American Eagle Soars On Better-Than-Expected Earnings And Guidance

American Eagle Outfitters‘ (NYSE:AEO) shares increased by more than 7% after it reported better-than-expected results for Q1 fiscal 2015, and guided its second quarter ahead of the consensus estimates. Backed by a recovery in store traffic and solid progress on the omni-channel front, the company reported 7% growth in comparable sales and 8.3% rise in revenues to $699.5 million, slightly ahead of the expected $692 million. ^[1] American Eagle’s earnings increased a staggering 646% to $29.1 million or $0.15 a share, soundly beating its own guidance of $0.09-$0.12. Sturdy topline growth, a  notable rise in gross margins, and controlled SG&A expense  enabled the retailer to record such an increase in profits. ^[2]

American Eagle delivered compelling merchandise in an appealing store and web environment for both its brands. Unlike other specialty apparel retailers, American Eagle has finally managed to draw customer attention with its fashion newness, that allowed it to drive a higher level of store and web traffic and fend off competition from affordable fashion-forward players such as Zara and Forever 21. New merchandise allowed the company to usher a higher proportion of full priced sales, that consequently pushed its comparable sales and margins higher. What’s interesting to note here is that American Eagle managed this growth amid an edgy retail environment, where buyers are consistently switching to online shopping. The credit for this success should not go to the updated merchandise portfolio alone. Swift progress on omni-channel initiatives also contributed to American Eagle’s growth.

Following its promising Q1 results, American Eagle guided its second quarter earnings per share at $0.11-$0.14, a little ahead of the analysts’ estimates of $0.11. The company has shown improvement in almost all the facets of its business and it appears that American Eagle has finally come out of its slump for good.

Our price estimate for the company at $14.07, is about 10% 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

Better Merchandise Portfolio

During the latter half of 2014, American Eagle showed several signs of improvement in its merchandise portfolio, were manifest in higher gross margins and average retail prices. While this improvement wasn’t strong enough to propel the company’s growth back then, it clearly  is now. American Eagle successfully identified what its product portfolio was lacking and what customers were seeking. It subsequently  updated its styles and elevated its focus on merchandise innovation, which resulted in products such as denim X and soft & sexy tops, that did very well during the quarter. While elevating its styles, the company did not compromise on its product quality.  This pushed product prices a little higher, but they still remained well in the affordable range. Additionally, American Eagle leveraged its heritage value and latest styles to deliver compelling seasonal concepts. Beach whites and indigo blues are a couple of examples on this front, that resonated very well with customers. The retailer is even focusing extensively on improving its product presentation online and in-stores to provide a compelling shopping experience. American Eagle’s marketing efforts are now primarily focused on products rather than prices, which is working very well. ^[3]

With better products and disciplined inventory control, the retailer saw its average unit retail and average prices go up, with traffic and conversion rate also improving. It appears that this improvement in the company’s performance is here to stay, though a single merchandise goof-up can send it back to its slump. American Eagle needs to keep pushing in the right areas from here on.

Progress On Omni-Channel

American Eagle had made several investments in its online and omni-channel portfolio over the last few years, and is finally beginning to see some fruitful results. The company mentioned in its earnings call that buy online and ship from store service is doing wonders for its business and it will soon launch a reserve online facility. The new state-of-the-art fulfillment center is fully functional and is helping the company reduce customer delivery time by almost 25%-30%. American Eagle has several other ongoing projects on the omni-channel front such as a new mobile app, that will bring incremental revenues in the future. Effective progress on omni-channel will allow the company to leverage its strong product portfolio to reach more customers across the country.

The U.S. apparel industry is highly saturated and competitive, and there are very few distinguishing factors among different brands. To gain share in a market that isn’t growing too strongly, American Eagle will have to take customers away from other brands. To accomplish this, it needs affordable high on fashion products and a vast customer reach. The company appears to be progressing very well on both these aspects.

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1. American Eagle Outfitters’ Profit Soars On Stronger Sales, The Wall Street Journal, May 20 2015 [↩]
2. American Eagle Outfitters’ Reports Strong First Quarter Results, American Eagle Outfitters, May 20 2015 [↩]
3. American Eagle Outfitters’ Q1 fiscal 2015 earnings transcript, May 20 2015 [↩]