American Eagle Outfitters Rises On Better-Than-Expected Results; Shows Progress On Merchandise And Omni-Channel

American Eagle Outfitters‘ (NYSE:AEO) stock rose by more than 7% after it reported better-than-expected results for its Q4 fiscal 2014 and guided its Q1 fiscal 2015 EPS ahead of the street estimates. The retailer’s net revenues for the fourth quarter increased 3% to $1.07 billion, just ahead of the market consensus of $1.06 billion. Its EPS increased a much more sizable 33% to 36 cents a share, beating analysts’ estimate of 34 cents a share. While comparable sales for the quarter remained flat, American Eagle’s gross profits increased 13% driven by 320 basis points improvement in gross margins.

The level of promotional activities for the retailer during Q4 fiscal 2014 was considerably below what it was in the year ago period, as it was able to deliver better merchandise. Although American Eagle started the year 2014 with a number of problems that were centered on the fact that its product portfolio had a limited fashion variety and its online channel was insufficiently sized, it improved considerably half way through the year. During the quarter, American Eagle offered an updated merchandise variety in a better store environment, which resonated well with customers, allowing the company to dilute the impact of the ongoing online shift.

Our price estimate for the company at $13.45, is over 15% below the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for American Eagle Outfitters

A number of casual apparel retailers in the U.S. are working on their merchandise range to strengthen their footing against fast-fashion players such as Zara and Forever 21, but they haven’t seen any significant success so far. However, American Eagle has shown small signs of improvement in its merchandise portfolio and it even has results to show for it. During the quarter, the company was able to operate with fewer discounts, which is evident from its gross margin improvement and rise in average retail prices. American Eagle’s mainline brand’s improvement was driven by better styles as well as proper inventory management that negated the need for markdowns. The management specifically mentioned in the earnings call that high attention to detail and innovation helped the sales of core categories such as knit tops, women’s denim, sweaters, men’s pants and accessories. Aerie was a standout performer, delivering 13% growth in comparable sales during the quarter driven by strength in PJ’s and soft bottoms. Although American Eagle is still far from establishing itself as a fashion retailer, we believe that it is several steps ahead of its counterparts such Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO).

In addition to improvements in its product portfolio, American Eagle is progressing very well towards the development of its omni-channel platform. Some of the priorities for the company in 2015 are to sustain the growth momentum in digital sales, deploy new omni-channel initiatives and progress further on the existing ones. The retailer plans to launch a localized website for the U.K. this year and will soon introduce its redesigned site for the domestic market. It is working on enhancing the online product variety for American Eagle and Aerie, and also planning to roll-out new POS (point of sales) systems across the U.S. store network to enable mobile checkout and enhance customer security. Also, American Eagle is looking to add a “reserve online” service to its existing omni-channel tools such as “buying online”, “ship from store” and “store to door”. ^[1] Although American Eagle appears to be moving swiftly in its omni-channel quest, it is unlikely to see any significant results in the near future, given the small size of its online business.

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1. American Eagle Outfitters’ Q4 fiscal 2014 earnings transcript, Mar 4 2015 [↩]