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American Eagle Gains on Robust Growth Efforts & Comps Trend

Zacks Equity Research

American Eagle Outfitters Inc. AEO seems to be on a roll, thanks to its ongoing omni-channel efforts, impressive comparable store sales (comps) trend and brand strength. The company delivered 15th straight quarter of positive comps, when it reported third-quarter fiscal 2018 numbers.

As a result, shares of this Pittsburgh, PA-based company have rallied 24.5% in a year, significantly outperforming the S&P 500 index’s 2.4% gain and the industry’s 12.6% decline.



Let’s Delve Deep

American Eagle remains intensely focused on developing its omni-channel platform by enhancing digital portals and store fleet. Notably, digital business contributed about 27% to sales in third-quarter fiscal 2018, while in-store comps improved 6%. Trends in brick-and-mortar stores continued to improve as both AE and Aerie brands’ stores reported positive in-store comps.

Moreover, American Eagle is witnessing continued momentum at its Aerie brand with comps growth of 32% in the fiscal third quarter. This marked the 16th straight quarter of double-digit comps growth for the brand backed by significant momentum in all areas of the business. Continued strength in the Aerie business helped the company gain a solid foothold in the retail space. Aerie has evolved into a lifestyle brand, and is focused on increasing market share and rapidly expanding its customer base. The brand remains on track to reach the next milestone of accomplishing $1 billion in sales.

The AE brand is also performing well and gaining from its leadership position in bottoms, with jeans business recording 21st consecutive quarter of comps growth. We believe comps momentum to continue in the fiscal fourth quarter as well. Last month, the company released its holiday sales data, reporting 6% comps growth for fourth-quarter fiscal 2018 to date.

Furthermore, management reiterated the earnings per share guidance of 40-42 cents for the fiscal fourth quarter, slated to release on Mar 6. The guidance includes impacts related to the additional 53rd week in fiscal 2017, which is likely to hurt revenues by about $60 million and earnings by 7 cents per share from the prior-year number.

Meanwhile, the company has witnessed higher costs as well as a shift in the 2018 retail calendar (moving of back-to-school week to the second quarter in fiscal 2018), which might continue hurting its near-term results. In fact, this shift resulted in $40 million lesser sales in the fiscal third quarter and also impacted operating margin. SG&A deleverage further dented operating margin due to higher cost of investments in brands and customer experience as well as higher store payroll, wages, and increased incentive expenses and advertising.

Nevertheless, we expect the company to continue with its bull run on the index driven by the aforementioned strategic initiatives. Further, this Zacks Rank #3 (Hold) stock has a VGM Score of A and an expected long-term earnings growth rate of 10.4%, which demonstrates its upside potential.

Three Better-Ranked Retail Stocks Seeking Your Attention

Shoe Carnival, Inc. SCVL has outpaced the earnings estimates in each of the trailing four quarters, the average being 31.4%. Also, the stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. BOOT has an impressive long-term earnings growth rate of 23% and a Zacks Rank #2 (Buy).

Abercrombie & Fitch Co. ANF is also a Zacks Rank #2 company, which has delivered average positive earnings surprise of 88.6% in the last four quarters.

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