Shares of American Eagle Outfitters Inc. (AEO) fell 6.9% during yesterday’s afterhours trade as the company came up with a dismal guidance for the fourth quarter of fiscal 2014 following soft sales results in the third quarter. The magnitude of the impact on shares was higher as fourth quarter happens to be a critical period for all retailers with expectations being sky high due to the holiday shopping season.
The company reported quarterly adjusted earnings of 22 cents per share, up 15.8% from 19 cents per share in the prior-year quarter and in line with the Zacks Consensus Estimate. The improvement in earnings reflects the year-over-year growth in markdowns and lower expenses, which more than offset the fall in revenues.
On a GAAP basis, the company’s earnings per share were 5 cents compared with 13 cents in the prior-year quarter, mainly hit by restructuring and asset impairment charges of 17 cents as elucidated in the company’s last month’s guidance update.
American Eagle's net sales in the quarter slipped marginally to $854 million compared with $857 million in the prior-year quarter. However, sales surpassed the Zacks Consensus Estimate of $844 million. The year-over-year decline in revenue was mainly due to a 5% plunge in comparable-store-sales due to ongoing softness in mall traffic along with a challenging and highly competitive retail environment.
Brand-wise, comps rose 3% at the company's aerie stores and declined 6% at AE Total Brand stores.
Quarter in Detail
Gross profit for the quarter rose 6% to $315 million and gross margin expanded 200 basis points (bps) to 36.9% owing to lower markdowns, partially offset by higher buying, occupancy and warehousing costs.
Selling, general and administrative (SG&A) expenses fell 1% to roughly $205 million. As a percentage of sales, SG&A expenses remained flat with last year at 24%, reflecting a decline in overhead and variable costs, offset by investments in new stores and global expansion coupled with increased incentive cost accruals.
The company’s operating income rose 22% to $74 million, primarily due to a fall in sales, more than offset by higher gross margin. Consequently, operating margin expanded 160 bps to 8.7%.
Financial Position
American Eagle ended the quarter with cash and short-term investments of nearly $280.4 million compared with $357.2 million in the prior year.
During the quarter, the company incurred $64 million of capital expenditure. Going forward, the capital expenditure projection for fiscal 2014 is maintained at $230 million, mainly to be allocated to new and renovated outlets, innovations in information technology and the Hazleton distribution center. Further, for fiscal 2015, management anticipates capital expenditure of around $150 million.
As of Nov 1, 2014, American Eagle’s total inventory was $469 million, down 10% from Nov 2, 2013. Inventory at cost per foot declined 14% from the prior-year quarter level. American Eagle expects inventory per foot in the fourth quarter to increase marginally from the mid-teen decline witnessed last year. Moreover, the company expects inventories from the fall and holiday clearance to decline roughly in the low-double digits.
Store Update
During the third quarter, American Eagle opened 23 stores, including 5 mainline stores in North America, 10 factory outlets, 5 stores in Mexico and 3 in Asia. The company shut down 3 stores, including 2 aerie stores. Alongside, on the global platform, the company opened 10 international licensed stores. At quarter end, the company operated 94 international licensed stores across 14 countries.
For fiscal 2014, the company remains on track to reduce its North American store count by closing nearly 50 AE and 25 aerie stores.
Outlook
Going forward, American Eagle stated that it will continue to work on reducing promotional activity while focusing on improving merchandise assortments. However, it is skeptical about future performance due to the ongoing softness in mall traffic as well as a challenging and highly competitive retail environment.
American Eagle projects earnings per share for the fourth quarter of fiscal 2014 to lie in the band of 30–33 cents a share compared with 27 cents earned in the prior-year quarter. The guidance is based on the company’s anticipation of a slight decline in revenue and mid single-digit decline in comps. The Zacks Consensus Estimate for the same is pegged at 34 cents per share.
Other Stocks to Consider
American Eagle currently has a Zacks Rank #2 (Buy). Other stocks performing well in the same industry include DSW Inc. (DSW), Bebe Stores Inc. (BEBE) and L Brands Inc. (LB), all carrying a Zacks Rank #2.
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