A month has gone by since the last earnings report for American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) . Shares have lost about 9.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Eagle due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

American Eagle’s Q3 Earnings & Sales Beat Estimates

American Eagle Outfitters posted better-than-expected third-quarter fiscal 2022 results. The top and the bottom line surpassed the Zacks Consensus Estimate and our estimate in the fiscal third quarter. Results reflected gains from AEO’s efforts to reset inventory and reduce costs. Revenues were partly aided by contribution from its supply-chain business and Quiet Platforms.

American Eagle reported earnings of 42 cents per share, surpassing the Zacks Consensus Estimate of 23 cents. Our estimate for the bottom line was 26 cents a share. The better-than-expected earnings resulted from aggressive actions to reset inventory and reduce expenses. The bottom line declined 44.7% from adjusted earnings of 76 cents reported in third-quarter fiscal 2021.

AEO’s inventory improved 8% from the year-ago quarter’s reading to $798 million, with continued progress expected in the fiscal fourth quarter as well. This marks a significant improvement from a 36% increase in the second quarter of fiscal 2022. Inventory per unit was up 7%. American Eagle’s actions to bring inventory receipts in line with the demand trends have been paying off so far. AEO is well-positioned with current inventory for the holiday season. It anticipates inventory at the end of the fiscal fourth quarter to be down year over year.

Total net revenues of $1,240.6 million declined 3% year over year but beat the Zacks Consensus Estimate of $1,201 million. Our estimate for the top line was $1,221.4 million. Brand revenues declined 5% in the fiscal third quarter but were better than AEO’s expectation of a high single-digit decline. However, revenues were partly aided by a 2-percentage-point contribution from supply-chain business and Quiet Platforms.

Q3 Details

Brand-wise, revenues fell 11% to $838 million for AE but surpassed our estimate of $835 million. Comparable sales (comps) for the AE brand dropped 10% year over year and were flat with the third-quarter fiscal 2019 tally. Revenues rose 11% to $350 million for Aerie and beat our estimate of $341.7 million. Comps for the Aerie brand declined 3% from the third-quarter fiscal 2021 level and improved 59% from the third-quarter fiscal 2019 tally.

American Eagle’s total digital revenues were down 5% year over year, while the same advanced 35% from the pre-pandemic levels (third-quarter fiscal 2019). Digital revenues accounted 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 spend, driven by a strong engagement across both brands.

Store revenues fell 4% year over year. Store sales were up 3% from the pre-pandemic levels.

The gross profit dropped 15% year over year to $480 million, while the gross margin contracted 560 basis points (bps) to 38.7%. The decline mainly resulted from a 400-bps impact from higher markdowns and increased product costs and a 70-bps impact from the scaling of the Quiet Platforms business. The gross margin was also affected by increased rent and warehousing expenses, slightly offset by lower incentive compensation.

Selling, general and administrative (SG&A) expenses declined 1% year over year to $311 million on lower incentive compensation accruals. As a percentage of sales, S&A expenses increased 50 bps to 25.1%.

Operating income was $117.5 million in the fiscal third quarter, down by a significant 44% from $209.7 million in the year-ago quarter but up from the third-quarter fiscal 2019 tally. Operating income included a $10-million loss from Quiet Platforms. The operating margin contracted 700 bps year over year to 9.5%.

For the Aerie brand, operating income of $56.5 million increased 8.7% from the year-ago quarter’s $52 million. The AE brand’s operating income declined 33.3% year over year to $174.1 million. Operating income margin declined 30 bps to 16.2% for the Aerie brand and 700 bps for the AE brand.

Other Financial Details

American Eagle ended third-quarter fiscal 2022 with cash and cash equivalents of $82.1 million. Total shareholders’ equity as of Oct 29, 2022, was $1,462.5 million. AEO had total liquidity, including available credit, of $423 million at the fiscal-quarter end.

AEO’s capital expenditure was $71 million in the reported quarter. It expects a capital expenditure of $250 million for fiscal 2022. Driven by American Eagle’s focus on reducing expenses, annual capital expenditure is expected to be significantly lower in 2023.

Store Update

In third-quarter fiscal 2022, American Eagle opened 8 AE and 16 Aerie stores, while it closed 5 AE stores. At the end of the fiscal third quarter, American Eagle operated 1,179 stores comprising 876 AE, 292 Aerie, six Todd Synder and five unsubscribed stores. Additionally, AEO operated 261 international license outlets.

Guidance

For the fiscal fourth quarter, American Eagle expects brand revenues to decline mid-single-digits. Comps are anticipated to be in line with the fiscal third quarter’s level. The company expects gross margin to be 32-33%, which is at the higher end of the previously projected low-30% range. While AEO made significant progress in inventory rightsizing, it expects the margins to reflect the impact of the highly promotional holiday season.

Management is on track with efforts to reduce expenses across store payroll, corporate expense, professional services and advertising. It anticipates delivering $100 million of expense reductions compared with the original plan. Consequently, SG&A expense is likely to be flat with the year-earlier fiscal quarter’s level in the fiscal fourth quarter.

American Eagle estimates the tax rate in the high-20s in the fiscal fourth quarter, with shares outstanding of 196 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, American Eagle has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

American Eagle has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

American Eagle is part of the Zacks Retail - Apparel and Shoes industry. Over the past month, Tapestry (TPR Quick QuoteTPR - Free Report) , a stock from the same industry, has gained 0.5%. The company reported its results for the quarter ended September 2022 more than a month ago.

Tapestry reported revenues of $1.51 billion in the last reported quarter, representing a year-over-year change of +1.7%. EPS of $0.79 for the same period compares with $0.82 a year ago.

For the current quarter, Tapestry is expected to post earnings of $1.26 per share, indicating a change of -5.3% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.3% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #4 (Sell) for Tapestry. Also, the stock has a VGM Score of B.