Analysis: American Eagle still has work to do; Aerie strong
While today’s results from American Eagle Outfitters are mixed, they point to a company that is holding its own in a challenging market. There are, however, some negative numbers, such as the erosion on the bottom line, that signal the company has much more work to do before it can claim to be back to full health.
American Eagle stores posted a comparable sales increase of 1%. This reverses the declines of the last two quarters and is a step up on preceding periods when growth was present but anemic. As positive as this is, it is not a cause for unbridled celebration. The uplift was delivered against the backdrop of a stronger period for apparel overall. This raises a question as to how much is down to underlying natural demand, and how much is attributable to the improvements American Eagle has made over the past year.
In fairness, we believe that a mix of both delivered the number. Categories like denim are performing well for American Eagle, with new washes and styles helping to drive sales. From our customer data, there is evidence to suggest that those shoppers who visit to buy jeans are now buying more in other categories too – this is particularly true for men.
An increase in cross-category shopping is comforting and partly alleviates our concern that American Eagle was becoming overly reliant on denim. As much as this is currently helping results, it makes the company’s sales growth dependent upon denim remaining in fashion – something that it is unable to control or guarantee. By using denim as a springboard to promote other parts of its offer, we believe American Eagle is on the right track.
Along with a skew in category performance, American Eagle is also showing a disparity in channel results. The growth in stores is poor while growth online is much stronger. Given the interplay between shops and the website, it is arguably the overall numbers that matter. However, the higher costs associated with online fulfillment contributed to a margin decline this quarter. This was further exacerbated by heavy promotional activity, which was necessary to keep pace with the rest of the market. As a consequence, net income fell by 15.9% over the prior year.
Away from American Eagle, Aerie continues to be a reliable source of growth. Its robust comparable sales uplift of 19% this quarter was market-beating and underlines that it is still taking the share of other players. Usually, after such a long run of very high sales increases, we would have concerns about a softening as lapping comparatives become tougher. We don’t yet feel this way about Aerie.
In our view, Aerie has excellent growth potential from two sources. First, the customer base continues to grow as more shoppers discover and migrate over to the brand. Aerie’s positioning and stance remain aligned with consumer attitudes, and this is helping to enlarge its share of shoppers.
Second, the category extensions into products like soft knit tops and leggings are helping to increase average transaction values and are giving Aerie access to a more significant share of its shoppers’ overall spending.
Overall, AEO is in a reasonable position. We believe performance over the holiday quarter will be solid and will mark a good end to a respectable year.
Despite objection, Toys ‘R’ Us bonus plan gets OK from court
The U.S. Bankruptcy Court in Richmond, Virginia has approved the plan to pay top executives at Toys “R” Us up to $21 million in bonuses.
At the hearing, the retailer’s lawyer made the argument that the bonus money would incentivize the executives to boost the retailer’s sales during the holiday shopping season, reported CNBC. The judge approved the plan despite an objection by the U.S. Trustee.
Under the plan, 17 eligible executives would split about $21 million if earnings before interest, depreciation and amortization for this fiscal year reach $641 million, CNBC reported.
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Promotions take toll on American Eagle Outfitters’ Q3 income but sales increase
American Eagle Outfitters on Wednesday posted its 11th straight quarter of same-store sales growth, fueled by a strong performance from its Aerie brand, and forecast strong earnings for the holiday season.
Total net revenue increased 2% to $960.4 million for the quarter ended October 28, just missing estimates of $960.8 million. Total same-store sales rose 3%, better than analysts expected. By brand, same-store sales at Aerie brand surged 19%, and inched up 1% at American Eagle.
Net income fell 16% to $63.73 million or 36 cents per share amid increased promotions and a $14 million charge. Excluding charges, the company reported adjusted earnings of 37 cents a share, missing analysts estimates of 38 cents per share.
“The third quarter produced record sales, sequential margin improvement and marked eleven straight quarters of comp sales growth,” said Jay Schottenstein, CEO. “Digital sales continued to grow at a rapid pace, while we also saw store sales strengthen. These results validate our investments in product leadership, innovation, quality and brand equity.”
The retailer expects earnings of between 42 and 44 cents per share for the holiday quarter. Analysts on average were expecting 39 cents.
American Eagle Outfitters operates more than 1,000 stores in the United States, Canada, Mexico, China and Hong Kong, and ships to 81 countries worldwide through its websites.
Click here for more analysis by Neil Saunders, managing director of GlobalData.