American Eagle Tumbles on Dismal Earnings - Analyst Blog

Shares of American Eagle Outfitters Inc. AEO fell 6.44% during yesterday's trade after the company reported dismal first-quarter fiscal 2014 results, because of weak top line during the quarter.

The company posted first-quarter fiscal 2014 earnings of 2 cents per share, plunging 88.9% from 18 cents per share in the prior-year quarter. The year-over-year decline in earnings per share was mainly due to lower sales and increased markdowns. However, the company's earnings for the quarter were above the Zacks Consensus Estimate of break-even earnings.

American Eagle's net sales declined 4.9% year over year to $646.1 million in the quarter and came below the Zacks Consensus Estimate of $657 million.

Quarter in Detail

Consolidated comparable-store sales (comps) including AEO Direct, fell 10% compared with a 5% decline in the year-ago quarter. Comps decreased 4% at the company's aerie stores and 11% at AE Total Brand stores.

Adjusted gross profit for the quarter fell 15.1% to $225.8 million. Moreover, gross margin contracted 420 basis points (bps) to 34.9% owing to increased markdowns and deleverage of buying, occupancy, and warehousing costs on negative comps, offset by leveraged merchandise and design costs.

Adjusted selling, general and administrative (SG&A) expenses increased 2.4% to $185.1 million. Moreover, as a percentage of sales, SG&A expenses expanded 200 bps to 28.6% in the quarter.

The company's adjusted operating income fell 85.4% to $8.4 million, primarily due to fall in sales and gross profit. Consequently, adjusted operating margin contracted 710 bps to 8.4%.

Financial Position

American Eagle ended the quarter with cash and short-term investments of nearly $327.7 million compared with $496.2 million in the prior year. During the quarter, the company spent $72 million toward capital expenditure. 

As of May 3, 2014, American Eagle's total inventory was $329.2 million, down 3.3% from $340.5 million as of May 4, 2013. Inventory at cost per square foot declined 7% from the prior-year quarter level.

Store Update

During the first quarter, American Eagle opened 11 stores, including 5 factory outlets, 2 stores in Mexico and 1 in China. The company shut down 20 stores, including 14 aerie stores. During the quarter, the company inaugurated three new North American mainline stores in prime market locations. Additionally, on the international platform, the company opened 11 international licensed stores in the quarter, comprising its first store in Colombia.

At quarter-end, the company operated a total of 1,057 stores across the United States and 77 international franchise stores.

Outlook

American Eagle projects earnings per share for the second quarter of fiscal 2014 to break even against about 10 cents earned in the second quarter of fiscal 2013. The guidance is based on the company's anticipation of high single-digit decline in comparable sales.

Moreover, the company expects inventory at cost per foot to decline in the mid teens or mid single-digits range at the end of second quarter 2014, excluding the change in ownership terms.

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.

After deliberate review of its store fleet, the company plans to shutter another 150 stores over the next three years, including about 100 AE stores. In fiscal 2014, the company targets to reduce its North American store count by closing nearly 50 AE and 20 aerie stores. Moreover, with the start of fiscal 2015, the company expects to register annual after-tax savings of nearly $10-$15 million resulting from these store closures.

Other Stocks to Consider

Currently, American Eagle has a Zacks Rank #4 (Sell). Better-ranked stocks in the retail space include Foot Locker Inc. FL, American Apparel Inc. APP and Zumiez Inc. ZUMZ. All of these have a Zacks Rank #2 (Buy).

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