After Competitors Collapse, American Eagle Looks Even Better

| About: American Eagle (AEO)
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Shares of teen retailers Aerospostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF) are both down around 9 percent as of this writing Friday afternoon, as fiscal first quarter results from both companies came in not only below analyst expectations, but at near-disastrous levels.

At Aeropostale, the quarter saw a net loss of 16 cents per share, a huge swing from a 13 cent per share profit a year ago. Same-store sales (including e-commerce transactions) were down a stunning 14 percent from the year-prior quarter. Meanwhile, the company's second quarter guidance was for another loss, between 15 and 20 cents, compared to a breakeven fiscal second quarter a year ago.

At Abercrombie, the company revised its fiscal 2013 guidance to $3.15-$3.25 per share, below previous guidance of $3.35-$3.45 and well below analyst estimates of $3.49 per share for the year. Comps at A&F showed a 15 percent decrease in Q1, though on the post-earnings conference call CEO Michael Jeffries attributed the bulk of that decline to inventory shortages; still, the company projected same-store sales "to be slightly down for the balance of the year."

These are not one-off, near-term issues, either. Aeropostale has suffered through of series of earnings declines, and has even admitted its merchandise is struggling to compete with rival products. Abercrombie has grown revenues and earnings out of the 2008-09 recession, but comp sales were down 1 percent in fiscal 2012 (according to the 10-K) and, considering the company's guidance, are expected to drop at a higher rate this year.

The struggles at both retailers showed the relative strength of the first quarter earnings report from American Eagle (NYSE:AEO), released on Wednesday. American Eagle, like its competitors, saw comparables fall year-over-year, but at a much lesser rate of just 5 percent. The company's guidance for full-year earnings of $1.42-$1.45 represent modest growth over 2012's $1.39 per share; comp guidance for a flat 2Q and "low single-digit" growth in the second half would appear to result in comps that are flat or up modestly for the full year.

Indeed, if you look at five-year earnings for the three companies, AEO's stability stands out. While ANF has shown more growth, it also saw a larger earnings fall amidst the recession, and projects a modest year-over-year decline in 2013. Meanwhile, ARO's earnings profile has simply collapsed:

Adjusted EPS, 2009-13
Stock 2009 2010 2011 2012 2013
AEO $0.92 $1.02 $0.86 $1.39 $1.431
ANF $1.122 $2.11 $2.31 $3.22 $3.203
ARO $2.27 $2.56 $0.90 $0.68 -$0.054

data from company press releases; "year" represents fiscal year, ending after January of the calendar year; all figures non-GAAP

1 -- at midpoint of company guidance of $1.42-$1.45

2 -- not adjusted from ANF's 2012 switch to retail method of accounting for inventory as company has not disclosed effects

3 -- at midpoint of company guidance for $3.15-$3.25

4 -- includes Q1 results, company guidance of a loss of 15 to 20 cents per share in Q2, and analyst estimates for Q3 and Q4

Again, Abercrombie has shown stronger growth out of the recession, but the effect of the embarrassing inventory mistakes in Q1, which appear to have cost roughly $80 million in sales, not to mention the continuing blowback from CEO Jeffries' comments that he didn't want overweight people wearing his company's clothes, should raise some near-term concerns. Aeropostale is now firmly a turnaround story; but a 14 percent decrease in comps is not a strong way to begin that tale. American Eagle seems the strongest of the three, yet is not necessarily priced as such:

Stock Price FY13 EPS P/E EV/FCF1 Yield
AEO $20.00 $1.43 14.0 9.05 2.2%
ANF $49.87 $3.20 15.6 10.2 1.6%
ARO $14.73 ($0.05) N/A 13.9 N/A

1 -- based on 2012 figures

Given American Eagle's steady growth, its shareholder-friendly policies -- which include a $1.50 special dividend paid late last year -- and its clear valuation advantages over its rivals, AEO clearly seems to best stock of the three.

And given its rather cheap valuation, with a forward P/E of just 14 and free cash flow equaling 11 percent of its enterprise value, American Eagle simply looks like an attractive stock right now. While teen retailing is not a zero-sum game -- there are far more competitors for American Eagle than just A&F and Aeropostale, of course -- the struggles at two main rivals could provide a tailwind for American Eagle.

Of course, at current levels, AEO doesn't need much; simply continued execution at the pace of the last 4-5 years. The results today from Abercrombie & Fitch and Aeropostale show that such execution may not be easy; but they also highlight just how effective American Eagle has been.

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.