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Here's Why Investors Should Hold on to American Eagle Stock

Zacks Equity Research

American Eagle Outfitters, Inc. AEO stock emerges as a strong contender, thanks to its solid comparable store sales (comps) and positive earnings surprise trend. In fourth-quarter fiscal 2018, the company has put up a stellar show by registering 16th straight quarter of positive comps. It also delivered fourth straight earnings beat in the quarter. Also, the company’s top-line surprise history reflects a decent picture, with a beat recorded in three of the last five quarters.

However, management issued muted earnings view for first-quarter fiscal 2019. Earnings are envisioned at 19-21 cents, excluding potential asset impairment as well as restructuring costs. This guidance is lower than adjusted earnings of 23 cents in the year-ago quarter. Consequently, the Zacks Consensus Estimate for the fiscal first quarter has moved 16% south to 21 cents over the past 30 days.

Nevertheless, shares of this Pittsburgh, PA-based company have gained 12% in a year, courtesy of robust omni-channel efforts and brand strength. Also, this Zacks Rank #3 (Hold) stock has outperformed the industry, which declined 12.4% during the same time frame.

 

Let’s delve deep.

Solid Omni-Channel Efforts to Drive Top Line

American Eagle is intensely focused on developing its omni-channel platform to reach customers in every possible way. The company has been enhancing its digital portals besides investing in store fleet. As a result, both store and digital channels reported solid sales in fourth-quarter fiscal 2018. Notably, digital business contributed about 31% to net revenues, marking the company’s 16th straight quarter of double-digit e-commerce growth. Moreover, American Eagle reported positive in-store comps for the fifth consecutive quarter.

Trends in brick-and-mortar stores steadily improved as both American Eagle (AE) and Aerie brands’ stores reported positive in-store comps. In fiscal 2019, management intends to open 10-15 AE outlets and 35-40 Aerie stand-alone stores. Also, it expects to remodel 15-20 AE stores, and shut down 10-15 AE and 5-10 Aerie stand-alone stores.

This makes it clear that a winning marketing strategy in retail is providing the best combination of digital and physical store experiences. The strategy is providing a boost to the company’s comps, which are anticipated to grow in low-single digits during the first quarter of fiscal 2019.

Brand Strength

American Eagle rides on its robust brand strength. The company is witnessing continued momentum at the Aerie brand, with comps growth of 23% in the most recent quarter. This marked the brand’s 17th straight quarter of double-digit comps growth backed by significant momentum in all areas of the business. Continued strength in the Aerie business has helped American Eagle gain a solid foothold in the retail space. The brand has evolved into a lifestyle brand and is currently focused on increasing market share and rapidly growing customer base. Markedly, Aerie is a key growth engine for American Eagle and remains on track to reach the next brand milestone of $1 billion in sales.

Additionally, the AE brand is performing well and gaining from its leadership position in bottoms. Apparently, the jeans business recorded 22nd consecutive quarter of comps growth. Impressively, both the AE and Aerie brands outpaced mall traffic in the fiscal fourth quarter.

Solid Capital Plan

American Eagle had a debt-free balance sheet with cash and cash equivalents of $333.3 million as of Feb 2, 2019, and healthy cash flows. This, in turn, helps the company to make strategic capital investments and return excess cash to its shareholders. In fiscal 2018, management returned nearly $242 million to its shareholders through dividends and share buybacks. Recently, management also approved a quarterly cash dividend of 13.75 cents per share, payable Apr 26, 2019.

For fiscal 2019, management anticipates capital expenditures of $200-$215 million, of which, more than half will be allocated to store openings and refurbishment. The balance will be invested in omni-channel and digital projects as well as general corporate maintenance.

Bottom Line

Given American Eagle’s impressive strategic efforts and inherent potential, we would suggest retaining the stock now. Also, the company is expected to continue with its bull run on the index, evident from its VGM Score of A and an expected long-term earnings growth rate of 7.2%.

Three Better-Ranked Retail Stocks Seeking Your Attention

Abercrombie & Fitch Co. ANF has delivered average positive earnings surprise of 88.3% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Canada Goose Holdings Inc. GOOS delivered average positive earnings surprise of 82.7% in the trailing four quarters. The company currently carries a Zacks Rank #2 (Buy).

Stitch Fix, Inc. SFIX, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 22.5%.

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