American Eagle’s Profit Grows Despite Missing Sales Targets Again

American Eagle Outfitters, Inc. (AEO) is a leading global specialty retailer known for offering high-quality, on-trend clothing, accessories, and personal care products under its American Eagle and Aerie brands. The company operates stores in the United States, Canada, Mexico, and Hong Kong, and ships to approximately 80 countries worldwide through its websites. Additionally, American Eagle and Aerie products are available at over 300 international locations operated by licensees in about 30 countries​ AEO-Inc

American Eagle fell short of Wall Street’s sales expectations for the second consecutive quarter, but the company still managed to achieve a nearly 60% increase in profit, thanks in part to lower product costs. However, this mixed performance led to a roughly 3% drop in the company’s shares during early trading on Thursday.

Here’s a look at how American Eagle performed in its fiscal second quarter compared to analyst expectations from LSEG:

Earnings per share: 39 cents vs. 38 cents expected
Revenue: $1.29 billion vs. $1.31 billion expected

The company reported a net income of $77.3 million, or 39 cents per share, for the quarter ending August 3, up from $48.6 million, or 25 cents per share, a year earlier. Sales increased to $1.29 billion, about an 8% rise from $1.2 billion in the previous year. This increase would have been smaller without a calendar shift that added $55 million to second-quarter sales.

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During the quarter, American Eagle’s intimates line, Aerie, saw a 9% revenue growth, while the flagship brand grew by 8%. The company’s gross margin was 38.6%, an increase of 0.9 percentage points from the previous year, aligning with analyst predictions. This margin improvement was driven by “favorable product costs,” indicating that the company spent less on producing its merchandise.

Looking ahead, American Eagle provided a more optimistic outlook for the current quarter than analysts expected, but its forecast for the full year was more conservative, suggesting caution about the rest of the year. The retailer expects comparable sales growth of 3% to 4% for the current quarter, surpassing the 2.8% growth forecast by analysts. However, for the full year, the company anticipates a 4% increase in comparable sales and a 2% to 3% rise in total revenue, which falls short of the 4.2% and 3.5% growth respectively, expected by analysts.

In May, CFO Mike Mathias indicated that American Eagle is maintaining a cautious outlook for the latter half of the year due to uncertainties like potential interest rate changes from the Federal Reserve and the impact of the upcoming presidential election. To navigate slowing demand for discretionary items, American Eagle has focused on cutting costs and enhancing efficiencies to protect profits. The company aims to increase sales by 3% to 5% annually over the next three years and improve its operating margin to about 10%.

CEO Jay Schottenstein expressed optimism about the company’s future, stating on the earnings call that American Eagle sees significant growth potential. “We’re a $5 billion business today, but in the next few years, we could be a $10 billion business,” Schottenstein said. He emphasized the company’s commitment to investing in growth to reach this goal.

During the quarter, American Eagle made progress toward these goals, achieving an operating income of $101 million, a 55% increase, and an operating margin growth of 2.4 percentage points to 7.8%. This operating income would have been lower without the calendar shift that positively impacted the figure by $20 million.

American Eagle Posts Mixed Q2: ‘Our Strategy Is Off To A Great Start,’ CEO Says – American Eagle Outfitters ( NYSE:AEO ) https://t.co/FibQnDBgEu

— John (@FintechAlgo) August 29, 2024

The company also reported a strong start to the back-to-school season, expecting the momentum to continue into September and beyond, especially in the Northeast. President and Executive Creative Officer Jennifer Foyle noted that while American Eagle continues to focus on its core women’s and denim categories, the company is also exploring new trends. Additionally, Foyle mentioned that the menswear segment is beginning to improve, stating, “We’re not just a one-fit brand anymore… we’re ready to play as we go into the back half of Q3 and Q4.”

Key Points:

i. American Eagle missed sales targets but saw nearly a 60% profit increase due to lower product costs.

ii. The company reported earnings of 39 cents per share, slightly above expectations, with revenues of $1.29 billion, below expectations.

iii. Eagle issued a cautious full-year outlook, expecting modest sales growth amid economic uncertainties.

iv. The company aims for significant growth, with goals to double its business size in the coming years.

v. Strong back-to-school performance and focus on new trends and categories indicate a strategic push for future growth.

Fallon Jacobson – Reprinted with permission of Whatfinger News