Why is American Eagle (AEO) down 9.6% since its last earnings report?

A month has passed since American Eagle Outfitters (AEO) last reported earnings. Shares have lost about 9.6% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Eagle poised for a breakout? Before we dive into how investors and analysts have reacted lately, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

American Eagle’s Q1 earnings beat estimates, revenue falls short

American Eagle Outfitters reported fiscal 2024 first-quarter earnings that exceeded the Zacks Consensus Estimate while revenues were flat. Results and earnings increased year over year, driven by brand strength and gains from progress in executing its Profitable Growth Support strategy.

The company’s first-quarter fiscal 2024 earnings of 34 cents per share doubled from adjusted earnings per share of 17 cents in the year-ago quarter. The net result topped the Zacks Consensus Estimate of 28 cents.

Total net income of $1.14 billion rose 6% year-over-year but missed the Zacks Consensus Estimate of $1.15 billion. The company’s record revenue growth in the quarter was driven by strengthening American Eagle and Aerie’s leading market positions and making the most of opportunities in casual apparel. Store revenue increased 4% in the quarter, while digital revenue improved 12%.

Quarterly details

On the brand side, revenue increased 8% year-over-year to $725 million for American Eagle. Comparable revenues for the American Eagle brand increased 7%. Sales of the American Eagle brand benefited from product range improvements. Our model estimated year-over-year sales growth of 8.5% for the American Eagle brand to $727.9 million.

Revenue increased 4% year over year to $373 million for the Aerie brand in the fiscal first quarter. Comparatives for the Aerie brand increased 6%, marking the highest ever first quarter comparatives for the brand. Strong demand for basic apparel and strength of the OFFLINE brand supported growth. Our model estimates year over year sales growth of 0.9% for the Aerie brand to $362.4 million.

Gross profit increased 12% year-over-year to $464 million in the fiscal first quarter. Gross margin increased 240 basis points (bps) to 40.6%. The increase in adjusted gross margin was primarily due to solid inventory management, the company’s shift to a more profitable sell-out strategy, reduced product and freight costs, and financial leverage on expenses including rent, delivery, distribution and warehousing.

SG&A expenses increased 7% year over year to $333 million, nearly in line with sales growth and the company’s guidance. As a percentage of sales, SG&A expenses increased 30 basis points to 29.2%. Our model predicted an SG&A rate of 28.9% in the fiscal first quarter, which is likely to remain flat year over year.

Operating income for the quarter was $78 million, up 76% from the prior-year quarter’s adjusted operating income of $44 million. Adjusted operating margin of 6.8% was up 270 basis points year over year. Our model predicted adjusted operating margin would improve 200 basis points to 6.1% in the fiscal first quarter.

The story continues

Other financial data

American Eagle ended the first quarter of fiscal 2024 with cash and cash equivalents of $300.5 million and no debt. Total stockholder equity as of February 3, 2023 was $1.75 billion.

Capital expenditures in the fiscal first quarter were $36 million. The company expects capital expenditures of $200 million to $250 million in fiscal year 2024.

During the first quarter of fiscal 2024, the company returned $60 million to shareholders in dividends and share repurchases. It repurchased 1.5 million shares for $35 million. In addition, the company paid a quarterly dividend of 12.5 cents per share, reflecting a total dividend payment of $25 million during the first quarter of the fiscal year. As of May 4, 2024, the company has 28.5 million shares outstanding under its current share repurchase authorization.

Conductivity

American Eagle reiterated its fiscal 2024 guidance. The company expects fiscal 2024 revenue to increase 2%-4% year over year, which includes a one-percentage-point negative impact from one less week than last year. Operating income is estimated at $445 million-$465 million.

AEO expects SG&A expense leverage for fiscal 2024, driven by ongoing cost management initiatives. The company expects D&A of $220 million for fiscal 2024. It anticipates a tax rate in the mid to upper 20s for fiscal 2024. The company expects the average number of shares outstanding to be in the high 190s at the end of fiscal 2024 .

American Eagle expects business momentum to continue into the fiscal second quarter. The company anticipates year-over-year revenue growth in the high single digits, including a $55 million positive impact from the retail calendar change. Operating income is expected to be $95-100 million in the fiscal second quarter.

How have estimates changed since then?

It turns out that over the past month, estimate revisions have been on an upward trend.

The consensus estimate moved 5.28% due to these changes.

VGM Results

At this point, American Eagle has a nice B growth score, a rating with the same momentum score. Charting a somewhat similar path, the stock was rated A for Value, putting it in the top 20% of stocks for this investment strategy.

Overall, the stock has a composite VGM Score of A. If you’re not focused on a single strategy, this rating should interest you.

Perspectives

Stock estimates are generally trending higher, and the magnitude of these revisions looks promising. Interestingly, American Eagle has a Zacks Rank #3 (Hold). We expect the stock to return in line with this over the next few months.

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