American Eagle’s Sales Decline To Slowdown In Q3; Margins Will Be Better

Pittsburgh-based specialty apparel retailer, American Eagle Outfitters (NYSE:AEO), is scheduled to release its Q3 fiscal 2014 earnings on December 4th. In a recent press release, the company reported that its revenues for the quarter declined slightly, with 5% fall in comparable sales. This is some improvement as compared to the first two quarters of the year, when comparable sales fell 10% and 7%, respectively. Also, in the same release, the retailer raised its third quarter EPS guidance from $0.19-$0.17 to $0.22, citing improvement in discounting and lower expenses as the primary reasons. ^[1] American Eagle ushered fewer-than-anticipated markdowns during the quarter, which is a pleasing development considering the performance of other apparel retailers during the third quarter. The management said that third quarter results had exceeded their expectations and margins were better as compared to the year ago period. Interim CEO, Jay Schottenstein, stated that the design team has made significant progress on merchandise improvement, but they aren’t planning too aggressively for the holiday season given that mall traffic remains weak.

While American Eagle’s comparable sales decline still remains significant, improvement in the third quarter results cannot be ignored. The company was able to operate with fewer markdowns amid a highly promotional retail environment. Its revenues declined only marginally despite 5% fall in comparable sales and closure of a certain number of stores (in-line with its earlier announcement). This indicates that the retailer is simultaneously opening stores at lucrative locations, that are performing very well. Also, its e-commerce growth is offsetting the impact of store traffic decline.

Our price estimate for American Eagle Outfitters stands at $13.45, which is just below the current market price.

See our complete analysis for American Eagle Outfitters

Over the last two years, while store traffic has declined 5% in almost every month, online sales have grown 15% year over year in almost every quarter. ^{[2] [3] [2]} Retailers with strong omni-channel portfolios have leveraged their vast store networks to take advantage of this growth. American Eagle’s own omni-channel efforts have yielded good results so far and they might have helped the company in the third quarter as well.

American Eagle’s “buy online and ship from store” (BOSS) pilot program has helped it attract those customers, who could have shied away from the retailer if the inventory pool wasn’t integrated across all the channels. The initial roll out was slow, but the company soon went aggressive on its deployment. In its Q1 earnings call, American Eagle had stated that this service would be available in 100 stores by the back-to-school season. However, it had 255 stores offering this service at the end of Q2.

The retailer reported that its BOSS program has exceeded all expectations, and this might help it operate with fewer markdowns and better inventory utilization in the future. This is exactly what has happened in the recently concluded quarter. Also, American Eagle has improved its delivery time significantly and it now delivers products in two days or less to more than 90% of its customers. It opened a new “state of the art” fulfillment center in Pennsylvania in July, that has played an important role in improving capacity and delivery efficiency. We believe that the aforementioned developments helped American Eagle propel its online growth during the third quarter, which helped the retailer mitigate the impact of weak foot traffic.

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1. American Eagle Outfitters Raises Third Quarter EPS Guidance, American Eagle Outfitters, Nov 12 2014 [↩]
2. Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩] [↩]
3. Back-To-School Slump Raises Concerns About Holiday Season, Bloomberg, Sept 23 2014 [↩]