Excessive Promotional Activities To Hurt American Eagle’s Bottom-line In The First Quarter

American Eagle Outfitters (NYSE:AEO) is slated to release its first quarter earnings on May 17, 2017, wherein a decline in revenue and earnings per share, as compared to last year, is expected. According to the guidance provided by the company, AEO estimates an EPS of $0.15 to $0.17, implying a 27% decline year-on-year, with comparable store sales expected to be flat or slightly negative. Weak merchandise margins, on account of the high promotional activity, are expected to wreak havoc on the bottom-line. The share price has tanked after the release of the weak guidance at the fourth quarter earnings conference call, falling by over 14%. In the latest reported quarter, the company delivered a positive earnings surprise of 2.6%. Moreover, it has been able to furnish a positive earnings surprise in eight of the past nine quarters. A similar result this time would give a boost to its share price, despite a soft earnings report.

Growth In Aerie And DTC Business Expected

American Eagle’s Aerie brand, which is the company’s lingerie and activewear segment, has been performing strongly for the past several quarters. The last quarter of 2016 was another breakout one, with comparable sales increasing by 17%, amid a tough retail environment. This represented the 12th consecutive quarter of double-digit growth, driven by strength in the digital business. The ability to incorporate the latest trends and best fabrics have helped the company to build a strong foundation, ensuring that the company continues to attract new Aerie customers. Going forward, the company’s sports and yoga line – Chill. Play. Move. – launched in 2016, as well as a new swimwear line, expected to be released in the first quarter, will continue to drive growth for the brand. Aerie currently operates approximately 190 stores in 13 states, including the recent expansions into new markets of Denver and Hawaii. The company sees an opportunity to increase this number to 300 plus stores over time. While weak mall traffic and a soft macro environment have negatively impacted other brands, Aerie has been gaining market share. According to Jen Foyle, Global Brand President of Aerie, the company wants to be “a real player in the intimates sector.”

With growing internet penetration, a consistent customer shift from store to web shopping, and the proliferation of smartphones and tablets, American Eagle Outfitters’ direct-to-consumer business has grown rapidly. The digital side contributes a significant percentage of the business, at roughly 27%. Mobile also continues to form an immense portion of the revenues, with a 35% increase in mobile penetration seen within the site. Hence, the company will also optimize and enhance its mobile capabilities going forward. The U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel. This is becoming an inevitable move for U.S. apparel retailers, including American Eagle, which is working hard to develop its omni-channel platform and has shown significant progress so far.

Company To Assess Store Locations

During FY 2016, the company opened 12 AE stores, 13 Aerie stand-alone stores, and 21 Aerie side-by-side stores, in addition to three Tailgate stores and one Todd Snyder store. AEO meanwhile continued to close underperforming stores, including 18 AE stores and eight old format Aerie stores. American Eagle is undertaking an analytic review of its store fleet, to seek opportunities to consolidate markets where it makes sense, and undertake closures of unprofitable locations. The company currently estimates just 46 stores were not profitable at year end, 26 of which come up for lease renewal or expiration within two years. Furthermore, in its entire portfolio of 1,050 stores, 580 come up for lease expiration in the next three years, giving the company the flexibility to implement its aggressive store closure plans.

See our complete analysis for American Eagle Outfitters

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

• American Eagle’s Stock Falls Over Poor Quarter And Weak Guidance
• Investors Overlooking American Eagle’s Growth Potential
• What Is American Eagle Doing To Bolster Its Direct Business?

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