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Specialty apparel retailer, American Eagle Outfitters Inc. (AEO - Free Report) seems to have broken its long-time trend of decelerating share prices, after a well deserved triumph in the second quarter of 2017. The stock has been soaring ever since, marking an 11.5% growth.

Moreover, American Eagle has grown 8.1% in the last three months, outperforming the industry’s decline of 12.2%. This can be attributed to the positive sentiment for second-quarter fiscal 2017, after reporting a dismal first-quarter.



More to the Upside Story

Following a soft fiscal first quarter, American Eagle lived up to its expectations in second-quarter fiscal 2017 as both the top and bottom line beat estimates. While the quarter marked second straight quarter of sales beat, earnings topped estimates after a miss in the last quarter.

The company also posted 10th straight quarter of positive comparable store sales (comps) driven by strong online sales at both the brands driven by efficient use of omni-channel capabilities to enhance customer experience. Results also gained from strength in the aerie brand, which posted 14th straight quarter of double-digit comps growth.

Moreover, the company is optimistic about the second half of fiscal 2017, particularly the fall season. This led to an uptrend in the Zacks Consensus Estimates in the last seven days. The Zacks Consensus Estimate for fiscal 2017 and fiscal 2018 rose to $1.13 per share and 1.16 per share, respectively, from $1.09 and $1.14.

Further, the company is striving to develop its omni-channel platform to reach customers in every possible way. Backed by these efforts and efficient digital marketing endeavors, American Eagle’s e-commerce sales contributed about 23% to total revenues in second-quarter fiscal 2017. Moreover, 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 completely digital program will be fully integrated across shopping channels, enhancing shopping experience.

Additionally, the company remains committed toward enhancing store sales by rationalizing its brick-and-mortar store fleet that includes closing underperforming stores and expanding the profitable ones. Consequently, the company recently announced plans to close about 25-40 stores in fiscal 2017. Additionally, it targets opening 10 new outlets (including five AE and Aerie stores, each) across the United States, Canada and Mexico through the rest fiscal 2017, as well as 32 international licensed stores.

Possible Deterrents

The rapid shift in consumers’ preferences toward online shopping has resulted in a considerable slowdown in store and mall traffic, which has forced retailers to undertake intense promotions to clear inventory. American Eagle is not immune to this trend.

Though the company’s second-quarter fiscal 2017 marked a comeback, margins continued to be under pressure due to increased promotional activities to counter sluggish mall traffic. Both adjusted gross margin and operating margin shriveled in the fiscal second-quarter on account of greater promotional activity, alongside a rise in buying, occupancy and warehousing costs, and higher SG&A expenses.

Going forward, the company expects the soft margin trends to continue and hurt results in fiscal third quarter, as evident from its recent guidance. For the fiscal third quarter, the company projects soft merchandise margins due to intense promotional activities. Moreover, it anticipates SG&A expenses to increase in low-single digits.

Conclusion

Though the company’s soft margins are definitely a concern, we believe growth endeavors and recent comeback are likely to mitigate the drawbacks. The company is likely to sustain its momentum going forward. Aptly, the company currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the retail space include The Children’s Place Inc. (PLCE - Free Report) , Five Below Inc. (FIVE - Free Report) and Tilly’s Inc. (TLYS - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Children’s Place has a long-term EPS growth rate of 9%. Further, the stock has returned 24.1% in the past year.

Five Below has gained a nearly 24.5% year to date. Moreover, it has a long-term earnings growth rate of 28.5%.

Tilly’s has improved 20.1% in the past year. Further, the company has delivered an average positive earnings surprise of 83.7% in the trailing four quarters.

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