Why Is American Eagle (AEO) Up 22.7% Since Last Earnings Report?
It has been about a month since the last earnings report for American Eagle Outfitters (AEO). Shares have added about 22.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is American Eagle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
American Eagle Tops on Q3 Earnings & Sales Estimates
American Eagle reported top and bottom-line beat in third-quarter fiscal 2023, driven by brand strength and solid demand. Earnings and sales also increased year over year. The company’s third-quarter fiscal 2023 earnings of 49 cents per share rose 17% year over year and surpassed the Zacks Consensus Estimate of 48 cents.
Total net revenues of $1,301.1 million improved 5% year over year, beating the Zacks Consensus Estimate of $1,275 million. Revenue growth was driven by rising brand momentum and tremendous fall season merchandise collection. Store revenues grew 3% in the quarter, while digital revenues rose 10%.
Quarterly Details
Brand-wise, revenues increased 2% to $857 million for American Eagle and beat our estimate of $807.7 million. Comps for the American Eagle brand rose 2% year over year. American Eagle brand sales benefited from improvements in its assortments. The AE brand is poised to benefit from new trends in casual wear, the expansion of dominance in denim, and making investments to better penetrate categories and occasions.
Revenues advanced 12% to $393 million for the Aerie brand in the fiscal third quarter and outpaced our estimate of $388.8 million. Comps for the Aerie brand also improved 12%. Sturdy demand in its core apparel, activewear extension, strength in the OFFLINE brand and renewed momentum in intimates aided the brand.
Gross profit increased 13% year over year to $544 million in the fiscal third quarter. The gross margin expanded 310 basis points (bps) to 41.8%. Gross margin growth in the quarter can be attributed to strong demand, reduced product and freight costs, and gains from profit improvement initiatives, which led to lower markdowns and leverage on rent, distribution, and warehousing and delivery expenses. Inventory discipline mainly resulted in lower markdowns as the company maintained healthy promotions.
Gross profit for the quarter surpassed our estimate of $532.4 million, which suggested year-over-year growth of 11%. We estimated the gross margin to expand 380 bps year over year to 42.5%, backed by a decline in the cost of sales due to lower freight expenses.
SG&A expenses rose 16% year over year to $362 million and beat our estimate of $361.4 million. As a percentage of sales, SG&A expenses increased 270 bps to 27.8%. Elevated SG&A expenses mainly resulted from higher incentive compensation compared with zero accruals last year. Additionally, higher store payroll due to increased wages led to SG&A deleverage. Our model had predicted a SG&A rate of 28.8% for the fiscal third quarter, reflecting an increase of 370 bps.
Operating income was $125.4 million in the quarter, up 6.7% from $117.5 million in the year-ago period. The operating margin of 9.6% expanded 10 bps year over year. Growth in the operating margin was aided by strong sales growth and an improved gross margin rate, offset by SG&A deleverage. Operating income surpassed our estimate of $115.7 million. Our model predicted operating margin decline of 30 bps to 9.2%.
For Aerie, operating income of $75.9 million increased 34.3% from the year-ago quarter’s $56.5 million and surpassed our estimate of $63.5 million. The AE brand’s operating income increased 5.7% year over year to $184 million in the quarter under review. AE’s operating income surpassed our estimate of $179.9 million.
Other Financial Details
American Eagle ended the fiscal third quarter with cash and cash equivalents of $240.9 million, and liquidity of $900 million, with no outstanding debt. Total shareholders’ equity as of Oct 28, 2023, was $1,738.3 million.
Capital expenditure was $43 million in the reported quarter. It expects a capital expenditure of $150-$175 million for fiscal 2023.
Inventory declined 4% year over year to $769 million, driven by continued inventory discipline. Inventory units were down 3%.
Guidance
The company noted that the strong business momentum continued in the fourth quarter of fiscal 2023 on robust holiday assortments, engaging marketing campaigns and solid execution. This, along with the strong year-to-date results, led management to raise its view for fiscal 2023.
For fiscal 2023, revenues are likely to be up year over year in the mid-single digits compared with the prior mentioned low-single-digit growth. Operating income is estimated to be $340-$350 million, narrowing toward the upper-end of the earlier stated $325-$350 million.
AEO expects SG&A to rise in the low-double digits for fiscal 2023 as improved business trends are likely to result in elevated incentives. In fiscal 2023, the company’s plan for consolidated store count is nearly flat with last year, suggesting 25 Aerie store openings, offset by 25 net closures for the AE brand.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
VGM Scores
At this time, American Eagle has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise American Eagle has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
American Eagle belongs to the Zacks Retail - Apparel and Shoes industry. Another stock from the same industry, Tapestry (TPR), has gained 20.3% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
Tapestry reported revenues of $1.51 billion in the last reported quarter, representing a year-over-year change of +0.4%. EPS of $0.93 for the same period compares with $0.79 a year ago.
Tapestry is expected to post earnings of $1.46 per share for the current quarter, representing a year-over-year change of +7.4%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Tapestry. Also, the stock has a VGM Score of C.
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