American Eagle Outfitters (AEO, Financial) is a retailer of apparel and accessories for age group of 18 to 25. The teen retailer sells denims, pants, shorts, sweaters, fleece, outerwear, graphic T-shirts, footwear and accessories under American Eagle Outfitters brand and intimates and personal care products for women the aerie brand.
Since around 2013, teen retailers like American Eagle, Abercrombie & Fitch (ANF, Financial), Aeropostale (ARO, Financial) have been sailing through a rough patch, primarily because the logo-centric appeal lost its charm with teen shoppers.
While Aeropostale and Abercombie continue to struggle, American Eagle posted a solid first-quarter fiscal 2015 results. The company sustained its momentum of fourth quarter fiscal 2014 into the new fiscal year. Also, the teen retailer provided an upbeat outlook for the second quarter.
Looking back at the numbers
During the recently reported quarter, both American Eagle and Aerie brands performed well, with comps growth of 7% and 12%, respectively.
American Eagle’s marketing focus has been less on promotions and more on merchandise, outfitting and a more compelling brand experience. This has been received well by the target customers and the retailer is winning back customers. As a result, comparable-store sales, or comps, increased 7% year over year versus a 10% decline last year. Comps gain is the least capital intensive route for growth, and thus helps drive profitability.
As a result of robust comps gain, revitalized merchandise collection, and focus on customer satisfaction American Eagle’s net sales climbed 8.3% year over year to $699.5 million and comfortably beat consensus estimate by $7.41 million. Also, as a result of lower markdowns, gross profit surged 16% to $262 million and gross margin expanded 260 basis points, or bps, to 37.5%.
On the back of strong sales and margin expansion, net earnings came in at $0.15 per share versus $0.2 per share in the year-ago quarter. Analysts expected $0.12 per share.
Growth drivers
As a part of global expansion initiatives, American Eagle recently signed licensing deals in EMEA and APAC regions, adding South Korea, Greece and Singapore to its international footprint. The teen retailer expanded its reach to 28 countries globally through company-operated and international licensed stores. The stores in three regions will start operating from mid of 2015 and will be a good growth driver.
By the end of fiscal 2015, American Eagle expects to operate 141 international licensed stores across 22 countries versus 109 international licensed stores across 17 countries at the end of first quarter.
American Eagle’s focus on “People, Product, Process and Presentation” is paying dividends. On the product side, merchandize innovation is the key. In addition, product quality, in-trend assortment seasonal concepts theme will also drive growth. American Eagle is executing well on the product side as evident from higher full price sales and lower markdowns.
The company is also investing in all important omni-channel sales initiative. Simon Nankervis – executive vice president, global commercial operations – said during a conference call:
“We do believe that there [are] opportunities to continue to drive the customers to malls and a large part of that will come down to our digital strategy and our potential to use the omni-channel network to fulfill both customer demand plus also establish our marketing cadence that is appropriate.”
Conclusion
American Eagle is executing its plans well and aiming towards a profitable mix of company-operated stores, licensed stores and omni-channel initiatives. The teen retailer is winning back customers, and comps growth in the second quarter fiscal 2015 is expected to be high-single-digit. Analysts expect next five year compound annual growth rate of 12.05% versus a decline of over 13% during the past five years.
With a trailing P/E of 39.88 and forward P/E of 15.54 strong earnings growth is projected. In fact, for the second quarter, American Eagle expects earnings to be in the range of $0.11-$0.14 per share, way ahead of $0.03 in the year-ago quarter.
Hence, this stock will be a good addition to your portfolio.
