Summary:
Keeping its positive earnings streak alive for the seventh straight time, American
Eagle posted splendid second-quarter fiscal 2016 results. Apart from outperforming
our estimates, both top and bottom lines rose year over year. Results mainly gained
from the company’s constant efforts to enhance brands via innovations, make
technological advancements as well as its commitment toward enriching consumer
experience. Continued strength noted in its American Eagle and aerie brands also
boosted results. Further, management issued a decent third-quarter view, as it
entered the fall season with great expectations. Also, global expansion plans and
omni-channel growth are likely to enable the company to augment business. However,
high dependence on external suppliers and macroeconomic headwinds may dampen
results. The company’s attempt to grow globally also exposes it to currency woes and
other global risks.
Reasons to Buy:
Strong Brand Portfolio: American Eagle is one of the major specialty retailers of
fashionable apparel and accessories in the U.S. and Canada. The company has a
strong portfolio of well-established brands, each focused on the unique characteristics
and rapidly changing preferences of target customers. We believe that the company’s
focus on enhancing consumer experience by providing top-quality products is likely to
place its brands well in the evolving retail space.
Splendid Q2 Results, Favorable Outlook & Robust Earnings History: American
Eagle delivered impressive second-quarter fiscal 2016 results, wherein both top and
bottom lines increased year over year, alongside outpacing our estimates. Notably, the
company’s bottom line has outperformed the Zacks Consensus Estimate for seven
straight quarters now, with an average beat of 14.4%. Results in the second quarter gained from the company’s constant efforts to
enhance brands via innovations, make technological advancements as well as its commitment toward enriching consumer
experience. Also, results benefited from continued strength noted in its American Eagle and aerie brands. Additionally, this quarter
marked the aerie brand’s fifth straight quarter of over 20% comparable-store sales (comps) growth, further underscoring the
brand’s inherent strength. Looking ahead, management remains confident of its near-term prospects, as it entered the fall season
with solid expectations with regard to market opportunities as well as the company’s robust execution. These factors highlight
American Eagle’s strong future potential, which also encouraged management to issue a favorable outlook for the third quarter.
Omni-channel & International Growth to Boost the Top Line: American Eagle has been strengthening its global presence for
some time now after witnessing strong profitability at its overseas licensed stores, with little capital requirements. In line with this
strategy, the company has fortified its presence in South Korea, Singapore, Greece, Peru, Chile, Bahrain and Oman. Moreover, the
company intends to take the count of international licensed stores to 181 by the end of fiscal 2016. Apart from this, American Eagle
is striving to develop its omni-channel platform to reach customers in every possible way. Hence, the company has been improving
its website as well as mobile app. We believe these plans for international expansion, together with its omni-channel growth, provide
significant opportunities to the company to expand its business and cater to the incredible global demand for its products.
Last Earnings Report:
American Eagle Q2 Earnings & Sales Beat:
American Eagle came out with splendid second-quarter fiscal 2016 results, wherein both
sales and earnings increased year over year and outdid estimates, thereby marking the
company’s seventh consecutive positive earnings surprise.
Quarterly earnings of $0.23 per share surged 35.3% from $0.17 recorded in the prior-year
quarter and beat the Zacks Consensus Estimate of $0.21.
Results gained from the company’s constant efforts to enhance brands via innovations,
make technological advancements as well as its commitment toward enriching consumer experience. Further, the company’s quarterly
results benefited from continued strength noted in its American Eagle (“AE”) and aerie brands.
The company’s total revenue advanced 3.2% year over year to $822.6 million, which surpassed the Zacks Consensus Estimate of
$818.7 million. Comps improved 3%, compared with an 11% jump recorded last year. Brand-wise, comps increased 24% at the
company's aerie stores and 1% at AE Total Brand outlets. Notably, this marked the aerie brand’s fifth straight quarter of over 20%
comps growth.
Quarter in Detail:
Gross profit in the quarter rose 8% to $307 million, with the gross margin expanding 160 basis points (bps) to 37.3%. The gross margin
expansion was driven by better merchandise margins, which in turn stemmed from lower costs and higher selling prices, somewhat
offset by greater delivery costs associated with digital sales growth.
Selling, general and administrative (SG&A) expenses increased 2% year over year to $200 million, reflecting higher investments in
brand advertising and variable selling costs, somewhat compensated by strong cost management efforts. However, as a percentage of
sales, SG&A expenses declined 20 bps to 24.3%.
The company’s operating income came in at $69 million, marking a 29% rise from $53 million recorded in the prior-year quarter. At the
same time, operating margin expanded 160 bps to 8.3%.
Financial Position:
American Eagle ended the fiscal second quarter with cash and cash equivalents of nearly $247.9 million compared with $327.3 million
in the prior-year quarter. The low cash balance is attributed to $227 million spends related to share buybacks, $94 million of dividends
and $135 million in capital expenditure in the past one-year period.
In second-quarter fiscal 2016, the company incurred $36 million of capital expenditure. For fiscal 2016, management now targets nearly
$160 million as capital expenditure, which marks the lower end of its previously targeted range of $160–$170 million.
As of Jul 30, 2016, American Eagle’s total inventory was $422.2 million, up 3% from the comparable year-ago period. The company
expects inventory at cost to increase in the low-single digits at the end of third-quarter fiscal 2016.
Store Update:
During the second quarter, American Eagle inaugurated four new AE Brand stores and one Tailgate Clothing Co. store (which was
acquired at 2015 end), while it closed three AE stores and four aerie stores. Alongside, on the global platform, the company opened 13
international licensed stores.
As of Jul 30, 2016, American Eagle operated 1,044 company stores and 158 international licensed outlets.
By the end of fiscal 2016, the company expects to operate 181 international licensed stores. Its total store count at the end of fiscal
2016 is expected in the range of 1,045?1,050.
Guidance:
Management remains confident of its near-term prospects, as it entered the fall season with solid expectations with regard to market
opportunities as well as the company’s robust execution. Also, management remains focused on enhancing consumer experience by
providing top-quality products, in an attempt to place American Eagle’s brands well in the evolving retail space.
Consequently, the company offered its view for third-quarter fiscal 2016, wherein it anticipates comps growth at a low single-digit rate.
Further, the company projects earnings per share in the band of $0.40–$0.41 compared with $0.35 earned in the prior-year quarter.
Risks:
High Dependence on Outside Suppliers: American Eagle does not own or operate any manufacturing facility and therefore,
depends on third-party manufacturers for all its merchandise. The company’s operations may be adversely affected in case of
any import disruptions, like manufacturers’ failure to ship orders on time or meet the company’s standards.
Macroeconomic Challenges & Seasonality of Business: The apparel retail industry is consumer driven and hence, very
sensitive to the health of the economy. Spending on apparel and accessories is heavily dependent on the personal disposable
income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may
restrain consumers from spending on these items. Further, the seasonal and cyclical nature of the company’s business puts it at
risk as failure to perform well during the peak season might hurt its annual performance.
