American Eagle Outfitters’ Troubles Continue As Comparable Sales And Earnings Crash

American Eagle Outfitters (NYSE:AEO) has had a difficult time driving store traffic over the past year-and-a-half, due to its limited fashion variety and industry-wide shift to online shopping. Moreover, the company has lost a number of its customers to fashion-forward brands such as Zara and Forever 21. American Eagle was once among the most sought after apparel brands in the U.S., but it has lost its essence with certain merchandise goof ups and off-pitch fashion calls. Between 2009-2012, the retailer’s revenue per square feet improved at an average annual rate of over 6.4%, but it crashed by 10% in 2013. While the company believes that it did not leverage the strong facets of its business as effectively in 2013 as it did in the previous year, a consumer spending pullback also had a role to play. With increased taxes, higher health care costs and slow job growth, U.S. buyers have been spending cautiously on discretionary products such as apparel and accessories.

American Eagle’s problems continue to persist in 2014 as its comparable sales in the first quarter declined by a staggering 10% due to unfavorable weather and heavy promotions. The retailer once again disappointed with its results as its second quarter earnings and comparable sales fell significantly owing to weak mall traffic and higher promotional activities.

Our price estimate for American Eagle Outfitters stands at $14.74, implying a premium of less than 15% to the market price. However, we are in the process of updating our model to include the recent earnings release.

See our complete analysis for American Eagle Outfitters

In its recently reported Q2 results, American Eagle recorded a decline of 2% in its overall revenues primarily driven by 7% fall in comparable sales and closure of five under-performing stores, partially offset by new store expansion. The retailer’s comparable sales decline can be mainly attributed to weak traffic in shopping malls resulting from sluggish economic environment and customer shift towards online shopping. It is worth noting that American Eagle’s comparable sales include its e-commerce revenues, and heavy decline in this metric suggests that the company’s omni-channel platform still isn’t strong enough to have a material impact. To compensate for weak store traffic, the company offered heavy discounts that dragged its gross margins down to 33.4% from 33.8% a year earlier. However, interim CEO, Jay Schottenstien, stated that although aggressive promotions impacted the company’s results, they helped it attain a clean inventory position for the second half of the year. ^[1]

The most disappointing aspect of American Eagle’s results was the alarming 70% decline in its earnings. The company reported a profit of $5.81 million in the second quarter, down from $19.6 million in the same quarter last year. ^[2] Last quarter, American Eagle laid out plans to close 150 of its under-performing stores in the next three years, to reduce its operating expenses as percentage of revenues. Since the idea behind this strategy was to increase sales productivity and profitability, the drastic decline in profits is a big concern for the company.

Despite closing five under-performing stores and opening 20 new stores, American Eagle’s SG&A expenses relative to revenues increased by 110 basis points. ^[1] This indicates that shutting under-performing stores did not have the desired impact and new stores did not generate adequate revenues. However, over the next few years, when the company closes a significant number of stores that do not generate sufficient revenues but contribute proportionally to SG&A expenses, it can realize a modest positive impact on its operating margins.

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1. American Eagle’s Q2 fiscal 2014 earnings transcript, Aug 20 2014 [↩] [↩]
2. American Eagle Outfitters Reports Second Quarter 2014 Results, American Eagle Outfitters, Aug 20 2014 [↩]