Earnings Preview: American Eagle Is Finally Out Of The Woods

Teen apparel retailer, American Eagle Outfitters (NYSE:AEO) is scheduled to report its Q3 fiscal 2015 earnings on December 2nd.  In a recent update, it reported that comparable sales during the quarter increased a sizable 9%. The company has been relying on its updated product mix to counter the impact of falling foot traffic, which appears to have paid off very well. Casual apparel retailers including American Eagle have been losing customers to fast fashion players such Zara and Forever 21, which have taken the industry by storm with their affordable fashion-forward merchandise. In response, American Eagle has made several efforts to introduce more fashion consciousness in its logo-centric merchandise portfolio, with some success thus far.

With better styles, firm inventory management, high attention to detail and certain product innovations, the retailer has been able to operate with fewer discounts over the last couple of quarters, which has pushed its average selling price and gross margin up. And with a significant rise in comparable sales for the quarter, we believe that American Eagle’s gross margins likely improved even more. During the earnings call, apart from focusing on the retailer’s operational improvements, we will keep an eye out for information on its recent acquisitions of Tailgate clothing company and Todd Snyder New York.

Our price estimate for the company at $16.14, is just below the current market price.

See our complete analysis for American Eagle Outfitters

In a recent press release, American Eagle announced that its comparable sales for the third quarter increased a sizable 9%. Given the strong showing, management raised its EPS guidance for the quarter from $0.28-$0.31 to $0.34, which now reflects a year-over-year increase of 55%. This should be indication enough, both that the retailer’s gross margins have improved significantly over the past year, and that it has even progressed well on expense control. We believe that an improved merchandise portfolio helped the company operate with fewer markdowns during the quarter, which allowed it to push margins up. Also, with the consolidation of underperforming mainline brand stores, American Eagle would have been able to reduce its SG&A expenses relative to revenues. In fact, the management mentioned that the company is witnessing an increased proportion of full-priced sales. ^[1]

Earlier this month, American Eagle announced the acquisition of Tailgate clothing company and Todd Snyder New York for $11 million in cash and stock. Tailgate operates its own brand of vintage, sports-inspired clothing with a college-town store concept, and Todd Snyder is an upscale menswear brand. American Eagle’s main aim with these acquisitions to was to add distinct brands to its portfolio, in order to further strengthen its position in the market. We believe that these additions will help the retailer in the medium to long run. It will be interesting to see how the company plans to approach their expansion. During the earnings call, we will keep an eye out for updates on the newly added brands.

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1. American Eagle Outfitters Acquires Tailgate Clothing Company, American Eagle Outfitters, Nov 3 2015 [↩]