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American Eagle Reports Strong 4Q

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Leading teen apparel retailer, American Eagle Outfitters Inc. (AEO - Free Report) reported outstanding financial results for the fourth quarter and fiscal 2012. The company’s sales touched record-high numbers and earnings per share remained in line with its guidance range for both periods.

American Eagle’s adjusted earnings of 55 cents per share for the fourth quarter (ending Feb 2, 2013) came in line with the Zacks Consensus Estimate, while surging over 41% from the prior-year comparable quarter’s adjusted earnings of 39 cents. The year-over-year growth in earnings of this Zacks Rank #3 (Hold) company was driven by a high single-digit rise in the top line, coupled with lower input cost and favorable markdown.

Adjusted figures do not include any restructuring or store impairment expenses and tax benefits. Including one-time items, American Eagle earned 47 cents per share compared with 26 cents in the year-ago comparable quarter.

We believe that American Eagle’s cost-saving initiatives and long-term growth strategy has not only provided financial flexibility, but also helped in driving value proposition. The company is relentlessly focusing on initiatives to cut down costs through supply chain efficiencies and is updating product allocation systems to boost its bottom line.

Quarter in Detail

During the quarter, American Eagle's adjusted net sales went up 9% year over year to $1,117.1 million, but remained slightly below the Zacks Consensus Estimate of $1,118.0 million. Growth in revenue was driven by a 4% increase in comparable-store sales compared with a rise of 11% in the year-ago quarter.

The company's AE Brand and AEO Direct segments reported a growth of 1% and 24%, respectively, in comparable store sales. However, comparable store sales at American Eagle’s aerie stores declined 3%.

Adjusted gross profit increased 27% to $460.6 million, while gross margin improved 600 basis points (bps) to 41.2%. The year-over-year increase in gross profit and margin was primarily driven by strong top-line performance along with better markdown, lower input and rent costs.

Adjusted selling, general and administrative (SG&A) expense increased 21.4% to $253.1 million. Moreover, as a percentage of sales, it expanded 230 bps to 22.6% compared with 20.3% in the prior-year quarter. The rise in expenses is primarily attributable to higher incentive compensation along with increased advertising expenses.

The company’s adjusted operating income soared 48% to $177.4 million primarily driven by increased sales and gross profit, partially offset by higher operating expenses. Consequently, adjusted operating margin expanded 430 bps to 15.9%.

Fiscal 2012, in Brief

For fiscal 2012, American Eagle’s adjusted earnings soared 43% year over year to $1.39 per share, but fell short of the Zacks Consensus Estimate by a penny. Sales for the period surged 11% year over year and touched a record high of $3,475.8 million. Moreover, it came nearly in line with the Zacks Consensus Estimate of $3,476.0 million. Operating margin expanded 320 bps to 12.6%, primarily driven by an improvement of 330 bps in gross profit margin, partially offset by an increase of 90 bps in SG&A expenses as a percentage of sales.

Financial Position

American Eagle ended the fiscal with cash and short-term investments of $509.1 million compared with $719.5 million in fiscal 2011. During the fiscal, the company generated $499.7 million of cash from operational activities, while it deployed $94 million toward capital expenditure, primarily in store and e-commerce enhancements and advancement of information technology systems.

The company’s total inventory was $332.5 million at the end of fiscal 2012 compared with $367.5 million in fiscal 2011. Cost per foot fell 8% from fiscal 2011 level.

Store Update

During fiscal 2012, American Eagle opened 16 AE Brand stores, while shut down 41 stores comprising of 34 AE Brand and 7 aerie stores. Moreover, it remodeled 48 stores during the period. At the end of the fiscal, American Eagle was operating a total of 1,044 stores across the United States and 49 international franchise stores. Apart from this, the company ships its product in 81 countries through online channel.

The company expects its U.S. store counts to be between 1,044 and 1,059, while international franchise stores are expected to increase to 63 at the end of fiscal 2013. Moreover, it intends to remodel or refurbish 45–55 of its stores during fiscal 2013.

Fiscal 2013 Guidance

Despite the strong fourth quarter and fiscal 2012 results, American Eagle is expecting a decline in its fiscal 2013 first-quarter earnings per share due to adverse weather conditions in February and some macro-economic challenges. The company projects earnings for the quarter to come between 16 cents and 19 cents per share compared with 22 cents reported in the first quarter of fiscal 2012.

The guidance for the quarter is based on the company’s anticipation of mid-single digit decline in comparable store sales. The current Zacks Consensus Estimate is pegged at 25 cents per share, which may see revision in near term.

In addition, the company is anticipating a decline in the range of mid-single-digit in inventory cost per foot. Moreover, American Eagle is planning to make a capital expenditure of $250–$280 million toward constructing a new distribution center for supporting online sales, improving merchandise planning system, setting up a new fleet-wide point-of-sale arrangement and increasing investment in store developments.

Other Stocks to Consider

Other stocks worth considering in the apparel retail industry are New York & Company Inc. (NWY - Free Report) , Urban outfitters Inc. (URBN - Free Report) and Zumiez Inc. . All these stocks hold a Zacks Rank #2 (Buy).

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