American Eagle Outfitters Inc.
), a specialty retailer of casual apparel, accessories and footwear
for men, women and kids, announced its plans to do away with its
children's brand (77kids). The business generated net sales of $40
million in the fiscal year 2011, on which it incurred a loss of
around $24 million.
Management further said that the company will emphasize on their
core business from now on, thus generating the best possible
return. As a result, management had to take the tough decision of
closing down one of its brands.
77kids is mainly targeted for the age group of 2-14 years and
was launched in the year 2008 as an online brand; but currently
also operates through 22 standalone stores across North
The company is on the look out for full or partial disposition
of the 77kids assets, which is likely to be completed by the end of
the current fiscal year.
Management expects the pay-offs related to the disposition of
the business to be allocated in the second and third quarters of
2012. However, the company has not yet made any financial
The company has also not mentioned the magnitude of headcount
reduction as a result of the closure of 77kids.
American Eagle will release its first-quarter financial results
on Wednesday, May 23, 2012. The results will exclude the operations
Neutral on American Eagle
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. 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, hurt by continued margin pressure from
higher product costs, higher markdowns and the potential for
However, we are 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 in the second half of the
The company, which faces stiff competition from
Abercrombie & Fitch Co.
), is continuously taking steps to reduce costs through supply
chain efficiencies and an updated product-allocation system,
intending to boost its bottom line.
Further, management's efforts to boost cash flow and maintain a
debt-free, healthy balance sheet bode well for future operating
Therefore, the company carries a Zacks #3 Rank, which translates
into a short-term 'Hold' rating, and we also remain 'Neutral' on a
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