When a retail company runs double-digit comp sales, everything is easy. Expenses leverage, inventory flies off the shelf, and picking new store locations is a target-rich environment.
But when sales momentum slows to a crawl, the party hats come off and making the numbers work becomes the typical retail grind.
After a long run of exceptional sales, American Eagle Outfitters (NYSE: AEO) has hit a slow sales patch. The company ended 2006 posting 17% comps in its fourth quarter; the first two quarters of this year managed to post only 6% and 2% respectively. The company released Q3 results yesterday with same-store sales inching up again by 2%. Of course, this isn't a surprise as the company reported a setback in September sales with a 5% drop in comps.
This sales slowdown is not uncommon, either. Other top-notch rag sellers like J.C. Penney (NYSE: JCP), Kohl's (NYSE: KSS), Abercrombie & Fitch (NYSE: ANF), and Aeropostale (NYSE: AEO) have been in a sales funk recently. Warm weather as well as housing and credit problems have crimped sales at retailers across the board.
How well will American Eagle manage through this sales slowdown? So far, so good.
Earnings per share of $0.45 were a penny more than last year and met Street expectations. Gross margin was down 210 basis points versus last year, driven by higher markdowns to clear seasonal inventory and rent; the company opened 60 stores in the second half of the year compared to 32 last year.
SG&A expense was actually lower as a percentage of sales than last year, revealing that the company is battening down the hatches. Inventories grew 13%, but 3% lower on a per-square-foot basis. This shows me the company is watching customer demand carefully, buying merchandise conservatively, and taking markdowns quickly ... all good signs.
American Eagle issued Q4 guidance that looks a lot like this quarter -- EPS of $0.67 to $0.70 compared to $0.66 last year.
The Street was not impressed, but it looks to me that this company has its ducks in the right order. With consumer confidence at its current low, soft retail sales are expected.
Foolish investors should watch for companies that can manage through adversity and position themselves to soar when consumer spending comes back. I'd say American Eagle fits that description.
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