American Eagle Profits Fall in Fourth Quarter

Wednesday saw American Eagle Outfitters AEO release fiscal fourth quarter numbers, with profit falling 41% as the clothing retailer posted approximately $20.7 million in store impairment charges while input costs rose sharply. Revenue improved, but that did not do enough to save the profits. Things are hardly desperate for AEO, with shares recently rising 2.2% premarket ay $14.95, with earnings reaching the high end of company guidance. On Tuesday evening, stock was down 4.4% for 2012. According to the Wall Street Journal, AEO competes with high-end retailers like Abercrombie & Fitch ANF, and bargain companies like Aeropostale ARO. In recent months, AEO has seen sales improve fairly consistently. As a result, it trimmed its fourth quarter earnings guidance in January based on aggressive promotions aimed at driving late holiday sales. All retailers know that the holiday fourth quarter is the most important of the year, as they can get roughly 40% of their annual revenue in those three months. For the quarter that ended January 28, American Eagle posted a profit of $51.3 million, 0r 26 cents per share, down from $87 million, or 44 cents per share, the previous year. Sales, meanwhile, rose 14% to $1.042 billion. The gross margin fell to 34.1% from 39.4% due to higher product costs. Input costs increased 24%. Following the release of the numbers, Oppenheimer put out a research report saying that it reiterates its Outperform rating on American Eagle Outfitters and $16 PT. Its PT assumes a 15x P/E multiple on its 2012 EPS estimate of $1.07. It believes that its PT is warranted given AEO's proactive promotional cadence, improved merchandising, premium denim positioning, cost-cutting opportunity, aerie/77kids growth vehicles, international AE opening and domestic store closure/refresh opportunity. “We remain extremely encouraged by management's conservative macro view and ongoing, aggressive, planned store event calendar. Plus we believe that low expectations, easing compares, a buyback/dividend program and strong balance sheet limit significant further downside risk.” Oppenheimer added that, “Although we understand there is concern regarding high inventory levels, we are encouraged that coming down sequentially. Elevated cotton costs contributed to higher dollar costs and should be largely resolved by FY2Q12. Last, when combined with the CEO announcement and what we assume will be additional hires, we view the risk/reward ratio as favorable at current levels.”