American Eagle (AEO) Down Despite Q1 Earnings & Sales Beat

American Eagle Outfitters, Inc.AEO declined nearly 1.8% on May 31, despite accelerated sales, continued sequential margin improvement and EPS growth in first-quarter fiscal 2018. Both earnings and sales topped estimates in the reported quarter. This marked the fourth sales beat in the last five quarters.

Moreover, American Eagle's shares ascended 9.5% in the last three months, against the industry 's 1.2% decline.

Q1 Highlights

Quarterly adjusted earnings of 23 cents per share rose 44% from 16 cents recorded in the prior-year quarter and beat the Zacks Consensus Estimate of 22 cents. On a GAAP basis, earnings surged 57.1% year over year to 22 cents per share.

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

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

Net revenues increased around 8% year over year to $823 million and surpassed the Zacks Consensus Estimate of $813 million.

Consolidated comps increased 9%, attributed to gains from strategic initiatives, and ability to boost market share through strong brands and compelling merchandise. This marked the company's 13th straight quarter of positive comps.

Further, the company's digital business continued to exhibit solid growth, improving 20% year over year and contributing about 29% to net sales. In fact, this was the company's 13th straight quarter of double-digit e-commerce growth. Moreover, trends in brick-and-mortar stores improved as both American Eagle (AE) and Aerie stores reported positive in-store comps, increasing in mid-single digit.

Evidently, transactions improved, driven by an increase in traffic and conversion. Notably, store traffic surpassed mall traffic for both the brands. Transaction value and average unit retail price also increased on account of a favorable sales mix with controlled promotional activity.

Brand-wise, comps rose 38% at Aerie stores while improving 4% at AE brand outlets. Notably, this marked Aerie brand's 14th straight quarter of double-digit sales growth, reflecting significant momentum.

Quarter in Detail

Gross profit increased 9.6% to $304.4 million in the reported quarter, with the gross margin expansion of 50 basis points (bps) to 37%. The increase can primarily be attributed to lower rent and favorable markdown rate, partly negated by higher digital-delivery expenses. This was in sync with the improvement witnessed throughout last year. Notably, the company has been witnessing sequential margin improvement since the first quarter of fiscal 2017. Looking back, the company's gross margin reflects sequential improvements from declines of 270 bps, 240 bps, 120 bps and 80 bps recorded in the first, second, third and fourth quarters of fiscal 2017, respectively.

SG&A expenses increased nearly 7.8% to $210.2 million. The rise in SG&A expenses, in dollar terms, was mainly driven by higher store compensation due to increased sales and wages as well as increased incentive expenses. However, as a percentage of sales, it leveraged 10 bps to 25.5% due to higher comps.

Furthermore, the company's adjusted operating income was $52 million, up 23% from $42 million recorded in the prior-year quarter. Adjusted operating margin rose 80 bps to 6.4%, driven by solid sales and lower expenses.

Financial Position

American Eagle ended the fiscal first quarter with cash and cash equivalents of $289.7 million compared with $225.2 million in the prior-year quarter. Further, total shareholders' equity as of May 5 was $1,207.4 million.

Moreover, the company spent $47 million as capital expenditure in first-quarter fiscal 2018. More than half of this spending was allocated to store openings and refurbishment while the remaining was invested in omni-channel and digital projects as well as general corporate maintenance. For fiscal 2018, management reiterated its capital expenditure forecast of $180-$190 million.

As of May 5, American Eagle's merchandise inventory at cost was roughly $404 million, up 11% from the comparable year-ago period. The increase is attributed to the company's store-clearance strategy and the support of strong sales trends in AE and Aerie brands. The company expects inventory to increase in high-single digit at the end of second-quarter fiscal 2018.

During the fiscal first quarter, the company returned nearly $69 million to shareholders by paying dividends of $24 million and buying back 2.3 million shares for $45 million.

Store Update

American Eagle inaugurated four new AE brand stores and one stand-alone Aerie location. The company also opened 23 refurbished stores, including two AE stores, in the reported quarter. Moreover, the company closed two AE brand stores and one stand-alone Aerie store.

As of May 5, the company operated 1,049 stores, including 935 AE (including 118 Aerie side-by-side locations) and 109 stand-alone Aerie stores. Additionally, the company operated 217 international licensed outlets.

In fiscal 2018, management intends to open 15-20 new AE outlets, including 5-10 Aerie side-by-side stores. Additionally, it plans to inaugurate 10-15 Aerie stand-alone stores and one each for Tailgate Clothing Company and Todd Snyder. Further, this Zacks Rank #3 (Hold) company expects to shut down 10-15 AE stores and 5-10 Aerie stores. Apart from this, the company anticipates refurbishing 60-70 stores in the fiscal, including about 20 AE brand stores.

Looking Ahead

Management remains impressed with the company's quarterly performance, particularly record sales growth and sequential improvement in margins. Consequently, it provided a robust outlook for second-quarter fiscal 2018.

American Eagle anticipates comps for second-quarter fiscal 2018 to increase in mid-single digit. This is likely to result in adjusted earnings per share of 27-29 cents compared with 19 cents earned in the prior-year quarter. Other assumptions for the guidance include continued improvement in gross margin and fixed costs leverage along with tax rate of 23%.

Looking for Some Trending Picks? Look at These

Some better-ranked stocks in the same industry are Shoe Carnival Inc. SCVL and Urban Outfitters Inc. URBN , both sporting a Zacks Rank #1 (Strong Buy), as well as Fossil Group Inc. FOSL , carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Shoe Carnival has gained 41.8% in the last three months. The company has long-term earnings growth rate of 12%.

Urban Outfitters has long-term EPS growth rate of 12%. Further, the stock has improved 13.9% in the last three months.

Fossil Group stock has grown nearly 58.5% in the last three months. Moreover, the company has long-term EPS growth rate of 5%.

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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 Nasdaq, Inc.

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

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