American Eagle Outfitters Inc. (AEO): Zacks Rank Buy
American Eagle Outfitters Inc. (AEO) has gained nearly 58.0% since mid-January, thanks to the company's focus on improving the direct-to-customer experience, technological advancements such as the e-commerce business, international expansion and its strategy of shutting down underperforming stores. Moreover, this fashion retailer currently enjoys a healthy dividend yield of 2.1%.
The surge in shares for this Zacks #2 Rank (Buy) stock was further amplified when newly appointed CEO Robert Hanson announced plans to exit its 77kids store concept on May 18, describing it as an underperforming division. This growth was underscored by the company's strong fiscal first quarter 2012 results on May 23, which included a 25% year-over-year rise in earnings and a solid guidance.
Fiscal 2012 First-Quarter
American Eagle reported fiscal first-quarter 2012 earnings of 20 cents per share, in line with the Zacks Consensus Estimate and up from the prior-year's 16 cents. The robust quarterly performance was primarily driven by solid top-line growth and an improved operating margin.
During the quarter, American Eagle's net sales went up 18% year over year to $708.7 million, but marginally missed the Zacks Consensus Estimate of $711 million. Growth in revenue was driven by a 17% increase in comparable store sales, compared with a decline of 7% in the year-ago quarter. During the period, the company's AE Brand, aerie and AEO Direct segments reported growth of 17%, 20% and 22%, respectively, in comparable store sales.
American Eagle is now forecasting fiscal 2012 earnings per share between $1.16 and $1.22, representing year-over-year growth of 19% to 26%. Comparable-store sales for the period are expected at a mid-single-digit growth. For fiscal second-quarter 2012, American Eagle expects to earn in the range of 13 cents to 15 cents per share, compared with 13 cents in the prior-year period. Moreover, the company still projects to incur a capital expenditure of $100 million in fiscal 2012.
Estimates Surge
Estimates for American Eagle have shown a considerable upside in the last 60 days. The Zacks Consensus Estimate for fiscal 2012 moved up 5.1% to $1.23, indicating a year-over-year growth of 42.7%. For fiscal 2013, the estimate increased 5.2% over the same timeframe to $1.41 per share, representing a projected year-over-year growth of nearly 15.2%.
Good Dividend Prospects
American Eagle last raised its quarterly dividend in June 2010 by 10% to 11 cents per share and has been consistently paying the same amount ever since. This affirms a healthy yield of 2.1% and a solid payout ratio of 53.0%. In contrast, the average dividend yield of the industry is 0.6%.
Premium Valuation
Valuation of American Eagle looks reasonable. The current forward P/E of 16.8x implies an attractive premium of 24.4% to the peer group average of 13.5x. On a price-to-book basis, shares are currently trading at 2.7x, a 28.6% premium to the peer group average of 2.1x. Given the company's compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 13.4%.
Strong Chart
The stock has been consistently trading above its 200-day moving average since January 18, 2012. It has also remained above the 50-day moving average since February 15, 2012. Average volume is decent at 5,138K.
American Eagle, which competes with Abercrombie & Fitch Co. (ANF) and Gap Inc. (GPS), has also outperformed the S&P 500 since September 22, 2011. The year-to-date return for the stock is roughly 33.8% compared with the S&P 500's return of 7.1%.
In Synopsis
American Eagle's management, under the leadership of CEO Robert Hanson (appointed in November 2011), has opted to divest its non-performing brands and concentrate on its core brands. With the announcement of the company's intention to exit its 77kids store chain, the company plans to shift focus on growing its flagship American Eagle stores as well as its aerie women's intimates store concept. The company will be closing down over 20 77kids stores in both the fiscal second and third quarters. The company also plans to increase its focus on merchandise assortments, adding more compelling brands, managing inventory level much more diligently and augmenting the e-commerce business.
Furthermore, American Eagle's ongoing initiatives to reduce cost through supply chain efficiencies and updated product-allocation system should boost its bottom line.
Founded in 1977 and headquartered in Pittsburgh, Pennsylvania, American Eagle is a leading retailer that operates under the American Eagle Outfitters, aerie and 77Kids brands. The offerings of the company's core American Eagle Outfitters brand includes jeans, cargo pants, and graphic T-shirts, as well as a collection of accessories, outerwear, and footwear for 15 to 25-year old men and women. Apart from this, the company offers Dormwear, intimates, and personal care products for girls under the aerie brand; and clothing and accessories for kids aged between 2 to 14 under the 77kids brand.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
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