American Eagle Outfitters: Solid Second Quarter Performance

Aug.27.12 | About: American Eagle (AEO)

Shares of American Eagle Outfitters, Inc. (NYSE:AEO), the specialty apparel retailer, rose 4% over the past week. The company reported its second quarter results on Wednesday.

Second Quarter Results

American Eagle Outfitters reported second quarter revenues of $740 million, up 11% on the year. Comparable sales increased by 9%. Revenues came in ahead of analyst expectations of $720 million.

Gross profits expanded by 210 basis points to 37.4%. Lower product costs and lower markdowns boosted margins. Furthermore, increased purchase performance and lower warehouse costs were helpful as well. Selling, general & administrative costs fell by 40 basis points to 24.0%.

Income from continuing operations rose 62% to $0.21 per diluted share. Earnings beat analysts consensus of $0.15 per share. Including the costs related to the closure of the 77kids business, earnings came in at $0.09. In May, the company announced its intention to close 77kids - which includes 22 stores and the online business. The company expects to take restructuring losses of $35 million. It took a $24-million charge, or $0.12 per diluted share, during the second quarter.

CEO Robert Hanson commented on the results:

"While pleased with our results, and therefore raising our annual outlook, we continue to drive for long-term performance improvement through fortifying our brands, further strengthening our products, market and customer experience, enhancing operational disciplines and pursuing growth across North America."

Outlook

For the third quarter, American Eagle expects earnings per share from continuing operations to come in between $0.37-$0.38. Analysts expected a third quarter earnings outlook of $0.35-$0.36 per share.

For the full year of 2012, earnings per share from continuing operations are expected to come in between $1.33-$1.36. The guidance is based on comparable stores sales growth of mid-single-digits in the third quarter, and low single-digits in the final quarter. The full year guidance comfortably beat analysts consensus of $1.23 per share.

Valuation

American Eagle Outfitters ended its second quarter with $702 million in cash and short-term investments. The company operates without any meaningful sums of short or long term debt.

For the first six months of 2012, the company reported revenues of $1.45 billion. The company reported net income of $58.7 million, or $0.30 per diluted share. The company is on track to generate annual revenues of $3.5 billion, on which it is expected to earn $1.35 per share.

The market currently values the firm at $4.3 billion. Excluding the net cash position, the operating assets are valued around $3.6 billion. This values the firm at 1.0 times annual revenues and around 14 times annual earnings. This valuation compares to a revenue multiple of 2.1 for Urban Outfitters, Inc. (NASDAQ:URBN) and 0.7 times for Abercrombie & Fitch (NYSE:ANF). These competitors trade around 30 times annual trailing earnings.

Currently, the company pays a quarterly dividend of $0.11, for an annual dividend yield of 2.0%.

Investment Thesis

Year to date, shares of Urban Outfitters have returned almost 45%. Shares moved from lows of $13 in January to highs of $22 at the moment.

Over the past five years, shares have lost about 15% of their value. Shares traded within a $10-$20 trading range over that time period. Between 2008 and 2012, the company managed to expand its revenues from $3.0 billion to an expected $3.5 billion. Profits rose from $1.11 per share in 2008 to an expected $1.35 in 2012. Earnings per share were boosted after the company gradually repurchased 5% of its shares.

In March of this year, I was enthusiastic about the prospects of Urban Outfitters. Shares have risen almost 50% from $15 at the time, towards $22 at the moment. I am less optimistic about the prospects for the short term. I would not initiate a long position at these levels, yet I would be comfortable maintaining a long position, if I had any.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.