Why American Eagle Outfitters Looks Like an Outperformer
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems as if the apparel retailers are unaffected by the economic slowdown and the uncertainty due to Euro crisis this quarter. This was reaffirmed once again when the teen apparel retailer, American Eagle Outfitters (NYSE: AEO) lit up the Street with its better than expected first quarter results, sending its shares surging.
Into the Financials
High cotton costs could not stop the popular specialty retailer. Instead, the top line surged 18% to $719 million and profit jumped by 43% to 20 cents a share. This increase in earnings came when American Eagle cut down on its promotional spending, a wise move since its products were already selling well. Also, its stores saw more customers walking in and spending more on each visit.
An early summer played a very important in American Eagle’s performance as it boosted demand for spring fashion clothing, that too without any discounts. American Eagle’s strategy of offering colored denims and shorts was very similar to that of its competitor, Gap (NYSE: GPS), which also gained because of its colorful summer collection. But the specialty retailer was way ahead in its performance when compared to its Gap. Gap’s quarterly performance of an increase in revenue and profit of 6% and 18%, respectively, pales in comparison to American Eagle’s numbers.
Key Strength against its Rival
The comparable store sales were also up by a remarkable 17%. This metric is considered as a key measure to gauge a retailer’s health. This was way above the same metric of American Eagle’s biggest competitor, Abercrombie & Fitch (NYSE: ANF), which saw negative same store sales in its recent quarterly results. The company benefitted from having less exposure to weak European market since all its stores are franchised. This not only lowered its costs but also decreased its dependence on its sales. This is where Abercrombie lacked since it owned stores in Europe.
Hitting the Bump
The teen and young clothing retailer is planning to sell off its 77kids chain which offers clothes for the infants and young toddlers. This isn’t a bad news for the investors because this step has been decided by the company in order to increase its profits further. The segment has been running in losses with 22 stores and an online portal. The company wants to do away with it and concentrate more on its profitable and healthy ventures.
The Bottom Line
With an amazing performance and great numbers, the company has proven its worth. With its smart strategies the Pittsburgh based retailer has managed to fight weak overseas market conditions and high cost inflation - 2 key issues for every retailer. Moreover, American Eagle is getting more agile by focusing on its profitable areas and is cutting out the flab. As a result, I believe the company has lots more to offer to its investors and can soar to greater heights in future.
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