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American Eagle (AEO) Beats Earnings & Sales Estimates in Q4

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American Eagle Outfitters, Inc. AEO reported better-than-expected results in fourth-quarter fiscal 2019. Despite sluggishness in the AE brand; robust traffic across brands and channels, an impressive performance of Aerie’s, solid growth in the bottoms unit on robust jeans contributed to the strong quarterly results.

The company witnessed positive consumer feedback for women’s sweaters and fleece, and men's hoodies in the holiday season. Also, the accessories category, including its new mood personal care line, performed well. Moreover, sturdy traffic during the holiday season as well as the post-holiday period acted as a catalyst. Apart from these, the Aerie brand continued to show strength, recording the fifth straight year of double-digit sales growth.

Q4 Highlights

Adjusted earnings of 37 cents per share in the fiscal fourth quarter surpassed the Zacks Consensus Estimate of 36 cents. However, the figure decreased 14% year over year from 43 cents reported in the prior-year quarter.

Total revenues grew 6% year over year to $1,314.6 million and beat the Zacks Consensus Estimate of $1,270 million. The upside was backed by consolidated comparable sales (comps) growth of 2% year over year. This marked the company’s 20th straight quarter of positive comps, with strong performances across AE Jeans, Aerie and the digital channel.

Brand-wise, comps rose 26% at Aerie, marking the brand’s 21st straight quarter of double-digit comps growth. Further, Aerie’s digital business continued to exhibit solid growth, contributing about 33% to total revenues.

However, comps fell 3% for the AE brand, owing to the soft demand for selective tops categories and higher promotions. On the flip side, customer traffic and transactions remained positive. Meanwhile, the AE jeans business recorded the 26th consecutive quarter of robust top-line growth.

Overall, the company’s digital sales rose in double digits, up 200 basis points (bps) from the year-ago period. In the recent quarter, American Eagle saw significant increases in its app and mobile channels, which represented more than half of the company’s digital business. On a consolidated basis, in-store comps fell 3% in the reported quarter, after a rise in the previous quarter.

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise

Quarter in Detail

Gross profit declined 5% to $408 million in the reported quarter. However, gross margin contracted 360 bps to 31% mainly due to higher markdowns.

SG&A expenses edged down 0.3% to $287 million, thanks to lower incentive expenses, somewhat offset by increased professional fees. As a percentage of sales, SG&A declined 130 bps to 21.8%.

Further, adjusted operating income was $77 million as compared to $101 million in the year ago quarter. Adjusted operating margin declined 240 bps to 5.8% due to gross margin contraction, somewhat mitigated by lower SG&A as a percentage of sales.

Other Financial Details

American Eagle ended fiscal 2019 with cash and investments of $361.9 million. Further, total shareholders’ equity as of Feb 1, 2020, was $1,247.9 million. Moreover, the company spent $210 million as capital expenditure in fiscal 2019.

For fiscal 2020, management anticipates capital expenditure of $225-$275 million.

As of Feb 1, American Eagle’s merchandise inventory was $446.3 million, up 5.2% from the comparable year-ago period number.

During fiscal 2019, the company returned nearly $205 million to its shareholders via dividends and share buybacks. It paid out dividends of $93 million and bought back 6.3 million shares for $112 million.

Store Update

In fourth-quarter fiscal 2019, American Eagle inaugurated eight AE stores and Aerie stand-alone stores each, while closed 13 AE stores and two Aerie stand-alone outlets.

During the quarter, the company operated 1,095 stores, comprising 940 AE (including 174 Aerie side-by-side locations), 148 Aerie stand-alone, five Tailgate and two Todd Synder stores. Additionally, it operated 217 international licensed outlets.

Going ahead, the company remains on track with store expansion plans, with an increased focus on standalone locations. In fiscal 2020, management intends to open 55-60 Aerie stand-alone stores and 10-15 AE stores. Further, American Eagle expects to shut down 10-20 AE and 5-10 Aerie stand-alone stores in fiscal 2020.

Looking Ahead

For fiscal 2020, management remains focused on enhancing product portfolio, managing inventory efficiently, strengthening AE jeans and maintaining growth at Aerie. Further, the company is making supply-chain efforts to improve customers’ shopping experiences and boost operational efficiencies. Moreover, it foresees an improvement in the women’s category, driven by core products such as tops, tees and fleece. Also, both store and online traffic are expected to remain strong.

For first-quarter fiscal 2020, the company expects comparable sales growth in low-single digits. For the first quarter, the bottom line is envisioned to be 20-22 cents per share, inclusive of $1 impact each due to the coronavirus outbreak and the exit of the Japanese licensed business.

Price Performance

We note that the Zacks Rank #3 (Hold) company has lost 12.5% as compared with the industry’s 15.7% decline.


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