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Summary

  • For the quarter, American Eagle Outfitters reported revenue and earnings that handily outperformed analyst estimates, sending shares soaring 12% on Aug. 20.
  • In light of this news, investors might be excited, but this revenue and earnings beat has a dark side to it as well.
  • In a tough retail environment, results in recent years haven't been terrible but management will have to demonstrate growth if it wants to save this once high-flying retailer.

After news broke that American Eagle Outfitters (NYSE:AEO) reported revenue and earnings for the second quarter of its 2014 fiscal year that smashed forecasts, shares of the once high-flying retailer skyrocketed 12% to close at $12.98. In light of this development, should investors rejoice or is the business still likely to be very risky moving forward?

Results beat… but is it enough?

For the quarter, American Eagle Outfitters reported revenue of $710.60 million. Although this represents a 2% decline from the $727.31 million reported by management the same quarter a year earlier, the retailer's top line came in far higher than the $689.94 million analysts anticipated. According to its press release, this decline in revenue was driven by a 9% drop in comparable store sales but was mostly offset by a 1.5% increase in store count from 1,056 locations to 1,072 year-over-year.

Earnings Overview
Last Year'sForecastedActual
Revenue (millions)$727.31$689.94$710.60
Earnings per Share$0.10$0.00$0.03

Looking at profits, American Eagle Outfitters also fared well but not quite as well as it did on the revenue front. For the quarter, the company reported earnings per share of $0.03. This is far better than the $0.00 analysts anticipated but fell short of the $0.10 management reported the same quarter a year earlier. In addition to being hurt by falling sales, the company was negatively impacted by rising costs across the board, particularly in its selling, general and administrative expenses, which rose from 25.6% of sales to 26.7%.

While the results posted by American Eagle Outfitters were better than forecasted, investors should keep in mind that its fundamental situation is deteriorating. Despite seeing sales shoot up between 2009 and 2012, the retailer was hit hard by a 5% drop in revenue and a 64% decline in net income during 2013. Fortunately, this was better than what other retailers like J.C. Penney Company (NYSE:JCP) and Aeropostale (NYSE:ARO) experienced during this timeframe, but with a difficult retail environment in play, shareholders shouldn't get overly excited.

Takeaway

This past quarter was much nicer to American Eagle Outfitters than Mr. Market anticipated, but investors need to keep in mind that the retailer's top and bottom lines are still declining. For this reason alone, the business should be reserved not as a value play necessarily but as more of a turnaround/contrarian prospect. Ultimately, management will need to demonstrate an ability to not only beat forecasts but to see growth instead of contraction. In the event that it can achieve this objective, then shareholders will likely be rewarded handsomely but any failure to reverse the business's downtrend will certainly prove destructive for investors and their portfolios.