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American Eagle Falls Despite Q2 Earnings and Sales Beat

Zacks Equity Research
Updated

American Eagle Outfitters Inc. AEO reported robust second-quarter fiscal 2015 results, wherein quarterly earnings of 17 cents per share increased substantially from 3 cents per share recorded in the prior-year quarter, and beat the Zacks Consensus Estimate of 14 cents.
 

American Eagle Outfitters Inc. - Earnings Surprise | FindTheBest

Results benefited from solid sales and earnings growth delivered by both the American Eagle and Aerie brands, across all networks. Quarterly earnings also exceeded the company’s own guidance range of 11–14 cents per share.

Total revenue of this Zacks Rank #1 (Strong Buy) company increased nearly 12% to $797.4 million, also surpassing the Zacks Consensus Estimate of $762.4 million. The rise came on the back of American Eagle’s enhanced merchandise collection and superior customer service. The company also recorded strong digital sales.

Comparable-store sales (comps) improved 11% as against a 7% decrease recorded last year. Brand-wise, comps increased 18% at the company's aerie stores and 10% at AE Total Brand stores.

Though the company reported solid top and bottom line results for the second quarter, the stock rolled down 7.5% yesterday. The probable reason for the negative investor sentiment could be the company’s soft comps guidance.

American Eagle anticipates comps to grow at a mid single-digit rate in the third quarter of fiscal 2015, which represents a slowdown from a growth of 11% delivered in the second quarter. Further, the company projects earnings per share in the band of 28–37 cents compared with 22 cents earned in the prior-year quarter.

Quarter in Detail

Gross profit for the quarter surged 20% to $285 million and gross margin expanded 230 basis points (bps) to 35.7% owing to lower markdowns coupled with buying, occupancy and warehousing leverage.

Selling, general and administrative (SG&A) expenses were $196 million, up 3% year over year, reflecting higher incentive compensation and selling expenses due to strong sales, offset by expense reduction initiatives. However, as a percentage of sales, SG&A expenses contracted 220 bps to 24.5%.

The company’s operating income came in at $53 million, a significant rise from $12 million in the prior-year quarter. Operating margin expanded 500 bps to 6.7%.

Financial Position

American Eagle ended the quarter with cash and investments of nearly $327 million compared with $263 million in the prior-year period.

During the quarter, the company incurred $37 million as capital expenditure. For fiscal 2015, the company maintained its capital expenditure guidance of $150 million, mainly to be allocated toward new and renovated outlets, the roll-out of the point of sale system across all stores, supporting technologies and the completion of its new fulfillment center.

As of Aug 1, 2015, American Eagle’s total inventory was $408.5 million, up 4% from the comparable year-ago period. Inventory at cost per foot jumped 5% year over year. American Eagle expects inventory per foot to remain flat in the third quarter.

Store Update

During the second quarter, American Eagle introduced six new stores, including four factory outlets. The company shut down three stores, including two AE and one aerie store. Alongside, on the global platform, the company opened seven international licensed stores, which include the company’s entry into South Korea and Singapore.

As of quarter end, the company operated 114 international licensed stores across 19 countries.

By the end of fiscal 2015, the company expects to operate 141 international licensed stores across 22 countries.

Other Stocks to Consider

Other favorably-placed stocks in the same industry include Boot Barn Holdings Inc. BOOT, with a Zacks Rank #1, DSW Inc. DSW and Foot Locker Inc. FL, each carrying a Zacks Rank #2 (Buy).

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AMER EAGLE OUTF (AEO): Free Stock Analysis Report
 
FOOT LOCKER INC (FL): Free Stock Analysis Report
 
DSW INC CL-A (DSW): Free Stock Analysis Report
 
BOOT BARN HLDGS (BOOT): Free Stock Analysis Report
 
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