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Why Is American Eagle (AEO) Up 7.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for American Eagle Outfitters (AEO). Shares have added about 7.2% 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 drivers.

American Eagle Q4 Earnings Top, Sales Lag Estimates

American Eagle reported mixed fourth-quarter fiscal 2018 results, wherein the bottom line outpaced the Zacks Consensus Estimate but the top line missed. Nonetheless, the top line grew year over year backed by strength in both American Eagle (“AE”) and Aerie brands, as well as across stores and digital channels.

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 the adjusted earnings of 23 cents registered in the year-ago quarter.

Q4 Highlights

Quarterly earnings of 43 cents per share surpassed the Zacks Consensus Estimate by a penny. However, the bottom line declined 2.3% from adjusted earnings of 44 cents recorded in the prior-year quarter. Earnings also plunged 17.3% year over year from GAAP earnings of 52 cents per share in the year-ago quarter.

Total net revenues increased 1% year over year to $1,244.2 million. However, the top line lagged the Zacks Consensus Estimate of $1,266.8 million. Further, a shift of the 2018 retail calendar (moving of back-to-school week to second-quarter fiscal 2018) resulted in roughly $60 million lesser sales in the fiscal fourth quarter.

Consolidated comps grew 6%, attributed to gains from initiatives and ability to boost market share through strong brands and compelling merchandise. This marked the company’s 16th straight quarter of positive comps, with both AE and Aerie brands reporting positive results across stores as well as e-commerce channels.

Brand-wise, comps rose 23% for the Aerie brand while it improved 3% for the AE brand. This marked Aerie brand’s 17th straight quarter of double-digit comps improvement, reflecting a significant momentum in all areas of the business. The AE brand is gaining from its leadership position in bottoms, with jeans business recording 22nd consecutive quarter of comps growth.

Meanwhile, the company’s digital business continued to exhibit solid growth, contributing about 31% to net revenues. Further, digital remained robust in the quarter, delivering high single-digit growth. Moreover, trends in brick-and-mortar stores continued to improve as both AE and Aerie stores reported positive in-store comps. The company reported positive in-store comps for the fifth consecutive quarter.

Evidently, the company witnessed a healthy quality of sales during the reported quarter, with positive store conversion as well as marginal rise in average unit retail price and transaction value. Further, both AE and Aerie brands outpaced mall traffic.

Quarter in Detail

Gross profit rose 1% to $431 million in the reported quarter. However, gross margin remained flat at 34.6% as lower markdowns were compensated with increased distribution and compensation costs.

SG&A expenses were up nearly 9% to $288 million with an increase of 160 basis points (bps) to 23.1% as a percentage of sales. The upside can be mainly attributed to higher investments brands and customer experience as well as higher store payroll, wages, incentives, and increased advertising costs.

Operating income of $101 million declined 12.9% from $116 million recorded in the prior-year quarter. Operating margin contracted 120 bps to 8.2% on account of the aforementioned unfavorable impact on sales due to the calendar shift as well as SG&A deleverage. Further, one week less in the fiscal fourth quarter negatively impacted operating income by roughly $18 million.

Financial Position

American Eagle ended the fiscal fourth quarter with cash and cash equivalents of $333.3 million compared with $413.6 million in the prior-year quarter. Further, total shareholders’ equity as of Feb 2, 2019, was $1,287.6 million.

Moreover, the company spent $189 million as capital expenditures in fiscal 2018. For fiscal 2019, management anticipates capital expenditures of $200-$215 million. More than half of this spending will be allocated to store openings and refurbishment, while the remaining is likely to be invested in omni-channel and digital projects as well as general corporate maintenance.

As of Feb 2, American Eagle’s merchandise inventory was roughly $424.4 million, up 6.6% from the comparable year-ago period number.

During fiscal 2018, the company returned nearly $242 million to its shareholders through cash dividends and share buybacks. It paid dividends of $97 million and bought back nearly 7.3 million shares worth nearly $144 million.

Store Update

American Eagle inaugurated 16 AE stores and 12 Aerie stand-alone stores, while it closed 15 AE and six stand-alone Aerie location in fiscal 2018.

As of Feb 2, the company operated 1,055 stores, comprising 934 AE (including 147 Aerie side-by-side locations), 115 stand-alone Aerie, five Tailgate and one Todd Synder stores. Additionally, it operated 231 international licensed outlets.

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. Further, American Eagle expects to shut down 10-15 AE stores and 5-10 Aerie stand-alone stores in the fiscal year.

Looking Ahead

Management remains impressed with its performance as it accomplished a milestone of $4 billion in annual revenues. The company expects to maintain the momentum and brand strength to drive growth in the future while delivering solid returns to shareholders.

Furthermore, American Eagle issued an outlook for first-quarter fiscal 2019. It anticipates comps to grow in low single digits.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.7% due to these changes.

VGM Scores

Currently, American Eagle has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Eagle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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