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Solid Demand to Aid American Eagle (AEO) Despite Cost Woes

American Eagle Outfitters, Inc. AEO has been gaining from robust demand across its brands and channels, along with strength in the Aerie brand. Also, it is on track with the Real Power, Real Growth value-creation plan.

This led to year-over-year sales growth of 17% and 15% on a two-year basis in fourth-quarter fiscal 2021. Higher full-priced sales and reduced promotions boosted the average unit retail and led to double-digit growth in average transaction value. This marked its seventh successive quarter of AUR growth.

Store revenues improved 32% year over year, owing to increased store traffic. Store sales were up 4% from fourth-quarter fiscal 2019. With customers returning to stores, mainline and factory outlets witnessed improvements, driven by a demand recovery. Robust holiday demand and brand strength also aided sales. Management highlighted that it reached $5 billion in revenues for fiscal 2021.

That said, let’s delve deeper into other factors aiding the stock.

Key Growth Drivers

The company has been witnessing growth for its Aerie brand for quite some time now. In fourth-quarter fiscal 2021, sales rose 27% year over year and surged more than 60% on a two-year basis. This marked the 29th consecutive quarter of double-digit growth for Aerie, driven by solid demand across apparel, intimates and off-line activewear categories.

The brand witnessed strong demand for core Aerie apparel and intimates, as well as OFFLINE activewear. Robust demand in the legging business, which is one of its best-margin categories, bodes well. The Aerie brand is a key growth engine for American Eagle and remains on track to reach the next brand milestone of $2 billion in sales, out of which it has already achieved $1 billion.

The digital business has also been performing well, driven by strong demand and expanded omnichannel capabilities. This includes a new mobile point-of-sale solution, which led to a significant increase in curbside pickup orders, along with a new instant-credit feature for returns and expansion of its Afterpay capabilities in its mobile app.

The company’s mobile app accounted for approximately one-third of its e-commerce sales and traffic in the fourth quarter. Also, the relaunch of its loyalty program bodes well. Gains from the acquisition of Quiet Logistics also aided delivery. As a result, the company’s digital revenues advanced 31% from fourth-quarter fiscal 2019. Digital revenues accounted for 36% of total revenues compared with 29% in fourth-quarter fiscal 2019.

This Zacks Rank #3 (Hold) company is on track with its Real Power Real Growth value-creation plan, which has been aiding performance. The plan is driving profitability through real estate and inventory optimization efforts, omni-channel and customer focus, and investments to improve the supply chain.

As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to strengthen the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company’s efforts under the plan have aided the recovery of the American Eagle brand. Going forward, it expects to undertake initiatives to deliver growth and sustained profitability for the American Eagle brand.

Headwinds to Overcome

The company has been reeling under elevated freight costs, which dented margins in fourth-quarter fiscal 2021. American Eagle’s gross margin contracted 160 basis points (bps) year over year, while the operating margin contracted 210 bps year over year. Also, SG&A expenses rose 19.7% year over year. The metric, as a percentage of sales, expanded 60 bps due to a rise in store wages and variable selling expenses. This led to a bottom-line decline of 10.3% in the said quarter.

For fiscal 2022, management anticipates operating profit of $550-$600 million, whereas it reported $603 million in the prior year. Also, earnings are expected to decline in the first half of fiscal 2022 due to continued freight pressures, followed by a potential recovery in the second half.

Industry-wide supply-chain disruptions also act as deterrents. These led to almost $80 million in freight costs in the fourth quarter of fiscal 2021. Out of these, $60 million was air freight costs related to the Vietnam factory closings. Higher freight of approximately $31 million in the fourth quarter impacted the Aerie brand. Also, the shortage of labor and raw materials resulted in delayed store openings.

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Consequently, shares of AEO slumped 31.9% in the past three months compared with the industry’s decline of 21.7%.

Conclusion

Despite rising cost woes, we believe that solid online show, robust demand and brand strength will aid the stock in the near term. Also, a VGM Score of A and a long-term earnings growth rate of 11% reflect its inherent strength.

Stocks to Consider

Here are three better-ranked stocks to consider — Nordstrom JWN, Tapestry TPR and Capri Holdings CPRI.

Nordstrom, a leading fashion specialty retailer in the United States, presently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nordstrom’s current financial-year sales and EPS suggests growth of 5.7% and 180%, respectively, from the year-ago period’s reported numbers. JWN has an expected EPS growth rate of 6% for three-five years.

Tapestry, the designer and marketer of fine accessories and gifts for women and men in the United States and internationally, presently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 28.2%, on average.

The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s reported numbers. TPR has an expected EPS growth rate of 12.5% for three-five years.

Capri, which provides women’s and men’s accessories, footwear and ready-to-wear, as well as wearable technology, watches, jewelry, eyewear and a full line of fragrance products, currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1,018.2%, on average.

The Zacks Consensus Estimate for Capri’s current financial-year sales and EPS suggests growth of 37% and 215.8%, respectively, from the year-ago period’s reported figures. CPRI has an expected EPS growth rate of 53.9% for three-five years.


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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report

Nordstrom, Inc. (JWN) : Free Stock Analysis Report

Tapestry, Inc. (TPR) : Free Stock Analysis Report

Capri Holdings Limited (CPRI) : Free Stock Analysis Report

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