American Eagle Plunges on Dismal Earnings - Analyst Blog

Shares of American Eagle Outfitters Inc. AEO plunged 7.8% during yesterday's trade after the company reported disappointing fourth quarter and fiscal 2013 earnings results, which came substantially below the prior-year numbers.

The company posted fourth-quarter fiscal 2013 adjusted earnings of 27 cents per share, plunging 50.9% from 55 cents in the prior-year quarter. Fiscal 2013 adjusted earnings came in at 74 cents per share, reflecting a 46.8% decline from $1.39 earned in fiscal 2012. However, the company's earnings for both periods beat the Zacks Consensus Estimate by a penny.

The year-over-year decline in earnings per share was mainly due to lower sales and weak merchandise margins, partially offset by effective cost management.

American Eagle's net sales declined 6.7% year over year to $1,041.7 million in the fourth quarter and came below the Zacks Consensus Estimate of $1,065.0 million. Full year sales totaled $3,305.8 million, down 4.9 year over year, while it came marginally ahead of the Zacks Consensus Estimate of $3,302.0 million.

Quarter in Detail

Consolidated comparable-store sales (comps) including AEO Direct, fell 7% compared with a 4% rise in the year-ago quarter. Comps decreased 4% at the company's aerie stores and 7% at AE Total Brand stores. However, American Eagle's AEO Direct segment reported year-over-year comps growth of 8%.

Adjusted gross profit for the quarter fell 27.9% to $332.2 million. Moreover, gross margin contracted 930 basis points (bps) to 31.9% owing to increased promotion activity and deleverage of rent on negative comps.

Adjusted selling, general and administrative (SG&A) expenses decreased 14.7% to $215.9 million. Moreover, as a percentage of sales, SG&A expenses contracted 190 bps to 20.7% in the quarter. The year-over-year improvement in expenses was primarily due to a fall in incentive costs and a planned reduction in advertising expenses.

The company's adjusted operating income fell 51.6% to $85.8 million, primarily due to fall in sales and gross profit. Consequently, adjusted operating margin contracted 770 bps to 8.2%.

Financial Position

American Eagle ended the year with cash and short-term investments of nearly $418.9 million compared with $509.1 million at the end of fiscal 2012. During fiscal 2013, the company spent $278.0 million toward capital expenditure, which was above expectations, driven by the timing of investments in the new distribution center and related systems to support omni-channel growth.  

As of Feb 1, 2014, American Eagle's total inventory was $291.5 million, down 12.3% from $332.5 million as of Feb 2, 2013. Inventory at cost per square foot declined 16% from the prior-year quarter level, primarily due to change in ownership terms.

Store Update

During fiscal 2013, American Eagle opened 64 stores, including 39 factory outlets, 6 stores in Mexico and 7 in China and Hong Kong. Moreover, it shut down 42 stores including 29 aerie stores. The company's square footage increased 5% on a year-over-year basis.

At fiscal-year end, the company operated a total of 1,066 stores across the United States and 66 international franchise stores.

Outlook

Noticing challenging business conditions as the harsh winter weather disrupts product demand, American Eagle projects earnings per share for the first quarter of fiscal 2014 to break even against about 18 cents earned in the first quarter of fiscal 2013. The guidance is based on the company's anticipation of high single-digit decline in comparable sales. The current Zacks Consensus Estimate is pegged at 14 cents per share, which is substantially higher than the company's guidance.

Moreover, the company expects inventory at cost per foot at the end of first quarter 2014 to decline in the mid single-digits.

Capital expenditure for fiscal 2014 is projected to be $230 million, with nearly half of the spending slated for new and upgraded systems, the completion of the distribution center and omni-channel projects. The remaining half of the capital spending will be directed towards store upgrades as well as factory and international store expansions.

Other Stocks to Consider

Currently, American Eagle has a Zacks Rank #5 (Strong Sell). Some better performing stocks in the apparel retail industry include Iconix Brand Group Inc. ICON, Foot Locker Inc. FL and Skechers USA Inc. SKX. Iconix sports a Zacks Rank #1 (Strong Buy), while Foot Locker and Skechers carry a Zacks Rank #2 (Buy).