American Eagle (AEO) Up 9.3% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for American Eagle Outfitters (AEO). Shares have added about 9.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is American Eagle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
American Eagle Q3 Earnings Top Estimates, Sales Miss
American Eagle reported third-quarter fiscal 2020 results, wherein earnings beat the Zacks Consensus Estimate, while sales missed the same due to sluggish traffic amid the pandemic.
Nonetheless, the company continued to witness robust digital sales. Management remains particularly impressed with the performance of the Aerie brand, which also benefited from a solid debut of the OFFLINE activewear brand. In fact, increased full-priced sales across both Aerie and AE brands led to solid margins in the quarter.
Apart from this, the company remains pleased with the initial holiday season trends in November as well as a solid response to its assortments. The company’s inventory is well-managed, and it anticipates continued AUR enhancement and favorable margins. Also, increased online shopping is likely to perk up distribution center and delivery costs.
Q3 Details
Adjusted earnings of 35 cents per share beat the Zacks Consensus Estimate of 33 cents. However, the bottom line declined 27.1% year over year due to an elevated tax rate as well as the effect of increased interest expenses and shares outstanding associated with convertible debt.
Total revenues declined 3% year over year to $1,031.6 million and lagged the Zacks Consensus Estimate of $1,054 million. The downside can be accountable to soft mall traffic amid the pandemic, partially compensated by robust online sales. Brand-wise, revenues declined 11% for AE, while it rose 34% for Aerie.
Store revenues declined 16% year over year due to sluggish traffic, which more than offset favorable AUR and conversion rate. Meanwhile, the company witnessed a robust digital demand. Markedly, digital channel customer acquisitions jumped 37% in the quarter under review. Despite stores having reopened, digital demand remained strong and exceeded pre-pandemic levels. This led to strong consolidated digital sales growth of 29%, with an 83% increase for Aerie and 11% growth for AE. Overall, online sales formed 37% of the company’s revenues during the third quarter.
Gross profit was $415 million in the reported quarter, up almost 2% year over year from $407 million in the year-ago quarter. Furthermore, the gross margin rate expanded 200 bps to 40.2% in the quarter under review, which marked the company’s highest rate in several years.
The upside can be attributable to elevated merchandise margins, which, in turn, stemmed from increased full-priced sales, reduced promotions and inventory optimization efforts. Also, reduced product costs and improvement in rent expenses aided the gross margin. These were somewhat negated by increased delivery and distribution center costs due to a solid digital business and escalated cost per shipment.
SG&A expenses rose from $259 million to $273 million in the third quarter due to greater performance-based incentive compensation.
Excluding COVID-related costs of $7 million, the company reported an adjusted operating income of $103 million, which came in line with the figure reported in the year-ago period.
Other Financial Details
American Eagle ended the quarter with cash and short-term investments of $692 million. This included proceeds from convertible notes offering of $406 million. During the quarter, the company repaid $200 million of the remaining balance on its revolving credit facility. Total shareholders’ equity as of Oct 31, 2020, was $1,068.2 million.
Moreover, the company spent $31 million as capital expenditure in third-quarter fiscal 2020 and $93 million year to date. For fiscal 2020, it anticipates capital expenditure of $100-$125 million, while it spent $210 million in the prior year.
Additionally, American Eagle suspended its dividend in June 2020 alongside deferring its first-quarter dividend until 2021. This dividend will be paid out on Apr 23, 2021, to shareholders of record as of Apr 9, 2021. The company anticipates no dividend payments throughout fiscal 2020.
Store Update
In third-quarter fiscal 2020, American Eagle inaugurated three AE and seven Aerie stand-alone stores, while it closed three AE stores.
As of Oct 31, the company operated 1,105 stores, comprising 931 AE (including 177 Aerie side-by-side locations), 167 Aerie stand-alone, four Tailgate and three Todd Synder stores. Additionally, it operated 225 international licensed outlets.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -11.97% due to these changes.
VGM Scores
Currently, American Eagle has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Eagle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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