Updated Research Report on American Eagle - Analyst Blog

We issued an updated research report on American Eagle Outfitters Inc. AEO after the company's first-quarter fiscal 2014 results.

American Eagle reported lackluster results for the first quarter of fiscal 2014, wherein its top and bottom lines declined from the prior-year numbers. Results were affected by lower sales and increased markdowns. Battered by the dismal results, the company came up with a bleak outlook for the second quarter of fiscal 2014.

The softness in results and a disappointing outlook have triggered a downtrend in the Zacks Consensus Estimate for the upcoming quarter and for fiscal 2014 and 2015 over the last 60 days. The Zacks Consensus Estimate for second-quarter fiscal 2014 declined 5 cents to break-even, while estimate for fiscal 2014 fell nearly 10.9% to 57 cents per share over the last 60 days. For fiscal 2015 too, most of the estimates were revised downward over the same time frame with the Zacks Consensus Estimate falling 11% to 73 cents per share.

Moreover, we remain concerned over the company's declining comps performance. The company posted negative comps along with declining sales results for all the four quarters of fiscal 2013. This trend continued in the first quarter of fiscal 2014 with comps and sales declining 10% and 4.9%, respectively. Further, the company projects a high single-digit decline in comps for the second quarter.

We believe a turnaround in the company's top line is largely dependent on the revival of its merchandise assortments, especially in the women's collection, which has lost its popularity with the customer group.

Though the company's earnings results and near term outlook failed to woo us, we remain impressed by its transformation plans focused on strengthening product assortments, store rationalization, diligent inventory management and e-Commerce growth. Further, we believe the company's international expansion plans together with its omni-channel growth provides significant opportunity to expand its business and cater to the worldwide demand for its brands.

After deliberate review of its store fleet due to the changing industry dynamics and increased pressure on brick and mortar stores, the company recently announced plans to shutter 150 stores in North America 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 upon lease expiration.

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. The company has also identified another 300 stores the leases of which will expire over the next three years and plans to assess these individually for potential closures.

Currently, American Eagle carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering in the sector include Citi Trends Inc. CTRN, Foot Locker Inc. FL and Christopher & Banks Corp. CBK. While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker and Christopher & Banks have a Zacks Rank #2 (Buy).