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American Eagle (AEO) Q1 Earnings & Revenues Beat Estimates

Zacks Equity Research

American Eagle Outfitters, Inc. AEO reported solid first-quarter fiscal 2019 results, wherein the top and bottom lines outpaced the Zacks Consensus Estimate. Both the metrics also grew year over year owing to strength in both the American Eagle (AE) and Aerie brands as well as solid growth across stores and digital channels.

Q1 Highlights

In the quarter under review, adjusted earnings of 24 cents per share surpassed the Zacks Consensus Estimate of 21 cents. The bottom line also rose 4.3% from 23 cents registered in the prior-year quarter.

Including restructuring charges of 1 cent, American Eagle’s earnings came in at 23 cents, up 4.5% from the year-ago quarter number.

Total net revenues grew 8% year over year to $886.3 million and outshined the Zacks Consensus Estimate of $855.2 million. Moreover, consolidated comparable sales (comps) grew 6%, attributed to gains from initiatives and ability to boost market share through strong brands and compelling merchandise. This marked the company’s 17th straight quarter of positive comps, with both AE and Aerie brands delivering solid performances across stores as well as e-commerce channels.

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

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

American Eagle Outfitters, Inc. price-consensus-eps-surprise-chart | American Eagle Outfitters, Inc. Quote

Brand-wise, comps rose 14% and 4% for the Aerie and AE brand, respectively. This marked Aerie brand’s 18th straight quarter of double-digit comps improvement, reflecting a significant momentum in all areas of the business. Meanwhile, the AE brand is primarily gaining from its leadership position in bottoms, with jeans business recording 23rd consecutive quarter of comps growth.

Additionally, this Zacks Rank #3 (Hold) company’s digital business continued to exhibit solid growth, contributing about 30% to total revenues. Further, digital sales increased low double-digits, up 100 basis points (bps) from the year-ago period. Backed by positive in-store comps at both AE and Aerie stores, brick-and-mortar stores are consistently performing well. The company reported positive in-store comps for the sixth consecutive quarter.

Evidently, the company witnessed healthy sales during the reported quarter, with increases in store traffic, conversion rate and transactions.

Quarter in Detail

Gross profit grew 7% to $324.9 million in the reported quarter. However, gross margin contracted 30 bps to 36.7% due to higher markdowns and delivery expenses. These were compensated with leveraged rent and lower product costs.

SG&A expenses were up nearly 9.8% to $230.7 million, with an increase of 50 bps to 26% as a percentage of sales. The upside can mainly be attributed to escalated compensation expenses on account of higher investments in stores organization that started midway through 2018. Also, higher advertising costs and professional services resulted in the increase in SG&A expenses.

Adjusted operating income of $49.4 million dropped 5.5% from $50.7 million recorded in the prior-year quarter. Adjusted operating margin contracted 80 bps to 5.6% due to lower gross margin coupled with higher SG&A expenses.

Other Financial Details

American Eagle ended the fiscal first quarter with total cash and investments of $350 million compared with $310 million in the prior-year quarter. Further, total shareholders’ equity as of Feb 2, 2019, was $1,241.8 million.

Moreover, the company spent $37 million as capital expenditures in the quarter under review. For fiscal 2019, management anticipates capital expenditures 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 May 4, American Eagle’s merchandise inventory was roughly $456.2 million, up 12.8% from the comparable year-ago period number.

During the reported quarter, the company returned nearly $44 million to its shareholders via cash dividends and share buybacks. It paid dividends of $24 million and bought back nearly 7911,000 shares worth $20 million. Following this, American Eagle had roughly 10.8 million shares outstanding under its current repurchase authorization.

Store Update

American Eagle inaugurated seven AE stores and four Aerie stand-alone stores, while it closed five AE outlets in first-quarter fiscal 2019.

As of May 4, the company operated 1,061 stores, comprising 936 AE (including 151 Aerie side-by-side locations), 119 Aerie stand-alone, five Tailgate and one Todd Synder stores. Additionally, it operated 235 international licensed outlets.

In fiscal 2019, management intends to open 15-20 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 stores and 5-10 Aerie stand-alone stores in the fiscal year.

Looking Ahead

Management remains impressed with its first-quarter results and is confident about its performance in the remainder of fiscal 2019. The company expects to maintain the momentum and brand strength to drive growth in the future and deliver solid returns to its shareholders.

Furthermore, American Eagle issued an outlook for second-quarter fiscal 2019. It anticipates comps to grow in low single digits. Adjusted earnings are envisioned to be 30-32 cents, down from 34 cents recorded in the year-ago quarter.

 



Price Performance

In the past three months, shares of American Eagle have lost 12.7% compared with the industry’s 22.3% decline.

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