Will This Teen Retailer Bounce Back?

Sidhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Retailers were quite disappointed with the holiday shopping season and so were investors. This year has been the weakest holiday season since 2008, affected by bad weather and uncertainty about the economy in the face of possible tax hikes and spending cuts early next year. Both the customers and the environment were challenging. Holiday shopping season is critical for retailers because it can make up nearly 40% of their annual revenue. One of many, American Eagle Outfitters, a leading global specialty retailer, reported weaker sales growth in this fourth-quarter that included 2012 holiday seasons.

American Eagle Outfitters (NYSE: AEO), a mall-based apparel and accessories retailer, operates more than 1,000 American Eagle and Aerie stores in North America and online at ae.com. Since its American Eagle stores account for more than 75% of total revenues, it is the most important business segment for the retailer. The retailer targets 15-25 year old customers with its high quality brand and trendy clothing, accessories and personal care products at affordable prices.

The company’s sales growth in the fourth-quarter, including the online business, increased 5%, compared to a 13% gain in the same period last year. Excluding online sales, sales increased just 1%, compared with a 12% increase excluding online sales last year. Holiday sales and comps grew at a much slower pace, as compared to strong comp gains last year. Online sales have grown 24% so far this quarter. 

Despite of dull sales figure, this teen retailer showed shareholder friendly moves and continued to buyback shares. It repurchased 5 million shares for a total of $105 million in December 2012. The company estimates approximately 202 million and 201 million diluted shares outstanding for the fourth quarter and full year 2012 respectively.

Strong Quarter with Strong Guidance

American Eagle issued strong quarterly earnings data of $0.41 earnings per share for the third-quarter 2012 ending November 28. The company had revenue of $910.40 million for the quarter, surpassing analysts’ estimate of $873 million. The company’s quarterly net sales were up 11.1% and earnings surged nearly 37% from the year-ago period.

This quarter marked the third consecutive quarter of double-digit top line growth. SG&A expense increased 18% to $219 million. Gross profit increased 21% to $379 million. The gross margin rate improved 350 basis points to 41.6%. Both AEO and Aerie witnessed 20% increased consumer traffic in stores.

The company also solidified its EPS projection of 54 cents to 56 cents. Its guidance for the quarter is an improvement over an adjusted EPS of 39 cents last year, representing growth of 38% to 44%.  American Eagle also said it expects same-store sales growth in the mid-single digit percentage rate. Similar to the third quarter, the company expects SG&A to increase at targeted rate of 23% to sales, because of incremental advertising investments and variable selling expense.

 The retailer expects to open at least 6 American Eagle Outfitters stores, including locations in New York, Miami and Los Angeles in 2013.

Competition Will Remain a Concern

We’ve already noted the weak holiday sales report from American Eagle Outfitters.  Now, two more specialty retailers, Abercrombie & Fitch (NYSE: ANF) and Aeropostale (NYSE: ARO), have posted sales numbers for the period, and the situation has not improved much.

At Aeropostale same-store sales, including online sales, fell 8%. Total net sales for the holiday season slipped 6% to $645 million from $682.6 million in the year-ago period. Aeropostale issued downside earnings guidance, due to weakening demand in the holiday period, to a new range of $0.20 to $0.24. It expects to announce its financial results for the fourth quarter and fiscal 2012 on March 14.

Abercrombie & Fitch, a specialty retailer of casual apparel for men, women and kids, is one of AEO's most direct competitors with different strategies. For the third quarter 2012, the company reported $0.87 EPS with revenue up 8.7% year-on-year basis. The firm updated its full-year earnings guidance to $2.85-$3.00 per share. Same store sales fell 3% in the third quarter, which is expected to drop into the mid-single digit percentage in the fourth quarter.

Meanwhile, specialty apparel retailer Urban Outfitters (NASDAQ: URBN) outperformed during the holiday period with relatively stronger holiday sales. It reported a 15% increase in net sales for the holiday season, while comparable store net sales declined by 1%.  This retailer is being less promotional and its revenue is improving.

The End

Management believes that American Eagle is on the right track with improved merchandise assortments in the women’s business segment, effective inventory management and controlled promotions. The retailer’s business has increased since Christmas and shoppers are responding well to its spring fashion trends.  Also, American Eagle’s 77Kids is to reopen on January 29 with new styles under a new name:  Ruum American Kid‘s Wear.  Ruum‘s look won‘t be a big departure from 77kids‘casual styles.

American Eagle will report its fourth-quarter and full-year financial results on March 6. It has a 52 week range of $12.86-$23.94 with market cap of $3.96 billion. Its current forward P/E of 14.8x implies a premium of 12.1% to the peer group average of 13.2x. Given the company’s strong fundamentals, I think its valuation is justified. American Eagle can continue its momentum into this year also by keeping up with the tastes of fashion-conscious teens. 


sidhikharkia has no position in any stocks mentioned. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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