American Eagle Outfitters Inc. (AEO) recently reported second-quarter 2011 results. Earnings in the second quarter decreased to 10 cents per share from the year-ago earnings of 13 cents per share and missed the Zacks Consensus Estimate of 11 cents a share.
Quarterly Review
During the quarter, American Eagle’s net sales went up 4.0% year over year to $676.0 million, still below the Zacks Consensus Estimate of $770 million. Same-store sales came in flat for the quarter. In the relevant quarter, the company opened 2 American Eagle (AE) stores, 1 aerie and 6 77kids stores, and remodelled 22 stores. The company closed 2 AE stores in the quarter.
American Eagle’s gross profit slipped 3.3% to $232 million, while gross margin contracted 250 basis points (bps) to 34.3%. Merchandise margins recorded an increase attributable to lower markdowns.
Selling, general and administrative (SG&A) expenses increased 1% to $167 million as savings from continuous cost cuts were fully offset by higher investments in opening new stores. The rise in the SG&A line resulted in operating income dropping sharply 23.7% year over year to $29 million while operating margin shrunk 160 bps to 4.3%.
Financial Position
American Eagle ended the quarter with cash and cash equivalents of $389.3 million, compared with $425.5 million in the year-ago period. For the six months period of fiscal 2011, cash used for operating activities came in at $84.9 million. The company also deployed $38 million toward capital expenditures including $28 million on opening of new stores and remodelling of old ones.
The company expects to incur capital expenditures in the range of $90 million to $100 million for fiscal 2011.
Guidance
In the third quarter of fiscal 2011, the company expects to earn in the range of 22 cents to 27 cents per share.
For fiscal year 2011, the company expects earnings to be between 85 cents and 95 cents per share.
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 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 #4 Rank (‘Sell’) rating and a long-term Neutral recommendation on the company.
