American Eagle stock sinks on soft outlook

By Christine Huang

American Eagle Outfitters Inc. stock plummeted 9.5 percent after the retailer predicted an earnings drop in the current quarter.

Shares closed at $14.34, down $1.51.

American Eagle reported net income of $54.6 million, or 30 cents per diluted share, in its fourth quarter ended Jan. 28, down 33 percent from $81.7 million, or 42 cents per share, in the fourth quarter a year earlier.

But excluding $21 million in impairment and restructuring charges, adjusted earnings were  $71.7 million, or 39 cents per share, a 6 percent increase from $67.5 million, or 35 cents per share, in the prior-year quarter.

Analysts polled by Bloomberg expected the company to earn 38 cents a share, a penny under the adjusted earnings.

The apparel retailer, headquartered in Pittsburgh, specializes in casual fashion for young adults and operates more than 1,000 stores. Its brands include American Eagle Outfitters, which focuses on denim, tops and accessories, and Aerie, an innerwear and loungewear brand targeting young women.

Revenues in the fourth quarter fell 1 percent to $1.10 billion from $1.11 billion.

In the conference call Chief Financial Officer Robert Madore said that in the first quarter of the new year, “we expect earnings per share of 15 cents to 17 cents on comparable store sales in the range of flat to low single-digit decline, which is consistent with the results so far this quarter. . . . Our first quarter EPS guidance compares to 22 cents last year and excludes potential asset impairment and restructuring charges.”

Eric Beder, managing director at Wunderlich Securities, attributed American Eagle’s ability to stay afloat in the challenging young adult retail market to its high-quality products, “aggressive” online strategy and brand relevance. “The teen market has been very weak,” he said in an interview, likening American Eagle to the “best house in the worst neighborhood.”

Unusually warm weather in the fourth quarter contributed to lower sales in men’s tops, Beder said. “The company historically has done really well with bottoms…but t-shirts and other things haven’t done as well,” he said. “Men’s business was really the culprit here. Men has been the weak part for them for a while.”

Beder also noted that the fourth quarter performance was hurt by an increase in the company’s effective tax rate to 37.4 percent from 27.9 percent.

Kelly Halsor, an analyst at Buckingham Research Group, echoed Beder’s statements and said that American Eagle enjoyed relative success in the fourth quarter compared to other retailers. They have a “really strong bottoms assortment, and there’s a lot of interest in denim right now after years of it being not as strong,” she said in an interview.

In the earnings call, Charles Kessler, global brand president of American Eagle Outfitters, pointed out that the company was working to focus its marketing efforts on “youth empowerment” and “strengthening [its] reputation as America’s favorite jeans brand.” He added that the company is working on modernizing its brick-and-mortar stores.

Jennifer Foyle, global president of the Aerie brand, said the fourth quarter marked the twelfth consecutive quarter of double-digit sales growth for the underwear line. “The Aerie creative team has done an incredible job incorporating the newest trends and the best fabrics to build a strong foundation of core products infused with value and quality,” she stated.

Beder noted that Aerie’s focus on authenticity has helped catapult the brand to success with millenials. “They’re the anti-Victoria Secret. Their models aren’t retouched. They’re real. And I think that very much resonates with the younger customer,” he said.

In the quarters ahead, American Eagle Outfitters will finalize the restructuring of unprofitable stores in the United Kingdom, Hong Kong and China, said CFO Madore in the conference call.

“AEO is strong and healthy. We are well positioned to capitalize on the strength of our brand and organization to fuel continued growth and return to shareholders,” said CEO Jay Schottenstein in the call.

For the full year ended Jan. 28 earnings slipped to $212.5 million, or $1.16 per diluted share, from $218.1 million, or $1.11 per diluted share. Revenues increased 2 percent to $3.61 billion from $3.52 billion.

Photo at top: An advertisement from Fall 2016. (Source: American Eagle Outfitters Inc.)