American Eagle (AEO) Soars as Solid Guidance Reassures Investors

Shares of American Eagle Outfitters (AEO: Charts, News) rallied strongly on Wednesday despite posting a 41% decline in profit. For its fourth quarter, the clothing retailer posted earnings of 26 cents per share, or $51.3 million, a precipitous drop from the 44 cents per share, or $87 million, it posted a year earlier.

Excluding one-time charges of $20.7 million, the company actually earned 35 cents per share, meeting its prior guidance of 33 to 35 cents per share. Revenue rose 14% to $1.04 billion. Both adjusted earnings and revenue were in line with analyst estimates.

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Pittsburgh, Pennsylvania-based American Eagle is an apparel retailer focused on clothes for teens and young adults between the ages of 14 to 25. The company operates over 900 retail locations throughout the United States and Canada. Between 2010 and 2011, the company took its first steps overseas by opening stores in Dubai, Kuwait, Riyadh, Lebanon and Bolivia. Over the next two years, the company plans to expand its presence into Egypt, Russia, Israel and China.

American Eagle, a common sight in American malls, is considered the mid-priced player compared to its primary competitors - the pricier Abercrombie & Fitch (ANF: Charts, News) and the cheaper Aeropostale (ARO: Charts, News) - which both target the same demographic. Brick and mortar American Eagle same-store sales rose 10%. Its Aerie intimate apparel brand posted a same-store sales increase of 6%. Meanwhile, its AEO Direct e-commerce business, which includes the American Eagle, Aerie and 77kids websites, posted a healthy gain of 18%.

Gross margin dropped from 39.4% to 34.1% due to higher product costs, while input costs rose 24%. The company knowingly sacrificed margins last quarter in order to push more "aggressive promotions" to increase holiday sales volume. The holiday quarter is considered the most important one of the year to most apparel retailers, which often attribute over 40% of their annual revenue to those three months. Up until the fourth quarter, American Eagle had posted steady improvement for several consecutive quarters.

Looking forward, the company forecasts a first quarter profit between 8 to 10 cents per share, in line with analyst expectations of 10 cents. The company attributes its confidence in meeting earnings targets to solid February sales, due to a "balanced" product line and popular springtime clothes. The company expects lulls ahead during Spring Break and Easter, when sales are typically weaker.

Throughout fiscal 2012, American Eagle anticipates "moderate" improvement in same-store sales and margins, although it warned that rising material costs and inflation could keep pressure on its margins for the next two quarters. The estimate accounts for possible strategy shifts in the coming year, such as increased markdowns and more aggressive promotions. The company plans to offer full-year guidance in May when it posts its first quarter earnings. Investors should also keep a close eye on rising oil costs, which are likely to impact the entire retail sector.

Although the company's numbers were hardly a bullish confirmation, investors expressed their confidence in the company, bidding shares up as much as 5% on Wednesday. Shares were down 4.4% for 2012 prior to its earnings, but are now flat for the year. The stock has underperformed the market over the past three months, despite a market-wide rally. Shares of American Eagle trade at 14.5 times forward earnings with a 5-year PEG ratio of 1.6. The company pays a quarterly dividend of 11%, which is a 3% yield at current prices.

Other News About AEO
American Eagle expects margins to improve
American Eagle forecasts a bright 2012.
American Eagle net income falls 41 percent
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Published on Mar 8, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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