American Eagle flies higher on bottom line beat, inventory improvement
American Eagle Outfitters (NYSE:AEO) stock surged over 14% higher after posting stronger than expected profits and reducing inventory overhang.
For the third quarter, the Pittsburgh-based apparel retailer reported $0.42 in GAAP EPS, doubling the analyst expectation. Meanwhile, $1.24B in revenue narrowly exceeded consensus estimates. The company credited the Aerie brands 11% rise in revenue, offsetting reciprocal declines at the American Eagle core brand, for the strong performance.
Gross margins contracted to 38.7% from 44.3% in the prior year quarter as the company worked through bloated inventory levels. Markdowns were cited as the driver of a 400 basis point decline in the metric, with inflationary pressures also playing a role in the contraction. The markdowns helped bring inventory levels to within 8% of prior year levels, down from an over 36% year over year increase marked in Q2. Additionally, the projection of inventory to end the year down from 2021 remains intact.
“I’m pleased to deliver a third quarter that exceeded our expectations, with profit margins meaningfully improved from the first half of the year. Bold actions to rationalize inventory and reduce expenses are paying off,” CEO Jay Schottenstein said. “As we navigate the current macro environment, we remain focused on our strategic initiatives — leading with innovation and judiciously investing in capabilities that will differentiate us in the long-run. Our organization is strong and I have tremendous confidence in the resilience of our brands.”
He added that he remains optimistic about the prospects for holiday sales, with inventory clearing supporting margins at the higher end of previous guidance in the range of 32% to 33%. Additionally, the company remains on track to deliver $100M in cost savings in the fourth quarter. Revenue is expected to be down in the mid single digits with comparable sales across brands consistent with the third quarter.
Shares 14.54% after Tuesday’s opening bell.
Dig into the details of the results.