What To Expect From American Eagle’s Fourth Quarter Results

American Eagle Outfitters (NYSE:AEO) is slated to release its fourth quarter and financial year 2016 (ended January 2017) earnings on March 1, 2017. The company has provided guidance for the earnings to be in the range of $0.37 to $0.39 per share, which was considered as weak by many investors, when compared to the earnings in the same quarter of FY 2015, prompting a decline in the stock price. 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.

See our complete analysis for American Eagle Outfitters

Impressive Performance In A Weak Retail Market

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.  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 three months, it would be hard to gauge its impressive performance, amid a tough retail environment.

The company has seen a rise in the revenues and earnings, besides a better inventory management and 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, which will enable the company to cut costs and free up cash.

Poor Mall Traffic May Result In A Weak Holiday Quarter

American Eagle has blamed traffic weakness in the malls leading into Christmas for a poor comps growth. This has been a result of the rise in e-commerce, prompting a shift from brick and mortar stores to the online channel. This trend has also forced hundreds of collective store closures, including those of Macy’s and Walmart.

According to Prodco Retail Traffic Index, brick and mortar traffic fell about 7% at stores through December 17. This shift is expected to continue in 2017, with a rise in online and mobile spending. While the clothing and accessories sales in the industry are increasing year-on-year, the non-store retail sales are the driving force behind it, creeping to over 30% of all retail sales (excluding autos, gas stations, food, and grocery). However, as noted by Jay Schottenstein, CEO of American Eagle, online sales for both American Eagle and Aerie were strong throughout the Holiday season. The company’s digital sales represent a huge portion of their sales, accounting for approximately 30% of the revenue. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing its e-commerce capabilities, and the figure for FY 2016 is expected to be higher. The growth in digital sales has been a major driver for the sales growth of the company in recent quarters as a result of the poor mall traffic.

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
• Why Has American Eagle’s Stock Price Fallen Despite Meeting Consensus Estimates?
• What Is American Eagle Doing To Bolster Its Direct Business?
• How Has the Digital Age Affected Apparel Retailers?
• Growth In Aerie Helps American Eagle Beat Estimates
• 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’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?

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