 34.9%. The downturn was mainly accountable to greater promotional activity. Further, buying, occupancy as well as warehousing expenses deleveraged 30 bps.

SG&A expenses grew 2% to $204 million, while as a percentage of sales it declined 20 bps to 24.1%. The improvement was backed by reduced compensation costs, partly countered by increased advertising expenses.

Furthermore, the company’s adjusted operating income came in at $50.3 million, decreasing 27.1% from $69 million recorded in the prior-year quarter. Adjusted operating margin also shriveled 230 bps to 6.0%.

Financial Position

American Eagle ended the fiscal second quarter with cash and cash equivalents of $192.6 million compared with $247.9 million in the prior-year quarter. Further, total shareholders’ equity as of Jul 29 was $1,124.3 million.

In the past one year, American Eagle paid $90 million as dividends, spent $88 million for share repurchases and incurred $187 million of capital expenditures.

Moreover, the company spent $46 million as capital expenditures in the reported quarter. For fiscal 2017, management continues to anticipate capital expenditures in the range of $160 to $170 million, of which roughly 50% will be spent on store openings and refurbishment. The balance will be invested in omni-channel and digital projects.

In the fiscal second quarter, the company did not make any share buybacks, thereby leaving 19 million shares for buybacks under its existing authorization.

As of Jul 29, American Eagle’s merchandise inventory was roughly $433 million, up 3% from the comparable year-ago period. This included a 2% rise in average unit cost while unit volumes remained flat.

Store Update

During the fiscal second quarter, American Eagle inaugurated six AE Brand stores and nine Aerie and international licensed outlets, each. However, it closed eight AE and three Aerie brand stores. As of Jul 29, the company operated a total of 1,057 stores alongside having 195 international licensed outlets.

Management intends to open 10 new outlets (including five AE and Aerie stores, each) across the United States, Canada and Mexico in the remaining fiscal 2017. Additionally, the company plans to open 32 international licensed stores.

However, given the rapid shift in consumers’ preferences toward online shopping and the resulting slowdown in store traffic, many retailers are aggressively closing stores. Following suit, American Eagle also announced plans to shutter down 25-40 stores in fiscal 2017.  

Looking Ahead

Management remains impressed with its quarterly performance, where results topped expectations. Moreover, the company remains optimistic about the second half of fiscal 2017, particularly the fall season.

Meanwhile, it remains on track to launch the revamped loyalty program that is likely to convert more than 15 million current metrics and attract new customers with a seamless overall experience. This program will be completely digital with complete integration around shopping channels, which will enhance the customers’ shopping experience.

American Eagle anticipates comps for the fiscal third quarter to range from flat to low single-digit increase. This reflects lower merchandise margins owing to greater promotional activities. Also, SG&A expenses are forecasted to increase in low-single digits.

Zacks Rank & Stocks to Consider

Currently, American Eagle carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader Retail space include The Children's Place, Inc. (PLCE - Free Report) , Canada Goose Holdings Inc. (GOOS - Free Report) and Five Below, Inc. (FIVE - Free Report) . While Children's Place sports a Zacks Rank #1 (Strong Buy), Canada Goose Holdings and Five Below carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place, with a long-term earnings growth rate of 9% delivered an average positive earnings surprise of 16.3% in the trailing four quarters.

Canada Goose Holdings, with a long-term earnings growth rate of 34.1% pulled off positive earnings surprise of 33.3% in the last reported quarter.

Five Below, with a long-term earnings growth rate of 28.5% came up with an average positive earnings surprise of 6.3% in the trailing four quarters.

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