American Eagle Slides to Neutral - Analyst Blog

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We recently downgraded our long-term recommendation on American Eagle Outfitters Inc. ( AEO ), a specialty retailer of casual apparel, accessories, and footwear for men and women, based on timid fourth-quarter 2011 results.

The company's fourth-quarter earnings declined 20.5% to 35 cents per share from the prior-period level, battered by higher input costs. However, it managed to surpass the Zacks Consensus Estimate by a penny. Increased input costs also impacted American Eagle's margins with gross margin dropping 540 basis points (bps) to 34.1%. This consequently resulted in a contraction of 700 bps in operating margin to 7.7%.

Looking ahead into 2012, the company sees a modest rise in sales and slight improvement in margin. The company expects margins to be under pressure in the first half of fiscal 2012 due to higher product costs. On a positive note, lower product costs are expected to benefit margins in the second half. Further, the company expects first-quarter earnings to come in the range of 8 cents - 10 cents per share compared with 13 cents in the prior-year period, due to continuous margin pressure from product costs, higher markdowns and the potential for increased promotions.

However, 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.

Moreover, United State and Canada's leading retailer of fashionable and stylish apparels is continuously taking initiatives to reduce cost through supply chain efficiencies and updated product-allocation system intending to boost its bottom-line.  We believe that these initiatives along with long-term growth strategy of opening stores in the Middle East and developing economies like India and China will also help drive value proposition for the company.

Further, management's efforts to boost cash flow and maintain a debt-free healthy balance sheet bode well for future operating performance.

American Eagle mainly competes with other teenage-focused retailers, such as Abercrombie & Fitch Co. ( ANF ) and Gap Inc. ( GPS ). American Eagle currently has a Zacks #3 Rank, which translates into a short term Hold rating.


 
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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AEO , ANF , GPS

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