American Eagle Outfitters Inc. (AEO) recently reported fourth quarter and fiscal year 2010 results. Adjusted earnings in the fourth quarter jumped to 44 cents per share from the year-ago earnings of 38 cents per share, marginally beating the Zacks Consensus Estimate of 43 cents a share.
The company reported fiscal 2010 adjusted earnings per share of $1.02 beating the prior year adjusted earnings per share of 92 cents and the Zacks Consensus Estimate of $1.01 per share.
Quarterly Review
During the quarter, American Eagle’s net sales went down 4.0% year over year to $916.0 million, also below the Zacks Consensus Estimate of $924 million. Same-store sales reported a decrease of 7.0%. In the relevant quarter, the company opened three American Eagle (AE) stores, one aerie and two 77kids stores, and remodeled nine stores. The company closed 9 AE stores in the quarter.
American Eagle’s gross profit went down 7.9% to $361.2 million, while gross margin contracted 160 basis points (bps) to 39.4%. Merchandise margins recorded a decline of 60 basis points.
Selling, general and administrative expenses, as a percentage of sales, fell 260 bps year over year to 21.2% due to the company’s continuous effort to reduce expenses and lower incentive compensation. Consequently, operating income increased 5.0% year over year to $134.1 million, while operating margin expanded 130 bps to 14.6%.
Financial Position
American Eagle ended the year with cash and cash equivalents of $667.5 million, compared with $693.9 million in the year-ago period. In fiscal 2010, the company generated $402.6 million of cash from operations and received $177.5 million from sale of investments. The company also deployed $216.1 million of cash for share buybacks, $84.3 million toward capital expenditures and $30.0 million for debt repayment.
The company expects to incur capital expenditures in the range of $90 million to $100 million in fiscal 2011.
Guidance
In the first quarter of fiscal 2011, the company expects to earn in the range of 12 cents to 17 cents per share taking into account an estimated same-store sales of flat to negative 3%.
For fiscal year 2011, the company expects same-store sales to grow in the range of low single digits and earnings to be at par with $1.02 per share reported in fiscal 2010.
Conclusion
We remain impressed with the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment, which will likely lead to a turnaround in top-line momentum as well as a rebound in gross margin.
The company operates in a highly fragmented specialty retail sector and faces intense competition from other teenage-focused retailers, such as Abercrombie & Fitch Co. (ANF) and Gap Inc. (GPS).
We currently have a short-term Zacks #3 Rank (‘Hold’) rating and a long-term Neutral recommendation on the company.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
ABERCROMBIE (ANF): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
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