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Here's Why American Eagle (AEO) Marched Ahead of Its Industry
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American Eagle Outfitters Inc. (AEO - Free Report) looks well-positioned on the back of cost-reduction efforts, strength in Aerie and a solid online show. The company has also been gaining from its efforts to reset inventory and reduce costs. Its Real Power Real Growth value creation plan bodes well.
Driven by these factors, this Zacks Rank #2 (Buy) stock has rallied 35.4% in the past three months, outperforming the industry’s growth of 6.7%.
Let’s delve deeper
Image Source: Zacks Investment Research
A Brief Introspection
The company has been witnessing strong digital demand on the shift in consumers’ shopping preferences. Digital revenues advanced 35% from the pre-pandemic levels (third-quarter fiscal 2019), accounting for 33% of the total revenues, driven by its mobile app, which is now the largest source of revenues in the digital channel. The mobile app business contributed 40% of the total digital spending, driven by a strong engagement across both brands.
Earlier, the company launched a mobile point-of-sale system in its North America stores, through which customers can check out or return items through a store associate. The move is likely to expedite transaction speed and minimize wait time, particularly in peak fall and holiday selling seasons. Also, its newly acquired Quiet Platforms partnered with Fanatics to launch same-day and next-day delivery services across 11 markets in the United States.
Some other notable efforts are customer self-checkout, a new instant credit feature for returns, and the expansion of its Afterpay capabilities in its mobile app, and the introduction of the Shop the Look service that allows customers to browse and shop head-to-toe looks curated by stylists. The relaunch of its loyalty program bodes well. Gains from the acquisition of Quiet Logistics aided delivery. Such well-chalked-out efforts are likely to contribute to the company’s top line in the near term.
Continued strength in Aerie remains a key growth driver. Sales rose 11% to $350 million for Aerie in third-quarter fiscal 2022 and surged nearly double on a two-year basis. Comps for the Aerie brand improved 59% from the third-quarter fiscal 2019 figure, driven by solid demand across intimates, leggings, apparel, and beauty and accessories.
OFFLINE activewear grew in the strong double digits on the back of an improved assortment and customer base. Management previously launched its largest integrated marketing campaign, namely Voices of AerieREAL. The Aerie brand is on track to reach the next brand milestone of $2 billion in sales, out of which it has already achieved $1 billion in revenues.
AEO has been making efforts to reduce expenses across store payroll, corporate expenses, professional services and advertising. The move is expected to generate cost savings of $100 million on an annual basis compared with the prior target of $60 million. As a result, SG&A expenses are anticipated to be flat year over year in the fourth quarter of fiscal 2022.
The company has been on track with its Real Power Real Growth value creation plan, which has been aiding its performance. 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. As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. It expects to undertake initiatives to deliver growth and sustained profitability for the American Eagle brand.
Driven by the trends and progress on its growth plan, American Eagle raised its 2023 financial targets. The company expects to achieve an operating income of $800 million for fiscal 2023. It also expects revenues of $5.8 billion for fiscal 2023, up from the earlier mentioned $5.5 billion. The operating income is estimated to be $800 million, with the operating margin expanding to 13.5% by 2023.
Headwinds to Overcome
Despite such upsides, American Eagle is reeling under a tougher macro environment and changing consumer spending behavior. This led to a sluggish year-over-year performance in third-quarter fiscal 2022. Adjusted earnings of 42 cents per share declined 44.7% from adjusted earnings of 76 cents reported in third-quarter fiscal 2021. Total net revenues of $1,240.6 million declined 3% year over year. Brand revenues declined 5% in the fiscal third quarter. For the fiscal fourth quarter, American Eagle expects brand revenues to decline in the mid-single digits.
Elevated freight expenses, higher markdowns and increased product costs dented margins. Rising inflation and higher gas prices remain concerning. In third-quarter fiscal 2022, the gross margin contracted 560 basis points (bps) to 38.7% due to increased rent and warehousing expenses. The operating margin contracted 700 bps year over year to 9.5%. Going ahead, it expects the margins to reflect the impact of the highly promotional holiday season.
Conclusion
Although higher freight and rising inflation act as near-term headwinds, we believe that a solid online show, robust demand and brand strength will drive growth. Also, a Value Score of A and a long-term earnings growth rate of 11.6% reflect its inherent strength.
Ross Stores, an off-price retailer of apparel and home accessories in the United States, currently sports a Zacks Rank #1 (Strong Buy). ROST has an expected EPS growth rate of 10.5% for three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Ross Stores’ current-year sales and EPS suggests declines of 1.6% and 11.7%, respectively, from the year-ago period’s reported figures. ROST has a trailing four-quarter earnings surprise of 10.5%, on average.
Tecnoglass, manufacturer and seller of architectural glass and windows and aluminum products for the residential and commercial construction industries, currently sports a Zacks Rank #1.
The Zacks Consensus Estimate for TGLS’ 2023 sales and EPS suggests growth of 11.2% and 9%, respectively, from the year-ago period’s levels. TGLS has a trailing four-quarter earnings surprise of 26.9%, on average.
Wingstop, operator of franchises and restaurants, currently sports a Zacks Rank #2. WING has a long-term earnings growth rate of 11%.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.
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Here's Why American Eagle (AEO) Marched Ahead of Its Industry
American Eagle Outfitters Inc. (AEO - Free Report) looks well-positioned on the back of cost-reduction efforts, strength in Aerie and a solid online show. The company has also been gaining from its efforts to reset inventory and reduce costs. Its Real Power Real Growth value creation plan bodes well.
Driven by these factors, this Zacks Rank #2 (Buy) stock has rallied 35.4% in the past three months, outperforming the industry’s growth of 6.7%.
Let’s delve deeper
Image Source: Zacks Investment Research
A Brief Introspection
The company has been witnessing strong digital demand on the shift in consumers’ shopping preferences. Digital revenues advanced 35% from the pre-pandemic levels (third-quarter fiscal 2019), accounting for 33% of the total revenues, driven by its mobile app, which is now the largest source of revenues in the digital channel. The mobile app business contributed 40% of the total digital spending, driven by a strong engagement across both brands.
Earlier, the company launched a mobile point-of-sale system in its North America stores, through which customers can check out or return items through a store associate. The move is likely to expedite transaction speed and minimize wait time, particularly in peak fall and holiday selling seasons. Also, its newly acquired Quiet Platforms partnered with Fanatics to launch same-day and next-day delivery services across 11 markets in the United States.
Some other notable efforts are customer self-checkout, a new instant credit feature for returns, and the expansion of its Afterpay capabilities in its mobile app, and the introduction of the Shop the Look service that allows customers to browse and shop head-to-toe looks curated by stylists. The relaunch of its loyalty program bodes well. Gains from the acquisition of Quiet Logistics aided delivery. Such well-chalked-out efforts are likely to contribute to the company’s top line in the near term.
Continued strength in Aerie remains a key growth driver. Sales rose 11% to $350 million for Aerie in third-quarter fiscal 2022 and surged nearly double on a two-year basis. Comps for the Aerie brand improved 59% from the third-quarter fiscal 2019 figure, driven by solid demand across intimates, leggings, apparel, and beauty and accessories.
OFFLINE activewear grew in the strong double digits on the back of an improved assortment and customer base. Management previously launched its largest integrated marketing campaign, namely Voices of AerieREAL. The Aerie brand is on track to reach the next brand milestone of $2 billion in sales, out of which it has already achieved $1 billion in revenues.
AEO has been making efforts to reduce expenses across store payroll, corporate expenses, professional services and advertising. The move is expected to generate cost savings of $100 million on an annual basis compared with the prior target of $60 million. As a result, SG&A expenses are anticipated to be flat year over year in the fourth quarter of fiscal 2022.
The company has been on track with its Real Power Real Growth value creation plan, which has been aiding its performance. 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. As part of the Real Power Real Growth plan, American Eagle will continue to pursue opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. It expects to undertake initiatives to deliver growth and sustained profitability for the American Eagle brand.
Driven by the trends and progress on its growth plan, American Eagle raised its 2023 financial targets. The company expects to achieve an operating income of $800 million for fiscal 2023. It also expects revenues of $5.8 billion for fiscal 2023, up from the earlier mentioned $5.5 billion. The operating income is estimated to be $800 million, with the operating margin expanding to 13.5% by 2023.
Headwinds to Overcome
Despite such upsides, American Eagle is reeling under a tougher macro environment and changing consumer spending behavior. This led to a sluggish year-over-year performance in third-quarter fiscal 2022. Adjusted earnings of 42 cents per share declined 44.7% from adjusted earnings of 76 cents reported in third-quarter fiscal 2021. Total net revenues of $1,240.6 million declined 3% year over year. Brand revenues declined 5% in the fiscal third quarter. For the fiscal fourth quarter, American Eagle expects brand revenues to decline in the mid-single digits.
Elevated freight expenses, higher markdowns and increased product costs dented margins. Rising inflation and higher gas prices remain concerning. In third-quarter fiscal 2022, the gross margin contracted 560 basis points (bps) to 38.7% due to increased rent and warehousing expenses. The operating margin contracted 700 bps year over year to 9.5%. Going ahead, it expects the margins to reflect the impact of the highly promotional holiday season.
Conclusion
Although higher freight and rising inflation act as near-term headwinds, we believe that a solid online show, robust demand and brand strength will drive growth. Also, a Value Score of A and a long-term earnings growth rate of 11.6% reflect its inherent strength.
Other Stocks to Consider
Here are three other top-ranked stocks to consider, namely Wingstop (WING - Free Report) , Ross Stores (ROST - Free Report) and Technoglass (TGLS - Free Report) .
Ross Stores, an off-price retailer of apparel and home accessories in the United States, currently sports a Zacks Rank #1 (Strong Buy). ROST has an expected EPS growth rate of 10.5% for three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Ross Stores’ current-year sales and EPS suggests declines of 1.6% and 11.7%, respectively, from the year-ago period’s reported figures. ROST has a trailing four-quarter earnings surprise of 10.5%, on average.
Tecnoglass, manufacturer and seller of architectural glass and windows and aluminum products for the residential and commercial construction industries, currently sports a Zacks Rank #1.
The Zacks Consensus Estimate for TGLS’ 2023 sales and EPS suggests growth of 11.2% and 9%, respectively, from the year-ago period’s levels. TGLS has a trailing four-quarter earnings surprise of 26.9%, on average.
Wingstop, operator of franchises and restaurants, currently sports a Zacks Rank #2. WING has a long-term earnings growth rate of 11%.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.