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American Eagle Outfitters Quietly Beats The Competition

Posted: Dec 04, 2007 15:23 PM by Glenn Curtis

Tickers in this Article: GPS, ANF, AEO

Although a number of apparel retailers have announced disappointing results in recent weeks, American Eagle Outfitter (NYSE:AEO) appears to be bucking the trend.

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The teen clothing retailer's third-quarter earnings results were actually pretty decent, and when compared to similar retailers, the company looks solid - despite not attacting much attention on Wall Street.

Drop in Profit Disguises Hidden Gems
In the period ended November 3, American Eagle's net income came in at $99.4 million (45 cents per share). That's down slightly from the $100.9 million (44 cents per share) it earned in the comparable period last year. The earnings however, were in line with Wall Street estimates. Meanwhile overall revenue increased 7% to $744.4 million from $696.3 million last year. That was just shy of the roughly $750.1 million that analysts had expected.

Looking out into the fourth quarter, the company expects to earn 67-70 cents per share. That's north of the 66 cents per share it earned in the fourth quarter last year. However, it is a bit below the 70 cents a share that analysts had been looking for. I don't think this is the end of the world.

Interesting Comparisons
American Eagle's same store sales rose 2% in the period. That's not bad at all. Gap (NYSE:GPS) posted a 5% decline in comps during the period and that comps rose only 1% at Abercrombie & Fitch (NYSE:ANF).

Operating margins also make for an interesting comparison. Due to higher markdowns and lofty occupancy costs, the total operating margin at AEO slipped to 20.3% of sales from 21.9% of sales last year. That's a bit of a thumping; However, it's still roughly a full point better than Abercrombie & Fitch reported in Q3, and it's about double what Gap's operating margin was in its latest quarter. (For added insight, read Zooming In On Net Operating Income.)

American Eagle Outfitters appears to have a fair amount of financial flexibility and I think it should be able to weather this competitive storm quite well, especially when compared to some of the other leading players in the industry.

Stock Buyback
Finally, American Eagle Outfitters is buying back its stock. During the quarter the company spent $58.5 million to repurchase 2.4 million shares. And year-to-date the company has bought back roughly 9.9 million shares, which helps explain why the EPS number was higher in Q3 despite net income being lower. Would the company be buying back its stock and spending its precious capital if it were in dire straits? I think not. (To learn more, check out A Breakdown Of Stock Buybacks.)

Bottom Line
American Eagle appears to be bucking the retail trend. It's results in terms of operating margin and same-store-sales were superior to that of competitors Gap and Abercrombie & Fitch. Finally, I was encouraged by the company's ability and willingness to buy back its stock.

As an added bonus, the stock pays a dividend with a current yield of 1.7%.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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