American Eagle Outfitters, Inc. (AEO Quick QuoteAEO - Free Report) reported second-quarter fiscal 2024 results, wherein earnings beat the Zacks Consensus Estimate while revenues lagged the same. The bottom and top lines increased year over year, driven by brand strength and gains from progress on its Powering Profitable Growth strategy. The quarter highlighted the company’s sixth straight quarter of record revenues. AEO has been managing costs efficiently.

The company’s earnings of 39 cents per share increased 56% from the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by a penny.

American Eagle’s shares fell nearly 9% in pre-market trading on Aug. 29 on the sales miss.  Shares of the Zacks Rank #3 (Hold) company have lost 2.4% in the past three months compared with the industry’s 9.3% decline.

AEO’s Quarterly Performance: Key Metrics and Insights

Total net revenues of $1.29 billion improved 8% year over year but missed the Zacks Consensus Estimate of $1.31 billion. The company’s revenue growth was driven by the strengthening of American Eagle’s and Aerie’s leading market position. Store revenues grew 7% while digital revenues improved 12%.

Brand-wise, revenues increased 8% year over year to $828 million for American Eagle. Comps for the brand rose 5%. American Eagle brand sales benefited from improvements in its assortments.

Revenues jumped 9% year over year to $416 million for the Aerie brand. Comps for the brand were up 4%. Sturdy demand for its core apparel and strength in the OFFLINE brand aided growth.

AEO Records Higher Margins & Expenses

Gross profit climbed 10% year over year to $499 million. The gross margin expanded 90 basis points (bps) to 38.6%. The increase in the gross margin mainly stemmed from robust inventory management and higher merchandise margins, backed by favorable product costs. Also, leveraged expenses, mainly in rent and digital delivery costs, aided the increase.

Selling, general and administrative (SG&A) expenses rose 4% year over year to $345.3 million. As a percentage of sales, SG&A expenses increased 90 bps to 26.7%, due to leverage across compensation, consisting of incentive costs, store and corporate payroll. Professional fees and services, and supplies and maintenance costs, improved as a rate of revenues.

Operating income was $101 million, up 55% from the year-ago quarter, driven by the benefits of the retail calendar shift to the tune of around $20 million.  The operating margin of 7.8% expanded 240 bps year over year. The rise in the operating margin was aided by strong sales growth and an improved gross margin rate.

AEO’s Financial Health Snapshot

American Eagle ended the fiscal second quarter with cash and cash equivalents of $191.8 million, with no outstanding debt. Total shareholders’ equity as of Aug. 3, 2024, was $1.69 billion. Inventory rose 4% year over year to $664 million at the end of the reported quarter.

Capital expenditure was $61 million. The company expects capital expenditure to be in the range of $200-$250 million for fiscal 2024. 

In the fiscal second quarter, the company returned $120 million to shareholders in the form of dividends and share repurchases. It bought back 4.5 million shares for $96 million. Additionally, it paid out a quarterly dividend of 12.5 cents per share, reflecting a total dividend payout of $24 million in the fiscal second quarter. As of Aug. 3, 2024, the company had 24 million shares remaining under its current share repurchase authorization.

What to Expect From AEO in Q3 & Fiscal 2024?

For the third quarter, AEO anticipates operating income to be in the range of $120-$125 million, representing nearly $20 million of profit that shifted into the reported quarter from the third quarter, thanks to the retail calendar shift. 

American Eagle expects comparable sales to grow in the band of 3-4%, with total revenues estimated to remain flat to rise slightly due to the impact of the retail calendar. SG&A is likely to leverage, with dollars down slightly, owing to the efficiencies in key focus areas.

For fiscal 2024, management now expects operating income to be in the range of $455-$465 million, the high end of its earlier guidance. The company expects comparable sales to be up around 4%, with total revenues increasing in the range of 2-3%, including the impact of one less selling week.

Key Picks

We have highlighted three better-ranked stocks, namely Boot Barn (BOOT Quick QuoteBOOT - Free Report) , Abercombie (ANF Quick QuoteANF - Free Report) and Deckers (DECK Quick QuoteDECK - Free Report) . 

Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has a trailing four-quarter earnings surprise of 7.1%, on average. 

The Zacks Consensus Estimate for Boot Barn’s current financial-year sales and earnings per share indicates growth of 10.7% and 8.9%, respectively, from the year-ago  figures.

Abercrombie, a leading casual apparel retailer, currently sports a Zacks Rank of 1. ANF delivered an earnings surprise of 28.9% in the last reported quarter. 

The Zacks Consensus Estimate for Abercrombie’s current financial-year sales indicates growth of 11.5% from the year-ago  figure. 

Deckers, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 47.2% in each of the trailing four quarters.

The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 11.5% from the year-ago figure.