Facts on American Eagle Before Q1 Earnings: Apt to Retain?

American Eagle Outfitters, Inc. AEO is expected to register top and bottom-line growth when it reports first-quarter fiscal 2024 results on May 29. The Zacks Consensus Estimate for fiscal first-quarter revenues is pegged at $1.2 billion, which indicates growth of 6.1% from the year-ago reported figure.
The Zacks Consensus Estimate for fiscal first-quarter earnings is pegged at 28 cents per share, suggesting 64.7% growth from the year-ago quarter's reported number. The Zacks Consensus Estimate for the to-be-reported quarter's earnings has moved up by a penny in the past 30 days.
The company's earnings beat the Zacks Consensus Estimate by 22% in the last reported quarter. It has an earnings surprise of 22.7% for the trailing four quarters, on average.

American Eagle Outfitters, Inc. Price and EPS Surprise

American Eagle Outfitters, Inc. price-eps-surprise | American Eagle Outfitters, Inc. Quote

Unlocking the Key Factors

American Eagle's first-quarter fiscal 2024 performance is expected to have benefited from continued brand strength and solid demand, driven by compelling products and exciting new marketing campaigns. Favorable demand for its leading brands and expansionary efforts into new markets have been driving its top-line performance. Innovation efforts, solid omnichannel capabilities and focus on efficient inventory management are likely to have boosted the top and bottom lines in the to-be-reported quarter.
Additionally, AEO's cost-reduction efforts, strength in Aerie and solid online show remain key drivers to top and bottom lines. The company has been gaining from the robust Aerie brand, driven by sturdy demand in its core apparel, activewear extension, strength in the OFFLINE brand and renewed momentum in intimates. The brand has been on an extraordinary growth trajectory, which is likely to have continued in the to-be-reported quarter. A solid online show is expected to have aided the fiscal first-quarter performance.
Also, the Real Power Real Growth value creation plan bodes well. AEO has been on track with the Real Power, Real Growth value-creation plan. Its first-quarter fiscal 2024 performance is expected to have benefited from significant progress on its Real Power Real Growth value creation plan. The plan has been driving profitability through real estate and inventory-optimization efforts, omni-channel and customer focus, and investments to improve the supply chain. The company's efforts under the plan have been aiding the recovery of the American Eagle brand.
Additionally, American Eagle's profit improvement initiatives have been paying off. This, along with leverage on rent, distribution, and warehousing and delivery expenses, is likely to have aided margins. Higher merchandising margins due to lower markdowns coupled with inventory control, and lower transportation and product costs are expected to have acted as tailwinds in the to-be-reported quarter.
On the last reported quarter's earnings call, management expected the business momentum to continue in the fiscal first quarter. The company anticipated year-over-year revenue growth in the mid-single digits, including a one-point positive impact of the retail calendar shift. The revenue guidance includes a gain of $15 million from improved volume during the spring week. Operating income is projected to be $65-$70 million in the fiscal first quarter.
Our model predicts first-quarter fiscal 2024 sales for the AE and Aerie brands to increase 8.5% and 0.9% year over year, respectively, driven by continued business momentum and strong customer demand.
We expect the adjusted gross margin to expand 150 basis points (bps) year over year to 39.7% in the fiscal first quarter due to lower freight expenses. The adjusted operating margin is likely to expand 200 bps to 6.1%, backed by an improved gross margin.
However, AEO has been witnessing elevated corporate compensation, incentives and other corporate expenses, which have been partially offset by cost efficiencies. The increase in these expenses has been leading to higher SG&A expenses. Rising costs and expenses are expected to have partly weighed on the company's margins and profitability in the to-be-reported quarter.
We expect SG&A expenses to increase 5.5% year over year in the fiscal first quarter. Meanwhile, SG&A expenses, as a percentage of sales, are expected to remain flat at 28.9%.

The Zacks Model Findings

Our proven model predicts an earnings beat for American Eagle this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat.
American Eagle has an Earnings ESP of +3.98% and a Zacks Rank #3.

Valuation Picture

From a valuation perspective, American Eagle shares present an attractive opportunity, trading at a discount relative to historical and industry benchmarks. With a forward 12-month price-to-earnings ratio of 12.95X, below the five-year median of 12.25X and the Retail-Apparel & Shoes industry's average of 16.01X, the stock offers compelling value for investors seeking exposure to the sector. Additionally, the stock currently has a Value Score of A, further validating its appeal.
Recent market movements show that American Eagle's shares have gained 8.4% in the year-to-date period compared with the industry's rise of 9.2%. Trading at $22.93 as of May 23, shares of American Eagle are likely to gain momentum, as our proven model predicts that the company is likely to beat earnings estimates in the impending release.

Other Stocks With Favorable Combination

Here are some other companies that you may want to consider, as our model shows that these also have the right combination of elements to post an earnings beat this season:
The Gap Inc. GPS has an Earnings ESP of +15.47% and currently sports a Zacks Rank of 1. The company is likely to register top and bottom-line growth when it reports first-quarter fiscal 2024 results. The consensus mark for GPS's quarterly revenues is pegged at $3.3 billion, which suggests growth of 0.1% from the figure reported in the prior-year quarter.
The Zacks Consensus Estimate for Gap's earnings has moved up by a penny to 14 cents per share in the past seven days. The consensus estimate indicates significant growth from earnings per share of the 1 cent reported in the year-ago quarter.
Abercrombie & Fitch ANF presently has an Earnings ESP of +4.48% and a Zacks Rank #2. The company is likely to register growth in the top and bottom lines when it reports first-quarter fiscal 2024 results. The consensus mark for ANF's quarterly revenues is pegged at $948.8 million, which suggests 13.5% growth from the figure reported in the prior-year quarter.
The consensus mark for ANF's quarterly earnings has moved up 3.2% in the past seven days to $1.62 per share. The consensus estimate suggests growth of 315.4% from the year-ago quarter's actual.
Nordstrom JWN currently has an Earnings ESP of +41.67% and a Zacks Rank of 3. The company is likely to register top-line growth when it reports first-quarter fiscal 2024 results. The consensus mark for JWN's quarterly revenues is pegged at $3.2 billion, which suggests growth of 0.5% from the figure reported in the prior-year quarter.
The Zacks Consensus Estimate for Nordstrom's loss per share has narrowed by a penny to 8 cents in the past seven days. The consensus estimate indicates a significant decline against earnings per share of 7 cents reported in the year-ago quarter.

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