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American Eagle (AEO) Down 5.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for American Eagle Outfitters (AEO - Free Report) . Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Eagle due for a breakout? 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 drivers.

American Eagle Q2 Earnings & Sales Beat

American Eagle reported solid second-quarter fiscal 2019 results, wherein the top and bottom lines outpaced estimates. This marked the sixth straight quarter of positive earnings surprise for the company, with the second consecutive sales beat. Both metrics grew year over year, owing to strength in AE and Aerie brands as well as solid growth across stores and digital channels.

Q2 Highlights

Adjusted earnings of 39 cents per share in the fiscal second quarter surpassed the Zacks Consensus Estimate of 32 cents. The bottom line also rose 14.7% from 34 cents registered in the prior-year quarter. Earnings included a contribution of 15 cents per share from license royalties from a third-party operator of AE stores in Japan.

Including restructuring charge of 1 cent, American Eagle’s earnings were 38 cents per share, up 11.8% from the year-ago quarter number.

Total net revenues grew 7.9% year over year to $1,040.9 million and outpaced the Zacks Consensus Estimate of $1,004 million. Revenues also included $40 million from the aforementioned Japan license royalties. Moreover, consolidated comparable sales (comps) grew 2%. This marked the company’s 18th straight quarter of positive comps, with strong performances across AE Jeans, Aerie and the digital channel. However, comps were below American Eagle’s expectations due to challenges in some of the warm weather-related apparel categories within the AE brand on unseasonably colder weather in May as well as a delayed start to the back-to-school selling season.

Brand-wise, comps rose 16% at Aerie but dipped 1% for the AE brand. This marked the Aerie brand’s 19th straight quarter of double-digit comps improvement, reflecting a significant momentum in all areas of the business and significant market share gains. Meanwhile, at the AE brand, strength in AE Jeans was more than offset by the aforementioned weather-related challenges. Notably, AE jeans recorded the 24th consecutive quarter of robust top-line growth, with double-digit growth in men’s and women’s assortments.

Additionally, the company’s digital business continued to exhibit solid growth, contributing about 25% to total revenues. Further, digital sales rose in low-double digits, up 100 basis points (bps) from the year-ago period. We note that the digital business outpaced in-store performance in the quarter. This was mainly due to a decline across AE stores while Aerie continued to display growth in both channels. On a consolidated basis, in-store comps dipped 1% in the reported quarter, after recording positive in-store comps for six consecutive quarters.

Quarter in Detail

Gross profit grew 8% to $382.6 million in the reported quarter. Gross margin expanded 10 bps to 36.7%, mainly benefiting from the 230-bps contribution from the Japan license royalties. This was partly negated by higher markdowns, compensation costs and delivery expenses.

SG&A expenses were up 8.2% to $253.1 million while remaining flat at 24.3% as a percentage of sales. The increase in dollar terms can mainly be attributed to escalated compensation expenses on higher investments in store organization that started mid-way through 2018. Also, higher professional service fees resulted in the rise in SG&A expenses.

Adjusted operating income of $85 million improved 11.8% from $76 million recorded in the prior-year quarter. Adjusted operating margin rose 20 bps to 8.1% due to gross margin expansion coupled with flat SG&A. In dollar terms, operating income included a $34-million contribution from the Japan license royalties.

Other Financial Details

American Eagle ended the fiscal second quarter with total cash and investments of $317.2 million compared with $363.3 million at the end of the prior-year quarter. Further, total shareholders’ equity as of Aug 3, 2019, was $1,228.6 million.

Moreover, the company spent $55 million as capital expenditure in the quarter under review. For fiscal 2019, management anticipates capital expenditure of $200-$215 million. More than half of this spending will be allocated to store openings and refurbishment while the remaining is likely to be invested in omni-channel and digital projects as well as general corporate maintenance.

As of Aug 3, American Eagle’s merchandise inventory was roughly $234.8 million, up 14.7% from the comparable year-ago number.

During the reported quarter, the company returned nearly $83 million to shareholders via cash dividends and share buybacks. It paid dividends of $23 million and bought back nearly 3.4 million shares for $60 million. Year to date, the company has repurchased about 4.3 million shares for nearly $80 million.

Further, it approved the repurchase of additional 30 million shares on Jul 10, 2019, following which it has the authorization to buy back about 37.4 million shares.

Store Update

American Eagle inaugurated six AE stores and 13 Aerie stand-alone stores while closed three AE, and one outlet each of Aerie and Tailgate in second-quarter fiscal 2019.

As of Aug 3, the company operated 1,075 stores, comprising 939 AE (including 158 Aerie side-by-side locations), 131 Aerie stand-alone, four Tailgate and one Todd Synder stores. Additionally, it operated 236 international licensed outlets.

In fiscal 2019, management intends to open 15-20 AE outlets and 35-40 Aerie stand-alone stores. Also, it expects to remodel 15-20 AE stores. Further, American Eagle expects to shut 10-15 AE and 5-10 Aerie stand-alone stores in the fiscal year.

Further, the company highlighted its plan to accelerate the Aerie store footprint, with total 60-75 Aerie store openings planned for the fiscal year, including stand-alone and side-by-side outlets. Based on the store openings executed so far and expected through the rest of fiscal 2019, management expects store openings for the fiscal year to be at the low-end of the aforementioned range.

As already stated, the company expects to open 35-40 Aerie stand-alone stores in fiscal 2019. This will be further accompanied by 25-35 Aerie side-by-side stores, within 10-15 of the new AE outlets planned, and 15-20 remodeled locations.

Looking Ahead

Management remains impressed with the trends since the start of third-quarter fiscal 2019, with robust performance of its fall product across both brands. Further, it expects strategic actions to aid in maintaining comps momentum and strong bottom-line trends through the rest of fiscal 2019. This should bolster shareholder returns. The company anticipates comps to grow in a low to mid-single digit in third-quarter fiscal 2019, driven by improving sales trends.

However, a softer-than-expected earnings view for third-quarter fiscal 2019 hurt investors’ sentiment. For the fiscal third quarter, the company envisions adjusted earnings of 47-49 cents, in line with 48 cents recorded in the year-ago quarter, but lagged analyst expectations.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -9.77% due to these changes.

VGM Scores

At this time, American Eagle has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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.


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