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Updated: 27-Nov-07 14:27 ET
American Eagle Outfitters (AEOS 21.05) - Update
Few things are as frustrating for an investor than to see their stock fail to participate in a broad market rally. This disparate condition has befallen American Eagle Outfitters (AEO 21.05, -0.32), which is losing ground today while the S&P 500 is up better than 1.0%.
The disappointing performance follows the retailer's third quarter earnings report, which was released before the start of trading.
For the 13-week period ended Nov. 3, American Eagle reported a 2.0% decline in net earnings to $99.4 million. Share buyback activity moved the dial, however, so that earnings per share actually rose 2.0% to $0.45. The latter was in-line with the consensus estimate. Total sales increased 7.0% to $744.4 million. That was below the company's original plan and the consensus number of $752.5 million.
The top line disappointment and gross margin contraction (to 47.4% from 49.5%) were negative focal points, as was the company's fourth quarter earnings guidance of $0.67 to $0.70 per share. The fourth quarter outlook matches the market's expectation at the high end, but clearly, there is more room for a negative surprise in the forecast range.
In expected fashion, the market is dwelling on the near-term outlook which is admittedly lackluster. The guidance range translates to growth of just 2.0% to 6.0% versus the same period a year ago.
American Eagle, though, is in better shape than you might think judging by the market's reaction. Inventory, excluding its direct business, is down 3.0% on a per square foot basis while clearance inventory is a lower percentage of total inventory than last year. This is a positive condition that should help mitigate margin pressures during what is expected to be a promotional holiday period.
Looking to 2008, American Eagle is poised to announce some new growth initiatives that include expanding in the global marketplace and unveiling its new Concept 4 business. Additionally, it plans to ramp up its successful aerie segment. There will be 39 aerie stores at the end of 2007, but more than 70 aerie store openings are planned for 2008.
Overall, American Eagle expects its square footage to grow 10% in 2008. The company also plans to install new point-of-sale terminals in at least half its chain by the end of 2008, and said it has 20.1 million shares, or nearly 10% of diluted shares outstanding, authorized for repurchase.
The company didn't provide any specific earnings guidance for 2008, other than to say that the loss from its MARTIN + OSA concept will be less than the $0.15 to $0.17 per share loss in 2007 and that the company will maintain a critical focus on expense and inventory management.
The FY08 consensus estimate is pegged at $2.14, which represents growth of 14% if American Eagle is able to hit the 2007 mark of $1.87.
There is clearly a lot of negativity right now surrounding the retail sector as the market frets about a slowdown in consumer spending. That much is clear in recognizing that AEO is down 17% since we highlighted it on the Bargain Hunting page in September.
We would hasten to remind readers that insiders were buying the stock in the $24.00 area, with Chairman Jay Schottenstein leading the way with a purchase of roughly 850,000 shares.
That insider buying combined with American Eagle's strong financial position, leading brand, and attractive valuation continues to underscore our bullish view of the stock, which is trading at a 20% discount to its projected long-term earnings growth rate.
--Patrick J. O'Hare, Briefing.com
YOU JUST BOUGHT HOW MANY SHARES!?!?!?
