American Eagle (AEO) Beats On Earnings In Q1, Stock Soars

American Eagle Outfitters Inc. (NYSE:AEO) reported robust first-quarter fiscal 2016 results, wherein earnings of 22 cents per share increased 47% from 15 cents recorded in the prior-year quarter, and substantially beat the Zacks Consensus Estimate of 18 cents.

Results gained from the company’s attractive assortments, strategic investments and effective execution in each department. Further, the company’s quarterly results gained from solid growth at its American Eagle (AE) brand and better-than-expected performance at its aerie brand.

In response, shares of this specialty retailer of casual apparel, accessories and footwear surged 14.6% in the after-hours trading session yesterday.

Total revenue of this Zacks Rank #4 (Sell) company increased nearly 7% year over year to $749.4 million and surpassed the Zacks Consensus Estimate of $731 million. Comparable-store sales (comps) improved 6% on top of a 7% increase recorded last year. Brand-wise, comps increased 32% at the company's aerie stores and 4% at AE Total Brand outlets.

Quarter in Detail

Gross profit in the quarter rose 12% to $293 million, while gross margin expanded 170 basis points (bps) to 39.2% mainly owing to a 110 bps decline in buying, occupancy and warehousing costs that stemmed from lower occupancy costs. Also, lower product costs contributed to the increase in gross margin, offset by higher markdowns.

Selling, general and administrative (SG&A) expenses increased 6% year over year to $196 million, reflecting higher investments in advertising, variable selling expense and strategic initiatives. However, as a percentage of sales, SG&A expenses declined 30 basis points to 26.2%.

The company’s operating income came in at $59 million, marking a significant 40% rise from $42 million recorded in the prior-year quarter. At the same time, operating margin expanded 180 bps to 7.8%.

Financial Position

American Eagle ended the fiscal first quarter with cash and cash equivalents of nearly $239 million compared with $327 million in the prior-year quarter. The low cash balance is attributed to $227 million spends related to share buybacks, $95 million of dividends and $136 million in capital expenditure in the past one-year period.

In fiscal first-quarter 2016, the company incurred $24 million of capital expenditure. For fiscal 2016, the company reiterated its target of spending about $160–$170 million toward capital expenditure.

As of Apr 30, 2016, American Eagle’s total inventory was $334.3 million, up 0.5% from the comparable year-ago period. American Eagle expects inventory at cost to remain flat at the end of second-quarter fiscal 2016.

Store Update

During the first quarter, American Eagle inaugurated two new AE Brand stores and one aerie store, while it closed one AE store and three aerie store. Alongside, on the global platform, the company opened six international licensed stores.

As of Apr 30, 2016, American Eagle operated 1,046 company stores and 145 international licensed outlets across 22 countries.

By the end of fiscal 2016, the company expects to operate 174 international licensed stores. The company’s total store count at the end of fiscal 2016 is expected in the range of 1,028 to 1,029.

Guidance

American Eagle anticipates comps growth at a low single-digit rate in the second quarter of fiscal 2016. Consequently, the company projects earnings per share in the band of 20–21 cents compared with 17 cents earned in the prior-year quarter.

Stocks to Consider

Some favorably placed stocks in the same industry include Abercrombie & Fitch Co. (NYSE:ANF) , The Children's Place, Inc. (NASDAQ:PLCE) and New York & Company Inc. (NYSE:NWY) , each carrying a Zacks Rank #2 (Buy).


ABERCROMBIE (ANF): Free Stock Analysis Report

AMER EAGLE OUTF (AEO): Free Stock Analysis Report

NEW YORK & CO (NWY): Free Stock Analysis Report

CHILDRENS PLACE (PLCE): Free Stock Analysis Report

Original post

Zacks Investment Research