AEO Shares Up on Prelim Results

Zacks

Following the announcement of first-quarter preliminary sales results, the shares of specialty retailer, American Eagle Outfitters Inc. (AEO), are trading at $20.02 per share, registering a year-to-date increase of approximately 32% from the closing price of $15.19 as of December 30, 2012.

Driven by strong spring season sales, American Eagle’s first-quarter comparable sales climbed 17%, resulting in a total sales increase of 18% to $719 million compared with $610 million in the year-ago quarter. Moreover, quarterly sales also beat the Zacks Consensus estimated sales of $708 million.

Further, better-than-expected top-line performance and lower promotional expenses, motivated management to raise its first-quarter earnings guidance range. The company now expects earnings for the quarter to be in the range of 18 cents to 20 cents per share, instead of 8-10 cents forecasted earlier.

The Zacks Consensus Estimate, which currently stands at 20 cents per share, was 10 cents per share prior to the announcement of preliminary results.

For fiscal 2012, on the back of low-to-mid single-digit increase in comparable sales, the company anticipates earnings in the range of $1.06 to $1.12 per share, up 23%-30% from the previous fiscal adjusted earnings of 86 cents per share. The Zacks Consensus Estimate, which currently stands at $1.16 per share, was $1.08 per share prior to the announcement of preliminary results.

Moreover, American Eagle revealed its plan to focus on inventory control measures and improvement of operational efficiency to further boost its bottom line. The company will announce its first-quarter results before the market opens on Wednesday, May 23, 2012.

Our Recommendation

American Eagle is one of the leading specialty retailers of fashionable and stylish apparels and accessories in the United States and Canada. The company has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of its target customers.

In a drive to boost its bottom line, American Eagle continues to take initiatives to reduce cost through supply chain efficiencies and updated product-allocation systems. We believe that these initiatives along with the long-term growth strategy of opening stores in the Middle East and developing economies like India and China will help drive value proposition.

Moreover, the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment is likely to enhance its top line while improving its gross margin.

However, American Eagle’s business is seasonal in nature and generates a high proportion of sales during the fiscal third and fourth quarters, which are characterized by the back-to-school and holiday seasons. Furthermore, the company ramps up its merchandise levels in anticipation of the holiday season, exposing itself to significant risks if the season fails to deliver impressive results.

Above all, American Eagle operates in a highly fragmented market and competes with national as well as regional players. Furthermore, apart from larger retailers such as Gap Inc. (GPS), American Eagle is facing increasing competition from value-priced specialty retailers, such as Abercrombie & Fitch Company (ANF) and Buckle Inc. (BKE).

Currently, we are maintaining a long-term Neutral recommendation on American Eagle. Our long-term recommendation is supported by Zacks #3 Rank, which translates into a short-term Hold rating on the stock.

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