Shares of American Eagle Outfitters, Inc. (AEO - Free Report) have lost 23.4% year to date, thanks to cost-related headwinds for a while now. Sluggish trends in its American Eagle (AE) brand owing to challenges in some of its apparel categories further hurt investors’ sentiments. In the same time frame, the industry declined 22.2%.
Nevertheless, American Eagle’s robust growth endeavors including brand strength and omni-channel efforts might help it bring back the lost sheen. Let’s delve deep.
Factors Hurting the Stock
Although the company’s margin expanded in second-quarter fiscal 2019 driven by contributions from the Japan license royalties, higher markdowns, compensation costs and delivery expenses remained deterrents. Further, SG&A expenses rose 8.2% on escalated compensation expenses due to higher investments in store organization that started mid-way through 2018 and higher professional services fee.
Moreover, the company plans to terminate the agreement with its partner in Japan. It is currently exploring options to craft a business model that can support continued growth in Japan. In third-quarter fiscal 2019, it anticipates increased promotional activity and mid-single-digit growth in SG&A expenses. These factors might dent the company’s margins and overall profits going forward.
Meanwhile, adverse weather conditions hurt AE brand’s performance in the fiscal second quarter. Consequently, the shorts category missed expectations while the product mix for women's top was at the lower AUR size. This resulted in a 1% decline in comparable sales (comps) for the brand, which also hurt the company’s consolidated comps.
Consequently, American Eagle issued an unimpressive earnings outlook for the fiscal third quarter, which fell shy of analysts’ expectations. Adjusted earnings for the fiscal third quarter are envisioned to be in the 47-49 cents range.
Strategic Efforts to Offset Hurdles
Regarding American Eagle’s strategic endeavors, it is imperative to mention that the company has been improving its omni-channel capabilities by enhancing digital portals and store fleet. In the fiscal second quarter, its digital business continued to exhibit solid growth, contributing about 25% to total revenues. Further, digital sales were up 100 basis points (bps) from the year-ago period. Notably, increases in app and mobile channels together represent more than 50% of the company’s digital business.
On store front, management intends to open 15-20 AE outlets and 35-40 Aerie stand-alone stores in fiscal 2019. Also, it expects to remodel 15-20 AE stores while shutting 10-15 AE and 5-10 Aerie stand-alone stores. These store-optimization measures coupled with e-commerce expansion efforts are likely to boost American Eagle’s top line.
In addition, American Eagle continues to witness spectacular growth for its Aerie brand, with 16% comps growth in the fiscal second quarter. This marked the 19th straight quarter of double-digit comps growth for the brand, reflecting a significant momentum in all areas of the business. Aerie has evolved into a lifestyle brand, and is focused on expanding 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.
Encouragingly, American Eagle’s earnings surprise history remains sturdy with sixth straight beat in second-quarter fiscal 2019. Also, the company boasts a robust comps trend, delivering growth for the past 18 quarters. Strong performance across digital channels, AE Jeans and Aerie, is driving comps performance. Notably, AE jeans recorded the 24th consecutive quarter of robust top-line improvement, with double-digit growth in men’s and women’s assortments. As a result, it anticipates comps to grow in low to mid-single-digits in third-quarter fiscal 2019.
Key Retail Picks
Boot Barn Holdings, Inc (BOOT - Free Report) has an impressive long-term earnings growth rate of 15%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hibbett Sports, Inc. (HIBB - Free Report) , which presently carries a Zacks Rank #2 (Buy), has an expected long-term earnings growth rate of 10.9%.
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