American Eagle Outfitters Inc
.'s (
AEO
) recently reported third-quarter 2011 earnings of 27 cents per
share that came in line with the Zacks Consensus Estimate. However,
it was lower than the previous-period earnings of 29 cents per
share primarily due to higher cotton costs and markdowns, partially
offset by higher revenue growth resulting from holiday season.
Quarterly Review
During the quarter, American Eagle's net sales went up 10.7%
year over year to $831.8 million, beating the Zacks Consensus
Estimate of $821 million. Growth in revenue was driven by a 5%
increase in comparable store sales primarily during the
Thanksgiving weekend. During the period, the company's AE Brand,
aerie and AEO Direct segments reported a growth of 5%, 8% and 21%,
respectively, in comparable store sales.
Higher cotton costs and markdowns attributed to a decline of
1.1% in gross profit during the quarter, while gross margin
contracted 450 basis points to 37.1%. However, the negative factors
were partially offset by a positive impact from lower occupancy and
warehousing expenses as a percentage of net sales.
Consequently, operating income declined 9% to $83.2 million from
$91.5 million in the prior-year period. The decline in operating
income was also impacted by an increase in Selling, General and
Administrative expenses.
Financial Position
American Eagle ended the quarter with cash and cash equivalents
of $380.3 million compared with $630.8 million in the year-ago
period. For the nine months period of fiscal 2011, cash used for
operating activities came in at $48.1 million.
During third-quarter 2011, the company deployed $31 million
towards capital expenditure, out of which approximately $22 million
were expended on opening of new stores and remodeling of old
ones.
Year-to-date, the company deployed $96.7 million toward capital
expenditures and is expecting to incur a total of $100 million in
fiscal 2011, revised from its previous guidance range of $90
million to $100 million.
Guidance
The company believes that the momentum of strong sales during
the holiday season will continue. However, pressure on margins is
also expected due to rising cotton costs. Therefore, American Eagle
anticipates to earn in the range of 40 cents to 44 cents during the
fourth quarter of fiscal 2011. The current Zacks Consensus Estimate
for fourth-quarter 2011 is 41 cents per share.
Store
In the reported quarter, the company opened 6 AE and 7 aerie
stores, while remodeled 5 stores. Currently, the company operates
937 American Eagle stores, 158 standalone aerie stores and 21,
77kids stores, across the United States and Canada. The company
sells its merchandises via its e-commerce in 77 countries.
Conclusion
We remain impressed with the company's continued momentum in
denim along with improved merchandise assortments in the women's
business segment, which will likely lead to a turnaround in its top
line as well as a rebound in gross margin.
The company operates in a highly fragmented specialty retail
sector and faces intense competition from other teenage-focused
retailers, such as
Abercrombie & Fitch Co.
(
ANF
) and
Gap Inc.
(
GPS
).
We currently have a short-term Zacks #2 Rank (Buy) and a
long-term Neutral recommendation on the stock.
AMER EAGLE OUTF (
AEO
): Free Stock Analysis Report
ABERCROMBIE (
ANF
): Free Stock Analysis Report
GAP INC (
GPS
): Free Stock Analysis Report
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