Teen apparel retailer American Eagle Outfitters (NYSE:AEO) is scheduled to announce its Q4 earnings on March 7.  A quick scan of the stock’s recent performance shows that 2012 has been a tough year for the company so far. Here we highlight a few key trends to watch for in the upcoming earnings release. American Eagle competes with other teen specialty retailers such as Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and Gap Inc. (NYSE:GPS).
- Where Will American Eagle Outfitters’ Online Revenue Growth Come From In The Next Five Years?
- Why Is American Eagle Outfitters Closing And Opening Stores Simultaneously?
- Is Women’s Apparel Becoming A Big Business For American Eagle Outfitters?
- What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2015 Results?
- Where Will American Eagle Outfitters’ Revenue Come From In The Next Five Years?
- How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
Margins to Be in Focus
As the company has disclosed the net sales and comp sales for the holiday season, the focus will now be on gross margins. Additionally, there is speculation that the gross margin may increase based on the revised earnings guidance issued in the sales update.
The holiday season was a difficult period for American Eagle Outfitters. In a bid to lure holiday shoppers, the company had to increase its scale of promotions to drive sales. The result was that despite registering a 15% growth in holidays sales, American Eagle had to trim its Q4 earnings outlook to $0.33 – $0.35 per diluted share from $0.40 – $0.44 previously. ((American Eagle Reports Holiday Sales Results, Source: American Eagle Outfitters’ Investors Relations))
See our article: American Eagle Cuts Q4 Earnings Outlook, Sends Shares Crashing
Due to significant promotional scale throughout the holidays, we expect the company’s margins to take a hit this quarter. However, an increase in direct sales may provide some tailwind to American Eagle’s margins.
Update on Inventory Levels
This will be one of the crucial factors to watch for on Wednesday. An inventory hangover in the later part of the holiday season forced the company to offer massive promotions on its merchandise. While American Eagle reported in its holiday sales update that it did manage to achieve desired inventories, the apparent fear in the market is that the company may end the quarter with higher than comfortable inventory levels. Should that happen, we expect the margin woes to stretch through the spring season too, since the pending inventories will decide how long the company will take to realize the benefit of declining cotton prices.
Trefis price estimate for American Eagle Outfitters stands at $17.75, implying an upside of nearly 20% to the current market price.Notes:
- American Eagle Outfitters to announce Q4 earnings on March 7th, Source: American Eagle’s IR [↩]