American Eagle Outfitters Earnings Preview: Trends We’re Watching

Teen apparel retailer American Eagle Outfitters (NYSE:AEO) is scheduled to announce its Q4 earnings on March 7. ^[1] A quick scan of the stock’s recent performance shows that 2012 has been a tough year for the company so far. Here we highlight a few key trends to watch for in the upcoming earnings release. American Eagle competes with other teen specialty retailers such as  Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and Gap Inc. (NYSE:GPS).

See our full analysis for American Eagle Outfitters

Margins to Be in Focus

As the company has disclosed the net sales and comp sales for the holiday season, the focus will now be on gross margins. Additionally, there is speculation that the gross margin may increase based on the revised earnings guidance issued in the sales update.

The holiday season was a difficult period for American Eagle Outfitters. In a bid to lure holiday shoppers, the company had to increase its scale of promotions to drive sales. The result was that despite registering a 15% growth in holidays sales, American Eagle had to trim its Q4 earnings outlook to $0.33 – $0.35 per diluted share from $0.40 – $0.44 previously. ((American Eagle Reports Holiday Sales Results, Source: American Eagle Outfitters’ Investors Relations))

See our article: American Eagle Cuts Q4 Earnings Outlook, Sends Shares Crashing

Due to significant promotional scale throughout the holidays, we expect the company’s margins to take a hit this quarter. However, an increase in direct sales  may provide some tailwind to American Eagle’s margins.

Update on Inventory Levels

This will be one of the crucial factors to watch for on Wednesday. An inventory hangover in the later part of the holiday season forced the company to offer massive promotions on its merchandise. While American Eagle reported in its holiday sales update that it did manage to achieve desired inventories, the apparent fear in the market is that the company may end the quarter with higher than comfortable inventory levels. Should that happen, we expect the margin woes to stretch through the spring season too, since the pending inventories will decide how long the company will take to realize the benefit of declining cotton prices.

Trefis price estimate for American Eagle Outfitters stands at $17.75, implying an upside of nearly 20% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. American Eagle Outfitters to announce Q4 earnings on March 7th, Source: American Eagle’s IR [↩]