Back to top

Image: Bigstock

Can American Eagle's Robust Comps Trend & Efforts Aid Stock?

Read MoreHide Full Article

American Eagle Outfitters, Inc. (AEO - Free Report) stock has been in the doldrums in the recent past. Shares of this leading apparel retailer have lost 18% year to date, wider than the industry’s 17.7% decline. This underperformance can be primarily attributed to the company’s soft earnings view for second-quarter fiscal 2019. Moreover, it has been witnessing higher costs including SG&A expenses for a while now.

Despite these limitations, American Eagle has a robust comparable sales (comps) trend and positive earnings surprise history. Notably, the company reported 17th straight quarter of positive comps in first-quarter fiscal 2019. While American Eagle delivered the fifth straight quarter of positive earnings surprise in the fiscal first quarter, it recorded a sales beat in four of the last six quarters.

Moreover, strength in both the American Eagle (AE) and Aerie brands as well as solid omni-channel efforts might help the company bring back its lost sheen.



Let’s Delve Deep
 
American Eagle’s adjusted earnings per share projection of 30-32 cents for second-quarter fiscal 2019 is lower than 34 cents earned in the year-ago quarter. Furthermore, higher markdowns and delivery expenses negatively impacted gross margin in the fiscal first quarter. Lower gross margin coupled with higher SG&A expenses, as a percentage of sales, hurt operating margin in the quarter.

Higher SG&A expenses can mainly be attributed to escalated compensation expenses on account of higher investments in stores organization that started midway through 2018. Also, higher advertising costs and professional services resulted in the increase in SG&A expenses.

Nevertheless, American Eagle’s comps are benefiting from strategic initiatives and its ability to boost market share through strong brands and compelling merchandise. Further, both digital and in-store businesses have been contributing to the company’s growth. Healthy quality of sales along with increases in-store traffic, conversion rate and transactions remain added positives.

In the last reported quarter, the AE and Aerie brands outpaced mall traffic. The company reported positive in-store comps for the sixth consecutive quarter. We note that the AE brand is gaining from its leadership position in bottoms, with jeans business recording 23rd consecutive quarter of comps growth. In second-quarter fiscal 2019, comps are anticipated to grow in low-single digits.

Additionally, American Eagle’s Aerie brand, which is a key growth driver, holds immense potential and remains on track to reach the next brand milestone of $1 billion in sales. This brand marked the 18th straight quarter of double-digit comps growth, reflecting a significant momentum in all areas of the business. Aerie has evolved into a lifestyle brand and is focused on expanding its market share and customer base. After the success of its core intimates offerings, the brand is rapidly gaining share in the innovative apparel market with the body positivity movement.

American Eagle is also striving to develop the omni-channel platform by enhancing digital portals and investing in store fleet. Apparently, its digital business contributed about 30% to total revenues, marking the company’s 17th straight quarter of double-digit e-commerce growth. This represents growth of 100 basis points from 29% recorded in the year-ago quarter. Also, the company is experiencing increases in its app and mobile channels, which together represents more than 50% of the company’s digital business.

Wrapping Up

American Eagle’s dismal stock performance cannot be ignored. However, we are optimistic about the company’s aforementioned growth efforts. Backed by these endeavors, the stock is likely to make a turnaround in the coming days.

At present, American Eagle carries a Zacks Rank #3 (Hold).

3 Better-Ranked Retail Stocks

Boot Barn Holdings, Inc. (BOOT - Free Report) has an impressive long-term earnings growth rate of 17% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Inc. (ZUMZ - Free Report) , also a Zacks Rank #1 company, has an expected long-term earnings growth rate of 13.5%.

Burberry Group plc (BURBY - Free Report) has an expected long-term earnings growth rate of 9%. The stock carries a Zacks Rank #2 (Buy).

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>