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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