Here's Why You Should Hold American Eagle (AEO) Stock Now

American Eagle Outfitters Inc. (NYSE:AEO) is a strong contender for the top spot, backed by its overwhelming comparable store sales (comps) performance and surprise history. Driven by strategic initiatives and ability to boost market share through strong brands, and compelling merchandise, the company continues to be in investors’ good books.

However, this Zacks Rank #3 (Hold) company’s stock has been volatile lately due to higher costs as well as a shift of the 2018 retail calendar, which should continue to weigh on near-term results. While the stock has moved decreased 3.3% year to date, it represents an outperformance compared with the industry’s decline of 17.2%.

Here are some factors indicating that the American Eagle stock still holds potential for growth.

Omni-Channel Growth to Drive Top Line

American Eagle is striving to develop the omni-channel platform by enhancing its digital portals while also investing in store fleet. Backed by its investments in omni-channel capabilities, both store and digital channels reported solid sales in third-quarter fiscal 2018. Digital business contributed about 27% to sales while in-store comps improved 6%. In fact, this was the company’s 15th straight quarter of double-digit e-commerce growth and fourth consecutive quarter of positive in-store comps.

Trends in brick-and-mortar stores continued to improve as both AE and Aerie stores reported positive in-store comps. This makes it clear that a winning marketing strategy in retail is providing the best combination of digital and physical store experiences.

Aerie Segment Holds Potential

Continued strength in the Aerie business helped American Eagle gain a strong footing in the retail space. Notably, comps for the Aerie brand improved 32% in the fiscal third quarter, marking the 16th straight quarter of double-digit growth, driven by significant momentum in all areas of the business. Aerie has evolved into a lifestyle brand, and remains focused on expanding market share and rapidly growing customer base.

After the success of its core intimates offerings, the brand is rapidly gaining share in the innovative apparel market, with the body positive movement. The Aerie brand is a key growth engine for AEO and remains on track to reach the next brand milestone of achieving $1 billion in sales.

Robust Q3 Performance, Strong View

American Eagle’s third-quarter fiscal 2018 results reflected significant progress in all areas, reporting solid sales and earnings per share growth year over year. Earnings topped estimates, marking the third straight quarter of positive surprise. Though sales missed estimates in the fiscal third quarter, the company reported positive sales surprise in three of the last four quarters. Further, sales reached the $1-billion mark for the first time in the reported quarter. Solid sales growth was driven by well-executed fall season for both AE and Aerie brands in both physical and digital channels, with less promotional activity.

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise | American Eagle Outfitters, Inc. Quote

Moreover, the company had a positive start to the holiday season, delivering record volume over Thanksgiving and Cyber Week shopping periods. It expects to maintain the momentum and brand strength to drive growth in the future while delivering solid returns to shareholders. The company anticipates comps for fourth-quarter fiscal 2018 to increase in a mid-single digit, with low-single-digit revenue growth. This is likely to result in adjusted earnings per share of 40-42 cents.

Factors to Deter Growth

Though American Eagle reported a strong quarter, the shift of the 2018 retail calendar (moving of back-to-school week to the second quarter in fiscal 2018) resulted in $40 million lesser sales in the fiscal third quarter. This shift in revenues unfavorably impacted operating margin in the fiscal third quarter. Additionally, SG&A deleverage due to higher investments in brands and customer experience as well as higher store payroll, wages, and increased incentive expenses and advertising weighed on operating margin.

Despite the improved gross margin, operating profit margin shriveled 70 bps in the fiscal third quarter. Moreover, the company expects additional 53rd week in fiscal 2017 to weigh on its fiscal 2018 results. The additional week should result in revenue loss of about $60 million and reduce earnings by 7 cents per share from the prior fiscal year.

Bottom Line

While higher SG&A expenses present a near-term headwind, American Eagle is well positioned for growth, backed by the aforementioned initiatives and robust surprise trend. Further, the company’s impressive long-term earnings growth rate of 10.1% supports our view.

Three Better-Ranked Retail Stocks You Can’t Miss

Some better-ranked stocks in the same industry are Abercrombie & Fitch Company (NYSE:ANF) , Fossil Group, Inc. (NASDAQ:FOSL) and Shoe Carnival (NYSE:CCL), Inc. (NASDAQ:SCVL) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch has gained 8.4% year to date. The company has long-term earnings growth rate of 12.5%.

Fossil Group delivered average positive earnings surprise of 119.5% in the last four quarters. Further, the stock has rallied 104.4% year to date.

Shoe Carnival stock grew nearly 22.1% year to date. Moreover, the company delivered average positive earnings surprise of 31.4% in the trailing four quarters.

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