American Eagle (AEO) Q2 Earnings Beat, Fall Y/Y, Stock Up - Analyst Blog

Shares of American Eagle Outfitters Inc. ( AEO ) soared nearly 12% during yesterday's trade after the company's second-quarter fiscal 2014 results beat estimates on the back of successful implementation of its strategic initiatives.

Though the company's quarterly earnings of 3 cents per share plunged 70% from 10 cents per share in the prior-year quarter mainly due to lower sales, earnings were above the Zacks Consensus Estimate of break-even.

Owing to a tough retail environment, American Eagle's net sales slipped 2.3% year over year to $710.6 million in the quarter. However, sales surpassed the Zacks Consensus Estimate of $685 million.

Quarter in Detail

Consolidated comparable-store sales (comps) fell 7% again following a similar decline in the year-ago quarter. Comps rose 9% at the company's aerie stores and declined 8% at AE Total Brand stores.

Gross profit for the quarter dipped 3.2% to $237.5 million with gross margin contracting 40 basis points (bps) to 33.4% owing to deleverage of buying, occupancy, and warehousing costs on unfavorable comps, majorly offset by leveraged merchandise and design costs along with a marginal enhancement in markdowns.

Selling, general and administrative (SG&A) expenses climbed 2% to roughly $190 million. Moreover, as a percentage of sales, SG&A expenses expanded 110 bps to 26.7% in the quarter, reflecting the effect of investments in advertising, factory outlets, global expansion and omnichannel efforts. However, the hike was partly compensated by a fall in overhead and variable costs.

The company's operating income plunged 59.1% to $12 million, primarily due to a fall in sales and gross profit. Consequently, operating margin shriveled 240 bps to 1.7%.

Financial Position

American Eagle ended the quarter with cash and short-term investments of nearly $262.6 million compared with $345.2 million in the prior year.

Also, during the quarter, the company spent $74 million toward capital expenditure. Going forward, the capital expenditure projection for fiscal 2014 is maintained at $230 million, mainly to be allocated to new and renovated outlets, innovations and the Hazleton distribution center. Further, for fiscal 2015, management anticipates capital expenditure of around $150 million.

As of Aug 2, 2014, American Eagle's total inventory was $393.3 million, down 15% from Aug 3, 2013. Inventory at cost per square foot declined 18% from the prior-year quarter level. American Eagle expects inventory per square foot to decrease at a low double digit rate or a mid single digit rate in the third quarter, excluding the change in ownership terms.

Store Update

During the second quarter, American Eagle opened 20 stores, including 10 factory outlets, 3 stores in Mexico and 2 in China. The company shut down 5 stores, including 2 aerie stores. During the quarter, the company inaugurated 5 new North American mainline outlets in underpenetrated locations.

Alongside, on the global platform, the company opened 7 international licensed stores. At quarter end, the company operated 84 international licensed stores across 13 countries.

In fiscal 2014, the company targets to reduce its North American store count by closing nearly 50 AE and 25 aerie stores.


American Eagle projects earnings per share for the third quarter of fiscal 2014 to lie in the band of 17-19 cents a share. The guidance is based on the company's anticipation of mid single-digit decline in comps. The Zacks Consensus Estimate for the same is pegged at 17 cents per share.

Management remains confident on the company's future prospects given its better-than-expected performance amid a difficult retail environment. The company managed to clear its spring and summer products and keep its inventory level in place. Further, the company intends to continue enhancing its omnichannel network, curtailing expenses and enriching customer experience. With these efforts underway, this Zacks Rank #3 (Hold) company is likely to achieve better operating results and drive shareholder value.

Other better-ranked stocks in the industry include Citi Trends, Inc. ( CTRN ), The Men's Wearhouse, Inc. ( MW ), each carrying a Zacks Rank #1 (Strong Buy) and Abercrombie & Fitch Co. ( ANF ), with a Zacks Rank #2 (Buy).

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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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