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American Eagle Outfitters Fails to Impress

- By Mrinalini Chaudhuri

American Eagle Outfitters Inc. (AEO) is a leading global specialty retailer with more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom. Through its websites, the company ships to around 81 countries. The company boasts of strong leadership in jeans and bottoms and stands out in the women's apparel space.

The company recently reported fourth quarter and full-year results. In a highly challenging retail landscape, the company has been consistently posting double-digit sales growth throughout 2016. Fourth-quarter revenue, however, decreased due to lower consumer traffic. It has also lowered revenue expectations for the first quarter of 2017. The operating income improved 20 basis points to 9.8% as a rate to revenue.

Management expects comps in the range of flat to a low single-digit decline for the first quarter of 2017. Earnings per share are expected to range between 15 cents and 17 cents in the first quarter.

Fourth-quarter performance

Total net revenue decreased 1% to $1.10 billion, which was $1.11 billion in the prior-year quarter.

Gross profit increased slightly to $389 million, which was $388 million in the prior-year quarter.

The gross margin increased 30 basis points and was 35.4% of revenue, up from 35.1% in the prior-year quarter.

Selling, general and administrative expenses during the quarter were $242 million.

Operating income during the quarter was $107 million, which was $106 million in the prior-year quarter.

Adjusted EPS of 39 cents increased 11% compared to adjusted EPS of 35 cents last year.

Fiscal 2016 performance

Total net revenue increased 2% to $3.61 billion, which was $3.52 billion in the prior-year period).

Consolidated comparable sales increased 3%.

Gross profit increased 5% to $1.37 billion.

Selling, general and administrative expenses during the year were $858 million, an increase of 2% from $844 million the year before.

Operating income increased 14% to $353 million.

The operating margin was 9.8%.

Adjusted EPS from continuing operations of $1.25 increased 24% from adjusted EPS of $1.01 last year.

Total ending inventories at cost increased 17% to $358 million.

Full-year capital expenditure totalled $161 million.

The company had $379 million in cash at the end of the year.

The brighter side

The Aerie brand has been performing well with double-digit sales growth throughout 2016, leaving it lots of room to expand. Its namesake brand is popular among U.S. teens.

The company has been paying dividends since 2006. Much of its revenue comes from online sales, which reduces the fixed costs incurred from keeping a store. The balance sheet does not have any debt, which is a plus.

The company may do well if it capitalizes on its Aerie brand, which has been delivering good comps consistently for few quarters now. It has been increasing its gross margins and the company declared a quarterly cash dividend of 12 cents per share, marking its 51st consecutive quarterly dividend. The dividend was declared on March 8 and is payable on April 21 to shareholders of record at the close of business on April 7.


The company's performance of late looks dismal. In spite of the positive earnings posted during the fourth quarter, sales faltered from stiff competition and changing consumer preferences. The company's outlook is also not promising. American Eagle has faced unfavorable trends recently. The stock has been in decline and is better to avoid at current levels.

Disclosure: I do not hold any position in the company.

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This article first appeared on GuruFocus.