Is American Eagle’s Stock Price Decline An Overreaction Or Is It Here To Stay?

While the retail industry has been suffering with the rise of fast-fashion retailers and declining mall traffic, the same cannot be said for American Eagle Outfitters (NYSE:AEO). The company has undergone a turnaround since the appointment of Jay Schottenstein as the CEO. However, if one were to look at the performance of the company’s stock price in the past two months, it would be hard to gauge its impressive performance, amid a tough retail environment.

See our complete analysis for American Eagle Outfitters

The company has seen a rise in the revenues and earnings, besides a better inventory management and a greater cost efficiency. However, the most important of these is the improvement in the gross margin. This metric has increased from 29.4% in the fourth quarter of FY 2013 to 40.2% in the latest quarter (third quarter of FY 2016). While there has only been a marginal rise in revenue and the company has benefited from lower costs from suppliers, much of this turnaround has come from increasing the average selling prices. The company has also managed to reign in its promotional activities, resulting in greater sales at full price. Further, the company expects the margins to continue rising in the near future, despite a competitive environment. This is expected to be achieved through favorable product costs and sourcing efficiencies, and maintaining tight inventories through more strategic and targeted promotions. Moreover, CFO Bob Madore has noted that the company has over 500 lease expirations in the next two years, with 185 in the next 12 months. This gives the company the flexibility to close down the underperforming stores, enabling it to cut costs and free up cash.

Furthermore, if President-elect Donald Trump goes ahead with his plan to cut down the corporate tax rate, it would be highly beneficial to a company like American Eagle, which routinely pays out taxes at 35%. Moreover, as he has almost killed the Republicans’ border adjustment reforms, apparel retailers can breathe a sigh of relief, as this measure would have driven up their tax bills, and would have forced them to raise the prices of their products.

In the face of these positives, why has American Eagle’s stock price trended downwards in the past couple of months? The root cause for this seems to be a weak guidance provided by the company for its fourth quarter EPS. American Eagle has reaffirmed its fourth quarter guidance for its EPS to be in the range of $0.37 to $0.39 per diluted share. This when compared with the EPS in the corresponding quarter of last year, of $0.42, seemed to be poor by the investors, given the fact that the fourth quarter is the most important quarter for a retail company. This, coupled with a predicted flat comps growth, resulted in a fall in the stock price of the company. During the holiday season, retailers tend to offer various discounts and promotions in order to encourage buying. Since this season accounts for a major chunk of a retailer’s earnings, a dismal performance in the quarter will hamper growth. However, the EPS of $0.42 in the corresponding quarter of last year included $0.07 of non-recurring items, including a gain on the sale of a distribution center of $9.4 million, and a lower tax rate of 27.9%, against an anticipated rate of 35% in the quarter this year. This means that the retailer’s fourth quarter earnings would actually represent a 6%-11% growth from the adjusted EPS of $0.35 last year. Moreover, the company has a history of reporting a low guidance in the holiday quarter, and thereafter, beating the analysts’ expectations every Q4 going back to 2011. So it remains to be seen whether this year will be any different and if the recent stock move turns out to be an overreaction.

Have more questions about American Eagle Outfitters? See the links below:

• Retail Companies Get A Boost Amid Border Tax Reform Complications
• Investors Overlooking American Eagle’s Growth Potential
• How Has American Eagle Performed In 2016?
• Why Has American Eagle’s Stock Price Fallen Despite Meeting Consensus Estimates?
• Growth Momentum To Continue For American Eagle In The Third Quarter
• What Is American Eagle Doing To Bolster Its Direct Business?
• How Is American Eagle Expected To Perform In 2016?
• How Has the Digital Age Affected Apparel Retailers?
• How Did American Eagle Manage To Improve Its Gross Margins In The Second Quarter?
• Growth In Aerie Helps American Eagle Beat Estimates
• How Will American Eagle Perform In The Second Quarter Of Its FY 2016?
• How Has The Merchandise Mix Of American Eagle Changed Over The Last Three Years?
• Why Will American Eagle’s Aerie Brand Be A Key Growth Driver In The Future?
• Why Are We Bullish On American Eagle?
• What Can Move American Eagle’s Stock Down In The Next Couple Of Years?
• What Is American Eagle Outfitters’ Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
• How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
• What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?
• Where Will American Eagle Outfitters’ Revenues Come From In The Next Five Years?

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