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American Eagle (AEO) Slumps 7% Despite In-Line Earnings in Q3

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American Eagle Outfitters, Inc. (AEO - Free Report) reported in-line earnings in third-quarter fiscal 2019. Revenue-wise, the company marginally outpaced the Zacks Consensus Estimate and the metric grew on a year-over-year basis.

Despite in-line earnings and sales beat, shares of American Eagle declined 6.6% after the earnings release yesterday. Decline in share price can be attributed to management’s bleak earnings guidance for the fiscal fourth quarter, which fell shy of the analysts’ expectations.

The company stated that it witnessed a softer-than-expected start to the holiday season on account of persistent challenges in the AE apparel business. We note that American Eagle witnessed weaker demand in some AE apparel categories in the fiscal third quarter, which resulted in increased markdowns. This downturn continued in the fiscal fourth quarter as well.

For fourth-quarter fiscal 2019, American Eagle envisions adjusted earnings to come in at 34-36 cents, down from 43 cents recorded in the year-ago quarter. The company’s guidance also fell short of the current Zacks Consensus Estimate of 48 cents for the fiscal fourth-quarter earnings.


 

In the past three months, American Eagle has lost 20.4%, wider than the industry’s 0.3% decline.

Q3 Highlights

Adjusted earnings of 48 cents per share in the fiscal third quarter matched the Zacks Consensus Estimate. The bottom line also remained flat with the prior-year quarter’s figure.

Total net revenues grew 6% year over year to $1,066.4 million and beat the Zacks Consensus Estimate of $1,064 million. The upside was backed by consolidated comparable sales (comps) growth of 5% year over year. This marked the company’s 19th straight quarter of positive comps, with strong performances across AE Jeans, Aerie and the digital channel.

Comps gained from increased number of transactions, partly offset by a fall in average transaction size on account of lower average unit retail price. Brand-wise, comps rose 20% at Aerie and 2% for the AE brand. This marked the Aerie brand’s 20th straight quarter of double-digit comps improvement, reflecting a significant momentum in all areas of the business and significant market share gains. Meanwhile, the AE jeans business recorded the 25th consecutive quarter of robust top-line growth.

Furthermore, the company witnessed positive comps across stores and digital channels. On a consolidated basis, in-store comps rose 2% in the reported quarter, after a decline in the previous quarter.

Additionally, American Eagle’s digital business continued to exhibit solid growth, contributing about 28% to total revenues. Further, digital sales rose in low-double digits, up 100 basis points (bps) from the year-ago period. In the recent quarters, American Eagle saw significant increases in its app and mobile channels, which together represents more than half of the company’s digital business.

Quarter in Detail

Gross profit grew 2% to $407.1 million in the reported quarter. However, gross margin contracted 160 bps to 38.2%, mainly due to higher markdowns.

SG&A expenses were up 4% to $259 million, thanks to increased store salaries and professional fees, somewhat offset by lower incentive expense. As a rate of sales, SG&A declined 50 bps to 24.3%.

Further, operating income of $103.1 million decreased 5% from $108.6 million recorded in the prior-year quarter. Also, operating margin declined 110 bps to 9.7% due to gross margin contraction, somewhat mitigated with lower SG&A as a rate of sales.

Other Financial Details

American Eagle ended the fiscal third quarter with cash and investments of $265 million. Further, total shareholders’ equity as of Nov 2, 2019, was $1,260.4 million.

Moreover, the company spent $58 million as capital expenditure in the quarter under review. For fiscal 2019, management continues to anticipate 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 Nov 2, American Eagle’s merchandise inventory was roughly $647.3 million, up 9% from the comparable year-ago period number.

During the reported quarter, the company returned nearly $55 million to its shareholders via dividends and share buybacks. It paid dividends of $23 million and bought back nearly 2 million shares for $32 million. Year to date, the company has repurchased about 6.3 million shares for $112 million, following which it had 35.4 million shares remaining under its current authorization.

Store Update

American Eagle inaugurated six AE stores and 12 Aerie stand-alone stores, while closed one Aerie stand-alone outlet in third-quarter fiscal 2019.

As of Nov 2, the company operated 1,094 stores, comprising 945 AE (including 170 Aerie side-by-side locations), 142 Aerie stand-alone, five Tailgate and two Todd Synder stores. Additionally, it operated 241 international licensed outlets.

In fiscal 2019, management intends to open 25-30 AE outlets and 35-40 Aerie stand-alone stores. Also, it expects to remodel 15-20 AE stores. Further, American Eagle expects to shut down 10-15 AE and 5-10 Aerie stand-alone stores in the fiscal year.

Looking Ahead

Management remains optimistic about continued strength in the Aerie brand, which will continue delivering growth. Also, the AE brand’s jeans and bottoms businesses remain strong. Moreover, this Zacks Rank #3 (Hold) company’s efforts to improve product assortments and inventory management remain encouraging.

For the fiscal fourth quarter, management projects comps to remain flat year over year. Further, gross margin is expected to be hurt more than the fiscal third quarter, thanks to increased promotional activity. SG&A is expected to be roughly flat and the effective tax rate is projected to be 20-22% for the fiscal fourth quarter.

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