Teen apparel retailer American Eagle Outfitters’ (NYSE:AEO) stock gained roughly 17% Wednesday after the company raised its first quarter earnings outlook, citing stronger than expected sales and less promotional activity.  American Eagle now expects Q1 earnings of $0.18 to $0.20 per diluted share, compared to earnings of $0.14 recorded last year. Its previous first quarter earnings guidance was in the range of $0.08 to $0.10 per diluted share. Additionally, net sales for the first quarter increased 18% to $719 million compared to $610 million last year, turning Q1 2012 one of the strongest quarters for American Eagle in the near history. American Eagle competes with other specialty retailers such as Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), Gap Inc. (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN) in the teen apparel space.
Reasons for strong performance in Q1 2012
It seems that American Eagle Outfitters has been on a roll in 2012 so far. In fact, it was the last quarter that gave impetus, as the company was able to cut down inventories by 35% on a q-o-q basis. Inventory management was the biggest issue for American Eagle in 2011, with inventory hangover particularly taking a toll on the company’s margins toward the end of 2011.
While lesser pressure from pending inventories did contribute a bit toward improved performance of American Eagle in Q1, the company made significant gains in other areas too. The appointment of CEO Robert Hanson, who joined American Eagle in January from Levi Strauss & Co., was well received by the investors. Hanson has been instrumental in cutting back the company’s inventory, pushing for faster fashion items turnaround, and improving product assortments to boost top-line growth.
Additionally, American Eagle’s Spring Collection is finding a good resonance among the teenagers, reflected by an impressive 17% growth in the company’s comparable store sales this quarter. While American Eagle continues to dominate the bottoms category such as denims, it is also gaining in other key categories such as tops and fleece. Moreover, a faster fashion item turnaround ensures that the company stays on top of changing fashion trends, as reflected in its spring merchandise that stands out from the product offerings of other teen apparel retailers.
We have a revised $22.70 Trefis price estimate for American Eagle Outfitters, which is at a premium of 10% to the current market price.Notes: