A month has gone by since the last earnings report for American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) . Shares have lost about 3.4% in that time frame, outperforming 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 Beats on Q2 Earnings & Sales, Lifts View

American Eagle posted impressive second-quarter fiscal 2023 results. Its earnings and sales beat the Zacks Consensus Estimate and increased year over year.

Results gained from brand strength, solid demand, particularly in June and July, and products that resonated with customers, driven by exciting new marketing campaigns. Also, management noted that positive momentum continued into the third quarter, across brands and channels.

For the second half, AEO expects positive response to its early fall goods. As a result, management raised its fiscal 2023 view.

Quarterly Details

American Eagle posted adjusted earnings of 25 cents per share, which surpassed the Zacks Consensus Estimate of 15 cents. The bottom line climbed significantly from 4 cents reported in the second quarter of fiscal 2022.

Total net revenues of $1,201 million inched up nearly 0.3% year over year, beating the Zacks Consensus Estimate of $1,188 million. Store revenues grew 4% in the quarter. Digital revenues fell 7%.

Brand-wise, revenues dipped 1% to $767 million for American Eagle and came ahead of our estimate of $753.5 million. Despite year-over-year decline, sales trends improved sequentially.

American Eagle brand exited July with positive comparable sales (comps), which has continued in the third quarter as well. The brand’s entry into men's activewear enabled it to expand reach. Women's tops as well as men's bottoms, particularly pants, also acted as growth drivers.

Comps for the American Eagle brand declined 2% year over year. Continued improvement in comps across denim and non-denim bottoms bode well.

Revenues rose 2% to $380 million for Aerie and outpaced our estimate of $359.3 million. Comps for the Aerie brand remained flat from second-quarter fiscal 2022 level. Sturdy demand in its core apparel, activewear extension, strength in OFFLINE brand and renewed momentum in intimates aided the brand. Its newly launched SMOOTHEZ styles and extended body suit collection have been received well by customers.

The company created history in the fiscal second quarter with the second highest AUR in its history. Strength in Customer KPIs with growth in total customer file and loyalty customer base remained tailwinds.

Gross profit jumped around 22% year over year to $453 million and outshined our estimate of $405.8 million. This was owing to profit improvement initiatives as well as lower delivery, distribution and warehousing costs. Meanwhile, gross margin expanded 680 basis points (bps) to 37.7%. This was boosted by higher merchandising margins, driven by lower markdowns stemming from inventory control, and lower transportation and product costs.

SG&A expenses increased 8% year over year to $332 million and came ahead of our estimate of $317.8 million. As a percentage of sales, S&A expenses extended 190 bps to 27.6%. This was primarily accountable to increased corporate compensation, incentives and other corporate expense partially offset by cost efficiencies.

Operating income was nearly $65 million in the quarter, up from around $14 million in the year-ago period. The metric beat our estimate of $33.7 million. Operating margin of 5.4% expanded 360 bps year over year.

For Aerie, adjusted operating income of $57.3 million increased from the year-ago quarter’s $11.8 million and surpassed our estimate of $21.3 million. The AE brand’s operating income increased from $109.1 million to $128.7 million in the quarter under review. The metric came ahead of our estimate of $151 million. Adjusted operating margin for the Aerie and AE brands increased 12 bps to 15.1% and 3 bps to 16.8%, respectively.

Other Financial Details

American Eagle ended the reported quarter with cash and cash equivalents of $175.3 million and liquidity of more than $800 million. Total shareholders’ equity as of Jul 29, 2023 was $1,673 million. AEO had long-term debt (net) of $32.3 million at the fiscal quarter’s end.

Capital expenditure was $46 million in the reported quarter. It expects capital expenditures in the band of $150-$175 million for fiscal 2023.

Inventory declined 7.3% from the year-ago quarter’s reading to $637 million. Inventory units were down 11%.

Guidance

For fiscal 2023, management raised its guidance, driven by better-than-expected business performance in the second quarter, solid demand and possibility of continued profit improvement in the back half of the year. Revenues are likely to be up low-single digits which compares favorably with its prior view of flat-to-down low-single digits. Operating income is estimated in the range of $325-$350 million, up from the earlier guidance of $250-$270 million.

The estimation includes $25 million gains from the company’s profit improvement initiatives. AEO also envisions gross margin expansion, driven by lower freight and product costs as well as reduced markdowns. Also, it expects SG&A to rise in the low double digits for fiscal 2023. Product cost and freight are also predicted to act as tailwinds in the second half of 2023.

For the fiscal third quarter, American Eagle suggests revenues to grow in the low single digits on a year-over-year basis. Operating income is projected in the range of $115-$125 million. Management envisions SG&A to jump in mid-teens. Depreciation is anticipated to be similar to this quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

The consensus estimate has shifted 16.99% due to these changes.

VGM Scores

Currently, American Eagle has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise American Eagle has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

American Eagle belongs to the Zacks Retail - Apparel and Shoes industry. Another stock from the same industry, Hibbett , has gained 2.7% over the past month. More than a month has passed since the company reported results for the quarter ended July 2023.

Hibbett reported revenues of $374.88 million in the last reported quarter, representing a year-over-year change of -4.6%. EPS of $0.85 for the same period compares with $1.86 a year ago.

For the current quarter, Hibbett is expected to post earnings of $1.12 per share, indicating a change of -42.3% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.5% over the last 30 days.

Hibbett has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.