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Here's Why American Eagle (AEO) Stock Soared Despite Q1 Loss

Zacks Equity Research

American Eagle Outfitters, Inc. AEO reported adjusted loss per share and a sales decline in first-quarter fiscal 2020 mainly on extended store closures due to the coronavirus outbreak and aggressive inventory liquidation efforts. However, the company benefited from increased customer engagement and strong digital demand. Also, its Aerie brand reflected immense strength despite store closures.

As part of its inventory liquidation efforts, the company cleared excessive inventory through the AE spring and summer merchandise program. This resulted in increased markdowns and promotions that weighed on its gross margin as well as the bottom line.

Nevertheless, the inventory clearance positions the Aerie and AE brands for new back-to-school collections in late July, followed by the fall season in late September. The company expects the inventory optimization initiatives currently in place to streamline assortments, provide greater alignment of inventory to sales plans and better utilize supply-chain strengths to chase product demand.

The company’s shares gained 14.7% on Jun 3, as its strong online demand and initial recovery prospects overshadowed its dismal fiscal first-quarter performance. Moreover, we note that the Zacks Rank #3 (Hold) company has lost 0.5% in the past three months as compared with the industry’s 18.6% decline.

 


 

Highlighting the recovery path, it has begun re-opening stores, following safety protocols to protect both customers and employees. The measures include sanitization stations and masks for all customers. As of Jun 3, the company has re-opened 556 stores. It notes that the re-opened stores are performing ahead of expectations, which has helped the stores to be less promotional to move inventory. Notably, these stores are achieving nearly 95% of last year’s sales productivity.

Further, the company notes that growth in the digital channel remains strong even as stores re-open. On a quarter-to-date basis, digital demand has increased more than 100% for Aerie, while it is up about 50% for the AE brand.

Q1 Details

Adjusted loss of 84 cents per share in the fiscal first quarter was substantially wider than the Zacks Consensus Estimate of a loss of 24 cents. Moreover, the figure compares unfavorably with adjusted earnings of 24 cents reported in the prior-year quarter.

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

 

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

Total revenues declined 38% year over year to $552 million and missed the Zacks Consensus Estimate of $652 million. The decline in the top line is mainly attributed to store closures for both brands due to the coronavirus outbreak. Meanwhile, the company witnessed robust digital demand, which partly cushioned the top line.

Brand-wise, revenues declined 45% for American Eagle (AE), while it fell 2% for Aerie. Digital demand, as measured by ordered sales, was up 33% in the quarter. After stores closed, demand accelerated to nearly 70% as new online customers more than doubled for both American Eagle and Aerie. This led to strong consolidated digital sales growth of 9%, with a 75% increase for Aerie and 15% growth for AE. Despite strong demand, digital sales were partly hurt by temporary delays in fulfillment, which led to higher-than-usual backlogs in distribution centers. However, the company managed to reduce backlogs from the peaks in mid-April.

Despite store closures for almost seven weeks, the Aerie brand witnessed double-digit growth in demand, driven by its unique brand platform. In fact, Aerie’s new customer acquisitions across all channels increased at a double-digit rate despite store closures. However, AE witnessed pronounced impacts due to store closures in the fiscal first quarter as most of the brand’s revenues come from stores. Meanwhile, the AE brand also witnessed strong digital demand and gained in key categories. Additionally, each brand gained from its previously store-only customers engaging online for the first time.

Gross profit of $28 million in the reported quarter marked a significant decline from $325 million in the year-ago quarter. Furthermore, gross margin rate contracted from 36.7% in the prior-year quarter to 5.1% in the fiscal first quarter. The decline in gross margin mainly stemmed from reduced store revenues, markdowns and promotions to clear through AE spring and summer goods, and $60 million in inventory provisions. Moreover, the company’s buying, occupancy and warehousing costs, as a percentage of revenues, witnessed significant pressures, owing to the sales decline.

SG&A expenses declined 18.6% to $188 million, thanks to lower store operating expenses during closures. However, as a percentage of sales, SG&A increased 710 bps to 34.1%.

Despite the decline in SG&A expenses, the company reported an adjusted operating loss of $203 million against an adjusted operating income of $49 million in the year-ago quarter.

Other Financial Details

American Eagle ended the quarter with cash and short-term investments (liquidity) of $886 million. This included drawings of $330 million on its line of credit and $406 million raised in convertible bonds. This ensured a liquidity of $886 million at the end of the fiscal first quarter. Total shareholders’ equity as of May 2, 2020, was $997 million.

Moreover, the company spent $34 million as capital expenditure in first-quarter fiscal 2020. It repurchased 1.7 million shares for $20 million in early first-quarter fiscal 2020, prior to the coronavirus outbreak.

Coming to measures to preserve liquidity, the company adopted proactive measures early in the fiscal first quarter, including expense reductions and furloughs as well as curtailment of inventory receipts. Additionally, it suspended share repurchases and deferred its first-quarter dividend until 2021. This dividend will be payable Apr 23, 2021, to shareholders of record as of Apr 9, 2021. It also suspended the second-quarter cash dividend and anticipates no dividend payments throughout fiscal 2020.

For fiscal 2020, the company also reduced capital expenditure plan to $100-$125 million, whereas it spent $210 million in the prior year.

Store Update

In first-quarter fiscal 2020, American Eagle inaugurated two AE stores and one Aerie stand-alone store, while closed 4 AE stores and one Aerie stand-alone outlet.

As of May 2, the company operated 1,093 stores, comprising 938 AE (including 175 Aerie side-by-side locations), 148 Aerie stand-alone, five Tailgate and two Todd Synder stores. Additionally, it operated 215 international licensed outlets.

Some Better-Ranked Stocks in the Retail Space

Tractor Supply Company TSCO, currently carrying a Zacks Rank #2 (Buy), has a long-term expected earnings growth rate of 12%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Levi Strauss Co. LEVI has an impressive long-term expected earnings growth rate of 2.6%.  It carries a Zacks Rank #2 at present.

Office Depot, Inc. ODP currently has a long-term expected earnings growth rate of 6.8% and a Zacks Rank #2.

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