American Eagle (AEO) Q2 Earnings Beat, Q3 View Hurts Stock

Highs and Lows Stock Data

American Eagle Outfitters, Inc.AEO has declined nearly 6.5% on Aug 29, despite solid sales, continued sequential margin improvement and EPS growth in second-quarter fiscal 2018. While the results reflect a significant progress in all areas, the investor community is probably disappointed with the company's fiscal third-quarter guidance, which has lagged analysts' expectations.

Both earnings and sales topped estimates in the reported quarter. This marked the fifth sales beat in the last six quarters.

Moreover, this Zacks Rank #3 (Hold) stock has ascended 35.7% year to date, outperforming the industry 's 5.2% growth.

Q2 Highlights

Quarterly earnings of 34 cents per share rose 79% from 19 cents recorded in the prior-year quarter and beat the Zacks Consensus Estimate of 31 cents. Earnings also surged 183% year over year from GAAP earnings of 12 cents per share in the year-ago quarter.

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 14% year over year to $965 million and surpassed the Zacks Consensus Estimate of $944.9 million. Solid sales growth was driven by increased sales volumes, with less promotional activity, which also aided margins. The company notes that a shift in the retail calendar (moving of the high volume back-to-school selling week to the fiscal second quarter) contributed nearly $40 million to revenue growth.

Consolidated comps increased 9%, attributed to gains from initiatives, and ability to boost market share through strong brands and compelling merchandise. This marked the company's 14th straight quarter of positive comps, with both American Eagle ("AE") and Aerie brands reporting positive results across stores as well as e-commerce.

Brand-wise, comps rose 27% for the Aerie brand, while it improved 7% for the AE brand. The AE brand is gaining from its leadership position in bottoms, with jeans business recording 20th consecutive quarter of comps growth. Further, this marked Aerie brand's 15th straight quarter (nearly four years) of double-digit sales growth, reflecting a significant momentum in all areas of the business.

The company's digital business continued to exhibit solid growth, contributing about 24% to net sales. In fact, this was the company's 14th straight quarter of double-digit e-commerce growth. Moreover, trends in brick-and-mortar stores continued to improve as both AE and Aerie stores reported positive in-store comps, increasing high-single digits. This marked the third consecutive quarter of positive in-store comps for both the brands.

Evidently, transactions improved, driven by an increase in traffic and conversion rates. Further, the company witnessed increases in transaction value and average unit retail price.

Quarter in Detail

Gross profit increased 20% to $353.1 million in the reported quarter, with the gross margin expansion of 170 basis points (bps) to 36.6%, primarily due to lower rent. Notably, the company has been witnessing sequential margin improvement since the first quarter of fiscal 2017. Looking back, the company's gross margin improved 50 bps in first-quarter fiscal 2018, after witnessing declines of 80 bps, 120 bps, 240 bps and 270 bps in the fourth, third, second, and first quarters of fiscal 2017, respectively.

SG&A expenses increased nearly 15.9% to $234 million and deleveraged 20 bps to 24.3% as a percentage of sales. The increase is mainly attributed to higher investments in customer-facing store payroll, higher wages, increased incentive expenses and advertising.

Furthermore, the company's operating income of $76 million improved 52% from $50 million recorded in the prior-year quarter. Operating margin rose 190 bps to 7.9%, driven by solid sales and leverage of certain fixed expenses.

Financial Position

American Eagle ended the fiscal second quarter with cash and cash equivalents of $323.3 million compared with $192.6 million in the prior-year quarter. Further, total shareholders' equity as of Aug 4 was $1,260.6 million.

Moreover, the company spent $54 million as capital expenditure in second-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 Aug 4, American Eagle's merchandise inventory at cost was roughly $466 million, up 8% from the comparable year-ago period. It expects high-single digit increase in inventory at the end of third-quarter fiscal 2018.

During the fiscal second quarter, the company returned nearly $24 million to shareholders through cash dividends.

Store Update

American Eagle inaugurated four AE brand stores, one stand-alone Aerie location and one Tailgate store in the fiscal second quarter. The company also opened 24 refurbished stores, including two AE stores, in the reported quarter. Moreover, it closed one stand-alone Aerie store.

As of Aug 4, the company operated 1,054 stores, including 939 AE (including 131 Aerie side-by-side locations), 109 stand-alone Aerie, five Tailgate and one Todd Synder stores. Additionally, it operated 223 international licensed outlets.

In fiscal 2018, management intends to open 15-20 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, the company expects to shut down 10-15 AE stores and 5-10 Aerie stores. Apart from this, it anticipates refurbishing 60-70 stores in the fiscal, including about 20 AE brand stores.

The company remains focused on strengthening its Aerie stores, targeting to open nearly 40 stores in fiscal 2018. Further, it continues to explore international expansion while also accelerating its Aerie footprint next year. Initially, the company expects to open 50-80 Aerie stores in fiscal 2019, including a number of new markets.

Looking Ahead

Management remains impressed with the company's quarterly performance, particularly record sales growth and sequential improvement in margins. Following the results, the company outlined its outlook for third-quarter fiscal 2018.

American Eagle anticipates comps for third-quarter fiscal 2018 to increase high-single digits, with mid-single-digit revenue growth. This is likely to result in adjusted earnings per share of 45-47 cents compared with 37 cents earned in the prior-year quarter. However, the guidance reflects a downside from the current Zacks Consensus Estimate of 49 cents, which probably has hurt investors' sentiment on the stock.

Looking for Some Trending Picks? Look at These

Some better-ranked stocks in the same industry are DSW Inc. DSW , Urban Outfitters Inc. URBN and Canada Goose Holdings Inc. GOOS , each sporting a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

DSW has gained 36.8% in the last three months. The company has long-term earnings growth rate of 7%.

Urban Outfitters has long-term EPS growth rate of 12%. Further, the stock has improved 9.2% in the last three months.

Canada Goose stock has grown nearly 41.1% in the last three months. Moreover, the company has long-term EPS growth rate of 26.3%.

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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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